Front Page Titles (by Subject) CHAPTER V.: OF FINANCE. - The Works of Jeremy Bentham, vol. 3
The Online Library of Liberty
A project of Liberty Fund, Inc.
Search this Title:
CHAPTER V.: OF FINANCE. - Jeremy Bentham, The Works of Jeremy Bentham, vol. 3 
The Works of Jeremy Bentham, published under the Superintendence of his Executor, John Bowring (Edinburgh: William Tait, 1838-1843). 11 vols. Vol. 3.
About Liberty Fund:
Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.
The text is in the public domain.
Fair use statement:
This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.
Under the head of sponte acta, there is nothing except by accident: there remain, therefore, agenda and non-agenda. Finance operates in toto in diminution of wealth: the object or end in view, should be to render the diminution as small as possible, and as pure as possible from collateral vexation and inconvenience in every shape.
The operations of finance are reducible to receipt and disbursement, or say expenditure.
Receipt may be—1. Without condition of return; 2. On condition of return; i. e. on the footing of a loan.
Disbursement is accordingly—1. Disbursement at large; 2. Disbursement in discharge of loans. Expenditure supposes; in all cases, previous receipt; and in cases of loans, necessitates future receipt for the purpose of replacing the money borrowed.
Receipt and expenditure are either—1. Of money; 2. Of particular articles for service.
Every sum expended supposes therefore a correspondent amount already raised, or to be raised, by taxes.
The practical rule which ought to be observed in judging of the expendiency of any branch of expenditure is,—compare the benefit of it with the burthen of a correspondent portion of the produce of the most burthensome tax. By striking off so much expenditure, you may save so much tax.
Taxes take from present enjoyment: they diminish comfort in proportion as they are paid by each contributor out of that portion of his wealth, which, had it not been for the tax, would all of it have been spent within the year in the way of maintenance, as money is spent by a man who is said to spend his income.
Taxes diminish future wealth in proportion as they take from capital; viz. by being taken from that portion of a man’s money, the whole of which, had it not been for the tax, would have been spent on articles by the production of which real capital is increased; or even by being taken from that portion of his money which is expended in the way of maintenance, in so far as the money, had it not been taken from him by the taxes, would have been employed in the shape of pecuniary capital, by which real capital is increased.
Taxes, therefore, take from growing wealth—1. In as far as they are levied on capital; viz. on money destined for employment in the shape of capital, or on goods or labour, of which real capital is composed;—2. In as far as they are levied on income, or expenditure in the way of income, of men who lay up money to be employed as capital, or would have laid it up, had it not been for the tax.
Borrowing money to defray war expenses, takes from pecuniary capital, thence from growing wealth, in the amount of the sum so raised—minus the amount of mercantile profit upon such part of the expense as consists of purchased articles.
Repaying money formerly borrowed for war or other expenses, adds to pecuniary capital—thence to real capital—thence to growing wealth, to the amount of the money so employed in such repayment or discharge; deducting such part, if any, as is exported without return to foreign countries; which is the case with such part as is exported by the proprietor, to be employed abroad by him or on his account without being reimported,—that or the profit made by it.
By the mere discharge of a million worth of debt, as much, or more, is therefore done towards the increase of wealth, as by a million given in the way of bounties for the encouragement of this or that particular branch of trade.
Those who in the one case receive the amount of the debts respectively due to them, give up the future interest, and the rest of the community is exonerated from the payment of it: those who in the other case receive the million on the score of bounty, give up nothing in return for it.
When money is to be borrowed, borrowing it, in part at least of foreigners, is attended with two advantages. At the time of borrowing, it diminishes the consumption of home capital, the consequent check to production, and the loss to private borrowers as well as to government by the sudden rise in the rate of interest. At the time of paying off, it diminishes the loss produced to moneyed men at home, by the sudden pouring in of capital into the market (money which must be laid out in the shape of capital,) and by the sudden fall in the rate of interest which is the consequence. By moneyed men, understand here—not the opulent only, but all, to the very poorest, whose incomes arise out of the interest of money, and that interest reducible.
Some men grieve on this occasion, at the thoughts of the money that goes out of the nation to pay foreigners. A housekeeper might as well grieve at the thoughts of the money that goes out of the house to pay the baker. If to-day the money goes out of the house, it is because the other day the bread came into it. Do without bread, or bilk the baker, the money will be saved.
Taxes are either on property, or on presumption of property. In both cases, they are either on income or on capital.
Taxes on property in the shape of income, are either direct, or on consumption,—called of late years, from the French, indirect taxes.
Taxes on capital diminish present capital, and thence future and growing wealth, by the whole of their amount: taxes on income by the amount of the savings that would have been made out of income, and added to capital, instead of being spent in maintenance, had it not been for the tax.
