The Online Library of Liberty

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• Essays On Economics and Society 1850–1879
• The Savings of the Middle and Working Classes 1850
• The Regulation of the London Water Supply 1851
• Newman’s Political Economy 1851
• The Law of Partnership 1851
• The Income and Property Tax 1852
• The Bank Acts 1857
• The Income and Property Tax 1861
• Currency and Banking 1867
• Endowments 1869
• Thornton On Labour and Its Claims 1869
• Leslie On the Land Question 1870
• Land Tenure Reform 1871
• Property and Taxation 1873
• Chapters On Socialism 1879
• Editor’s Note
• Chapters On Socialism
• Preliminary Notice
• Introductory
• Socialist Objections to the Present Order of Society
• The Socialist Objections to the Present Order of Society Examined
• The Difficulties of Socialism
• The Idea of Private Property Not Fixed But Variable
• Appendices
• Appendix A: Mcculloch’s Discourse On Political Economy (1825)
• Appendix B: Petition On Free Trade (1841)
• Appendix C: Examination Paper In Political Economy Set By Jsm (1872)
• Appendix D: Land Tenure Reform Association: Public Lands and Commons Bill (1872)
• Appendix E: Bibliographic Index of Persons and Works Cited In the Essays, With Variants and Notes

THE INCOME AND PROPERTY TAX

1852

EDITOR’S NOTE

Parliamentary Papers, 1852, IX, 780-91, and 794-820. Not republished. Original headings: “John Stuart Mill, Esq., called in; and Examined,” and “John Stuart Mill, Esq. called in; and further Examined.” Running heads: “Minutes of Evidence taken before the/Select Committee on Income and Property Tax.” The evidence was taken on 17 and 20 May, 1852, with Joseph Hume in the Chair, and the following members of the Committee present on the 17th: Sir Francis Baring, Joseph Henley, Charles Newdegate, John Lewis Ricardo, Harry Vane, Thomas Vesey, and Sir Charles Wood. On the 20th the same members were present, except Baring, Newdegate, and Vane, and in addition Benjamin Disraeli (Chancellor of the Exchequer), Edward Horsman, T. Sotheron Estcourt, and James Wilson. Identified in JSM’s bibliography as “Evidence before the Select Committee of the House of Commons on the Income Tax, printed with their Report, forming Vol. IX of the papers of the Session of 1852” (MacMinn, 77). No copy in Somerville College.

On 17 May, JSM’s examination includes questions 5222 to 5269 of the evidence before the Committee; on 20 May, questions 5277 to 5447.

The Income and Property Tax

j. hume:You have given considerable attention to the subject of taxation, and have published your opinions upon the income and property tax? On the general principles of the income and property tax.^[*]

What is your opinion of the present income tax,^[†]as regards its fairness and equality to the different interests affected by it? It seems to me to be the chief defect of the present tax, that it does not make any distinction between permanent and temporary incomes, or between precarious and certain incomes. I should not however be inclined to make so great a distinction in either of those cases as is contended for by many. The most popular of the plans for remedying the inequality or injustice of the present tax in making no distinction between permanent and temporary incomes, is the plan of capitalizing, as it is called, the income, and taxing each income at what would be its selling value at the moment when the tax is levied. Now this appears to me to involve an arithmetical fallacy. Suppose, for instance, there were two incomes, each of 1,000l. a year, the one a permanent income, and the other an income for 10 years, or what is equivalent, a life income, the life being supposed to be worth 10 years’ purchase. Supposing that the permanent income would sell for 20 years’ purchase, it would be double the value of the other, and, according to the maxim of taxing all persons in proportion to their means without consideration of anything else, all would admit that an income which is worth only half as much as another income, should pay only half as much. Under cover, however, of this principle, it is contended that an income of 1,000l. a year which is to last for only 10 years, should be considered as equivalent to an income of 500l. a year to last for ever, and should be taxed at only the same rate at which a perpetual annuity of 500l. would be taxed. This appears to me to be fallacious: because, after converting an income of 1,000l. a year for 10 years into an equivalent value in perpetuity, that is to say, into 500l. a year in perpetuity, you do not tax it in perpetuity, which you would do if it were really a permanent income of that value, but you tax it only for 10 years. The fallacy lies in capitalizing the income without at the same time capitalizing the tax. It appears to me that you ought to do both, or neither. The point might be illustrated in this way. Supposing the tax were to be paid only once, and assuming, as before, that a perpetual income is worth 20 years’ purchase, it would be fair to take from a perpetual income of 1,000l. a year exactly twice as much as you take from an income of 1,000l. a year for 10 years; that is to say, an income of 1,000l. in perpetuity being worth 20,000l., an income of 1,000l. a year for life at 10 years’ purchase, would be worth only 10,000l., and therefore ought to pay half as much as the other. Now supposing the tax were levied once for all, and that it were a tax of five per cent., the one income would pay 1,000l. once, and the other income would pay 500l. once, because the one would be worth 20,000l., and the other only 10,000l.; that everybody would allow to be fair, the one being half the selling value of the other. As that would be fair if the tax was to be levied only once, I apprehend that it would be fair in whatever mode the tax was levied; the one ought to pay what is equivalent to 1,000l., and the other to pay what is equivalent to 500l. But it is proposed that an income of 1,000l. a year for 10 years only, should be taxed as if it were an income of 500l. a year, that it should be taxed therefore only 25l. a year, and should pay that for only 10 years. So that where the perpetual income pays a perpetual tax equal in value to 1,000l., the terminable income pays a terminable tax equivalent only to 250l., and consequently pays a fourth, instead of a half, what the other pays. This, I conceive, is not consistent with the principle of paying in proportion to means, which is the principle of the tax as at present levied. At the same time, I do not consider that to be the right principle of taxation. I do not conceive that the tax should be in proportion to the means only, but that it should take into consideration the means, and also the wants. I would therefore tax temporary or precarious incomes at a lower scale than permanent or certain incomes, not because of their having a less selling value, but because the possessors of those incomes have one want, which those who possess permanent incomes have not; they are liable to be called upon in most cases to save something out of that income to provide for their own future years, or to provide for others who are dependent upon them; while those who possess permanent incomes can spend the whole, and still leave the property to their descendants or others. It is for this reason that I would tax a temporary income at a lower rate than a permanent income.

When you speak of temporary incomes, you include professional incomes? Yes.

You say that in the case of temporary incomes, not only the means but the wants should be taken into consideration in levying the tax. Are youable to point out what those wants are, in regard to any particular class of incomes, or to lay down a rule upon the subject? It is impossible to lay down a rule with precision, and entirely impossible to take into consideration the special circumstances of individual cases; but it may be said generally of both classes of incomes, that is, temporary and precarious, that the possessors will be unable prudently to spend the whole of the incomes, as possessors of permanent incomes might do. I think that this difference between those classes of persons and persons having permanent incomes is a ground for making a distinction between them in taxation. The true principle of the equality of taxation, I conceive to be, not that it shall be equal in proportion to means, but that it shall, as far as possible, demand an equal sacrifice from all. If two persons have equal incomes, and one of them can afford to spend the whole of that income, while the other is called upon to make a certain reserve to meet future wants, to demand from these two persons the same annual sum, is to require from them not an equal, but an unequal sacrifice.

You consider that there would be an equality in the tax if the allowance which you have now stated were made? I am only stating now what appears to me to be the principal objection to the present tax, namely, that it does not make any distinction between permanent and temporary incomes. The distinction which I think it ought to make, would be to leave untaxed such a proportion of the temporary income as it might reasonably be expected that the individual possessing it should save. Of course you cannot consider individual cases, you must consider classes of cases, and obtain as good an average as you can.

In what manner would you be able to ascertain what those wants were? It must be done to a considerable degree arbitrarily. No rule that can be adopted is perfectly just, because no two persons are in the same circumstances as to wants and means, but you may adopt a sort of general standard. It seems to me that the suggestion of taxing incomes in proportion to their capitalized value is a great deal too favourable to temporary incomes. If you convert an income of 1,000l. a year for 10 years into a permanent income of an equivalent value, which we will suppose to be 500l. a year, and tax the income as if it were 500l., you leave untaxed 500l. out of 1,000l. According to the view I take, this would be only justifiable if it was reasonable and just to suppose that the person enjoying that income would save 500l. out of the 1,000l. as a provision for future years or for his descendants, or any persons in whom he is interested. Now this is much more than the owners of life incomes generally do save, or can reasonably be expected to save. If a person having an income of 1,000l. a year which he has to work for, and which therefore depends on his life, were to put by as much as would convert this into a perpetual income of an unvarying amount, that is to say, on the present supposition, 500l. a year, he would leave to his posterity as large an income in perpetuity without work, as he allowed himself out of the produce of his labour, which is a very exaggerated view of the obligations or the probabilities of saving.

