Taxation: A Very Short Introduction

Citation

Smith, S. (2015). Taxation: A Very Short Introduction. Oxford University Press. Very Short Introductions.

Chapter Summary

A short book: an introduction and six chapters on about 120 pages, followed by a glossary, further reading and an index. The author, a professor of economics at University College London and a former deputy director of the Institute for Fiscal Studies, writes for readers with no economics. The publisher's description states the book's aim: tax policy will always be political, but public decisions about tax would be better if people understood what taxes are for and how different taxes work.

Introduction

A two-page opening that sets the scene. Taxes pay for roads, courts, defence, welfare and, in many countries, much of health care and education; in 2012 they took a quarter of national income in the United States and on average almost two-fifths in the member states of the European Union. The introduction notes how taxes touch individuals (lower disposable income, tax returns, fear of investigation, behaviour changed to reduce tax) and why tax is so central to political argument between left and right.

Chapter 1: Why do we have taxes?

The first chapter (pp. 3–11) asks the basic question of what taxation is for. Its specific content is not shown in the public summaries; the introduction frames it around paying for public services.

Chapter 2: The structure of taxation

Tax systems differ widely across countries, yet nearly all rely on the same broad elements: taxes on personal incomes, sales taxes and taxes on corporate profits. The chapter shows the diversity beneath those similarities in tax bases, rates and legal and practical arrangements, and explains why the real amount raised has grown so much over fifty years: rising incomes and spending, higher rates and new instruments such as value added tax.

Chapter 3: Who bears the tax burden?

The incidence chapter distinguishes formal incidence (who is legally liable or from whom tax is collected) from effective or economic incidence (who ultimately bears the burden). It then asks how large the average burden is, how it is spread across groups, and in particular how it varies with household income, explaining the difference between progressive and regressive patterns.

Chapter 4: Taxation and the economy

The longest chapter (pp. 48–74) argues that the cost of taxation is more than the tax paid. It identifies three kinds of cost: administrative costs to government, compliance costs to taxpayers and distortionary costs when tax changes behaviour. It then covers the principles of optimal commodity taxation, effects on the labour market and tax wedges, the trade-off between equity and efficiency, and the interaction of income tax with benefits.

Chapter 5: Tax evasion and enforcement

A chapter of about twenty pages (pp. 75–96) on tax evasion and on how tax authorities enforce the tax system. The common terms that Google Books lists for the book include under-reporting, tax compliance and penalties, but no chapter summary is publicly available.

Chapter 6: Issues in tax policy

The final chapter asks what makes good tax policy, starting from Adam Smith's four canons (equity of contributions, certainty, convenience of payment and minimisation of costs) and the principle of neutrality. It then takes three issues facing many countries: radical simplification of the tax system, a single-rate (flat) income tax, and exempting basic goods such as food from sales taxes. It ends with environmental taxes and the future of tax policy.

Key Concepts

Introduction and Chapters 1–2: Purposes and Structure

• Tax base: what a tax is levied on, which varies widely from country to country even for the same kind of tax.
• Main tax types: personal income taxes, sales taxes such as VAT, and taxes on corporate profits.

Chapters 3–4: Incidence and Economic Costs

• Formal and effective incidence: who is legally liable to pay a tax versus who ultimately bears it.
• Progressive and regressive taxation: tax burdens that rise or fall as a share of income.
• Compliance and administrative costs: the costs of running and dealing with the tax system.
• Distortionary cost (excess burden): the economic cost that arises when taxes change how people and firms behave.
• Tax wedge: the gap between what an employer pays and what a worker receives, created by taxes on labour.

Chapters 5–6: Enforcement and Policy

• Tax evasion and enforcement: illegal non-payment and the means tax authorities use against it.
• Adam Smith's canons: equity, certainty, convenience and low cost as principles of good taxation.
• Neutrality: the principle that taxes should avoid favouring some activities over others.
• Flat tax: a single-rate income tax, one of the reform proposals examined.

Critical Analysis

Strengths

• Written by a tax-policy economist. The publisher's author note records Smith's years at the Institute for Fiscal Studies and his work as an adviser to the Treasury, the IMF and the OECD, and the book's chapter plan reflects an interest in how tax systems actually operate, not only in theory.
• Core ideas in plain language. The core economic ideas of public finance (incidence, excess burden, optimal commodity taxation, tax wedges) are presented in a book written for readers without economics, which makes it a useful bridge into a public economics course.
• Practical as well as theoretical. Administration, compliance and enforcement get real space: Chapter 4 counts them as costs of taxation and Chapter 5 is devoted to evasion and enforcement.
• Policy-oriented ending. Chapter 6 applies the principles to live debates (simplification, flat taxes, zero-rating food, environmental taxes), showing how the earlier analysis bears on choices governments face.

Limitations

• Very brief. At about 120 pages, each topic gets only a few pages; it is not a course text with exercises, and the formal analysis behind incidence and excess burden is left to textbooks.
• Data from the early 2010s. The figures quoted in the introduction are for 2012, and tax policy has changed in many countries since publication.
• Little visible on international tax. The public chapter summaries do not show coverage of the taxation of multinational companies or international tax competition, which are now central to tax debates; students will need other reading on them.

Where It Fits in the Course

This is a short entry point to the public-finance half of this course. Jonathan Gruber's Public Finance and Public Policy is the full undergraduate textbook, pairing theory with evidence on why governments intervene, how social insurance is designed and how taxes affect behaviour and the distribution of income; Smith's Chapters 3 and 4 are a plain-language preview of Gruber's tax chapters. Thomas Piketty's The Economics of Inequality is the natural companion on the distributional side, concentrating on the division of income between labour and capital and on what redistribution can achieve.

For the labour-economics side, Ehrenberg, Smith and Hallock's Modern Labor Economics treats taxation as one of its policy applications; Smith's discussion of tax wedges and of the interaction between income tax and benefits connects directly to it. Cahuc, Carcillo and Zylberberg's Labor Economics is a graduate text and belongs much later.

How to Use This Book

No economics is assumed, and the glossary at the back defines the technical terms.

• Read it whole, early. The book can be read in a few sittings before or during the first weeks of a public economics module.
• Core chapters: 3 (incidence) and 4 (economic costs, optimal commodity taxation, tax wedges) carry the economic ideas that textbooks formalise; read them twice.
• Context chapters: the Introduction and Chapters 1–2 give the facts and vocabulary of tax systems; Chapter 5 on evasion and enforcement adds the practical side of taxation.
• Policy chapter: use Chapter 6 for essay and seminar preparation; for each of its three issues, write down the efficiency and equity arguments on each side.
• Follow up: after Chapters 3–4, work through the incidence and deadweight-loss diagrams in a textbook such as Gruber; use the further-reading list for more depth and check current figures against recent government or OECD data.