The fault of direct taxes on presumption of property is inequality—that of direct taxes on property is vexation. Indirect taxes have no fault beyond the mere privation, which must be undergone at any rate: the vexation which in the case of direct taxes on property extends to everybody, is confined in the case of indirect taxes to the fabricators and venders of the article taxed, who make themselves amends for it in the price.
Of direct and indirect Taxation.
When a tax is imposed upon any commodity, a proportionable discouragement—intended or not intended—is applied to the corresponding branch of profit-seeking-industry, and thence a proportionable encouragement to the most immediately rival branches. In this way the branch of political economy which belongs to finance is unavoidably, though often perhaps undesignedly, entangled in practice and effect with the other branches.
To an indirect tax, each man pays no more than he pleases;* and the vexation attendant on the collection of it is confined to the makers and venders of the commodity taxed.
To a direct tax, each man pays what the imposer of the tax pleases; and the vexation attendant upon its collection embraces every man who pays it.
Indirect taxation, as far as it will go, is therefore preferable to direct; but the length to which it can be made to go depends, in the instance of each nation, upon its degree of relative opulence.
Of France, England, and Holland, in the scale of absolute wealth, France is at the top, Holland at the bottom. In the scale of relative opulence, France is at the bottom, Holland at the top.*
Comparatively speaking, England, till of late, made little use of direct taxes: France, little use of any other. Her abstinence from indirect taxes has been chiefly the result of necessity,† though in some degree of choice.
A tax on imports is borne by our own people—a tax upon exports to foreign countries, is borne by the inhabitants of foreign countries. Whatever imposition of this kind foreigners can be made to bear, is so much gain to us. If, indeed, when a fresh tax is imposed upon an article of export, the quantity of it produced is considerably diminished by the tax, a temporary distress is thereby produced; and the suffering may be less or greater than the suffering saved by the saving in the amount of taxes borne by ourselves. But if the quantity produced be merely prevented from increasing, no such suffering is produced, and the benefit by the saving in home-paid taxes is pure. The addition which, had it not been for the tax, would have been made to the quantity of the commodity thus taxed, spreads itself among other commodities of all sorts.
The direct effect of the sort of tax called indirect, is to make a man pay for the use of the article taxed, and go on using it as before:—an indirect effect is—to make him cease to use it, to avoid the paying of the tax. This indirect effect is the same as that of a prohibitive law,—prohibiting the use of the article,—viz. under a penalty equal to the amount of the tax. So far as the one effect takes place, the other does not. Commonly they take place together, in proportions infinitely diversifiable.
In the way of prohibition, a tax seldom falls on the article taxed, so exclusively as might be supposed. The prohibition falls—not merely upon the article taxed, but upon whatever article each man can best spare. When a fresh tax is imposed upon wine, a man who, having been used to buy wine and books, is fonder of wine than of books, reduces the quantity, not so much of his wine, as of his books. By a tax upon gin, many a man, instead of being sobered, has been starved.
The best sort of indirect tax is that which, by its effect in the character of a prohibition, diminishes the consumption of an article the use of which is pregnant with future misery,—the dregs of the cup of present pleasure. Such, above all, are the pabula of drunkenness. The fiscal, is in this case crowned by a moral use.
The worst sort of indirect tax is that which, in the character of a prohibition, lessens the use of an article to which a man’s attachment is apt not to be so great as it were to be wished it were, considering what is the produce of it in the shape of permanent good, over and above the evanescent pleasure. The fiscal use is in this case clogged with an antimoral tendency. Books, especially of the instructive kind, music, instruments of pastime of all sorts, not to speak of public entertainments—everything—morality is served by everything of this nature that calls a man off from drunkenness.
The mischief done in the way of prohibition by that species of direct tax which is imposed upon produce, is frequently but too real, but is apt to be exaggerated. Though my profit would be greater if I had nobody to share it with me, my having somebody to share it with me, does not make me deny myself all profit. Few men are so spiteful as to hate others more than they love themselves:—especially, the government, which is nobody, quarrels with nobody, and protects everybody. A man without a partner has the whole profit to himself;—yet many men submit to saddle themselves with partners. The government which imposes proportional taxes on produce, is a partner who furnishes protection, though nothing else.
I have elsewhere spoken of the best of all financial resources, and the worst.‡ The best (supposing public opinion to admit of it,) as well as the most copious, seems to be that which gives to the public a share in property become vacant by death, on failure of near relations. The formation of counter-expectations being prevented by pre-established law, receipts from this source need not be attended with that vexatious sense of privation which is the inseparable accompaniment of a tax.