You think that an allowance should be made in all those cases according to the prudential views of what it is necessary to lay by in order to provide for the old age of the individual, or to provide for the family which he may have? I do not think you could establish any minute classification, but you might take an average of what those whose incomes are for life, or for a shorter period than life, might be reasonably expected to save, and that may, perhaps, be taken to be one-fourth. I say one-fourth, without much consideration, and without much means of judging, but you can only strike a general average. It might, I think, be assumed, that on the average persons with temporary incomes may prudently expend three-fourths and save the other fourth; if that were a fair calculation I would tax them on three-fourths and leave a fourth untaxed.

If I rightly understood you, what you mean is this, that supposing A from landed property received 400l. a year and B from professional income received 400l. a year, you would tax the one on 400l., and you would tax the other on 300l. a year? Exactly.

That you put as the average, without being able mathematically to arrive at the correct result, because the parties enjoying those incomes in each class will require, in order to act with prudence, to lay by a portion of their incomes to meet future wants? Of course it is a general average, but it does not seem to me objectionable to take it as such an average.

Would you apply that to salaries and all temporary incomes? I would apply it to all temporary incomes. But in the case of professional incomes, or incomes derived from trade or business, where, in addition to being only temporary, they are precarious, I would make a further distinction in favour of them. A precarious or variable sum which averages 1,000l. a year is not to any one’s feelings of so great value as 1,000l. a year of certain income. It would therefore be fair that incomes of the precarious class should be taxed on a somewhat lower scale, in addition to the exemption of one-fourth, or whatever other proportion were adopted, on the score of its being a temporary income. This would not apply to salaries, or any incomes of a fixed character, but only to those which are precarious; to all incomes from commerce, for instance.

On that view, probably half in a trade where considerable risk existed, your proportion might go up to a half, whilst other incomes were charged upon the three-fourths? To a certain extent regard is paid to that consideration in the present system, by allowing losses to be deducted, but it is not provided for completely, because under the present system all losses are not allowed to be deducted; it is only the loss in a particular year which is deducted. If for several years in succession there has been a loss in business, though no tax is levied in those years, yet nothing is given back; therefore it is not, in the present mode of levying the tax, correct to say that losses are allowed for; they are only partially allowed for.

sir c. wood:Is not loss allowed for in each and every year? If in one year there is 1,000l. gained and 500l. lost, the tax is levied on 500l., but if in the succeeding year the profits are 500l. and the losses are 1,000l. the State is content with levying no tax in that year, but it does not refund to the taxpayer, as I conceive in justice it ought to do.

That is to say, the State does not indemnify a man for the loss of income in any one year, by paying him a certain sum in that year, although it received the tax from him in the year when he made a profit? Precisely so; he has paid the tax in those years in which there was a profit, but in those in which there was a loss he has not received anything back, therefore taking a series of years he has paid the tax on more than the surplus of his profits above his losses.

j. hume:You are aware that under Schedule (A.) for losses arising from repairs, or other circumstances attending the management of real property, no allowance is made. Do you consider that just? On principle I should say it is not just; but I have not considered the subject very particularly.

Then we understand you to speak of net income after making the allowances which under each class might fairly be made? Yes. There is something further which I think is not strictly just with reference to losses. In consequence of the classification of the sources of income in the return that each person makes under Schedule (D.), the whole of the losses are not allowed for, even in the same year. As I understand the matter, if under some of the heads he has received profits, and under others he has sustained losses, the losses under one head are not allowed to be deducted from the profits under another. For instance, supposing a person in Schedule (D.) makes a return that he has lost 500l. by his business, but that he has gained during that year 500l. by the sale of railway shares, he is called upon to pay on the 500l. he has gained on railway shares, taking no account of the 500l. which he has lost in his regular business; but I apprehend, in the case supposed, he ought to pay nothing.

You would require each individual under Schedule (D.) to place his whole receipts and his whole losses, so that he should pay only on the net balance, if it was a profit? Exactly, and that I conceive must have been the intention of the Legislature, but I believe it is not the practice.

c. newdegate:You have stated that it would be just in the case of temporary incomes, and more especially in the case of professional incomes, to allow for a reserve, and that amount allowed for a reserve should beexempt from the tax; would not that be equally just under Schedule (A.), in the case of estates, where at certain periods buildings are required to be renewed as well as repaired? I think so, on the principle that people ought to be taxed only on their net receipts; on the income they receive after deducting all the charges necessarily connected with it. They ought to be taxed on that portion of the year’s income which they can afford to spend upon themselves. That is the principle on which all my remarks have been founded.

Making allowance in all cases for a necessary reserve? Yes.

Have you ever considered the case of the owners of mineral property who receive what is termed a royalty, which includes rent for the use of the mines and also the whole of their share of the coal or minerals in each year? I have not considered that case particularly.

Is it not the case that those parties pay the tax upon their whole share of the coal sold in each year, that coal being absolutely disposed of, and, in fact, being so much capital? I apprehend that they ought only to pay upon the surplus of their receipts beyond expenses, like other people.

The case I put is this: under Schedule (A.) the coal-owner is taxed upon the whole royalty which he receives, that royalty includes the sale of a certain portion of his coal, which is so much capital; is it just that he should be taxed upon the whole value of that sale? I can only conceive that question to arise in contemplation of the ultimate exhaustion of the coal mines, but as that must be at so very distant a period, it does not seem to me that any deduction which could be reasonably made with reference to that contingency, could make any material difference.

Would you, then, tax the royalty, which includes the value of the coal sold, at the same rate as you would tax rent, which is only an annual payment for the user of the land? As far as I can see at present, without much consideration, I should; but in regard to precarious incomes, such as profits of trade, or professional incomes, which cease altogether with the life of the person, and are liable to fluctuate from illness, or varying success, or from a hundred other circumstances, I think the tax is doubly unjust to the holders of those incomes. In the first place, it taxes them on the whole of their receipts, but does not deduct the whole of their losses. In the second place, I conceive that even if you deduct the whole of their losses you will not do full justice to them. Supposing a variable income which averages 1,000l. a year after all losses were deducted, but which might cease altogether any day, though on a series of years the income might be the same as that of a person who had 1,000l. year from land, still it would not be just to tax it on the same scale, because it is not the same to any one’s feelings. A permanent income of the same amount is of more value to any man’s feelings than an uncertain income, averaging that amount, but which may at any time dwindle to nothing. On that account, if all losses were allowed to be deducted, and justice done in that respect, still some additional consideration would, I think, be due to the possessor of a precarious income.

j. hume:Though you do not agree entirely in the principle that the State should levy the tax by capitalizing the different incomes, still you come to the conclusion that those who have precarious incomes should not be taxed, as they now are, at the same rate with those who have permanent incomes? Not only so, but I would make a double distinction: in the first place, as regards those whose incomes are temporary, I would tax only such a proportion of their income as it may be reasonably supposed they can afford to spend upon themselves, and leave untaxed that portion which they are bound, or may be reasonably expected to save. In addition to that, where incomes were precarious, I would tax even that reserved portion at a somewhat lower rate. For instance, supposing that permanent incomes were taxed as at present, 7d. in the pound, then in the case of temporary incomes I would levy 7d. in the pound only upon three-fourths of the income; and in the case of precarious or uncertain incomes, such as those derived from professions and trades, I would take, perhaps, only 6d. in the pound upon the three-fourths.

Do you think that those classes could be so arranged as to enable the officers who were employed to levy the tax to collect it with fairness? I do not think it would be possible to make nice distinctions in particular cases, but it seems to me that there would be more justice in drawing the line a little arbitrarily than in not drawing any line at all.

Though you could not draw the line quite correctly in all cases, you are of opinion that it would be better to attempt it than to continue the present system, which you consider unjust? Decidedly.

c. newdegate:You stated in reference to the principle of taxation, that means only should not be considered but wants also to a certain degree, including under the term “wants” the necessity for making a reserve in the case of persons who have limited interests. Is there not also this further consideration, viz., the advantages derived by each from the state, which are not the same in all cases; for instance, are not professional incomes much more dependent upon the good order and permanent condition of society than incomes derived from land? It seems to me that all incomes are essentially dependent upon the protection of government.

But are not professional incomes more so than the incomes derived from land? Supposing society to be sufficiently ill governed, no property whatever would be safe.

But would not professional men, in the case of society not being well governed, suffer more than the owners of real property? It seems to me very disputable whether they would, but supposing they did, I do not conceive that to be a consideration on which a principle of taxation can be grounded. The just principle of taxation, I conceive to be, to impose as far as possible an equal sacrifice on all.

According to their means? Yes.

Then, after all, the distinction you have established resolves itself into the principle of taxation according to a person’s means? Taxation in proportion to means, but with an allowance in certain cases where the payment of the same proportion would be an equal sacrifice.

