Key Arguments

• When public expense is raised within the year 'from the produce of free or unmortgaged taxes,' only 'a certain portion of the revenue of private people is only turned away from maintaining one species of unproductive labour, towards maintaining another', so while 'The public expense, however, when defrayed in this manner, no doubt hinders, more or less, the further accumulation of new capital; ... it does not necessarily occasion the destruction of any actually-existing capital.'
• By contrast, 'When the public expense is defrayed by funding, it is defrayed by the annual destruction of some capital which had before existed in the country; by the perversion of some portion of the annual produce which had before been destined for the maintenance of productive labour, towards that of unproductive labour.'
• Under funding, because 'the taxes are lighter than they would have been, had a revenue sufficient for defraying the same expense been raised within the year,' the private revenues of individuals are 'necessarily less burdened, and consequently their ability to save and accumulate some part of that revenue into capital, is a good deal less impaired,' so the frugality and industry of individuals can 'more easily repair the breaches' made by government.
• Smith limits this relative advantage, saying, 'It is only during the continuance of war, however, that the system of funding has this advantage over the other system.'
• If war expenses were always defrayed by current taxes, 'the taxes from which that extraordinary revenue was drawn would last no longer than the war,' so although 'the ability of private people to accumulate, though less during the war, would have been greater during the peace, than under the system of funding.'
• He argues that under such a system 'War would not necessarily have occasioned the destruction of any old capitals, and peace would have occasioned the accumulation of many more new,' while 'Wars would, in general, be more speedily concluded, and less wantonly undertaken,' because people, 'feeling, during continuance of war, the complete burden of it, would soon grow weary of it,' and the 'foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it.'
• He further notes that with funding, once it has 'made a certain progress,' the 'multiplication of taxes which it brings along with it, sometimes impairs as much the ability of private people to accumulate, even in time of peace, as the other system would in time of war.'

Source Quotes

Had they not advanced this capital to government, there would have been in the country two capitals, two portions of the annual produce, instead of one, employed in maintaining productive labour. When, for defraying the expense of government, a revenue is raised within the year, from the produce of free or unmortgaged taxes, a certain portion of the revenue of private people is only turned away from maintaining one species of unproductive labour, towards maintaining another. Some part of what they pay in those taxes, might, no doubt, have been accumulated into capital, and consequently employed in maintaining productive labour; but the greater part would probably have been spent, and consequently employed in maintaining unproductive labour.

Some part of what they pay in those taxes, might, no doubt, have been accumulated into capital, and consequently employed in maintaining productive labour; but the greater part would probably have been spent, and consequently employed in maintaining unproductive labour. The public expense, however, when defrayed in this manner, no doubt hinders, more or less, the further accumulation of new capital; but it does not necessarily occasion the destruction of any actually-existing capital. When the public expense is defrayed by funding, it is defrayed by the annual destruction of some capital which had before existed in the country; by the perversion of some portion of the annual produce which had before been destined for the maintenance of productive labour, towards that of unproductive labour.

The public expense, however, when defrayed in this manner, no doubt hinders, more or less, the further accumulation of new capital; but it does not necessarily occasion the destruction of any actually-existing capital. When the public expense is defrayed by funding, it is defrayed by the annual destruction of some capital which had before existed in the country; by the perversion of some portion of the annual produce which had before been destined for the maintenance of productive labour, towards that of unproductive labour. As in this case, however, the taxes are lighter than they would have been, had a revenue sufficient for defraying the same expense been raised within the year; the private revenue of individuals is necessarily less burdened, and consequently their ability to save and accumulate some part of that revenue into capital, is a good deal less impaired.

Under the system of funding, the frugality and industry of private people can more easily repair the breaches which the waste and extravagance of government may occasionally make in the general capital of the society. It is only during the continuance of war, however, that the system of funding has this advantage over the other system. Were the expense of war to be defrayed always by a revenue raised within the year, the taxes from which that extraordinary revenue was drawn would last no longer than the war.

War would not necessarily have occasioned the destruction of any old capitals, and peace would have occasioned the accumulation of many more new. Wars would, in general, be more speedily concluded, and less wantonly undertaken. The people feeling, during continuance of war, the complete burden of it, would soon grow weary of it; and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so.

Those, on the contrary, during which that ability was in the highest vigour would be of much longer duration than they can well be under the system of funding. When funding, besides, has made a certain progress, the multiplication of taxes which it brings along with it, sometimes impairs as much the ability of private people to accumulate, even in time of peace, as the other system would in time of war. The peace revenue of Great Britain amounts at present to more than ten millions a-year.

Key Concepts

• When, for defraying the expense of government, a revenue is raised within the year, from the produce of free or unmortgaged taxes, a certain portion of the revenue of private people is only turned away from maintaining one species of unproductive labour, towards maintaining another.
• The public expense, however, when defrayed in this manner, no doubt hinders, more or less, the further accumulation of new capital; but it does not necessarily occasion the destruction of any actually-existing capital.
• When the public expense is defrayed by funding, it is defrayed by the annual destruction of some capital which had before existed in the country; by the perversion of some portion of the annual produce which had before been destined for the maintenance of productive labour, towards that of unproductive labour.
• It is only during the continuance of war, however, that the system of funding has this advantage over the other system.
• Wars would, in general, be more speedily concluded, and less wantonly undertaken.
• the multiplication of taxes which it brings along with it, sometimes impairs as much the ability of private people to accumulate, even in time of peace, as the other system would in time of war.

Context

Middle of the passage; Smith systematically compares the economic effects of paying for government entirely out of current taxation versus by borrowing and funding, and then draws out the implications for capital accumulation, wartime finance, and the political incentives surrounding war.