That which Iain McLean called ‘one of the finest parts of WN,’ seen in the light of Balbir Singh Sihag’s analysis of the अर्थशास्त्र (Arthaśāstra)

4 min readJun 23, 2020

For Iain McLean (DPhil), Professor of Politics, Official Fellow, Nuffield College, ‘one of the finest parts of WN’[1] (‘WN: Inquiry into … the Wealth of Nations. Glasgow edn vol. II in two parts’[2]) is Adam Smith’s ‘discussion of taxation and public expenditure’[3]. He praises Smith as being “two hundred years ahead of his time”[4] for relying on ideas, that, according to McLean, “were not formalised until co-operative game theory”[5]. Though McLean does not specify which corpus, or whose work, he was alluding to when he mentioned to the epoch of co-operative game theory, it is likely 2012 Nobel laureate Lloyd Shapley’s 1953 paper A Value of n-Person Games [pp. 307–317 in Contributions to the Theory of Games II published by Princeton University Press] is part of that corpus, if not the paper itself.

In a section titled The Egalitarianism of TMS, found in a transcript of McLean’s lecture [delivered at MZES/Facultät Kolloquium (University of Mannheim) on 15th June 2005], he has included the following:

“The canons of taxation are laid out in WN V.ii.b (Glasgow edition pp. 825–6).
I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state….
II. The tax which each individual is bound to pay ought to be certain, and not arbitrary….
III. Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it….
IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the publick treasury of the state….” [5]
“Smith not only says that taxation should be proportionate to income, but gives as his reason that the rich enjoy more revenue than the poor “under the protection of the state” — a thoroughly egalitarian justification of proportionate taxation.” [6]

The following excerpts from Balbir Singh Sihag’s 2009 paper Kautilya on principles of taxation are invoked for a reader to see the above-mentioned points, from WN, in light of Sihag’s analysis of the अर्थशास्त्र:

“Kautilya mentioned the existence of a proportional income tax during his time” [7]
“It appears that, Kautilya implicitly combines both the benefit principle and the ability to pay principle. According to both the benefit principle and the ability to pay principle, rich people should pay more[4]. However, the benefit principle does not allow any subsidy to the poor. But Kautilya suggests the payment of a subsidy to the poor implying the use of the ability to pay principle.” [8]
“3.2 Collecting taxes only when they are due
According to Kautliya, it makes no sense in collecting taxes before the crops are harvested. Since taxes become due only after the harvest, it is useless to collect raw grains and also annoys the farmers.” [9]
“Kautilya’s Arthashastra contains many essential ingredients of a sound fiscal structure, such as a linear income tax, stability of tax structure, maximization of net tax revenue, making tax payable at the right time, and fiscal federalism. Despite the availability of a lump sum tax, he accepts a linear income tax. Only recently, tax compliance has been incorporated into the discussion on optimal taxation but Kautilya proposed tax compliance as an integral part of a tax system. The concepts, at least in embryonic forms, of the Dupuit-Laffer curve, and the Marshallian producer surplus are present in his analysis.” [10]

Adam Smith’s WN may have been, as McLean says, 200 years ahead of his time. If that is true, in light of Sihag’s analysis cited above, what should McLean say about विष्णुगुप्त चाणक्य अर्थशास्त्र (viṣṇugupta cāṇakya arthaśāstra)?

(more to follow)

References:

[1], [3]-[6]: p. 17 in Adam Smith and the modern left

[2]: ibid. p.1

[7]: p. 56 in Kautilya on principles of taxation

[8], [9]: ibid. p. 58

[10]: ibid. p. 63

The verse in अर्थशास्त्र about collecting taxes only when they are due