Without a consideration of the necessities of the enjoyment, or the advantages derived? If you could ascertain the particular necessities of every individual, which you cannot do, and if you could also distinguish the necessities he brings upon himself by imprudence from those which are inherent in his position, I think justice would require that you should do so. But as that is clearly impossible, all you can do is to consider classes of cases; and if you can in any particular class of cases distinctly see that there is a necessity which does not exist in another class of cases, and that if you took the same proportion of income from both, it would impose a greater sacrifice upon the one than upon the other, I think this should be avoided.

You admit that wants are to be taken into consideration in fixing the tax, and that the tax is to be regulated according to certain classes which you would establish? Yes.

Without consideration of the advantages derived by each class from the institutions of the country? Exactly.

j. hume:I understood you to have said that taxation is raised for the protection of all parties in the State; will you explain the words you have now used, “equal sacrifice.” You say there ought to be an equal sacrifice, but you do not look to the sacrifice which each individual has to make, but you take it in classes? I hardly know how to give any better explanation than is implied in the words themselves. If the object was to raise from a number of persons a contribution for some common object, the natural course would be not to take exactly the same sum from each, because they can afford it in unequal degrees; and by taking, not the same sum, but the same proportion, you would still take from them what they could not afford in equal degrees. I would make an allowance for that circumstance, and I would endeavour so to regulate the sum taken from each, that each should be required to give up an equal share, not of their means, but of their enjoyments.

j. l. ricardo:That each should make an equal sacrifice? Yes.

j. hume:You would not look altogether to the property possessed, but toother circumstances connected with the situation of the property? The amount of the property is one of the principal circumstances to be looked to, but not the only one.

In a former answer you stated that you would make a certain allowance to all; what do you mean by an allowance; is it for necessaries, not luxuries? In order to answer that question, I must enter into another part of the subject, which is, the expediency of leaving a certain portion of all income untaxed. It seems to me right to exempt from income tax, and from all taxes as far as you can, the amount of income required for the necessaries of life. If, for instance, 50l. a year would provide an individual and an average family, or rather a family just sufficient to keep up the population, with necessaries of life, so much should be left untaxed.

For rich and poor? Yes. I would not leave incomes of 50l. untaxed, and tax incomes of 60l. upon the whole 60l.; I would tax them on the surplus above 50l., in order to take a certain proportion of the surplus, and not a certain proportion of the whole income.

Is it your view that all property, and all incomes should be taxed, subject to the exception you have now stated? If the income tax was the only tax, and the whole national revenue was raised by means of it, I should say so, certainly; but as circumstances are now, one part of the revenue system must be considered with reference to other parts. If I were laying on an income tax to supply the whole of the national expenditure, I would tax all incomes that yield more than the necessaries of life, and tax them on the surplus above what would yield the necessaries of life. But under the present system of taxation, it is right to consider whether the remaining taxes do not press more on the smaller than on the larger incomes. I conceive that they do, and that this justifies the present exemption from the income tax of incomes under 150l. a year. The excise and customs, and our indirect taxes in general, are levied mostly on commodities of very general consumption, other articles being seldom worth the expense of levying a tax: and thus the great mass of our revenue is derived from the articles consumed by the middle and lower classes. The consequence is, that probably the people in this country who are most heavily taxed in proportion to their incomes, are those receiving incomes of between 50l. and 150l. a year, because all articles of general consumption are consumed in a greater proportion by that class than by the rich.

c. newdegate:You consider that under the present system of taxation, what may be termed luxuries are, in a great measure, exempt? The luxuries of those whose incomes are small, are taxed much more heavily than those of the rich; and that is carried so far, that the same amount of tax is often levied on the lower qualities of the same articles as on the highest qualities.

If I understand you, the luxuries of the comparatively poorer classes are more heavily taxed, under the present system, than the luxuries of the richer classes? Yes; what I mean to say is this, that if there were no tax but an income tax, it would be fair to commence at as small a sum as 50l., which would cover the necessaries of life, and to tax in all cases the excess above 50l., but under present circumstances it is justifiable to begin as high as 150l. The class between 50l. and 150l. now pay a disproportionate share of our indirect taxes, inasmuch as the articles upon which those taxes principally fall, are articles upon which a larger proportion of small incomes than of large incomes is expended.

sir c. wood:Is not this what you mean, that you justify the exemption of the lower incomes from the income tax, because in your opinion the indirect taxation presses more heavily upon persons of smaller incomes than upon persons of larger incomes? Yes.

c. newdegate:If I understand you rightly, you would recommend the abolition of the exemption from the taxes upon incomes under 150l. a year, if you were not of opinion that the other taxes of the country pressed so heavily upon them; but you think the incomes which are most heavily taxed, according to the present system, are the incomes between 50l. a year and 150l.? Yes.

j. l. ricardo:Most heavily taxed by indirect taxation? Yes; and in order to re-establish the balance, as the other taxes press more heavily upon the small incomes, it is just that the income tax should exclusively upon the larger incomes.

You mean that the pressure upon the lower incomes is not from direct but from indirect taxation? Exactly.

j. hume:Would you recommend a graduated scale in the plan which has been recommended by Archdeacon Paley,^[*]increasing the tax as the amount of income increased, and as Mr. Pitt did in the first Act of his?^[†] I should not be favourable to taking a larger per centage from the higher incomes than from the lower incomes.

Do we understand you to say that before the present income tax on any class of the community can be fairly imposed, you must take into view the general amount of taxation, and how far those who have smaller incomes pay a larger proportion of their incomes under indirect taxation than others who have larger incomes? Yes.

And therefore the absolute money payment from individuals in the middle and lower classes of society does not indicate the pressure of taxation on those classes? No, and an income tax which would not in itself be just, may be rendered just by the necessity of compensating for the undue pressure of other taxation.

^[*]You were asked your opinion as to taxing property on a graduated scale; you stated that you did not think that would be advisable. Do the same objections, in your opinion, apply to taxing land or realized property? I think there are the strongest objections to an income or property tax exclusively on realized property. The objections are that, in the first place, it is taxing people upon what they save, and leaving them untaxed upon what they spend; and, further than that, it appears to me to be taxing only the present owners of land or securities. By realized property, I presume, is understood not property engaged in business, but property which has been taken out of business if it was ever in business, and invested in some permanent form. I am using the term “realized” in the sense in which it is generally used by those who contend for a tax on realized property only. Now, it seems to me that it is absolutely impossible for the Legislature, by any income tax, to tax future realizations. They can only tax present realizations. The imposition of a tax on incomes from realized property, from which tax other incomes were exempted, would lower the price of all realized property of land and all securities, and all who hereafter bought such property would buy it at a reduced price; so that they would escape the tax, and it would be levied exclusively on those who at present hold land or securities. The present holders would continue to pay the tax after they had parted with the property, because they would have had to sell it at a lower price. I conceive therefore that the tax would be simple confiscation of a certain proportion of their property.

You stated that you would not make any exemption from charge in the case of realized property? Yes.

Does the same rule apply to professional and variable incomes? With reference to variable incomes, it appears to me that some allowance may properly be made not only for their temporary nature, but also for their precariousness.

sir c. wood:Would you apply your rule of taxing three-fourths only of the income to temporary incomes derived from realized property, as well as to other temporary incomes? Yes.

j. hume:Supposing the exemption to be made, to what amount would you descend of income, both as regards income from landed property and income from professional exertions? If there were no other tax than an income tax, I would make that tax descend to the amount which might be considered sufficient for necessaries. I mean necessaries not very strictly interpreted, and not necessaries for the individual only who is assessed to the tax, but for the whole of the existing population. At that point, whatever it is, the income tax should commence, if there were no other tax whatever; but when there are other taxes existing, it is necessary to consider the incidence of those taxes, and if they fall, as I think they do, with a much greater proportional pressure on the smaller than on the larger incomes, it is a fair compensation that the income tax should fall only on the larger incomes. On that account I think the present limit of 150l. is defensible.

We understand you to say, that in order to call for an equal sacrifice from all parties, not the income tax only, but the other items of taxation bearing on the different classes of the community, ought to be taken into consideration before a judgment can be pronounced as to what would be a fair and equal rate of taxation upon all classes? Certainly.

