If you think talking about public revenue and taxes is a sure way to make a party boring, then hold on, because Adam Smith’s wisdom in The Wealth of Nations proves it can be surprisingly interesting with a bit of humor and some old-school anecdotes to spice things up. Let’s dive into Book V, Chapter II Of the Sources of the General or Public Revenue of the Society and explore how societies fund their governments, with some laughs along the way.
The Two Big Buckets of Government Revenue: Sovereign's Own Funds vs. People's Revenue
Adam Smith starts off by explaining that every government, no matter how grand or humble, needs money not just for defending the country and supporting the head honcho’s dignity (yes, even kings have to keep up appearances), but also for all those other necessary expenses that keep society ticking.
He breaks down government revenue into two main sources:
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Funds that belong peculiarly to the sovereign or commonwealth basically, money or assets the state owns outright and can use independently of taxing people.
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Revenue drawn from the people themselves taxes, fees, and all sorts of contributions.
Think of it like this: the sovereign’s funds are like the royal family’s own piggy bank, while the revenue from the people is what’s collected from the kingdom’s citizens. Spoiler alert: the royal piggy bank alone rarely pays all the bills!
Part I: When the King is Also a Businessman Sources of Public Revenue That Belong to the Sovereign
At first glance, you might imagine the sovereign as a savvy entrepreneur, running businesses on the side. Adam Smith shares some fun historical tidbits here.
For example, some ancient Tartar or Arabian chiefs actually earned their revenue by directly managing their herds essentially being shepherd-CEOs of their own livestock. It’s like a CEO who’s also the janitor and the accountant rolled into one. But, as Smith notes, that was only in the earliest, most rudimentary states.
Then there’s the Republic of Hamburg, which got creative and made money through public ventures like a wine cellar and an apothecary’s shop. You can imagine the city council thinking, “Hey, why not make the state a bit of a wine merchant? We’re all about the public good…and the public grape!”
More ambitious governments even owned banks. Smith mentions Venice, Amsterdam, and even Great Britain, where the government could theoretically profit from managing banks. But here comes the big question: Could a government known for either careless splurging during peacetime or reckless spending during war really run a bank well? Smith’s tone suggests skepticism — imagine trying to make a frugal accountant out of a spendthrift aristocrat!
One government project that consistently made money? The post office. That’s right — delivering letters wasn’t just about romance and gossip; it was a reliable business model for all sorts of governments. The government pays the upfront costs but collects fees with a nice profit margin. That’s like running a taxi service where everyone has to use your cars. Clever!
When Sovereigns Try to Become Traders: The Perils of Royal Business Ventures
Princes have long tried their hands at commerce, hoping to boost their fortunes. But Smith, with his typical sharp wit, points out that princes are almost doomed to fail at being good traders. Why? Because their agents often treat the royal treasury like an endless candy jar buying carelessly, selling carelessly, and moving goods without much thought for profit or loss.
An anecdote about Lorenzo de’ Medici (who was no prince of mean abilities) illustrates this well: his agents were so wasteful that the Republic of Florence had to pay off his debts multiple times. Eventually, Lorenzo gave up on being a merchant and decided to just spend the state’s money in more traditional royal ways you know, fancy banquets and palaces.
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Smith also critiques the English East India Company, which transitioned from traders to rulers, only to struggle financially afterward basically, “great at trade, lousy at sovereignty.” Their servants in India went from being clerks to government officials overnight, but apparently didn’t get the memo about fiscal responsibility.
Lending Money and the Risk of War: How Public Funds Can Grow or Vanish
States may also lend mone either to foreign governments or to their own citizens, earning interest as a source of revenue. For instance, the canton of Berne lent money to France and England and earned interest. But here’s the catch: if war breaks out, the debtor nation might just confiscate those funds, leaving the lender empty-handed.
On the other hand, Hamburg ran a public pawn-shop (or lombard) lending money to its citizens at interest, providing steady income. It’s like the government saying, “Need some quick cash? We got you, for a fee!”
Pennsylvania had a clever approach: issuing paper bills of credit, which functioned like banknotes, advancing credit to people based on land security. This helped cover state expenses without amassing treasure upfront. Smart, but risky as several American colonies later found out when such credit was overused and caused financial chaos.
