65
See also: The circular flow of the economy 40–45 ■ Efficiency and fairness 130–31 ■ External costs 137 ■ The theory of
the second best 220–21 ■ Taxation and economic incentives 270–71
THE AGE OF REASON
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.
Who should pay taxes?
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.Perfect tax design
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. ■Anne-Robert-Jacques
TurgotBorn 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, forcedlabor 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.Key works1763 Taxation in General
1766 Reflections on the
Production and Distribution
of Wealth
1776 The Six EdictsAristocrats at Versailles were
targeted by Turgot’s tax reforms of- He suggested they should no
longer be exempt from tax, so they
arranged his dismissal from office.