The plan you have stated you do not consider to be perfect justice, but you consider it the nearest approximation to justice, and much better than the present system? Certainly much better than the present system. But in order to do complete justice, it seems to me, though it is not a principle generally recognised, that the income tax ought to exempt all that portion of income which is saved. I express this opinion not solely on grounds of policy or expediency, with a view to encourage savings, but as a simple question of arithmetic. If that portion of income which is laid by is charged with income tax, it pays the income tax twice; first on the capital, and then on the interest derived from it. For instance, suppose that in one year I save 100l.: if I did not save that 100l. I should have to pay 3l. to the State, which would leave me 97l. to expend on luxuries or indulgences: but if, instead of spending, I save the 100l., I should not save it to lock it up, but to invest it; and I should immediately begin to pay income tax on the income derived from it, which would be equivalent to paying the tax on the 100l. If I spend the 100l. I pay 3l. to the State, and have 97l. for my own use; if I save it, I pay 3l. to the State, which reduces my future income from it in the same proportion, and I also pay three per cent. on this diminished income; so that, in reality, I pay the income tax twice, first on the capital, and then on the interest. This could only be just, on the supposition that I had the use and benefit both of the capital and of the income; but I have not. If I have the use of the capital I derive no income from it; and if I have the income, it is because I abstain from using the capital.

sir c. wood:Your principle is this: if I had an income of 50,000l. a year, and spent the whole of that income, I ought to pay income tax upon the 50,000l.; but if I were a great miser, and lived on 1,000l. a year, and saved 49,000l. I ought to pay the tax upon the 1,0000l. a year, leaving the 49,000l. untaxed? The reason for exempting the 49,000l. is, that it will hereafter pay the tax when invested. Instead of paying 7d. in the pound at once, it will pay an annuity of 7d. in the pound on the interest, the present value of which annuity would be exactly equal to 7d. in the pound upon the 49,000l. At present, the 49,000l., if spent, only pays the tax once, but if saved, it pays it twice, although the person to whom it belongs has not the use of it twice, but only once.

Is not the future tax upon the interest derived from the investment of the capital which is so saved? Yes, but the interest is all the benefit that by the supposition is derived from the investment by the owner. The benefit of the capital is obtained by the labouring class whom he employs, or who are employed by the person to whom he lends the money.

Do you think that the opinion which you have now expressed in favour of exempting from the income tax all monies saved is consistent with the opinion which you formerly gave,^[*]that the wants of parties ought to be considered as well as their means, in apportioning the income tax? The consideration which ought to be given to wants, in modification of the rule of taxing persons in proportion to their means, seems to me quite compatible with interpreting that general rule in the mode which appears to me arithmetically correct. If the portion of income which is saved pays twice as much tax as that which is spent, this is not equal taxation in proportion to means. The principle of making allowance for wants, does not require that the same portion of income should pay the tax twice when employed in one way, while if employed in another way it would pay it only once.

j. wilson:When you say it is taxed twice, you mean that first of all it is taxed as income in the year when the income arises, and that afterwards it is not taxed once only, but annually, as the interest of that capital accrues? Yes, that is equivalent to being taxed twice; first of all, it pays three per cent., supposing that to be the amount of the income tax, and afterwards it pays in a perpetual annuity, what is equivalent to another three per cent., so that in fact it pays as much as if it had had to pay six per cent. at once.

sir c. wood:Is not the principle for which you contend of exempting savings from incomes, equally applicable to increases of all capital in the country derived from gradual accumulation? Certainly; but if that portion of the income which was saved was exempted from the tax, it would still be called upon to pay income tax in proportion as it came to be expended and used for the benefit of the owner.

Therefore all additions to incomes derived from the investment of savings ought, in your opinion, to be exempt from income tax? I am not entering into the question of what is now practicable, but what would be necessary to make an income tax a strictly just tax.

Is it your principle that, in strict justice, all income derived from the investment of accumulated savings ought to be exempted from the incometax? I would tax the income; what I would exempt would be the investment itself. I would not tax the investment and then the income derived from it; in fact, I would make the tax a tax upon expenditure, and not upon income.

j. wilson:You would only tax the portion of the income which the man expended, and not the income which he actually made? Yes; and if he saved any portion of his income, and afterwards derived income from it, I would tax that income according as it came into use by expenditure.

sir c. wood:Would you call upon every person under Schedule (D.) to make a return, not of his income, but of his expenditure? That is a question of expediency and practicability, and depends on the reliance to be placed on conscience. I do not think that such a mode of levying the tax would be practicable; but it is necessary to keep in view the requisites of exact justice, whether they can be completely realized or not, in order that we may at least approach as near to them as we can.

j. hume:But you state that you do not think it would be practicable? I do not see any means by which you can secure the correctness of such returns, especially if it is borne in mind, that if a person saves a certain sum in one year, that same sum may be squandered in the next year, and it would not be possible in such a case to take back the boon which had been conceded.

sir c. wood:However just the tax would be, you do not regard it as being very practicable? That is a question for persons of greater experience of details than myself, but I do not see how it would be practicable.

e. horsman:After all you have said, does it not resolve itself into this, that a person pays a higher tax because he is a richer man from his accumulation? He would equally pay a higher tax because he was richer if the distinction which I propose were made. In consequence of his savings, he would have a greater income next year than this year; and he would be taxed on the whole of that greater income except any part of it which he saved in that year.

sir c. wood:In the case of the miser, who saved 49,000l., you would never get the additional tax from him, however rich he might be? That, no doubt, as far as it goes, is an objection to what I suggest; but the less he paid, the more would be paid by those who succeeded to his accumulations.

If the tax is at all imposed in proportion to the advantage derived from the State in the shape of protection, is it not fair that this party should pay in proportion to that which is protected? That is an objection which if it exist applies to all taxes on expenditure, and therefore to all existing taxation.

All taxes are not imposed on the same principle as income tax? No; on the opposite principle, I conceive.

Is not the general principle of income or property tax, that a person should pay in proportion to the property which he has, and which derives protection from the State? I would rather say that the equitable principle of taxation is to require from each the same proportional sacrifice of his enjoyments.

Is not the principle which you have laid down, that each person should be taxed to the income tax according to the amount of his expenditure? Yes.

j. wilson:The principle which you lay down with regard to income tax you consider to be exactly analogous to indirect taxes upon articles of consumption; you would substitute an income tax for Customs and Excise taxes and all other indirect taxes, and tax a man in proportion to his expenditure and not in proportion to his income; and your idea is that that would make the income tax analogous in its operations to indirect taxation? Yes; except that it would be a tax on all expenditure, and not a tax on expenditure of some particular kind.

sir c. wood:Do you remember whether a tax on expenditure was the principle of Mr. Pitt’s original scheme? I rather think it was.

Do you remember what the result of that was? No, but I should be quite prepared to find that it was a complete failure.

Are you not aware that the principle of a tax upon expenditure was abandoned in consequence of its being an utter failure, and the tax on income substituted as the only means of getting a fair amount of tax? It is very probable, and I never expressed an opinion how far that mode of levying the income tax would be practicable; but it seems to me the fairest mode if it were practicable, and therefore any approach to it in practice would be desirable.

j. hume:You have, in your publication, expressed an opinion as to how far you consider the land tax should be reckoned at the present moment as a tax paid to the State? As far as I am acquainted with the nature of the land tax, it seems to me simply a reserve made by the State of a certain portion of the rent of the land, which never properly belonged to the present owners. They or their predecessors were liable to feudal obligations which, if fairly commuted, would have required from them a payment of a much greater amount than the present land tax.

Do you consider that Mr. Pitt, in making the land tax perpetual,^[*]laid it on the land as a substitute for all the feudal charges which had existed on the land before that time? Undoubtedly he did not, because the feudal charges had been taken away previously; but they had been taken away without commutation, which I think was a gross injustice; to abolish charges upon land which had been previously held subject to those obligations, and to render it free of those obligations.

At what period do you consider those feudal charges on land to have been abolished? The last of them were abolished in the time of Charles the Second, therefore only a short time before the first imposition of the land tax,^[*] the proportion of which was larger than it is now, having been since reduced.

sir charles wood:Has not the land tax varied from time to time in amount? Yes, but chiefly in the way of reduction.

j. henley:You say that the feudal charges would have been heavier than the existing land tax; what per centage do you apprehend the feudal charges would have been? I am not competent to say.

How, then, do you form your opinion that they would have been higher than the present land tax? Because the land tax bears a very small ratio to the value of the land: and as the land was granted for the purpose of feudal service, it cannot well be supposed that the burthen of that service was only a twentieth or a thirtieth part of the value of the land.

What do you suppose to be the amount of the land tax? I have not the facts in my memory at the present moment, and therefore I cannot say.

You neither know the amount of the land tax, nor have you formed an estimate of the amount of the feudal charges? No, I am not in a position to form any estimate upon the subject; I did formerly make estimates upon the subject, but what they were I cannot at this moment say.

Do you give that opinion from an examination of estimates formed upon the subject, or is it merely a general opinion? I give the opinion upon general grounds, and upon details which I do not now recollect; but I have formerly read many discussions on the subject of the land tax.

Feudal charges were applicable to all lands held from the Crown by military service? Yes.

Many lands in the country were not so held? Not very many.

There were some, were there not? In this country there were very few; there were more in other countries.

Do you mean to assert that there were no lands held in England except on terms of military service? No, I do not mean to say that; but the general rule in this country was a feudal tenure; there was scarcely any allodial tenure remaining in this country in the middle ages, though in still earlier times tenure was allodial here as elsewhere.

If the imposition of the land tax was, as you state, in substitution of feudal tenures, how happens it that it was not imposed equally over the whole kingdom? It is very difficult to say, without a minute investigation of the history of taxation, what is the explanation of the caprices of taxation that have existed in this as in all other countries. There have been many more such irregularities in all countries than are justifiable on any good grounds.

