Front Page Titles (by Subject) BOOK III: PUBLIC REVENUE (Continued) THE PRINCIPLES OF TAXATION - Public Finance
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BOOK III: PUBLIC REVENUE (Continued) THE PRINCIPLES OF TAXATION - Charles F. Bastable, Public Finance 
Public Finance. Third Edition, Revised and Enlarged (London: Macmillan, 1903).
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PUBLIC REVENUE (Continued) THE PRINCIPZES OF TAXATION
definition and classification of taxation
§ 1. The subject of the present book is undoubtedly the central part of modern finance. Its importance has led English and American writers to regard it as almost the sole topic for discussion. Though this is not true either for England or the United States, and is still more erroneous when other countries are taken into account, yet the existence of such an opinion proves the preponderating influence of taxation in the modern financial organisation. Another evident reason for the great prominence given to this source of state revenue is its close connexion with economics. State expenditure may be looked on as a question of public policy to be decided by the practical judgment of ‘that crafty and insidious animal vulgarly called a statesman or politician,’ the quasi-private receipts may be treated on the principles of private economy, but taxation raises a series of fundamental questions which involve refined ethical and economic considerations. The effect of any given tax system is a strictly economic question, requiring for its solution frequent reference to the conditions both of production and of distribution. What ought to be the system adopted in each special case must be decided by reference to both moral and economic conditions. Assuming that the partition of the burden should be a just one, we must estimate its true weight and the share really borne by each citizen before we can venture to pronounce a judgment for or against any proposed arrangement.
The necessity for constantly appealing to the theorems of economists has made the study of taxation almost a part of applied political economy;1 but, notwithstanding that this is the favourite English method of treatment, it is far better to discuss it as a part of the wider subject of public finance, since its origin and growth are in this way better understood, and the unquestionably close relation between the several departments of public finance can only thus receive due recognition.
§ 2. At the commencement of our examination questions of definition and classification present themselves in embarrassing number. Administrative practice and economic theory are both responsible for this difficulty. Terms apparently of the utmost simplicity have been, and are, used with a variety of meaning that is all the more confusing because of the strong points of connexion between the different uses. Discussions as to the meaning of terms are, it need not be said, hardly ever purely verbal: they in almost every case turn on different conceptions of facts, or different modes of grouping the objects under notice. The literature of finance, especially in Germany, is rich in examples, and some of the best-known doctrines derive a great deal of their authority from some particular application of an ambiguous word. To clear up our terminology, or at least to explain the use of the terms we employ, is an indispensable step in the investigation.
§ 3. First of all we have to settle the meaning of the word ‘tax.’ This term, so clear and simple to the ordinary citizen, has been very variously defined, sometimes at astonishing length, and often with the, it may be unconscious, design of aiding a particular theory as to the character of the facts denoted by it. The following definition is, we believe, correct and quite in accordance with the realities of finance and politics: it has the further advantage of not implying unfairly any special view respecting the nature or justice of taxation.
A tax is a compulsory contribution of the wealth of a person or body of persons for the service of the public powers.1
Each term in this definition is significant, and helps to explain the object defined. First, a tax is ‘compulsory.’ This does not mean that all tax revenue is paid unwillingly, but merely that the will of the payer is legally immaterial. The amount, the mode and time of levying, the persons affected, are all determined by the sovereign or its delegate, and individual preferences or dislikes are allowed no place in the act. It thus appears that so-called voluntary taxation is not true taxation, which is plainly the fact; for in the few cases in which it has been tried, society is either in the pre-political stage in which the public economy exists only in a rudimentary form, or the system is one of self-assessment supported by social rather than legal sanction. Gifts may indeed be made by individuals to the State, a circumstance not without importance in the history of finance, but they are at present so rare as hardly to need mention.
Next, a tax is a ‘contribution’—that is to say, it involves a sacrifice on the part of the contributor. It is quite possible that some persons may gain through the operation of a tax of which they themselves pay a part; but it is rather the operation of the tax than its payment by the person affected that produces this result. Every tax necessitates a deduction from the wealth of the contributor, even though compensation may be indirectly brought about through its action.
Thirdly, the term ‘wealth’ has to be understood in a wide sense, including ‘services’ as well as commodities. Military service or forced labour for, say, repairing roads (corvées) is taxation quite as much as payment of money or goods. These may be good or bad forms of taxation, but they must be reckoned in the category of taxes.
Again, all taxation is imposed on ‘persons.’ This necessarily follows from the circumstance that the payment of taxation is a duty, and persons only can be liable to duties. The proposition is apparently inconsistent with the division of taxes into ‘personal’ and ‘real,’ and also with the taxation of commodities so often mentioned. There is, however, no opposition between the different uses. The term ‘real’ taxation refers to the ‘object’ of taxation; the owner or ultimate bearer is the ‘subject’ of the tax, and he is a person. Taxation of commodities falls on the consumers or other persons connected with the taxed articles, and a similar analysis will apply to other forms of taxation. The truth, though often forgotten, yet always holds good that a tax must ultimately be paid by some one.1
Fifthly, taxation is levied for ‘service’ or ‘benefit.’ The public economy requires the supply of its wants, and taxation is the mode of meeting whatever proportion of those wants remains unsatisfied from other parts of the public revenue. The produce of taxation has unfortunately been only too often misapplied, and resulted in injury rather than gain; but the tax-imposing body must be regarded as the final arbiter of the justice of its wants. That some requirements are evil makes them none the less requirements in the case either of individuals or of States.
Finally, taxation is for the ‘public powers,’ i.e. it has to meet the wants of both central and local governments. A rate raised by the smallest parish is as much a tax as if it were levied by the Imperial Parliament. All contributions to the various organs of government are taxes in the view of finance, whatever be their administrative name. Special kinds of taxation have been often denounced as being for the benefit of classes or individuals, not for that of the State. Protective taxes, e.g., have incurred this reproach. Such forms of taxation are, however, imposed in the interest, or supposed interest, of the nation, and if they yield any revenue are so far productive of gain to the State. The advantage obtained by the protected producers may be regarded as equivalent to so much public expenditure in their favour. It is generally incapable of being estimated, but this circumstance is of practical rather than theoretical importance. That all taxes of equal pressure are not of equal advantage, either to the State or the community, is too evident to need formal assertion. Otherwise there would be no reason for the selection of any particular forms.
§ 4. The foregoing definition, with the accompanying explanations, conveys all that is essential in the idea of taxation, but the numerous efforts to explain the term deserve some further notice. Many of the ablest writers on the subject have given definitions which substantially agree with that stated in the preceding section. Thus De Parieu defines taxation as ‘the charge levied by the State on the property or labour of the citizens, in order to provide for the public expenses’; Roscher asserts that taxes are ‘the contributions which individual economies must pay, in consequence of their dependence, to the State, province, commune, etc., or, generally, the particular collective compulsory economy placed over them in order to assist in satisfying the financial needs of the receivers.’ According to Cossa, a ‘tax is that part of the wealth of private individuals which the authority of the State, province, or municipality appropriates in order to provide for the public expenses incurred for the advantage of the general body of tax-payers.’1 To these definitions it is not here desirable to add the many others that generally agree with them; but we ought to consider some of the doubtful variations in the formal statements of the nature of taxation. One of these is suggested by the last clause of the definition just quoted from Cossa.1 The phrase ‘incurred for the advantage of the general body of tax-payers,’ recalls to mind the once-established, and still generally popular, doctrine that taxes are the price paid for the services of the public authorities. This way of looking at the facts was quite in harmony with the political doctrines of the seventeenth and eighteenth centuries. Belief in a compact between the ruler and his subjects led naturally to regarding taxation as simply a payment for service done. The citizen received security and paid its price in taxation. The immediate advantage of this doctrine, as placing a limit to arbitrary exactions and tending to increase security, is apparent, and there is accordingly no reason for surprise when, in some form or other, the idea of exchange is associated with the payment of taxes. In Montesquieu's opinion, ‘the revenues of the State are the portion of his property that each citizen gives in order to have security for the remainder, or to enjoy it in comfort.’ Here the conception of payment to escape further demands is combined with that of return for services rendered. The French National Assembly gives still another variation in its reference to taxation as ‘the common debt of all citizens, and the price of the advantages that society affords them.’ From this it is not far to the assertion of Proudhon that ‘Taxation is an exchange in which the State gives services and the contributor money.’2 Hardly distinguishable is the belief that taxation is the insurance premium against the risks of social disorder set forth in Mirabeau's proposition that ‘Taxation is only an advance to obtain protection for social order.’ The desire to present a ready justification of the arrangements of society finds an illustration in these attempts to depict taxation as a quid pro quo.
To show that this way of explaining taxation is incorrect is not difficult. The assertion that taxes are purely a return for services rendered is plainly untrue. We shall see that there is no possibility of measuring precisely the most important of the benefits rendered by the State. Security against aggression is, literally speaking, an ‘incalculable’ good. Social order cannot be sold by retail like tea or sugar, and so is it with the other state functions, even the purely economic ones. Indeed, it would be very near the truth to say that the difficulty of applying the normal method of purchase makes a given form of activity suitable for state management; if defence and justice could be readily bought and paid for, we might trust to private enterprise for a sufficient supply. Wherever the benefit to the individual can be even approximately estimated there is a strong presumption in favour of levying the cost incurred from him and converting the tax into a ‘fee.’ Special reasons may make it desirable that this charge should be compulsory. The citizen may be so negligent of his true interest as to omit obtaining the best appliances for the purposes of health or education, but even in such cases there is also a general interest which furnishes the principal ground for the intervention of the State.
