Why did Adam Smith believe that the necessities of life should be exempt from taxation?
In general, Smith believed that the dynamics of the market can self regulate, providing enough wealth and profit for all of its participants. His perception of government intrusion in the form of taxes and tariffs were already of skepticism. His feeling was that all form of taxation has the propensity to take money that could be geared towards the sustenance and growth of the free market: "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 public treasury of the State."
Smith believed that in taxing the necessities of life, the government takes from the poorest elements of society for the necessities represent the bare minimum of what the poorest require. For example, if a family is impoverished, they can barely afford sugar or salt. If they are able to afford it, then the government, through taxing these necessities, is increasing their hardship, already considerable. Smith finds it acceptable to tax luxuries for indulgence in such items is seen as a personal choice. For example, people make a conscious choice to purchase luxurious elements such as tobacco.