The worst is that tax called direct or indirect, which, as often as it acts as a prohibition, deprives a man of everything, by depriving him of justice—the tax, I mean, upon law proceedings, by which the poor, that is, the bulk of the community—especially the oppressed and afflicted part of it—are put out of the protection of the law.
Abstractedly considered, the tax upon medicine might be stated as still worse:—the prohibition in this case bearing more immediately and exclusively, as well as extensively, upon health and life. But the tax is not apt to be so heavy upon medicine as upon justice. There are, moreover, hospitals and dispensaries for the relief of the poor who want medicine; but there are none for the relief of poor and helpless suitors who want justice.
Indirect and direct taxation are limited by the patience of the people. The ne plus ultra is variable and unascertainable, depending upon events and the temper of the times. Not knowing how soon it may arrive, governments are anxious to pay off debt—because, in proportion as debt is paid off, taxes, by which the interest is paid, may be taken off; and being taken off, may in case of need be laid on again. A tried tax will always be a more secure dependence than an untried one.
In the case of indirect taxes, a common notion considers the ratio of the tax to the price of the article as limited to a maximum;—limited, viz. by the effect of smuggling. If the ratio be increased, it is supposed that more will be lost by the quantity that escapes the tax, than will be gained by the addition to the amount of the tax on the quantity that pays it. This notion, supposing it just, as applied to the aggregate of taxable articles, will be apt to be illusive, as applied to this or that sort of article, considered by itself. In respect of difficulty of evasion and facility of collection, the scale of variation is stretched to a great latitude by the bulkiness of the article, by the local circumstances of the place at which the tax is collected, and by a variety of circumstances. But other causes of variation, and these very powerful ones, are,—the organization of that part of the financial system which concerns the mode of collection;—and thence the vigilance or remissness—the sufficiency or insufficiency in number, and the probity or improbity of the functionaries employed;—the good or bad contrivance of the taxation laws, in respect of the obligations imposed on the contributors for the prevention of evasion; the amplitude or scantiness, the good or bad choice made,—of the powers given to the collectors for the prevention of evasion;—and the apposite or inapposite construction of the system of judicial procedure on this subject, including the rules of evidence.
The limits thus set to indirect taxation, are set—not by the nature of things, but by the imperfection of the laws. It is to this imperfection that men are indebted for the inequality and vexation attendant on direct taxes, in comparison with indirect ones.
Taxes—Effects on Production.
Taxes ought to have no other end than the production of revenue, with as light a burthen as possible.* When it is attempted to employ them as indirect means of encouragement or discouragement for any particular species of industry, government, as we have already seen, only succeeds in deranging the natural course of trade, and in giving it a less advantageous direction.
The effects of particular taxes may appear very complicated and difficult to trace. By considering the subject in a general point of view, and distinguishing the permanent from the temporary effects of taxes, this complexity will be disentangled, and the difficulty disappear.
First question: What are the effects of a tax imposed by a foreign nation upon the articles of our manufacture?
Permanent consequences:—1. If the exportation be not diminished, the tax makes no difference with respect to us: it is only paid by the consumers in the state which imposes the tax.
2. If the exportation be diminished, the capital which was employed in this branch of manufacture withdraws itself and passes into others.
Temporary consequences:—This diminution of exportation occasions a proportional distress among the individuals interested in this species of industry. The workmen lose their occupations; they are obliged to undertake labours to which they are unaccustomed, and which yield them less. As to the master manufacturer, a part of his fixed capital is rendered useless; he loses his profits in proportion as the manufacture is reduced.
Second question: What are the effects of a tax imposed by ourselves, upon the manufactures we ourselves consume?
Permanent consequences:—1. If the consumption be not diminished, no other difference is produced than the disadvantage of the tax to the consumer, and a proportional advantage for the public.
2. If the consumption be diminished, individuals are deprived of that portion of happiness which consisted in the use of this particular article of enjoyment.
3. Capital, in this as in the preceding case, retires from this branch, and passes into others.
Temporary consequences:—If the consumption be not diminished, the tax makes no difference: if it be diminished, similar distress, in proportion, as in the case above.
Third question: What are the consequences of a tax imposed by ourselves, upon the manufactures of our own country consumed by foreigners?
Permanent consequences:—1. Whilst the consumption is not diminished, the operation produces so much clear gain for us. The burthen of the tax is borne by the foreigner, and the profit is reaped by ourselves.
If the consumption be diminished, the capital which loses this employment passes into others.
Temporary consequences:—Consumption not diminished, no difference to us: consumption diminished, similar distress in proportion, as in the former cases.