The opposition between free payment and taxation is too important to be evaded by the introduction of a vague idea of exchange of services as including both, and any definition of taxation that implies, or expressly states, this combination is so far erroneous. Like the general doctrine of the social contract, its practical convenience as a weapon on the side of liberty cannot conceal its scientific weakness. The equivalence between the amount of taxes paid and the benefits obtained is rather to be found in the case of the community as a whole than of any special part of it. Looking at the public agencies from this point of view, it is well to consider whether the advantages of government are a compensation for its cost, and this test should be steadily applied in judging the merits of any proposed expenditure. The question, in truth, belongs to that department of public finance. Once expenditure has been incurred, the imposition of taxation in order to meet it is a matter of course. We have accordingly considered it in its fit connexion.1 In any case, to introduce what is at best a highly disputable doctrine into the definition of so important a term is altogether a mistake.
§ 5. Other definitions of taxation fail through excessive vagueness. We gain little by being told that taxation is ‘a public charge, a duty imposed on certain things.’2 Very often one or more of the essential elements is omitted. Thus the fact of taxation falling solely on persons is neglected in the definition of taxes as ‘the enforced proportional contribution of persons or property levied by the authority of the State for the support of government and for all public needs.’3 Besides the error of including ‘property’ as a subject of taxation, this definition brings in the unessential principle of ‘proportionality,’ and would therefore exclude large groups of what are universally regarded as taxes. This is a very common defect in the definitions of the term, due to the desire to give an exhaustive account of its attributes, or to bring some favourite theory into its general conception. Professor Ely's elaborate account, like those of many German writers, illustrates this danger.4 The real function of a definition is to give a clear idea of the nature and limits of the phenomenon denoted by the term, not to convey in a formal statement all that is known about it, still less to prejudge the questions that may arise in the course of further inquiry.
§ 6. The etymologies of the words employed in different languages to’ denote this class of public contributions are full of instruction. The English ‘tax,’ as also its equivalent in local finance, ‘rate,’1 suggests the estimation or fixing of the amount of charge. So does the German ‘Schätzung.’ The idea of assistance or advantage to the State is foremost in the French ‘aide’ and the German ‘Steuer.’ That of compulsion is primary in ‘impôt’ and ‘Auflage.’ The surrender by the payer is connoted in ‘tributum,’ ‘dazio,’ and ‘Abgabe,’ while finally the origin of taxation in voluntary payment is evidenced by the words ‘donum’ and ‘benevolence.’ Minute investigation may show that there are differences in the nature of the charges described by these several names, but, speaking broadly, they all cover what we regard as taxation, and help to justify the definition given above.2
§ 7. Having determined the meaning of ‘taxation,’ it next becomes necessary to understand its chief classifications and the technical terms employed respecting it. First, we may notice the term ‘subject,’ which is conveniently used to denote the person who bears its burden, and who must be distinguished from the immediate payer—e.g. the importer of wine in England pays the duty on it, but the ‘subjects’ of the wine duties are the consumers so far as the charge is really a pressure on them. The ‘subject’ and the payer may or may not be the same according to the particular circumstances.
As the ‘subject’ of taxation is the person affected, so the ‘object’ is the thing or fact on which it is imposed.1 Thus, in the example just given of the wine duties, the commodity wine would be the object of the duty. Even where taxation is said to be ‘personal’ it is assessed on some object as ‘income’ or ‘produce,’ or in the extreme instance of a capitation or poll tax on the person as a physical body. Confusion between the ‘subject’ and ‘object’ is the cause of the belief that some taxation does not fall on persons.2
The ‘source’ of taxation has somewhat the same relation to its ‘object’ as the ultimate bearer or subject to the immediate payer. The fund created by taxation is derived from the resources of the community, i.e. as we shall see from the income, or in special instances the property, of the ‘subjects.’ There has been much dispute as to the real ‘source’ of the tax-revenue that will need consideration later on, but there can be no doubt as to the proper use of the term ‘source’ in respect to taxation. It is, perhaps, unnecessary to mention the terms ‘unit’ and ‘rate,’ which are employed, the former to describe the quantity of the object taken as a standard, the latter the amount of taxation per ‘unit.’ Where commodities are taxed the unit will be a measure of weight, e.g. the lb., as in the British tea duty, or contents, as the gallon in the wine duty, or length, as in the old duties on cottons. A sum of the standard money is the commonest, as in the system of ad valorem duties.2
§ 8. A much more important set of terms is that connected with the classification of taxation. The division and grouping of the several kinds of taxes have been varied to suit particular financial systems, and much of the general discussions on the subject is concerned with the comparative merits of these arrangements, and the extent to which they conform to the natural order, so far as it can be said to exist. A preliminary notice of some of the more common distinctions is desirable at the present stage.
One of the most widely known and frequently used divisions of taxation is that into ‘direct’ and ‘indirect’; unfortunately it is used in different senses, though with several points of connexion. That most familiar to English readers is stated by J. S. Mill in the following terms:—
‘Taxes are either direct or indirect. A direct tax is one, which is demanded from the very persons who, it is intended or desired, should pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another.’1
The difference is here made to turn on the mode of incidence, a matter often very difficult to determine, and changing with the special circumstances of each case. Whatever be its economical importance, it is evidently useless for administrative purposes, and probably owes its origin to the peculiar theory of the Physiocrats respecting the ‘source’ of taxation.
A natural result has been that practical financiers have adopted a different basis of distinction, and regard those taxes as direct which are levied on permanent and recurring occasions, while charges on occasional and particular events are placed under the category of indirect taxation. On either method the income tax would be ‘direct,’ and the excise and customs ‘indirect’: the ‘death duties’ would be ‘direct’ from Mill's point of view, and ‘indirect’ in the administrative sense. The vagueness of the terms has led to a number of further applications differing from the important ones just mentioned. With some writers taxes on possession are ‘direct,’ taxes on consumption ‘indirect’: with others production is substituted for possession, while a third class would regard taxation of income as direct, imposts on expenditure being indirect.1
Another division is that into ‘taxes on revenue’ and ‘taxes on capital,’ or, perhaps better, on ‘property.’ The former are paid out of the annual national production; the latter encroach on the accumulated wealth of the society. But in qualification of this statement it must be added that most of the actual property or capital taxes are so only in name, being really paid out of the income of the persons subject to the charge. There is thus a discordance between the practical and scientific use of these terms as great as in the case of direct and indirect taxation.
Taxes are often said to be either ‘real’ or ‘personal,’ and attempts have been made to distribute them into two classes on this basis. Personal taxes are those in which the person is taken note of in assessment. They require lists of the tax-payers (rôles nominatives, in the language of French administrators). Real taxes are assessed on objects other than persons, and without direct reference to the owners or possessors. Capitation and income taxes are ‘personal’; taxes on land, houses, or goods are ‘real.’ The use of these terms has the inconvenience, already noticed, of obscuring the fact that all taxation is in the last resort on persons, and further raises a particular form of levy into undue importance. An income tax is certainly personal, but Schedule A of the English income tax is very similar to the French impôt foncier, that is as certainly ‘real.’
In respect to the mode of assessment taxes may be either ‘rated’ or ‘apportioned.’1 In the former class the charge per unit is fixed, but the total yield is always uncertain, depending as it does on the number of units that pay. An apportioned tax is one the total amount of which is fixed the shares being apportioned among the objects that are charged. As examples the English income tax and the French impôt foncier will again serve. The former is ‘rated,’ the latter ‘apportioned,’ being so divided among the departments as to make up the previously fixed amount. This method is decidedly the more primitive: it has disappeared long ago from the English system, and will probably meet the same fate elsewhere.2
§ 9. The foregoing distinctions are too important to be passed over, but they are also too imperfect to be of much use in a scientific classification of taxes. Particular aspects of taxation, the administrative peculiarities of certain countries, and obsolete or imperfect theories have been the causes of their employment. It is accordingly advisable to consider the subject from a more general point of view in order, as far as possible, to reach a natural arrangement.
In choosing the principle of grouping we have to make a selection between two contrasted systems which may be distinguished as (1) the economical and theoretical, and (2) the empirical or fiscal modes.
The first mentioned depends on the economical theory of the distribution of wealth, and can be traced back at least to Adam Smith. He opens his discussion of taxation by asserting that ‘the private revenue of individuals arise ultimately from three different sources—rent, profit, and wages,’ and proceeds, ‘every tax must finally be paid from one or other of those different sources of revenue, or from all of them indifferently.... The particular consideration of each of these different sorts will divide the second part of the present chapter into four articles.’1 Nothing can be plainer and simpler in appearance than this arrangement. The economic shares in distribution are regarded as so many sources of revenue, on one or more of which every tax must fall. The later analysis of profit into the component parts of ‘interest’ and ‘employer's gain’ would add one further source, but would not otherwise disturb the treatment.2 The great attractions of this method are its simplicity and the facilities that it affords for employing the propositions of economics in deducing the effects of taxation. To reduce the subject into ‘four articles,’ even with ‘several other subdivisions,’ promises a welcome abridgment of labour. English economists in treating of taxation have therefore intended, as far as possible, to follow this course. Ricardo and J. S. Mill are the most prominent examples. But on closer examination it appears that neither of them, nor even Adam Smith himself, could adhere consistently to this over-simple grouping. In Ricardo's hands the subject requires eleven chapters, several of which consider the effects of taxes on land, houses, raw produce, and gold, in addition to those on the primary sources of rent, profit, and wages. Mill goes further and formally limits the division of taxes according to the economic source on which they are imposed to the case of direct taxation on income.3 The taxation of commodities and such taxes as those on contracts and on communication are quite outside it. But the Wealth of Nations affords a stronger proof of the insufficiency of the ground of division selected by its author. Sections devoted to taxes on produce of land, on the profit rent, and the ground rent of houses, to capitation taxes, and taxes on commodities, break up the compact order that the introduction holds out. It is evident that the subject-matter refused to fit into the limited groups that the economic classification required, and the sound common sense so characteristic of Adam Smith is shown by his deviations from the theoretic lines previously traced out by him.