Have you ever seen any estimate of what the cost of those feudal chargeswas in the time of Charles the First? I imagine in the time of Charles the First they were already very much diminished, but I cannot offer any particular estimate; any estimates that may have been made must in a great measure have been conjectural.

The whole of this matter is very conjectural, is it not? Yes.

Were there, as well as burdens, any privileges which the lands enjoyed formerly under the feudal system which they have since lost? I am not aware of any which they have since lost; the possession of land has always been a source of importance and power.

Take, for instance, manorial rights; were there not many manorial rights dependent upon the feudal tenures, which were very much more valuable at the time that those tenures existed than they are now? I should doubt very much whether any of that description of rights were more valuable in a poor state of society than in a rich one. Manorial rights have generally become limited in the course of time, by customs of different kinds, by which indefinite obligations were exchanged for definite ones, but I do not think that on the whole it can be supposed that the value of manorial rights has diminished with the growth of society.

Have any rights been wholly swept away? I dare say some have.

Wardship for instance? Wardship was a privilege to the vassal, with regard to sub-vassals; but a burden to the tenants in capite, in relation to the Crown.

Do you consider that, on the whole, it was a gain or a loss to the landed interest when that was done away? I am unable to say.

You have not looked into that part of the subject? I have not looked into any part of the subject for several years.

Do you consider that there are any other rights analogous to wardship which have been swept away? It is possible there may have been.

You have, then, given a general opinion, without having looked into the subject in all its bearings? I cannot say whether or not I have considered it in all its bearings, but I think it would be very difficult for any one to maintain that the whole of the feudal obligations, taking those to which the tenants and sub-tenants of the Crown were liable, did not amount to fully as much as the land tax now amounts to.

Then, having given that opinion to the Committee, have you taken all those elements into consideration? I have not entered into the minutiæ of the subject very accurately. I have gone on general probabilities and presumptions.

Do you know what the land tax is in the county of Lancaster, and what it is in some of the Southern and Midland counties in England? I cannot say particularly.

If you heard that, in the Midland counties, the land tax was 1s. in thepound upon the rental, and that in Lancashire it was not 1d. in the pound, should you say that it was a tax imposed as a substitution for military service, equally applicable to both counties? I never said that it was imposed as a substitute for military service; I said that the fact of these lands having been subject to military service would have justified the tax being imposed; and, therefore, when the land tax was afterwards imposed, it appears to me just on the principle of substitution, even though there were no coincidence in point of time, or in the amount of the tax.

According to your view, to make it just, it would be necessary to equalise it? I should not be prepared to admit that consequence. I should rather regard it as a deduction from the rent of the land, which might be considered as having been reserved by the Government. I would put it on the ground of prescription. If an express commutation had been made, there probably would not have been the great inequality which there is now; still, that inequality existing, I should not be inclined to increase the amount on the lands which are most lightly taxed.

You would regard it as prescriptive, although its origin is statutory and known? I would; it does not appear to me that its origin being statutory makes any difference in that respect.

Not in the use of the word “prescription”? In the legal use of the word “prescription” it may make a difference, but not, I conceive, in the moral sense of that word.

Why not? Because it seems to me that prescription in regard to property consists in allowing that to continue in possession which has been very long held, and under reasonable expectation of being held permanently.

Without reference to its origin? With reference to its origin only in so far as that might affect the reasonableness of the expectation that it would be continued.

Then if the origin was clearly known, and was of a nature adverse to that view, your reasoning would not hold good? That would be matter of opinion in each case.

It would wholly depend in your opinion upon the ground of the origin justifying the conclusion that you had come to? Yes.

If the origin was entirely adverse, all the superstructure you had raised upon it would fall to the ground? Of course it would.

Do you know at all the history of the alterations of the land tax from time to time? I know that the tax has been several times reduced, but at what precise times I am not aware; I know that at one time it was as high as 4s. in the pound, and that afterwards it was reduced to 1s. in the pound.

Do you happen to know what it was at its origin? I did know those facts, but I have not got them in my recollection.

Was it originally put on at more or less than 4s. in the pound? At less, I believe.

Then it has been subject to increases as well as decreases? Yes.

According to your belief now, is it at 1s. in the pound? It is extremely variable; it is very unequal in different situations.

It was always irregular; that irregularity depending upon the amount of the charge, and not upon the amount in the pound to be raised upon the assessment? I am not sufficiently acquainted with the facts to be able to answer any questions with certainty upon the subject; but the total amount at any time which has been raised by means of the land tax, if it were distributed equally over all the lands of the kingdom, would certainly be a small equivalent for the feudal obligations upon those lands in respect of military service.

But not being so distributed, it may press very heavily upon some lands, and amount to 2s. in the pound upon their rack rents? I should consider the case to be very similar to the commutation of tithes. It may appear hard that some persons should have to pay a larger amount as commutation of tithes than other persons of equal income have to pay, but it does not at all follow that what they have to pay is unjust. The question is, whether they can be considered to have been ever entitled to the tithes; and in the present case, to have been ever entitled to that portion of the rent of the land which is taken from them by the land tax.

In the case of title it is a prescriptive payment, of which we do not know the origin, but in the case of the land tax it is a statutory payment, of which we know the origin and the circumstances? The origin was statutory, but it may be considered to have been, at the time it was imposed, morally, though not legally, an equivalent, or a partial equivalent, for the obligations to which the land was previously subjected; and in that view, even if some lands were dealt with more leniently than others, still if that comparative lenity has continued for generations, it does not appear to me that it can be made a subject of complaint now.

Then the justice of your comparison would depend altogether upon the identity of the origin, would it not? The only way in which it could be affected would be, if the land tax now levied on the land of the community, or on any portion of that land, could be considered as more than a fair equivalent for the obligation of military service, and for whatever other feudal obligations of an expensive nature the land was subject to.

What you mean to contend for is this, that if A. B. were taxed ever so highly to the land tax, and could not show that that was more than he ought to have paid for military service, he would have no right to complaint? It appears questionable whether it would be just to impose on the present generation an increased charge as land tax, on the ground that the present land tax was an insufficient equivalent for the burthens which the land of their forefathers was subject to. After a certain duration of such an arrangement, even though made by statute; after the property has passed through several generations, and the expectations of families have been founded upon the arrangement, it appears to me that the Government could not equitably take advantage of a defect in the origin of it, for the purpose of laying on upon that ground any higher tax.

However unjustly the tax may bear at a particular time on particular parties, on account of the length of the time for which it has existed, and the change of circumstances, whatever they may be, that have taken place, in your opinion it would be unjust now to make an alteration in the tax? Yes. I might illustrate my meaning by saying that it is my opinion, and the opinion of many other persons, that it was an exceedingly improper act of Hen. 8th to give away the lands of the monasteries to individuals, whose successors now possess those lands; but I conceive it would be now unjust to take those lands, or any portion of them, from the present possessors.

How do you establish an analogy between a grant of the Crown and a tax upon the subject, which has always varied and been dealt with from time to time according to the circumstance of the State? It is a question of degree, in my view of the matter. In proportion as the State has adhered to a particular mode of taxation, as in the case of the land tax, and made no alteration in it for a long period, just in that proportion the arrangement of landed property which has grown out of that system of taxation, approximates more and more in its character to the case of property held under direct gift. It seems to me, though I would not lay down any fixed principle on the subject, that the same principles are to a certain degree applicable to the two cases.

sir c. wood:May not a tax which has been unjust in its first imposition become just in the case of the person succeeding to the property as far as regards the subsequent holders? Certainly; it may become just as regards subsequent buyers, because if the land is under any disadvantage it tells on the price for which the land is sold.

j. henley:But in the case of the present holders it would not be just? All you have to consider in the case of those who have inherited property and not acquired it, is the reasonable expectations which they were justified in forming, and those expectations necessarily depend upon the state of the law. It is not to be supposed by a person who inherits land that he is to have the land altogether, free from the burdens to which his ancestors who held that land were subject.

If a tax of that sort by the State has continued for a considerable lengthof time, you think that that class has no right to complain of that tax or to consider it a hardship? After a tax has existed for a considerable time, so as to be attached to a particular property, and to be considered in all settlements and all bequests of that property, and in all sales of it, though it may be on the ground of policy expedient and desirable to make an alteration in the tax, it has been never contended for on the ground of justice to the possessors of the property.

You consider that that applies to every species of taxation? Every species of taxation that is of the same nature as this. I can never suppose that taking away the malt tax, or the tax on any other commodity, is required by justice to the particular class that immediately pay it, though it may be advisable on grounds of policy.

You apply that to municipal taxes as well as imperial? I apply it to all taxes which fall upon particular kinds of property, and which have been for some time imposed; it can never be said that on the ground of justice to the possessors of those particular kinds of property, it is necessary to take the tax off.

j. wilson:I understand you to say in your answers, that whatever irregularities may exist in the tax where it is first imposed, as the property is dealt with in reference to the tax which is so imposed, the subsequent holders of the property have no right to complain? I think so.