Part II: Taxes When the People Open Their Wallets
Since sovereign funds alone rarely suffice, the rest of the money must come from taxes the obligatory contribution of citizens to keep the state functioning.
Smith smartly categorizes taxes based on the economic source they ultimately fall upon:
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Rent (income from land ownership)
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Profit (income from business or investment)
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Wages (income from labor)
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A mixture of the above
Before analyzing these taxes, Smith lays down four timeless maxims about taxation that still resonate today:
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Equality: Taxes should be proportional to one's ability to pay, just like tenants paying in proportion to their share of a joint estate.
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Certainty: The tax amount, timing, and method must be clear to the taxpayer to avoid corruption and arbitrariness.
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Convenience: Taxes should be levied at times and manners convenient for taxpayers (e.g., taxes on rent paid when rent is due).
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Efficiency: Taxes should minimize extra costs beyond the actual revenue raised, including administrative costs, disruption of business, penalties for evasion, and taxpayer inconvenience.
Taxes on Rent: Landowners and the Ever Complicated Land Tax
One of the oldest and most common forms of tax falls on land rent. Smith explains two ways to impose it:
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Fixed valuation tax: Tax based on an unchanging valuation of land, like in England.
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Variable tax: Tax that rises and falls with the actual rent or cultivation state, recommended by some French economists for fairness.
The fixed valuation system in England has the drawback that it can become unequal over time due to varying land improvements. Landlords who improved their land end up paying less tax relative to their increased rent a bit like paying the same gym membership fee no matter how much fitter you get!
Smith notes that this constancy might be good or bad depending on the economic circumstances, like how sometimes your internet bill seems to stay the same no matter your usage, and sometimes it doesn't.
The variable tax is fairer in theory but can be administratively costly and could discourage landlords from improving their land if the sovereign takes a share of the profits.
Smith also discusses the nuances of taxing rents paid in kind (like crops or livestock), rents from houses versus land, and even taxes on windows and hearths which historically caused people to brick up windows to avoid the window tax, hence the phrase "daylight robbery." If you ever thought your property taxes were unfair, just be thankful they don’t require you to sacrifice natural light!
Taxes on Profit: Businesses and the Balancing Act Between Traders and Consumers
When taxes fall on the profits from stock or business, Smith points out that these taxes often end up being paid by consumers, as businesses pass on the costs through higher prices. It's the classic "you pay, I pay, everyone pays" scenario.
Some taxes, like those on hawkers, coaches, and alehouse licenses, are structured in ways that neither favor big players nor oppress small ones too much. But others, like flat fees on all shops, could unfairly burden smaller businesses and push the market towards monopolies definitely not a recipe for happy consumers.
This explains why some proposed taxes on shops were scrapped and replaced by more balanced subsidies or levies.
Taxes on Wages: Labor’s Contribution to the State
Though Smith does not delve deeply into wages in this chapter, the implication is clear: labor income is also taxed, but how taxes on wages interact with the broader economy is a delicate matter. High taxes on wages might discourage labor supply or reduce take-home pay, impacting consumption and overall economic vitality.
The Perils and Promise of Taxation: Lessons from History
Smith reminds us that taxing is a balancing act too heavy or too arbitrary, and you get corruption, evasion, and economic decline. Too light, and the state cannot fulfill its duties.
He gives examples of how some states cleverly rely on voluntary declarations and public trust, like in Swiss cantons, while others struggle with complicated, unfair tax assessments causing constant grievances and reimpositions.
An amusing (if tragic) anecdote is how taxing slaves was different from taxing free men the former being a true badge of slavery, the latter a badge of liberty. It’s a reminder that taxation is deeply tied to citizenship and social contracts.
Why Adam Smith’s Tax Lessons Still Matter Today
Reading Adam Smith’s thoughts on public revenue in 2025, it’s clear that many of his insights remain highly relevant. Governments still wrestle with how to balance revenue sources, fairness, efficiency, and economic growth.
And remember, no matter how much times change, the eternal challenge remains: getting the right amount of money from the right places, without turning citizens into disgruntled tax dodgers or bankrupting the royal treasury. So next time you grumble about taxes, just imagine the medieval kings trying to run wine shops or pawn-shops and be glad we’ve come a long way!
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