Much of the difficulty arises from the fact that taxation always has persons for its ‘subjects,’ and they frequently derive their income—the normal ‘source’ of taxation—from more than one of the different economic shares. The citizen is not a pure rent, interest, or wages receiver; he often combines all three in his annual receipts. Again, the most prominent external feature of taxation is the ‘objects’ on which it is levied. These are, however, very many, and it is often beyond the power of analysis to decompose the charge on some commodity or form of receipt into its economic constituents, e.g. the produce of land may be due to the co-operation of natural agents, capital, labour, and directing ability, but to say how much of the taxation imposed on the result is to be assigned to each factor is quite impossible.
The obvious conclusion is that the classification is unsuitable. It is often convenient to use the economic theorems respecting rent, wages, etc., in our investigations of the effects of taxation, even though we should never meet in fact with the pure taxes on those parts of the product. For the problems of finance it is also necessary to remember that these preliminary inquiries are but steps towards the final result, which must deal with realities and not with imaginary and hypothetical cases.
§ 10. The defects of the economical mode of classification lead us to turn to what we have entitled the ‘empirical’ or ‘fiscal’ one, which takes the actual kinds of taxation and arranges them in the most convenient way. To this procedure it may at once be objected that as each country has its own tax system, varying from time to time, we cannot attain to a general arrangement applicable to all cases. The classification of taxes suited for ancient Rome would be inadequate in modern England, and even confining attention to the present day, the Indian and British tax systems cannot be easily reduced to the same classification. This effect of temporary circumstances in limiting general principles has been already noticed,1 and it does at first sight raise difficulties in the effort to prepare a natural grouping of taxes. A ready mode of escape is, however, to be found. The terms and minute details of taxation vary greatly at different times and places, but this does not preclude the existence of large categories of taxation, possible in all countries, and found in somewhat different forms in many. The Indian land revenues differ from the English land tax and also from the French impôt foncier, but in all three countries there is ‘taxation of land,’ which offers a general title, under which they may be placed in company with the Roman provincial tax and several others. Like treatment can be applied to different forms of taxes on the produce of industry, and so in other cases.
The question next arises, How far should this process be carried, and what general categories can we form? Rau has boldly grouped all taxes under the two heads of ‘estimated taxes’ (Schätzungen) usually charged on goods, and ‘taxes on expenditure’ (Aufwandsteuern), which does not carry us much beyond the rude divisions mentioned in § 8. Hoffmann prefers the division into taxes on possession (Besitz) and taxes on acts (Handlungen), while Cohn accepts the tripartite arrangement of Wagner into taxes on (a) acquisition (Erwerb), (b) possession (Besitz), and (c) consumption (Verbrauch).2 De Parieu carries out the division more minutely, and forms five classes of taxes, viz. (1) on persons, (2) on wealth, (3) on enjoyment, (4) on consumption, (5) on acts. In defence of this arrangement he argues that, like all natural classifications, it allows of an indefinite margin between each adjacent group, and that it further harmonises with the administrative division between direct and indirect taxation, classes 1, 2, and 3 belonging to the former, and classes 4 and 5 to the latter category.1
All the preceding classifications appear to have at least two defects: for (1) they simply deal with certain external features of taxes, and do not take note of their essential characteristics, and (2) like the otherwise very different arrangement of Adam Smith, they are too simple for the complexity of the facts to which they are applied. Hock has attempted to avoid this defect. He starts from the untenable position that taxation is a compensation for state services. These services are, he thinks, of three kinds, to wit: (1) protection of person, (2) protection of property, and (3) the performance of special services. To each corresponds a ‘primitive tax’ (Ursteuer): these are (1) personal taxes, (2) income taxes, (3) taxes for special services rendered.2 The practical difficulties in levying these taxes in their pure form leads to the use of other taxes as substitutes (Surrogate) in the form of taxes on (a) consumption, (b) product, (c) customs, (d) special income taxes, (e) fees and charges on occupations.3
Though it is plain that the basis of Hock's division is unsound, it yet has the merit of suggesting the best way of reaching a truly natural arrangement. The distinction between primitive and derived taxes is a valuable one, and can be so used as to combine the economical and empirical methods of grouping in a consistent arrangement.1
§ 11. The position of Adam Smith that taxation must be derived from the constituents of private income is, broadly speaking, correct. Where it falls on property there is a diminution of the national wealth which, if continued, must prove destructive. A true instinct, therefore, prompted him in his effort to analyse taxes into those on rent, on wages, and on profit. On the other hand it is equally true that the ‘objects’ of taxation do not easily allow of this analysis. Between the taxes of economical theory and the taxes of actual life there is a gulf that appears hard to bridge over, and one that has retarded the progress of financial science.
This difficulty is at all events extenuated by the circumstance that though the abstract economic taxes are not met with in fact, they are not wholly imaginary. A tax on economic rent has some and often considerable resemblance to a land tax, or, to put it the other way, a land tax often tends to become a tax on rent. The ‘tax on profit’ of the economic text-books bears a like relation to the taxes on business, of which Schedule D of the English income tax, the Prussian Gewerbesteuer, and the French Patente may be taken as specimens. So with the wages tax, in relation to actual capitation taxes, or the late Classensteuer of Prussia. If now we regard taxes on the factors of production, and therefore on the shares in distribution, as ‘primary,’ we have a basis from which to proceed to the investigation of those secondary taxes that are placed on other ‘objects.’ By grouping together the various taxes on land we can consider the play of financial forces in the case of rent. The industrial taxes will similarly enable us to see the working of charges on interest and profit, and finally poll and capitation taxes will perform the same service for taxes on wages.
The economic mode of arrangement assigns a place to taxes on income or revenue which may be regarded as a combination of all the primary forms. It may in certain cases be admissible to break up an income tax into its component parts, just as, on the other hand, it may be well to combine a series of taxes that together make up an income tax. Thus the five schedules of the English income tax or the four of the Italian one might be separately treated, or again the ‘four direct contributions’ of the French system might be taken in combination as nearly equivalent to a general income tax.1 Still, it is necessary to consider the fiscal bearings of general income and property taxes, and this discussion most fitly follows the examination of the taxes on component parts of income.
When the ‘primary,’ and, if the phrase be admissible, ‘quasi-primary’ taxes have been discussed, there remain no small number of other charges. The whole elaborate system of taxation on commodities that has so large a place in every country must be dealt with. It may be regarded as taxation of consumption, or of expenditure, but for practical purposes it includes the two great departments known to English fiscal practice as ‘excise’ and ‘customs.’ So far the taxes enumerated have appeared to fall on the production, the distribution, or the consumption of wealth; those that directly affect the remaining economic process of circulation must also be noticed. Taxes on transport and communications come under this head; so does the yet more important class of taxes on the transfer of property and the transactions of commerce, i.e. the ‘taxes on acts’ of De Parieu's arrangement. The taxation of succession after death may be treated as a particular case of transfer, but it also has affinities with property and income taxes which must be carefully considered. In like manner taxes on necessary commodities often resemble in their effects a tax on wages, as Ricardo with some exaggeration urged. The other secondary taxes have similar reactions on the constituents of income, but, nevertheless, their separate treatment is desirable, and indeed unavoidable.
§ 12. We have now obtained what appears, on the whole, a satisfactory distribution of the several taxes. Briefly recapitulated it is as follows: The main division is into ‘primary’ and ‘secondary.’ The primary taxes comprise those on land, on business and capital, on persons and on labourers’ earnings. The combination of these primary forms gives us the general income and property taxes which come next in order. Passing to the secondary forms of taxation we find (1) taxes on commodities, including both excises and customs, (2) taxes on communication and transport, (3) the remaining taxes on commerce and legal transactions, (4) taxes on transfer of property, (5) succession duties.
But the discussion of the several taxes in the foregoing order must be postponed until we have studied the operation of taxation in general and the conditions required for its satisfactory working. No single tax can be rightly appreciated without reference to the financial system of which it forms a part. The remaining chapters of the present Book will therefore be devoted to a study of the characteristics of taxation in general and the principles that should regulate its application. In this part of finance we meet with difficult theoretical and practical questions which will require the utmost attention for their proper understanding. On some points opinion is sharply divided, and consequently, while endeavouring to reach a definite judgment on each disputed question, we shall endeavour to obtain a clear conception of the grounds on which opposing views are based.
the general features of taxation
§ 1. The increasing importance of taxation as a mode of supplying the public wants is a conspicuous feature in financial development. It is partly attributable to the decline of the earlier forms of revenue, but far more to the great and continuous growth of expenditure. The modern State is dependent on taxation to an extent unknown in mediæval times. Hence all questions connected with this department of finance have an enhanced interest. Errors on the subject, or mistakes on the part of practical financiers, tend to become more and more serious and the need of a careful study of the general features of the tax system is greater. Without a true appreciation of the conditions under which it works, it is hopeless to expect the adoption of a wise policy, or determination in applying it. Practical sagacity has its part—and no small one—in successful financial management, but it is all the more effective when enlightened by the study of principles. The complications of modern financial systems make it advisable to note their chief characteristics before discussing the comparative merits of the rules proposed for their regulation. The phenomena are not so simple as to admit of regulation by a single mechanical rule, and the real bearing of the different propositions will be best understood after some acquaintance with the subject-matter to which they are applied, and the difficulties that surround them. The interaction of state and national economy brought about by taxation produces further complications that will not allow of hasty treatment. We shall therefore begin by a study of some of the general features of the tax-system, a knowledge of which is essential for forming a correct judgment respecting its regulation.