There was an answer which you made with reference to direct taxes, that a new tax imposed upon realized capital in any shape or form would not be just, because it would be an act of confiscation, the present owners of that capital only paying the tax and not the future owners? Yes.

Would not the same objection apply to any tax which is imposed now for the first time; take for instance the house tax?^[*] If a tax were imposed on one description of property and no other, I think it would be liable to that objection. I apprehend that according to all received opinions, the imposition of a tax on one particular description of property, is only just supposing the general system of taxation to tax other kinds of property in a proportionate degree.

The same observation would apply to taxing capital, if all realized property were taxed in whatever shape it was found. You described it as an act of confiscation, because the tax would be paid by the existing owner, the future owner paying less for the property in consideration of its being subject to that tax? Yes.

That would apply whether it was general or partial? I apprehend not if the possessors of all property paid equally, and not merely the possessors of land and securities. Supposing, for instance, property engaged in trade paid the same tax as land and securities, a person would not subject himself to any peculiar tax by buying land and securities, and therefore there would be no reason why he should give a less price for them.

That would be a reason for saying that the owner of the property for the time being would not suffer from the tax; but the argument you put forward was, that the present holder of the property would pay the tax, and that the future holder of it would pay no tax? I do not conceive that would be the case if the tax were imposed upon all property; because as all property would stand in the same situation, the buyer of any particular description of property would not pay a lower price for it in consideration of the tax. If a person by buying land subjects himself to a particular tax, he will pay so much less for the land; but if he subjects himself, by buying the land, to no further tax than he would have to pay if he derived income from the purchase money in any other manner, the tax would constitute no reason why he should pay a less price for the land.

Your remark with regard to confiscation applied to the case of the tax being imposed partially and not generally? Yes.

j. hume:You were asked to give your grounds for the opinion you have held; have you not published your opinions on the principles of general taxation; and did you not, before publishing those opinions, have the whole question of the several taxes of this country before you in order to enable you to judge? In the book which I published,^[*] my object was to give my view of the general principles of taxation, and to enter into the consideration of hypothetical taxes rather than into the complication of the taxes of any particular country, and I do not consider myself bound by the opinions which I have expressed on such details, in the same degree as on the general principles, because opinions upon particular taxes are liable to vary.

Does not the land tax form one of the points on which you have given a decided opinion, that opinion being founded on researches made at the time? It was founded on general considerations rather than on the special details of the case, but certainly with a full conviction of its justice.

You have been asked with reference to the origin of the land tax; are you aware that Mr. Pitt, on the general valuation of the land in England, fixed the quota for each county? I have no doubt that was so, but I cannot say that I remember the facts with respect to the history of the land tax, except in a very general way.

You are not aware that Mr. Pitt’s valuation, and the quota which was fixed for each county, were with reference to the rent of cultivated land at the time, and that all wild lands were excluded? I was not aware of that.

You have not been able to account for the irregularity of the tax as laid on property, which is now of great value, by the circumstance of its being in a wild and unproductive state at the time the tax was fixed? That, I conceive, is only one of a great number of inequalities which must necessarily grow up in any such case. If, for example, a tax is laid on in reference to the value of land at the time, and the tax is not afterwards altered, but the land afterwards changes from being employed in cultivation to being employed in building, the tax must necessarily become unequal.

Are you aware that the whole of Marylebone parish, and various parts round the metropolis, do not pay one twentieth of a penny land tax, while there are portions in the city and in the country which pay several shillings in the pound to the land tax? I am aware that there are great inequalities, as great as those which you mention, but in what particular cases they occur I do not know.

sir c. wood:Is not the present inequality of the tax mainly, if not entirely, owing to the changes which have taken place in the value of land in different parts of the country at the present moment, as compared with the value at the time the tax was imposed? Yes; it is owing to the fact that the tax was imposed on a fixed assessment, which was not altered with the subsequent increase in the value of the land.

j. wilson:The inequality is precisely similar to the inequalities which have arisen, and which will further arise in the commutation of tithes? No doubt it is.

j. hume:You have stated your opinion respecting taxing incomes. Have you formed any opinion as to how far what may be called unproductive capital, such as pictures, jewels, coins, or any other matters, which may be of great value but produce no income, should be subject to a fixed taxation? Though I have not very much considered the subject, it seems to me that there is no reason why expenditure on durable articles should be taxed in preference to expenditure on articles of daily consumption. On the contrary, I should say that it is more desirable to encourage people to expend money on things which last, and which will be of benefit to future generations, than to expend it on articles which are consumed by the person himself, and from which no other person derives any benefit. Buildings, paintings, sculptures, and other matters of that kind, have an indefinite duration, and money so expended gives pleasure to others as well as to the individual concerned; and it appears to me that such expenditure ought rather to be encouraged than to be subjected to any peculiar tax.

Do we understand you to say that capital invested in such articles ought to be altogether without taxation, or more lightly taxed than any other capital? I conceive that the tax should in all cases be levied on income, and not on the capital from which the income proceeds; property which does not yield an income being exempt. The income expended in the purchase of those articles will have paid its share of the taxation when it was received.

In fact, the tax should be on income and not on property? Certainly.

Are you able to state upon what amount of capital the income tax in this country has been assessed? I have read various estimates of the amount, but, as I was not aware that I should be questioned on the subject, I am not able to say anything about it. One thing, however, has always struck me in looking at the estimates, viz., the very small amount of capital which pays income tax under Schedule (D.). This seems to me a strong proof of the evasion of the tax. In a country like this, where trade is carried on to so large an extent, it is difficult to believe that there is not a much larger amount of income derived from professions and trades than the amount shown under that schedule.

You are aware that the amount, according to the Parliamentary papers before us, upon which the tax is assessed, is 193,000,000l.,^[*]including all the schedules. Do you consider that a small amount? No; I was speaking of the proportion which the income assessed under Schedule (D.) bears to the other schedules, and which I presume to be much less than the true proportion of those incomes in this country.

The tax is assessed under Schedule (D.) upon the amount of 58,000,000l. out of 193,000,000l.; and your opinion is that that is a small proportion? Yes; I have no particular knowledge upon the subject, but I think it must appear to any one to be a small proportion.

In speaking of the fairness of this tax, do you not consider that if the Government would make the income tax and the property tax more equitable and just, that would remove many of the objections that now exist to that tax being made a permanent tax? Undoubtedly it would remove a large class of objections.

In speaking of the present system as being palpably unjust, are you able to state what particular parts strike you, besides those that you have mentioned, with regard to permanent and variable incomes? I believe I have mentioned all the points which I consider decidedly unjust in the present income tax.

Those objections you mentioned in the first part of the evidence which you gave.^[†]If those objections were removed in the way you suggest, you think that the tax would be more equitable to the payer, and would be collected with less dissatisfation? It would certainly be much more equitable, but whether it would be collected with less dissatisfaction I am not sure; especially as a number of those who are of the same opinion with me, that the tax at present presses unjustly on temporary and professional incomes, carry that opinion much further than I do, and contend for a much greater distinction in favour of temporary incomes than I advocate. There would probably remain a considerable amount of dissatisfaction, in whatever way the tax might be regulated.

You were asked a question respecting the tax on houses. Do you consider the tax at present levied on houses to be fair, on the principle you have advocated of each class being called upon to make an equal sacrifice towards the support of the State? I conceive that the house tax justly assessed is a very fair tax. No tax is exactly fair in all cases; but what a person spends in house rent is generally a fair criterion of what he can afford to spend altogether. But in order to make it just, it appears to me that a different rule from the present should be adopted with reference to houses not let, but retained in the hands of the proprietor, including some of the largest and most valuable houses in the country. Those houses are considerably under-taxed when they are taxed, as they are under the present house tax, on the rent which they might be supposed to let for, because that would bear no proportion to what they cost to the proprietor. I am not aware what may be the practical difficulties in making a fair assessment of such houses, but I imagine that they could not be great.

In reference to the equal sacrifice which every individual ought to be called upon to make for the support of the State, take the houses in Hanover-square and the houses in Hoxton-square; in the one case they may average 150l. a year, and in the other they may average 25l. a year. Do you consider that the parties occupying those houses pay an equal rent in proportion to their several incomes? Of course there can be no exact correspondence, but I think there would be a nearer correspondence than in most of the other modes that could be adopted of taxing expenditure.

Supposing house rent in St. George’s parish to be on the average 150l., and that no person could occupy any house there with an income of less than 1,500l., paying therefore one-tenth of the income in house rent, are you not aware that persons occupying houses in the surrounding districts pay 20l. or 25l. a year rent for those houses, which is equal to paying one-seventh or one-eighth of their incomes instead of one-tenth; and would it not be unjust in your view to tax both parties equally? I should conceive that persons generally expend in house rent something bearing a more equal proportion to their general means of expenditure than almost any other criterion that can be selected.

