Economic policy
Anne-Robert-Jacques Turgot (1727–81)
1689–1763 Expensive wars, together with an inefficient tax system that exempted landowners and unions, lays the ground for French financial crisis and the Revolution.
1817 In his Principles of Political Economy and Taxation, British economist David Ricardo argues that taxes should fall on luxuries.
1927 British mathematician Frank Ramsay emphasizes the importance of price elasticity.
1976 Economists Anthony Atkinson and Joseph Stiglitz suggest uniform commodity taxes are optimal in The Design of Tax Structure.
Who bears the burden of tax? The key question of “tax incidence” intrigued the gifted economist Anne-Robert-Jacques Turgot, who was the French Minister of Finance from 1774–76. The question is not as simple as “who should pay tax?” because taxes affect many things, from prices and profits to amounts of goods consumed and incomes received. Changes in these can ripple through the economy in surprising ways. The “burden” of a tax—which is taken to mean a decrease in happiness, welfare, or money—can be shifted from one person or group to another. If you are planning a vacation and a new fuel tax puts the airfare above the level you are prepared to pay, the tax has made you unhappy. The new fuel tax has reduced your welfare, but not necessarily the airline company’s profits.
Turgot argued that taxes interfere with the free market and should be simplified. Powerful groups should not be exempt from taxation, and the details of its implementation matter. His recommendation was for a single tax on a country’s net product—the value of its total goods and services minus depreciation.
His thinking was influenced by an early school of economists known as the physiocrats, who believed that only agriculture (land) produces a surplus. Other industries do not produce a surplus and so cannot afford to pay tax—they will always try to pass it on by increasing prices and charges until finally it reaches the landowners. As farmers pay much of their surplus in rent to landowners, who produce nothing, Turgot argued that the landowners should be taxed on the rent they charged.
Later economists refined the principles of fairness and efficiency that go into an optimal tax system. Fairness includes the idea that those most able to pay should pay the most; that similar people should face similar taxes; and that those who benefit from government spending, such as users of a new bridge, should contribute to it. Efficiency means both effectiveness in collection and maximizing society’s welfare while raising the required revenue. Economists argue that efficiency means disturbing the market as little as possible, particularly to avoid blunting incentives for work and investment.
Aristocrats at Versailles were targeted by Turgot’s tax reforms of 1776. He suggested they should no longer be exempt from tax, so they arranged his dismissal from office.
The last few decades have seen huge strides in the sophistication of tax design, integrating both fairness and efficiency. “Perfect markets” theory, for example, suggests commodity taxes should be uniform and apply only to “final” goods (for sale to final users); income taxes should be linked to ability rather than income; and taxes on company profits and income from capital should be minimal. “Market failure” analysis, on the other hand, suggests that taxes on undesirables such as pollution increase people’s welfare.
In general, tax policies have moved in the directions shown by such theories while paying attention to revenue and political acceptability.
Born in Paris, France, in 1727, Turgot was destined for the priesthood until an inheritance in 1751 allowed him to pursue a career in administration. By the late 1760s, he had become friendly with the physiocrats, and later met Adam Smith. From 1761 to 1774, he was the Intendant of Limoges, a regional administrator. On the accession of Louis XVI in 1774, Turgot became Minister of Finance and set about making reforms that encouraged free trade. In 1776, he abolished the guilds and ended a government policy that used unpaid, forced labor to build roads by instituting a road-building tax instead. Louis XVI did not approve and dismissed Turgot from office. His reforms—which some felt might have averted the French Revolution of 1789—were overturned. He died aged 54 in 1781.
1763 Taxation in General
1766 Reflections on the Production and Distribution of Wealth
1776 The Six Edicts