§ 2. Looked at in a broad general way, the first circumstance that strikes the observer is the fact that taxation means the subtraction of so much wealth from individual enjoyment or use. The definition given in the last chapter seeks to express this fact by pointing out that taxes are contributed by persons from their wealth for the public service. State expenditure is devoted to the supply of certain wants of the community or nation by the action of the public powers. These, like all other agencies, cannot be obtained without cost, partly met by the economic or quasi-private revenue, but leaving a balance to be supplied by taxation. It thus appears that there is an element of truth in the description of taxation as ‘the expenses of production of the State’; the phrase, however, suggests too close an analogy with industrial enterprises, in which the expenses are repaid out of the product. In respect to public services, the benefits will in normal cases largely exceed the cost, but the method of calculation is not so easily applied, nor is the object in view the attainment of profit.
The proposition that taxation is the form of cost or expense proves that it is so far an evil in the sense that every sacrifice is such. It may be necessary or advisable, but could the object be otherwise accomplished it would be still better. Any saving in the expense of working the State enables a larger amount to be left in the possession of the tax-payers, and to that extent improves their economical position. The former statement of this very plain fact might appear superfluous were it not for the existence of strong popular prejudices in favour of the expenditure of funds derived from taxation. ‘Government expenditure gives employment and benefits the labourers’ is the commonest form in which this belief is asserted. Without entering into the question how far such expenditure does really reach the labourers, it is sufficient to reply that the persons from whom the funds have been taken by the tax-collector would certainly have made use of them, either in the employment of labour, or the purchase of commodities. The belief that taxation returns in ‘a fertilising shower’ was rightly regarded by Bastiat as one of the errors arising from defective observation.1 Hardly worthy of refutation as a theoretic doctrine, its evil effect, particularly in democratic societies, in producing extravagant expenditure is not to be overlooked.
The idea that ‘taxation is the best form of investment’ is placed by Bastiat in the same category as the gross fallacy just refuted, but it admits of a more favourable interpretation. If it be said that the taxation required for the national defence, the maintenance of justice, and the necessary functions of the State, has been invested in the best manner and yields a good return, the assertion is substantially true, though perhaps expressed in a misleading way, as the State cannot be regarded as a mere industrial concern. Further, as Leroy-Beaulieu points out, the proceeds of taxation, if employed in public works, may yield a satisfactory profit, and thus be, in the literal sense, ‘a good investment.’ The expediency of such investment belongs rather to the subject of expenditure than to that of taxation, but we may remark that, if public works are likely to be profitable, it seems better on the whole to raise the requisite funds by a loan, to be repaid through the agency of a sinking fund. To use taxation for this purpose is almost equivalent to a ‘forced loan.’2
§ 3. The consideration of taxation as reproductive in the way of investment suggests the further question of the possibility of its productiveness through reaction on the national economy. If the use of the funds raised by taxation can prove beneficial, may not the effect of taxation itself on production be sometimes good? This view is expressed in the maxim discussed by Hume, ‘that every new tax creates a new ability in the subject to bear it, and that each increase of public burdens increases proportionably the industry of the people,’ which, he thinks, ‘must be owned, when kept within certain bounds, to have some foundation in reason and experience.’1
Natural disadvantages sometimes stimulate industry, why then should not artificial ones have the same effect? The most remarkable economic progress has been made in countries where man has had to exert himself in consequence of the parsimony of nature, not in those that possessed the richest and most fertile lands. A judicious use of the engine of taxation would, it might be thought, have a similar effect on the disposition of the people. Such was the opinion of McCulloch, who maintained that the heavy taxation of England, during the French wars (1793–1815), was one of the causes of the growth of wealth at that time, since it stimulated industry and the spirit of enterprise and invention.2
The doctrine in this rather extreme form admits of an easy refutation; for if taxes create a new ability on the part of the payers there can be no determinable limit to their useful employment. A wise government would increase taxation indefinitely, and thereby augment the national possessions. The process of creating fresh wealth by simply taking it from the producers is so evidently impossible that its advocates hesitate to carry their view to its logical outcome. There is in truth a two-fold fallacy in the argument. In the first place, natural obstacles do not, in general, stimulate to exertion; economic development is not greatest among the Eskimos, or the Fuegians, as it ought to be on this hypothesis. Some natural difficulties urge man to action, but others reduce him to torpor, and check the first steps towards civilisation. The influence of natural disadvantages in promoting the growth of wealth is rather by their indirect effect on the physical and mental qualities of those subject to them, not by the economic loss that they occasion. Secondly, the analogy between natural and artificial obstacles is defective. It does not follow, because men work more strenuously (and this is doubtful) to till a barren soil, that therefore they will exert themselves the harder the more they suffer from the incursions of marauders. The greatest promotive of industry is security, and protection from arbitrary or oppressive taxation is but one form of that ‘protection against the Government’ on which Mill justly insists as more important even than ‘protection by the Government.’1
Later on, however, Mill appears to adopt a milder form of McCulloch's view. When examining the effect of a tax on profits, he declares that ‘It may operate in different ways. The curtailment of profit, and the consequent increased difficulty in making a fortune, or obtaining a subsistence by the employment of capital, may act as a stimulus to inventions, and to the use of them when made.... Profits may rise ... sufficiently to make up for all that is taken from them by the tax. In that case the tax will have been realised without loss to any one.’2 Such a result, though possible, is extremely unlikely, as the additional production in consequence of the tax would itself be subject to taxation. A low rate of profit may lead to the introduction of economising expedients, but the expectation of a high rate is far more effective in increasing production. There is just as much, and just as little, truth in the belief that low profits encourage industry, as in the similar beliefs that low wages make the workman and high rents make the farmer industrious.1 Some special examples have been brought forward in support of the position that certain forms of taxation stimulate invention. McCulloch cites that of the Scotch distillers, who, under the influence of a spirit duty, assessed according to the contents of the vessels, so improved their processes by economy of the time spent in distilling, that instead of taking a week, they in a few years required only three minutes, and thereby were able to bear a duty nearly forty times as great as at first. Somewhat similar improvements have been introduced into the Continental beet-root sugar industry in consequence of the method of imposition, which assumes a certain yield and charges duty only on that amount, leaving any excess free.2 What is really striking in these cases is the fact that invention has been stimulated, not by the duty, but by the possibility of escaping it: the imperfect form of assessment has encouraged efforts in this direction that would cease if the true return were brought under taxation. They do not show in the slightest that the progress of invention is greater in a taxed industry than in one free from taxation. All antecedent probability, and all actual experience, go to prove the opposite.3 One great impediment to the use of new processes is the surveillance that taxation renders necessary.
The result of the preceding discussion is, briefly, that any compensating effect of taxation in increasing production is extremely doubtful, and is at best so small, and occurs in so few cases, as not to form an element worthy of entering into the rational calculations of the financier. The raising of compulsory revenue means so much loss to the payers and to the community, for which the only return obtained is the benefit resulting from the efficient execution of state functions. Any doctrine that removes attention from this cardinal fact is erroneous in principle, and may lead to serious practical evils.
§ 4. Nor does taxation only mean the withdrawal of the amount required by the public powers from the disposable funds of the subjects of taxation. It may, and often does, take much more. In all countries the cost of collection is no inconsiderable item, which must be added to the actual amounts needed by the state departments unless it be regarded as an additional state function. In either view it increases the burden to the payers. Consequently, one of the most generally recognised maxims of finance is that which prescribes that ‘Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the State.’1 This rule, declared by Wagner2 to be simply the application of the general principle of economy to public finance, has two distinct applications: (1) as regards the State itself, the aim of securing the best return in amount of taxation for the expense incurred in collection is very plain, but even when this is realised there is (2) the still more important object of not inflicting indirect loss on the subjects, either by the obstruction of industry that taxation causes, or by the inconvenience that the regulations incident to the system of collection may produce. Some forms of taxation are much more oppressive in these respects than others, and one of the principal tasks of financial practice is to discover the least burdensome modes.
The public economy depends ultimately on the national economy; anything that reduces the economic power of the individual citizens is an injury to the State. A system of taxation that diminishes the revenue of the subjects without a corresponding return to the public treasury is certain before long to show its effect in reduced receipts from taxation.
A comparison of English taxation as it existed in 1820 with that now in force proves how much may be gained by a determination to conform to the rule of ‘economy.’1 But even in the best existing systems of finance there is a large amount of waste, some of it unavoidable. The raising of such a sum as £120,000,000 in the course of a year cannot be accomplished without much interference with industry and trade and a great deal of annoyance to individuals. From a purely material point of view this canon of ‘economy’ is probably the most important in fiscal science, and no efforts should be spared to secure the closest observance of it that existing conditions permit.
