The Wealth of Nations · Chapter
Taxes Upon Profit, or Upon the Revenue Arising from Stock explained
This chapter examines the taxation of profit from stock, arguing that it is less suitable for direct taxation than land rent due to the difficulty of assessing capital, its variability, and the mobility of stock.
What happens
This chapter examines the taxation of profit from stock, arguing that it is less suitable for direct taxation than land rent due to the difficulty of assessing capital, its variability, and the mobility of stock. Smith discusses the division of profit into interest and surplus, the impact of taxes on landlords, consumers, and interest rates, and compares various tax systems in England, Hamburg, Switzerland, and Holland.
Themes in this chapter
Role of Government
Smith critiques direct taxation of stock, highlighting the government's challenge in assessing and collecting taxes without driving away capital.
Wealth and Money
Discusses the nature of stock, interest, and profit as components of national wealth, and the effects of taxation on capital mobility.
Characters to notice
- Adam Smith
Author and primary voice analyzing taxation of stock and profit.
- The Proprietors
Landowners who may bear the final burden of taxes on farming stock through reduced rent.
- The Employer
The employer of stock who must receive compensation for risk and trouble, and may shift tax burdens.
- The Master
Implied as the manager of stock who adjusts profit rates or interest in response to taxes.
Key passages
“The revenue or profit arising from stock naturally divides itself into two parts; that which pays the interest, and which belongs to the owner of the stock; and that surplus part which is over and above what is necessary for paying the interest.”
Profit from capital splits into interest for the owner and a surplus compensating the employer for risk and effort.
Smith distinguishes the components of profit to analyze tax incidence.
“The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country.”
Capital owners are globally mobile and may relocate their assets to avoid burdensome taxes.
Highlights the challenge of taxing mobile capital compared to immovable land.
“A tax which tended to drive away stock from any particular country, would so far tend to dry up every source of revenue, both to the sovereign and to the society.”
A tax that drives capital away reduces all forms of national income, including land rent and wages.
Smith warns of the broad economic harm from taxing capital excessively.