Are you not aware that many persons living on from 150l. to 200l. a year live in houses of 20l. and 25l. a year, and is not that, generally speaking, in this metropolis a much larger proportion of rent to income than rich men pay? But rich men have very often more than one house, which makes a sort of equivalent.

You consider that the liability of the rich man elsewhere to the same tax, may be regarded as an equivalent? Yes.

Have you expressed any opinion as to how far the house tax should be continued, and whether any exemption should be made, as at present, of houses under 20l.? I have not particularly considered whether in the present state of our general taxation, I would make any exemption of low-rented houses.

In offering the opinion which you have offered, as to the principles of an income tax, do you consider it necessary, according to your principle of an equal sacrifice by all classes for the support of the State, that the whole question of indirect as well as of direct taxation should be considered by Parliament? I certainly think that the justice of any one tax can only be estimated as part of the general financial system of the country; because that which might be unjust if it were the only tax, might be a just compensation for other inequalities in the general taxes.

Seeing that the taxes of this country have been from time to time levied according to particular emergencies, do you consider that before a tax, such as the income or property tax as now levied, ought to be made permanent, the whole system of our indirect and direct taxation, as well as the facility of collection, and the mode of collection, and other matters, ought to be considered? Decidedly.

You have expressed the opinion very decidedly that it is the duty of the Government to act upon the principle of requiring an equal sacrifice from all parties? Yes.

In fact, the Government cannot, in your opinion, do justice to its subjects paying taxes, without having before it the other taxes, in addition to the income tax, as bearing upon each class of the community? Without that they cannot, in my opinion, form any rational opinion of the fairness of any particular tax.

It is on that principle that, in the early part of your evidence,^[*]when you were asked whether an income tax was a fair tax upon particular classes, you said that you could not offer an opinion unless you considered all the other taxes and burdens which each class had to pay? I said, that any opinion which I should express would be dependent upon what other taxes are retained, and that if you retain the indirect taxes which bear more heavily upon the smaller incomes than upon the larger ones, it would be just to exempt those smaller incomes from the income tax, although it would not be just under other circumstances.

The opinion you have expressed is, that the tax should be upon the net income, allowance being made in each class for the necessary deduction in producing that income? Certainly.

You think that that would be better than making it a tax on property, instead of making it a tax on income? A tax on property, as distinguished from a tax on income, I should say, is only just under certain circumstances. It seems to me not just or politic to make a distinction between property saved from income obtained by personal exertions, and that which is spent as income, and not converted into property; that it is not just, in fact, to tax persons on property saved from their personal exertions, which would remain untaxed if they expended it on their own indulgences. But I think it is just to make a distinction between property acquired by exertion and that which is inherited, and I would make that distinction very broadly by imposing a tax on inheritance and bequest.

You would draw a distinction between savings handed down by a person’s ancestor and savings by a person living? Yes, and especially if the savings were of a great amount. The principle of graduation I do not think is just as applied to incomes derived from personal exertions, or to the savings from incomes derived from personal exertions; but I do not think that the same objection holds good to the principle of graduation when applied to inherited property.

Ought not the principle of taxation to be the same, whether the property is large or small, agreeably to your former evidence, or would you draw the line, and say that the tax should be graduated in the case of large property, and not of small? In the income tax you cannot make any distinction, and I would not attempt to make it; but that degree of distinction which I think ought in justice to be made between inherited property, and property acquired by personal exertions, may be made by means of a tax on succession.

Would you make any distinction whether it was real or personal property? No, I would not make any distinction; whatever might be the kind of property transmitted by succession, I would tax it all; but I should be inclined to make a distinction by imposing higher rates on larger than on smaller inheritances.

Why would you make that distinction? On the principle that it is much more important to spare small inheritances than large ones. There are not by any means the same reasons against peculiar taxation on property acquired by gift or bequest, that there are in reference to property which people earn by their own exertions. It is unjust to tax a person because, by his own savings, he acquires a large fortune, and to tax him in a larger proportion than if he had squandered more and saved less; but there is no injustice in taxing persons who have not acquired what they have by their own exertions, but have had it bestowed them in free gift; and there are no reasons of justice or policy against taxing enormously large inheritances more highly than smaller inheritances.

sir c. wood:You would impose in point of fact a graduated succession tax as a legacy duty? I would do so to the utmost extent to which the means could be found for imposing it without its being frustrated. The larger the sum demanded by the tax, the more would people try to evade it; but that is the only limitation I would apply to the principle.

j. hume:Having expressed a decided opinion that a graduated income tax on the man who earned that income is unjust, you say that a graduated tax on property acquired by succession would not be equally injust? A graduated legacy duty would not be unjust in my opinion.

In that case do you consider that properties, though not likely to be productive of profit, such as pictures, cabinets, and other valuable matters, ought to be subject to legacy duty? Certainly.

Your opinion is, that all property exempted from the present legacy tax ought in that way to be brought in? All property which could be sold for money should pay legacy duty in proportion to its present value.

j. henley:I understood you to say that you would not tax a man, and that you do not think he ought to be taxed for capital that he saved? I have expressed the opinion that, if possible, savings for investment should be exempted from income tax, and that the tax should only be levied on the proceeds of the investment when made; but that is not the particular point in question now.

But with reference to the point now in question, do I understand you rightly, that you would not tax a man during his lifetime upon the amount of his savings? I have said that in assessing an income tax it would be just to exempt savings altogether. But a graduated property tax, in so far as it bears on property acquired by a man’s own exertions, does the extreme contrary; it imposes an extra tax on savings. If a person is taxed a fifth of his income because he has increased that income by saving, while he would have been taxed only a tenth if he had not saved, it seems to me that the extra tenth so imposed upon him is a penalty on saving.

You would not tax a man upon his savings? Strict justice would require that he should not be taxed at all on his savings: but the plan under consideration now, namely, a graduated property tax, does much more than tax his savings: it lays a heavier tax on what he saves than on what he spends.

Will you be good enough to answer the question, whether you would tax a man at all upon that property which he saves out of his own exertions? I have already said, that I do not think it would be practicable, though I do think it would be just that the portion of a person’s income which he saved should be exempt from taxation. But even assuming that he ought to be taxed on that which he saves exactly as if he spent it, a graduated property tax not only taxes him upon what he saves, but makes his savings a reason for taxing him in a higher proportion.

I cannot collect from you whether I have rightly understood or not that your proposal is that the amount which a man saves from his industrial exertions should not be liable to taxation according to your view of justice? According to my view of strict justice it ought not, but according to my view of expediency it probably ought.

Though you would not tax those savings during the lifetime of the man who saved them, you would, by means of the tax on succession, tax the man who succeeded him? Yes.

Consequently you would mulct the son for the virtues of the father? I do not conceive that it is mulcting the son. It is not mulcting him to prevent him from receiving what he has not exerted himself to earn. If you were to retain the property, and not allow him to receive it as a free gift from another, you would not do any injustice to him; if there were any injustice, it would be an injustice to the giver, by limiting him in his right of property.

You would deduct from the son by means of a succession tax, that amount which you did not levy from the father? Yes; I would make taxation bear upon that which people acquire without exertion and talent, rather than upon that which they acquire by exertion and talent.

Do you conceive it is an advantage for the State that a miser should put by money, or that he should spend what he has? It depends upon the mode of spending. There are ways of spending money which are more useful than saving it. But if people invest their money in some mode in which it is rendered productive, it is more useful than if they spent it upon themselves. If 1,000l. a year were expended even in alms, it would be soon spent, and the benefit of it would remain only so long as it lasted; but if the same sum were employed productively, by being lent to a manufacturer or an agriculturist, it would become a fund in perpetuity for maintaining labour; so that the miser, when he invests money, employs it usefully. But there are methods of expending this 1,000l. which would be still more useful than saving it.

When I used the term “miser’s savings,” I did not suppose that you would understand me as referring to a man laying out his money in manufactures, or any other useful employment that does not ordinarily come within the notion of savings, but is the employment of capital in industrial pursuits. Whatever any one saves, unless it is locked up, is, generally speaking, employed in industrial pursuits. If he buys securities, the person who has sold those securities lends the money to some one else for productive employment; in fact, all, or almost all savings, go into productive employment and become a permanent source of employment for labour.

Then we are to understand that you are of opinion, that a man who saves money and invests it in any security, does more benefit to the country than the man who spends that money? Yes, than the man who spends that money on his own enjoyments. But there are many ways of spending the money which are still more beneficial to the public. If, for example, he endowed a school, with proper precautions for its being useful, I think the money would be still more usefully employed than by being saved and employed productively.

To what degree would you carry that proposition? To this degree: if the money is spent on the man’s personal indulgences, the most that it can do, even on the most favourable supposition, is to support those who derive employment from it, while it lasts; whereas, if it is invested and employed productively, it reproduces itself, and becomes a means of supporting a number of persons in perpetual succession.