§ 5. The supply of state wants by taxation is then, it is plain, a charge on the collective resources of the community. Finance is no exception to the general rule that it is impossible to obtain something out of nothing. Prudent management may make the available resources go farther than they otherwise would. The financier, like the mechanician, proves his ability by the direction, not by the creation, of force, and especially by reducing to a minimum the loss through friction. But having decided that taxation is a charge on the national resources, there is room for further inquiry as to the precise fund on which it falls. We have already mentioned Adam Smith's opinion that it must be derived from the shares of revenue. Ricardo declares that ‘Taxes are always ultimately paid either from the capital or from the revenue of the country,’2 and expands his statement by pointing out that the proceeds of a tax must curtail consumption, increase production, or reduce capital, i.e. ‘impair the fund allotted to productive consumption.’ From this he concludes that taxation should be imposed on revenue rather than on capital, since the latter form of tax tends to check future production. Some writers have even raised this into a maxim of finance.1 The danger of hindering the growth of capital is apparent, though as capital is derived from revenue it is not easy to avoid taxing it to some extent. ‘To provide that taxation shall fall entirely on income and not at all on capital is,’ says Mill, ‘beyond the power of any system of fiscal arrangements.’2 In actual economic life the line between capital and non-capital is not so fixed and rigid as the text-book definitions would make us believe.3 Any tax is certain to take some wealth that would otherwise have been devoted to the aid of production, and also some that, if left to the taxpayers, would have been consumed unproductively. How much will come from each source is not easily determinable.
The distinction between capital and revenue is, besides, not quite the same when considered from the national rather than the individual point of view. Much individual capital is not national capital, and this is likewise true of revenue; but for the financier it is national capital and revenue that need attention. Any pressure on the most important auxiliary of production is as far as possible to be avoided; but when capital is rapidly increasing, a tax that appears to trench on individual capital, as e.g. the English Death Duties, is not open to the objection of reducing national capital in the same degree as it would be in a poor and unprogressive country. Taxation is drawn from the total stock of wealth, including at any given time both capital and revenue. The real aim should be to so direct it as to interfere to the smallest extent with the action of the forces that promote accumulation. Heavy taxation will always be injurious in this respect. If imposed on revenue it reduces the fund from which capital comes, and may even lead to direct encroachments on individual capital: if on capital it leaves revenue free to partially fill up the gap that it has made. There is no impassable barrier between the two categories of wealth; any action on one will, in all probability, extend to the other.1
In addition to the productive capital and annual new production, every civilised society possesses a large mass of wealth in process of use, ‘stock reserved for immediate consumption’ as Adam Smith calls it, ‘consumers’ capital’ in Sidgwick's phrase. There is in this ‘stock’ a further source on which taxation may fall without injuriously affecting the productive powers of the community. In fact, we can fairly say that no less comprehensive term will suffice to describe the source of taxation than that already employed, viz. ‘the collective wealth’ of the country. But in actual societies in their normal condition taxation is derived from the national revenue, some of which would have been transformed into capital. Nothing but a national crisis would justify taxation so heavy as to absorb the free income of the society and reduce the sum of its accumulated wealth.
§ 6. A celebrated doctrine has carried still further this limitation, and maintained that all taxation should be levied on the net, as opposed to the gross, income. Net income is asserted to be the only disposable fund for the purpose. Gross income includes the necessary expenses of maintaining the citizens and replacing the national capital. To touch on that part of the gross receipts would be a blow to the industrial organisation, inasmuch as it is an essential requisite for the society being continued in its full efficiency as an economic machine. A tax that takes away a part of the labourer's necessary subsistence, or lowers profits below the minimum for which men will consent to take the risk of investment, is indefensible, and in the long run defeats its own object.
The earliest appearance of this doctrine is with the Physiocrats. Their theory of the ‘produit net’ has its chief application in respect of taxation. The fifth of Quesnay's maxims lays down ‘that taxation should not be destructive or disproportioned to the sum of the national revenue; that its increase should follow the increase of revenue; that it should be imposed immediately on the net product of land.’ According to Du Pont de Nemours, ‘the portion of the returns called the net product is the sole contributory to taxation, the only one that nature has prepared to meet it. It is of the essence of taxation to be a part of the net product of cultivation.’ Mercier de la Rivière is, if possible, clearer. ‘Taxation is nothing but a part of a net product, and can be levied only on a net product.’1 The conception of the net product as consisting of nothing but the rent of land appears absurd, but the way in which Quesnay and his followers reached that startling result is not hard to follow. In their opinion the labourer requires a definite amount of commodities for his subsistence; more than that he will not receive, and so much he must get under penalty of starvation. This ‘subsistence theory’ of wages was fully accepted by the Physiocrats,’2 and fairly accorded with fact in the France of the Ancien Régime. Precisely analogous is the position of the capitalist. The rate of interest is just sufficient to keep up the existing supply of capital. The interest on capital advanced is, Turgot tells us, ‘the price and the condition of that advance, without which the undertaking could not continue. If that return is diminished the capitalist will withdraw his money, and the undertaking will cease. That return ought then to be sacred and enjoy an entire immunity.’1
When wages and profits are removed by the nature of things from the tax-collector's power, it goes without saying that rent is the only remaining source on which he can draw, and we are compelled, their premises being given, to accept the Physiocratic conclusion. Adam Smith, however, declined to follow this seemingly rigorous deduction. He holds that both wages and profits may contribute to taxation, though the amount to be obtained from the former must be very small. Ricardo takes the same view. While asserting formally that it is only from profits and rent ‘that any deduction can be made for taxes,’ wages ‘if moderate constituting always the necessary expenses of production,’ he qualifies his statement by the admission that labourers may receive more than their necessary expenses, in which case the surplus is a part of ‘net produce.’2 Finally, J. S. Mill emphasises the share of the labourers in ‘net produce,’ and seems to desire to amend Ricardo's doctrine on this point.3
§ 7. The doctrine of net income as the sole source of taxation, whose history we have just traced, has met with strenuous opposition in Germany. For the last thirty years the fact that taxation is a duty incumbent on the citizen and to be paid by him, not by the pure abstraction called ‘net income,’ has been loudly proclaimed. Hermann's theory of ‘use capital’ (Nutz-capital) has been employed to show that there is an enjoyment revenue to be added to the economic revenue derived from production in the strict sense. ‘It is,’ says Cohn, ‘undoubtedly income that the owner of a house enjoys from his residence in it, the owner of a park from his enjoyment of the park, that a person enjoys in his own hunting-ground, in his own picture gallery. It is income in the specific form of enjoyment of property.’1 Such an extension would give a larger fund on which to draw, though it seems preferable to regard these forms of wealth, in the way adopted in a preceding section of the present chapter, as property or capital, and so far liable in exceptional cases to taxation. Of greater force is the argument that the cost of maintaining the State is itself a part of the necessary expenses of the society. The protection of person and property, the duty of the public powers even in the opinion of the extremest individualists, is almost as indispensable as feeding or clothing. So far then from taxation being dependent on the surplus produce of the community, it may with justice be looked on as one of the first charges on the gross production, coming next to that minimum of food and covering that is needed for the preservation of life.
The apparent contradiction between two such plausible opinions can, we believe, be escaped by taking a broader view of the subject than the disputants on either side have done. Necessary expenses are in no case a fixed amount. Each standard demands a certain minimum outlay, but the standard can be varied. The subsistence standard of the English labourer has always been higher than that of the Hindu, and what is true of labour is equally true of the other factors of production. The amount of capital can be reduced to suit a less intensive method of production, and the smaller the quantity needed, the less, cæteris paribus, will be the rate of interest. And so is it also with state wants. Their amount and cost can and have to be adjusted to the general position of the society. The difficulty of laying down any definite rule as to the proportion of national income, gross or net, that ought to be devoted to the public service has been shown at an earlier stage of our inquiry.2 Here it will suffice to distinguish between that part of taxation that conduces directly or indirectly to the production of wealth and that which produces non-economic advantages. The former is beyond dispute a part of the cost of production; without it the amount of wealth would be smaller, and the payment of this part cannot be said to come from the net income, or surplus after necessary expenses are met. The latter, like all other forms of enjoyment, can be dispensed with, and yet leave the amount of production as great as before. It may, therefore, be said to come out of the net produce in the wider sense given to the term by Mill. This separation is, however, very hard to carry out. All forms of public expenditure have some effect in promoting industry,1 and some retrenchment might be made in all without economical loss to the society. Still the principle of the separation is intelligible, and within limits can be usefully employed.2
§ 8. Inquiries respecting the derivation of the tax revenue from gross or net income, or from the sum total of the national wealth, may appear at first a piece of unnecessary subtlety. They have, however, important practical bearings. Until the normal source of taxation has been determined, it is impossible to estimate the pressure that it places on a community. The taxable capacity of India or Ireland would be very different according as gross or net revenue is taken as the measure; and in a comparison between Great Britain and the United States, the test of income would probably give the first place to the latter, while that of property would assign it to the former.3 In another important question of finance the problem of the true source of taxation becomes of moment. The justice of any particular system of taxation cannot be estimated without a knowledge of the fund from which the tax revenue is derived. According as taxation has its source in gross or in net income our view of the equity of existing systems must vary.