It results from hence, that the permanent effects of these taxes are always of little importance as to commerce in general; and that their temporary effects are evil in proportion to the diminution of the consumption. The evil is greater or less, according as it is more or less easy to transfer capital and labour from one branch of industry to another.
The least hurtful of these taxes are those which bear upon our own productions consumed by foreigners. If the same quantity be exported after the tax as before, so far from being prejudicial, it yields us a clear benefit: it is a tribute levied upon them precisely as if it were raised out of the bowels of the earth.
The tax imposed by us upon foreign importations is paid by ourselves, and burthensome as any other tax would be to the same amount. If the consumption be not diminished, it would be better that the tax upon this article should be imposed by us, that we might profit by it, rather than by the country which produced it, and which would then enjoy the benefit.
A nation which has a natural monopoly of an article necessary to foreigners, has a natural means of taxing them for its own profit. Let us take tin for an example: England is the only country which has mines of this metal—at least, all others are too inconsiderable to satisfy the demand. England might therefore lay a considerable tax upon the exportation of tin, without danger of smuggling, because it might be levied at the mine, or at the foundry. France could not impose an equal tax, because it would give too great an allurement to the smugglers.
These principles are easy of application to commercial treaties. Everything which is permanent, whether it be called encouragement or discouragement, has but little effect upon trade and commerce in general; since trade and commerce are always governed by the capital which can be employed on them. But international precautions may be taken for the prevention of rapid changes, from which temporary distresses result. Let every nation make a sacrifice by refusing to impose taxes, or to augment them, upon articles of its own exportation: every nation would then receive indemnification by a reciprocal sacrifice. Commerce would thus acquire stability; and that petty fiscal warfare would no longer be carried on, which produces a dangerous irritation among the people, always greatly disproportioned to the importance of the object.
The object of the first chapter of the commercial code ought to be to show the reciprocity of international interests, to prove that there is no impropriety, during the continuance of peace, in favouring the opulence of foreigners—no merit in opposing it.
It may happen to be a misfortune that our neighbour is rich: it is certainly one that he be poor. If he be rich, we may have reason to fear him; if he be poor, he has little or nothing to sell to, or to buy of, us.
But that he should become an object of dread by reason of an increase in riches, it is necessary that this prosperity should be his alone. He will have no advantage, if our wealth has made the same progress as his own, or if this progress has taken place in other nations equally well disposed with ourselves to repress him.
Jealousies against rich nations are only founded upon mistakes and misunderstandings: it is with these nations that the most profitable commerce is carried on; it is from these that the returns are the most abundant, the most rapid, and the most certain.
Great capitals produce the greatest division of labour, the most perfect machines, the most active competition among the merchants, the most extended credits, and consequently the lowest prices. Each nation, in receiving from the richest everything which it furnishes, at the lowest rate and of the best quality, would be able to devote its capital exclusively to the most advantageous branches of industry.
Wherefore do governments give so marked a preference to export trade?
1. It is this branch which exhibits itself with the greatest show and eclat: it is this which is most under the eyes of the governors, and which therefore most strongly excites their attention.
2. This commerce more particularly appears to them as their work: they imagine they are creators; and inaction appears to them a species of impotence.
All these pretensions fall before the principle, that production is subordinate to capital. These new branches of trade, these remote establishments, these costly encouragements, produce no new creations; it is only a new employment of a part of one and the same capital which was not idle before. It is a new service, which is performed at the expense of the old. The sap which by this operation is strained through a new branch being diverted from another, gives a different product, but not an increase of produce.
[* ]When indirect taxes are levied upon articles of luxury, a man need pay no more than he pleases; but the case appears to be otherwise as respects the poor, when they are levied upon articles of necessity.—Ed.
[* ]I speak of the recently past: one knows not well what to say of the present.
[† ]Indirect taxes, being collected from venders, presuppose exchange: direct taxes may alike be levied, exchange or no exchange—they may be levied on producers, venders or non-venders. The further a nation is advanced in the career of opulence, the fewer the articles produced by non-venders. A main cause, as well as effect, of opulence, as per Adam Smith, is division of labour:—as this advances, fewer and fewer sorts of things are done by the same hand; till at last, some one sort of thing excepted, there is nothing that a man does not find it cheaper to buy than to make at home. This applies more particularly to manufactures: in agriculture, the division is stopped by a variety of causes, which for the most part, though not in toto, are insuperable.
[‡ ]See Escheat vice Taxation, Vol. II. p. 585; and Protest against Law-Taxes, Vol. II. p. 573.
[* ]This principle may admit some exceptions, but they are very rare: for example, a tax may be imposed upon intoxicating liquors, with the design of diminishing their consumption by increasing their price.