Do you think that the consideration of the natural benefit derived from such investment requires that it should go to a quarter, or half, or three-fourths, or to what proportion of a man’s income? I do not consider it a duty to save for those purposes; all I would say is that, ordinarily speaking, a person does a work of public utility who saves money to employ it productively.

To increase the capital of the country? Yes.

You have expressed an opinion with regard to the taxation of money which is saved which is acquired by a man’s own industrial pursuits; but with regard to the capital which a man inherits, you propose that that should be taxed upon the succession; do you apply the same principle to the further taxation upon that after it has been so taxed upon succession; do you put it in the same category as capital saved by industrial exertions? I certainly think it is the income of capital, and not the capital itself that should be taxed. I do not clearly understand what principle you speak of when you ask whether I would apply the same principle to inherited capital.

I have understood you to say, that in the case where a man saves out of his industrial occupation, you would not subject it to taxation till the succession? I would not tax the capital, but I would tax the income which he derives from the capital.

In both cases? Yes.

Then we misunderstand you; you would not impose a tax on realized saved capital? All I said was, that if it were possible, it would be just to exempt from taxation that portion of income which a man saves; and if he saved it, and invested it, and derived an income from it, I would tax that income, except again such portion as he saved. And I would apply that same principle to inherited capital; that is, having taxed it on the inheritance when it came into the possession of the inheritor, I would afterwards tax only such part of the income as the possessor did not save.

Whatever principle you applied to savings of a man from his industrial earnings, you would apply to the savings of a man from inherited property; in the same proportion as you taxed the one you would tax the other? Yes; savings from whatever source derived.

t. vesey:Would you capitalize income derived from land and tax that capital in the case of inheritance? In the case of land, in the same way as with any other saleable property, whatever tax is levied I would levy on the saleable value; the mode of estimating different kinds of property might be different, but what it would sell for I would tax.

With regard to inherited property, you would tax all that property at the marketable value? Yes.

sir c. wood:Did I rightly understand you in the former part of your evidence to say, “That you did not think that the claim to taxation on the part of the State was owing only to the protection which it afforded”?^[*] I do not think that the proper test by which to determine the proportional amount of taxation to be paid by different persons. It seems to me to have nothing definite in it. It is not possible to say that one person derives more benefit than another from the protection of the Government; it is necessary for all.

Did I understand you to say that the claim of the State to support by means of taxation was not in return for the protection afforded by the State to the different classes? It is in return for good government, which includes that and much beyond it.

What do you include beyond the protection of person and property which the State gives to parties? In answering that question it would be necessary to enter into a large consideration of what the Government can do for the benefit of those subject to it, and that is a very wide question, on which people may differ.

Will you state what, in your opinion, that includes? I should say that it includes the improvement and benefit of the community in all ways in which those objects can be promoted by legislation.

Will you state any instances so as to make clear what you mean? For example, the establishment of schools and universities; that cannot be called the protection of person or property; it is not in all cases a thing which I think the Government should do; but in many cases it is. It seems to me a matter of judicious discrimination in each case, what the Government can do for the benefit of the community. Whatever it can do usefully, which will be different in different circumstances, it ought to do.

e. horsman:With reference to what you said about Schedule (D.), you seemed to think that the returns under Schedule (D.) were very much less than they ought to be? I have no very good means of judging of that, but they do seem to me very much less than I should have expected them to be.

You followed that up by saying, that most probably there were very great evasions under the schedule? Yes; and that appears to be a very great objection, and the only great objection that cannot be got rid of, to an income tax. It seems impossible, without a degree of inquisitorialness which no free community will submit to, to dispense with relying mainly upon the returns made by individuals; and those returns, even in the most honourable community which has ever yet existed, could not be implicitly relied upon.

That is the result of secrecy in making the returns? No doubt if there were not secrecy there would be a greater check, but the check would not be complete even then.

It is the secrecy which is observed which gives the facility to evasion? Yes.

Therefore the correctness of the return depends, to a great extent, upon the man’s own conscience? Yes.

It becomes a tax on conscience rather than on income? Yes, and that appears to me to be a very great objection to the income tax in any case. It seems the only objection which it is impossible to get rid of. Whether it is such an objection as to render the income tax inadvisable in a country which has to raise by taxation so large a sum as this country has to raise, I should not venture to give an opinion upon. There are many worse taxes than the income tax, but there are many better.

But would you say that the income tax was the fairest of all taxes, provided you could carry it out justly? I should say that the house tax was a much fairer tax than the income tax, because the house tax makes its own allowances, which must be made artificially in the case of the income tax. The house tax, being proportioned to an item of expenditure which approximates to a correct measure of the general scale of a person’s expenses, has the advantage that what he saves is spontaneously and naturally excluded, and you are not obliged to exclude it by special regulations.

In the case of a man with 1,000l. a year, the proportion of expenditure which his house costs him is very much larger than in the case of a man with an income of 50,000l. a year? That would be the case; but then a person with 50,000l. a year has usually several houses; and if you include the whole sum which his houses cost him in taxation, together with the grounds attached to them, and suppose an equitable assessment of the house tax, which does not exist at present, it would probably make up the difference.

Your view is, that the objection arising from the income tax is to be attributed to the secrecy? Not exactly that, because, in the first place, publicity, if there were publicity, would be an additional objection, and even if there were publicity it would not altogether check the evasion. It would do so to a certain extent; but if there were publicity the objection that people have to the inquisitorial nature of the tax would be necessarily increased.

j. l. ricardo:Do I understand you to say, that you hold the doctrine of direct taxation is the true principle of taxation? Not in that unqualified manner, certainly.

Can you state what qualification you would place upon that doctrine? It seems to me that all direct taxation must necessarily recognise some limit; that is, you must leave a certain amount of income untaxed, on the supposition that that income is required for necessaries. Now it is quite possible, when a liberal allowance is made for necessaries, that some part of it may be applied to indulgences instead of necessaries. I would not restrict the allowance to that which was just sufficient to prevent starvation. If, for instance, you began to impose the tax at 50l., which you might suppose, on a liberal allowance, to be the sum required for necessaries, it is quite possible that a portion of that might be expended on indulgences, and not used for the purpose for which the exemption was intended, and in that case I think it is just that those indulgences should be taxed.

I understand you that your proposition was that there should be a certain limit calculated upon the amount required to procure the necessaries of life; and that with that exception you would consider that direct taxation was the proper mode of raising the revenue of the country? I am not aware that I gave any general opinion that direct taxation was the proper mode of raising the whole of our large revenue.

Do you consider it the fairest and most equitable mode? I should hardly say that; for a house or income tax, or any other tax, however imposed, has inequalities which are inevitable; and since there are inequalities in all taxes, it seems to me desirable to have several different modes of taxation, in order that the inequalities of taxation may not all fall in the same place.

Your proposal was, that the direct taxation should not bear on the poorer classes? Yes, because the articles which are taxed by indirect taxation are consumed in larger proportions by the poorer classes than by the richer classes.

Would you hold the doctrine that all direct taxation should be coupled with a graduated scale? I should say not. I would have no graduated scale on any kind of direct taxes, except taxes on succession. It seems to me that the just claims to graduation are sufficiently satisfied by taxing only the surplus above the minimum allowance to cover necessaries. No doubt, supposing 150l. to be the minimum allowance, those who have an income of 160l., if they are taxed on the whole of that, have an injustice to complain of; but if they were taxed only on 10l. they would have nothing to complain of.

Did I not understand you, a short time ago, to state that you consider that the property tax should be a graduated tax? I was speaking of taxes on succession.

You made a distinction, if I understood you rightly, between capital inherited and capital realized from personal exertions? Yes.

It is only on capital inherited that you consider that there should be agraduated scale of taxation? Yes; and for this reason, that if there is a graduated scale of taxation on capital acquired by saving, people are taxed more heavily for saving than they are for squandering.

Under the present system the capital realized by personal exertions is taxed, not merely upon the interest it produces but upon the capital itself, before it is actually put aside? Yes; and that, as I have already said, if you can prevent it, appears to me not just.

j. hume:Have you any other observations to make? I do not remember anything further.

[[*] ]See Principles, in Collected Works, II, pp. 807-72.

[[†] ]5 & 6 Victoria, c. 35.

[[*] ]Paley, William. The Principles of Moral and Political Philosophy. 15th ed., London: Faulder, 1804, II, p. 429 ff.

[[†] ]39 George III, c. 13.

[[*] ]The evidence of 20 May begins here.

[[*] ]See p. 466 above.

[[*] ]38 George III, c. 60.

[[*] ]1 William & Mary, c. 20.

[[*] ]See 14 & 15 Victoria, c. 36.

[[*] ]Principles of Political Economy.

[[*] ]See, e.g., “Appendix No. 10,” Parliamentary Papers, 1852, IX, p. 964 n.

[[†] ]See pp. 465 ff. above.

[[*] ]See pp. 473-5 above.

[[*] ]See pp. 471-2 ff. above.