The principles just stated find an important application in the case of the financial position of Ireland. It has been argued with apparent plausibility that the cost of subsistence of the Irish population should be deducted from its gross income in order to ascertain the fund disposable for taxation. But this at once raises the difficult question of calculating the cost of subsistence, and also suggests that the doctrine of section 7 as to the variableness of necessary expenses should be taken into account. Sir R. Giffen has assumed that the amount of £12 per head should be taken as the minimum standard, and thus departs in two respects from the taxation of true net income, for (a) the assigned amount is too high for a very poor population, and (b) far too low as an allowance for expenditure necessary for efficiency in the higher grades of producers. In comparing the taxable capacity of two countries it is the amount in each really disposable for the tax-collector that should be considered. In no case can this exceed a part of even so-called ‘net income.’ The poorest population must have something above bare subsistence, since there will always be persons much wealthier than the mass of the people. This question is, moreover, one, not of equity but of fact, to be ascertained by appropriate evidence, which is, in truth, very difficult to procure.1
the distribution of taxation
§ 1. From an examination of the general and what may almost be called the necessary features of the tax system, conditions that are beyond the direct influence of human agency, we have now to pass to a problem of a very different character, viz., the determination of the proper distribution of the burden inevitable in the levy of taxation among the persons or ‘subjects’ liable to it. Instead of studying ‘what is,’ we ask ‘what ought to be.’ The distribution of taxation may be said with far more justice than the distribution of wealth in general to be ‘a matter of human institution solely.’1 Like all questions into which the conception of ‘ought’ or rightness enters, it is an ethical one; but its correct solution is so bound up with economic and financial considerations that it must remain within the field of financial inquiry. Without a knowledge of the surrounding conditions and the effects of any given tax system, the attempt to form a judgment respecting its justice is hopeless. Moreover, to obtain an approximately correct answer to the question is of great importance to the practical financier. Any error, wilful or otherwise, on the subject is apt to show itself in political difficulties that may in some cases reach an acute point. Nor is it sufficient that a tax system shall be substantially just: it ought to be generally recognised as such. The prevalence of even an unfounded belief that the public burdens are not fairly divided among the different classes and individual members of a society is a seriously disturbing force. Finance touches on the domain of general politics, and no method of fiscal administration, however successful in other respects, can be worthy of approval unless it seeks, so far as existing conditions allow, to realise the idea of an equitable division of the public charges. The establishment of general principles on this point for the guidance of financial policy and their recognition by the people in general are so eminently desirable, that the investigation of the grounds on which taxation should be distributed is a work of utility in the narrowest practical sense.
The difficulties of the inquiry are increased by several distinct circumstances. First, they are due to the changing nature of the public economy. The city state of Greece or Italy, the mediæval kingdom on a feudal basis, and the nation of modern times have so many points of contrast, their several functions are in outward appearance so different, that it seems impossible to assign a single law of distribution that can include them all and yet be more than a truism. Will it not be necessary to take each stage of political evolution and deal with it separately? Next, even confining our attention to a single type of State, it is not easy to bring the numerous public charges, and the equally numerous functions whose cost they defray, to the test of a common calculation. It is not clear on the surface that all citizens should bear all charges in an equal degree, or that all expenditure should fall on a common and indivisible fund. The text-book writers have, it must be said, created a third difficulty, as they, in too many cases, have supplied us with formulas that allow of a convenient laxity of interpretation, and give an appearance of information without the reality.
Under such circumstances it will be expedient to examine the various rules of distribution, and to note their historical application. While thus engaged we shall see how misunderstanding has often arisen from neglecting the necessary changes in public economy, and the gradual development of the State, as well as from attempts to stretch a particular rule beyond its legitimate limits.
§ 2. The first and, in one sense, the simplest principle for the distribution of taxation is that which would treat it as a payment for public services. We have already seen reason for rejecting this mode of explaining the nature of taxation,1 and thereby implicitly its value as a measure of its amount. There was, however, much in the mediæval economic system that tended to foster the belief. Private economies admittedly sold their services, but the royal economy was nothing but the largest of private economies. The King lived by his domain and by the fees that he obtained for the performance of duties. The whole feudal system was based on the idea of contract. Defence against enemies was the payment for the vassal's homage and dues. Justice was bought, and so were the few economic services rendered by the sovereign. Under such conditions the doctrine that taxation should be measured by service supplied was but the formal expression of an existing fact. The growth of the state economy made this no longer true and the doctrine thus became a survival from earlier times. It is still more important to note that the method of specific payment for public services was never a realisation of justice in the distribution of burdens. Neither in respect of national defence nor of legal administration, nor finally of general economic activity, is it possible to distribute the advantages among individuals, and to charge in proportion. The introduction of general taxation was in part a result of the defects of the older mode, and it was undoubtedly a step in advance, particularly in the direction of securing a fairer allocation of the expenses of the public powers. The theory that taxation is the price of the State's services, and finds its measure for each citizen in the amount of benefit received, is, as regards the latter part, quite unsupported by history. The system of direct purchase applied to the State's tasks was so far from being equitable that justice was only made possible by its abandonment.
Much of the plausibility of this view of the measure of taxation arises from the apparent support that it gives to the individualistic theory of the State. If the services of government are the standard by which to regulate taxation, there appears to be no essential difference between the payment of taxes and the purchase of commodities. The assimilation of the two forms is in reality a forced one. In the case of taxation the advantage given is indefinite, and the payment for it is compulsory; the modern upholders of the doctrine are consequently forced to have recourse to some other standard, which they declare brings about a substantial equality between the benefits received and the taxes paid.1 That usually suggested is the rule of taxation in proportion to revenue. It is, however, quite impossible to establish any such connexion. Limiting state functions to the minimum, viz. the protection of person and of property, there can be no doubt that the former would in general require equal payment from all. It costs quite as much (if not more) to protect a poor man's person as it does to perform the same service for a rich man. Again, as regards property, there is little ground for the belief that the cost of guarding it varies directly as its value. If security is to be sold like an ordinary commodity, there ought, on the strictest commercial principles, to be some allowance made to the purchaser of a large quantity! The natural conclusion, therefore, appears to be that the rate of taxation should, on the theory of purchase and sale, be lower on large than on small incomes; but even this result does not rest on very solid grounds, since any change in the quantity or quality of state services would alter the relations of the parties concerned.
§ 3. The evident weakness of the theory just discussed makes the adoption of some other and more precise criterion necessary. Retaining the idea that taxation should be equal, but giving up as hopeless the attempt to measure the respective services performed for each person by the State, we might conceivably abandon all efforts at differentiation between individuals, and hold that equality was realised by taxing all persons (or all families) at the same rate. Such a method might be admissible in a primitive community. All are dependent on the State for certain essential conditions of social life. Why should not all pay equally for these advantages? Military service is rendered by all alike, and the same principle might seem as applicable to the contribution of commodities as to that of services. Civilised societies have, however, almost forgotten the existence of a state of things in which such an arrangement would be feasible. The annual tax revenue of the United Kingdom may be put roughly at £120,000,000, and the population at 40,000,000. Under a system of equal contribution the rate per head would be £3, or £15 for a family of five. The labourer's family, with a weekly income of £1, would be taxed about 30 per cent.; a middle class family, with £500 per annum, would be taxed 3 per cent.; where the family income was £50,000 per annum the charge would be an insignificant fraction. The method of equal contributions per head would be impossible politically, besides being extremely unjust.
Dismissing then the idea of equal taxation of persons as utterly impracticable, we come to what is the best known and most widely accepted doctrine, viz. that which takes ‘faculty’ or ‘ability’ as the measure for taxation. This view, which is found as early as Bodin,1 has been embodied by Adam Smith in the first of his classical maxims: ‘The subjects of every State ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities.’1 For the last thirty years it has been the doctrine accepted by the majority of German writers on finance. One reason for the readiness with which ‘ability’ has been adopted as the measure of taxation is perhaps its convenient vagueness. The mere statement that taxation should be proportioned to ‘ability’ does not afford much practical guidance. A measure of ‘ability’ is further wanted, and in fact different criteria have been put forward with equal sincerity and equal confidence. Property, revenue, net revenue have each been selected as the test of the taxpayer's ability.
§ 4. All the foregoing tests are more or less measurable, and present, so to speak, objective standards, but the measure of ‘ability’ has sometimes been transformed into that of ‘sacrifice,’ and this criterion has been widely accepted. ‘Equality of taxation,’ says Mill, ‘as a maxim of politics means equality of sacrifice.’2 It is apparent that the rule of equality of sacrifice is but another mode of stating the rule of equality as to ability. Equal ability implies equal capacity for bearing sacrifice. An equal charge will impose equal sacrifice on persons of equal ‘faculty,’ and where abilities are unequal a corresponding inequality in the amount of taxation will realise the aim of equality of sacrifice. There is, however, a shade of difference in the use of the two terms. Ability suggests the positive element of power to contribute, sacrifice the negative one of loss by contribution; the former is most naturally measured by some objective standard, the latter refers primarily to the sentiments of the people concerned, and is, therefore, rather subjective. The use of sacrifice undergone by the payer as the measure of taxation is probably due to a disposition to place weight on the element of privation felt by those who are taxed, instead of on the external marks that indicate ability to pay.
But when the conception of ‘sacrifice’ is substituted for that of ‘ability’ the road is opened for a further and more radical alteration. Assuming the utilitarian standard as the true one, it is forcibly argued that the proper distribution of taxation is not that which imposes equal sacrifice. The ‘greatest happiness’ of the society will be best attained by so distributing the burden as to inflict the least sacrifice on the whole, and therefore placing the heaviest pressure on those who are far above the average in resources, while exempting altogether those who are much below it.1 The same train of thought leads to more careful discrimination in the treatment of ‘equal sacrifice, since under this term equal sacrifice in the strict sense and ‘proportional sacrifice’ are frequently included. Last of all in this process of refinement is the recognition of ‘equi-marginal sacrifice’ which will lead to the realisation of ‘minimum’ or ‘least sacrifice.’
These complications in the employment of the sacrifice principle seem to justify adherence to the objective standard of ability, especially as the practical application of the criterion of ‘least sacrifice’ is impossible.2 It is clearly inadmissible to use a principle of a highly abstract character, and one limited by other important considerations, as the guide in such an essentially practical study as finance.
§ 5. But whether ‘ability’ or ‘sacrifice’ be taken as the standard, it is possible to reach very different practical results according to the amount of weight assigned to the different elements. We accordingly meet with three different forms of distribution, all avowedly based on the criterion of ability, and all claiming to realise true equality. These are: (1) pure proportional taxation, in which income is taken as the standard, and the amount of public burdens regulated by it; (2) qualified proportional taxation, where income is still the test, but is subjected to certain modifications, either by deduction of necessary expenses or by analysis of its component parts; (3) progressive or graduated taxation, which places a heavier rate of charge on large than on small incomes, since the ability of the ‘subject’ is supposed to increase in a more rapid ratio than the increase of his income.
The rule of proportional taxation has been undoubtedly the doctrine of the classical political economy. Connected on its political side with the liberalising movements of the eighteenth century, its representatives protested against all exemptions and privileges, and against none more than those granted in respect of taxation. The assertion of the justice of taxing in proportion to revenue carried with it a condemnation of the very common freedom from all personal taxation enjoyed by the privileged classes of the Continent. ‘There is,’ says Vauban, ‘a natural obligation on the subjects of all conditions to contribute in proportion to their revenue or their industry ... Every privilege that tends to exemption from that contribution is unjust and abusive.’1 If taxation should be proportional it follows necessarily that it must also be general. The French Revolution, and the changes that it led to elsewhere, so completely abolished the objectionable privileges that this side of the doctrine is often ignored, and its reference to the income possessed alone considered. Adam Smith completes his statement that taxation should be adjusted to the abilities of the subjects by adding ‘that is in proportion to the revenue which they respectively enjoy under the protection of the State.’1 And since his time the rule has been quoted and adopted by most of his English and French successors.2 At first put forward as a protest against the injustice of the old system of privilege, the maxim of proportional taxation is now employed as a weapon against the newer Radical socialism.3
One great advantage of the rule is its simplicity. As M. Say puts it, ‘Proportional taxation does not need definition, it is the rule of three ... When it is said of a tax that it will be levied proportionally every one understands it.’4 The problem of taxation is reduced to its least complex form. Given the amount that must be raised by taxation, and given the sum of individual incomes, the rate per cent. can be assigned and applied to each case. It is true that there are certain practical difficulties in the way. The ascertainment of individual incomes is not a perfectly easy work, and where, as is almost universally the case, it is necessary to specialise the tax system and have a number of duly correlated charges, it is difficult to measure the exact amount paid by each citizen to the public treasury. But any other principle must either meet or evade these embarrassments, besides the additional difficulties that are peculiar to itself. Simplicity and easy application, though desirable in finance, are not the sole objects to be attained, and therefore the rule of proportional taxation has been vehemently opposed as failing to give a just distribution of the public charges. The question has, in fact, been mainly debated on the issue whether proportional or progressive taxation should be the system adopted.
§ 6. What is known to Continental writers as progressive5 —but more familiar in England as graduated—taxation includes, as we have said, any system in which the rate of taxation becomes higher, or progresses, as income increases. In this consists the essence of the principle; the grades into which incomes are divided, the initial rate of charge, and the increases at the several stages of advance, though very important, are yet matters of application.
The reasons that have led to the popularity of progressive taxation are obvious enough. The loss of a portion of wealth by a rich man is generally regarded as a very slight evil or as none at all, while to a poor one it causes curtailment of real enjoyment. The deduction of £10 from an income of £100 will in most cases prove a serious pressure, sweeping away perhaps the savings of the period, or compelling the sacrifice of all relaxation; that of £100 from £1,000, though still heavy, would not trench upon the conditions of a comfortable life; £1,000 taken from £10,000 would leave a balance sufficient to support a luxurious existence; and £10,000 from £100,000 would hardly, so popular sentiment imagines, be perceptible by the owner. Yet it is precisely these deductions that proportional taxation carries out, without recognition of the real gradations of ability and capacity for bearing sacrifices. So regarded, the levying of equal rates on all incomes has an appearance of unfairness that has given much support to the plan of graduating charges according to different scales.
Though the general current of economic opinion has till recently been decidedly against the idea of progression, the system has secured the adhesion of some eminent authorities. A passage of Montesquieu's has been often quoted in its favour, in which, speaking of the Athenian property tax, he says, ‘it was just though not proportional; if it did not follow the proportion of goods, it followed the proportion of wants. It was thought that each had equal physical necessities, which ought not to be taxed; that what was useful came next, and should be taxed, but not so highly as superfluities.’1 Rousseau and the elder Mirabeau took the same view. In the nineteenth century J. B. Say and Joseph Garnier approved of a system of moderate progression. The former ‘did not fear to declare that progressive taxation was the only equitable form’; the latter held that ‘taxation ought to be progressive without spoliation.’2 Still the weight of authority was on the other side. ‘Progressive taxation,’ like ‘protection’ or ‘a double standard,’ was an heretical tenet opposed to the true economic faith. Alike in England, France, and Germany it was rejected by such representatives of competent opinion as J. S. Mill and McCulloch, Levasseur and De Parieu, Gneist and Hermann.3
The recent change in opinion on this subject has been due partly to increased popular influence over government. The shifting in the centre of political gravity that the growth of democracy has brought about has, as one of its consequences, a tendency to alter the distribution of taxation in favour of the most powerful class, i.e. the numerical majority. This can only be accomplished by putting a heavier burden on the wealthy. The diffusion of socialistic ideas assists in this movement. Progressive taxation is one of those agencies that seem likely to facilitate the transition from the capitalist to the socialist régime, and it consequently has the support of the various sections of that party. Among the counts of the indictment that the French economists bring against the system, one of the weightiest, in their opinion, is its socialistic character.
Modern developments of economic theory have also had their share in the work. The members of the ‘historical’ school have not been bound by any undue respect to the opinions of their predecessors, and their greater sympathy with semi-socialist ideas made them inclined to favour what seemed to be a mode of relieving the poorer classes from the pressure of excessive taxation. Accordingly some moderate form of progression has generally received their approval.
Another and apparently opposed school has tended in the same direction. The more accurate study of the variations of utility, which forms the common starting-point of the researches of Jevons, Menger, and Walras, has among its other important effects given a new mode of measuring the pressure of taxation. Final or marginal utility becomes the measure of sacrifice, and if, as is plain, the utility of a shilling is more to the possessor of an income of £100 than it is to one of £1,000, it does not follow that it is exactly ten times as great. The assumption that equal percentages of income are of equal utility is a rough ‘first approximation,’ admissible, perhaps, in the earlier stages of inquiry, but certain to give place to the more accurate results of later investigation. It is noticeable that Sax and Wieser, who represent the financial studies of the Austrian school, have both declared for progressive taxation.1
The substitution of ‘least sacrifice’ for ‘equal sacrifice’ as the criterion for distributing the burden of taxation would lead of necessity to a more extreme form of progression, approximating to, if not actually attaining, a state of socialistic equality. This substitution is, however, too speculative, and, as previously explained, too much limited by the need of maintaining production, to be seriously considered. Still, even its qualified recognition may be regarded as one of the influences giving support to the movement towards the development of progressive taxes.
§ 7. A system of progression may be realised in different ways, as by heavy taxes on luxuries consumed by the rich,1 or by higher duties on the finer kinds of all commodities. Duties on the transfer of property, and on commercial transactions generally, could be so adjusted as to reach the same end, while taxes on inheritance appear to supply a specially effective form of progression.2 The mode usually employed is, however, that of progressive income and property taxes. This is obviously the most direct way, since it places the increased charges at once on the larger incomes, and has not to trust to the less certain and calculable operation of taxes on ‘consumption’ or on ‘acts.’ In form the tax may be on property, or on income, or on both; but as in any case it must normally be paid out of income, the assessment of property is simply a particular mode of fixing the rate of charge.
But whatever be the form adopted, the policy of progressive taxation is open to serious objections, of which the following may be noticed as the most important.
In the first place, it is entirely arbitrary. The possible scales are infinite in number, and no simple and intelligible reason can be assigned for the selection of one in preference to its competitors. The schemes proposed vary widely. Some are of a very drastic character, aiming in fact at confiscation of all income above a certain appointed level.3 Others are more moderate, and seek only to realise a supposed equality of sacrifice, or simply to somewhat favour the poor as against the rich. But the fact that such divergent plans can be plausibly propounded is highly significant.
Actual examples of progression, as we shall see, are not of an extreme type. The highest rate of charge is fixed at a comparatively low percentage. It still remains true that there is no self-acting principle by which to determine the scale of progression. We must perforce agree with Léon Say's declaration that ‘progression is naturally arbitrary.1 Opponents of the system will hold that the mildest form is the least objectionable, and try to attain that result (unless they prefer to have an extreme measure in the hope that its hardships may cause a reaction). Reasonable supporters will recognise that a rapidly increasing rate is both unjust and economically injurious. But beyond such vague propositions nothing can be stated. All depends on the will of the legislature, i.e. in most modern societies on the votes of persons who will not directly feel the charges placed on the higher incomes, and will probably believe that they will be gainers by them.2
Another serious obstacle to a progressive system is the danger of evasion. No empirical law is better established in finance than that which states that high taxation leads to efforts to avoid it. Duties on luxuries are in part escaped by the smuggler's aid; special duties on the better kinds of goods lead to false declarations; graduated inheritance taxes are met by concealment and gifts inter vivos; progressive income and property taxes cause false returns on the part of the contributors. For this latter fact there are several reasons. The increased charge on higher incomes offers a special inducement to understatement on the part of those liable, as thereby they obtain the advantage of a lower rate, a proceeding the more readily excused to their consciences by the plea that the exaction escaped is itself unjust. Another reason is the impossibility of employing effective measures for collection. With a uniform income tax a great deal of income can be taken at its source, where evasion is impossible; with progression, as the rate varies according to the sum of income, the ascertainment of that fact is required for fixing the charge, though it is undoubtedly very difficult to get a proper answer to inquiries respecting it. Thus the motives for evasion are stronger and the means of prevention less effective in the case of a progressive than of a proportional tax.1 It is the intrusion of the personal and arbitrary element that raises this difficulty, which is accordingly unavoidable.
A third powerful argument against progressive taxation is derived from its probable effect on the accumulation of wealth. One of the motives to providence is the desire of gaining a large fortune, but a system that in its extreme forms prevents, and in any case hinders, the attainment of this desire must, it is argued, check the growth of capital. The imposition of special taxation on the larger incomes or properties is, in fact, a fine on saving, and consequently an impediment to the supply of one of the auxiliaries of production. If the legislator is to interfere at all, he ought rather to encourage the formation of new stores of wealth that will, in the vast majority of cases, be used to assist industry.
The discouragement to the growth of capital may operate in two different ways. There will naturally be a movement of wealthy persons from a district in which they are subjected to special penalties. Any existing outflow of wealth will be increased, and the influx of other wealth so far checked. Such is a very probable and serious danger in a small district from which movement is easy, and with the modern tendency to international movements of capital it may occur even in large areas. But for countries with a highly developed system of industries, another effect is more to be dreaded, viz. the stoppage of saving at an earlier period. Capital may not emigrate readily from such a country as England or France, but the annual increment may become smaller and finally cease. Considering the dependence of industry on the facilities for obtaining new capital, it would seem that any artificial check to its growth would be a grave evil and likely to react on the finances of the State.
In mitigation it may be urged that progressive taxation is not in fact likely to weaken the disposition to save. It will only affect those who possess a good deal already, and such persons save as much from habit as from conscious motive. There is, too, the further fact that the heavier taxation on the rich will leave the poor a larger disposable sum, part of which they may save, and to that extent increase the store of wealth. But though in both those ways the loss to capital under a moderate progression may be reduced, it seems clear that some loss there will inevitably be, and it is incumbent on the supporters of any measure tending in this direction to show what compensation will be gained through fairer distribution.1
In discussing this matter it is well to remember that the productiveness of a progressive tax on incomes is not as great as is popularly supposed. This failure to reach expectation is due partly to the evasions that have been noticed as incident to the tax, and also to the various devices, not absolutely illegal, that are used to escape the extra pressure. If rigorously collected the tax causes much capital to emigrate; discretion is therefore very often employed in enforcing claims, and in either case the revenue suffers. Another reason is found in the fact that in most countries large incomes do not form a large proportion of national revenue. Taxation to be productive must draw on the resources of the middle and working classes. The unproductiveness of progressive direct taxes is paralleled by the small yield of taxes on the luxuries of the rich as compared with duties on articles of general consumption.1 To obtain the funds needed by the State pressure must be placed on all classes of society, not merely on the prosperous.2
§ 8. The foregoing objections, which may be distinguished in their order as political, moral, and economical, are so weighty that a very clear proof of injustice inflicted by any other system than progression must be made out in order to sanction its use. The injustice of proportional or regressive taxation, if established, would tend to show that for the realisation of equity progression in some form must be adopted. But in support of this contention we have nothing except the appeal to equality of sacrifice as the standard, and the alleged failure to conform to it by taking equal proportions from different incomes. The deduction of £10 from A's income of £100 and of £10,000 from B's of £100,000 will, it is maintained, inflict greater suffering on A than on B. Such is the assumption of the upholders of progression, and their view accords with popular sentiment. There is, nevertheless, room for doubt. Is it really certain that A, whose income is reduced from £100 to £90, is worse treated than B, whose £100,000 is brought down to £90,000? There can be no dispute as to the wants which the latter will have to leave unsatisfied being very much slighter than those of A, when looked at from the same point of view. But the point of view is not the same. B's system of life on its material side is so differently constituted from A's that any comparison of the kind is absurd.1 £10 from A's income may mean the loss of a certain amount of alcoholic drink; B, by having to give up £10,000 may lose the chance of purchasing an estate, or may have to abandon some social scheme that he could otherwise have carried out. The economic calculus is not at present competent to deal with such comparisons. The complexity of the problem is admittedly great, and not to be solved by simple methods.2 The weightiest difficulty that the theoretical advocates of progression have to meet is the essentially subjective nature of their standard. Its translation into an objective rule of taxation can be accomplished only by the aid of assumptions as to the relations of enjoyment in different classes that must contain a large element of conjecture. The modern elements of the theory of utility fail to supply any definite practical basis on which to frame a scale of progression.
Progressive taxation has been supported by a very different line of reasoning in Cohn's brilliant Finanzwissenschaft.1 Proportional taxation is asserted by him to be the logical result of the ‘contract’ or assurance theory of the State. In accordance with that belief, it was fitting that all should pay the same proportion of income in exchange for the stipulated services. The modern or ‘higher’ conception of the State abandons altogether this theory of the social compact, and therefore its corollaries, in which is included the rule of proportional taxation. Writers who like Rau, De Parieu, and Leroy-Beaulieu reject the older view of the State's relation to its subjects, and yet maintain the justice of proportional taxation, are guilty of inconsistency, explicable only by their dread of the often-described evils of progressive taxation.
To this ingenious contention the answer is that, granting the derivation of the rule of proportional taxation from the ‘assurance theory,’ the refutation of the latter does not upset the former, since a true conclusion may result from false premises. But even this concession need not be made. It has been argued in the present chapter that the exploded doctrine of ‘assurance’ would logically lead not to proportional, but to what has been called ‘regressive’ taxation, i.e. to a lower percentage on large than on small incomes.1
§ 9. Experience of the actual working of progressive systems might be expected to throw light on the reality of the evils attributed to them and their real operation. A large amount of evidence has been collected with this object by very competent inquirers,1 but, unfortunately, the results are not decisive. Most of the cases discussed are those of Swiss cantons or the smaller German States. (The short-lived income-tax of the United States and the progressive income-tax of Prussia are the chief exceptions.) Now, the financial arrangements of small political bodies are undoubtedly full of instruction and deserve attentive study, but they belong to the domain of local rather than general finance. The conditions of working are therefore different, and there is to some extent room for the use of a different principle of distribution,1 since the public services rendered by local bodies do often allow of an estimation of their value to individuals, and, besides, have to be considered in connexion with the taxation of the State.
The peculiar economic conditions under which progressive taxes have been applied are clearly shown in the discussions respecting their operation, which are chiefly concerned with the danger of forcing capital to emigrate and that of undue discrimination against particular persons. Both are real and serious in a small area; within the wider boundaries of a nation their probability would be smaller. It is hardly conceivable that the English Chancellor of the Exchequer should arrange his scheme of taxation with reference to any small number even of the wealthiest taxpayers; nor would the emigration of capital be caused by even a fairly heavy tax. On the other hand, the facilities for assessment are much increased by having to deal with a limited district in which the income and property of each resident can be ascertained with a close approach to the truth, and as incomes are in no case very large, there is not the same room for injustice. Progressive taxation could not be easily applied in national finance. The forms of wealth are very numerous, and can be so placed as to escape the tax-collector's notice when he has to deal directly with income as a whole. We have, therefore, no evidence sufficient to modify the unfavourable conclusion reached on general grounds respecting progressive taxation.1
§ 10. The idea of securing equality of sacrifice while escaping the dangers of unregulated progression has led to the adoption of what is known as ‘degressive’ taxation, a system in which a uniform rate of tax is levied beyond a prescribed limit; but incomes under that limit are either altogether exempt, or rated only for a part of their amount. Some of the so-called progressive taxes in Switzerland are really of this kind. Thus in Zürich 500 francs are free, the excess up to 1,500 francs is rated at only one-fifth, the next 1,500 francs at two-fifths, the next 3,000 at three-fifths, and the next 4,000 at four-fifths, anything beyond being rated at its full amount, e.g. an income of 12,500 francs (£500) would only pay on 8,300 francs.1 By this method the confiscation of the higher portions of income can never happen, but there is still an arbitrary power of fixing the several scales which is inconvenient, while this form of progression is particularly open to the charge of unproductiveness, and is somewhat hard to work owing to the minute subdivisions that are usually made.
Degressive taxation may, however, like the more moderate forms of progression, be employed rather to secure than to destroy proportionality of taxation, as it affects only one part of the tax-system, and may correct inequalities in other directions. When the articles consumed by the poorer classes are heavily taxed, they would contribute more than their share to the maintenance of the State were they not relieved through the income and property taxes. This is one of the reasons for the exemption of incomes of §160 and under from income tax in the United Kingdom and the abatements on those up to §700. The duties on tea, sugar, tobacco, spirits, and corn, which chiefly affect the smaller incomes, are thus balanced, and a substantial equality (or what is believed to be such) attained. The rule of proportionality is applicable only to the whole tax-system, and it may be necessary to have several partial inequalities in order to establish that final equality which is one of the principal merits of a financial system.
§ 11. Another ground for modifying the rule of proportional taxation exists in the doctrine that net income is the sole available fund for social objects. If certain kinds of expense be necessary and unavoidable, it seems that any income which only suffices for meeting them should be exempt from taxation. On the supposition that the labourer's wages are just enough to keep him alive, the slightest extra charge will lead to his death, unless he is relieved from some other quarter. Taxation on the minimum of subsistence must, by the nature of the case, be paid by somebody else. The Physiocrats, as we saw,1 extended this argument to the interest on capital, but their successors have not accepted this extreme view. However, the doctrine known as ‘the exemption of the minimum of subsistence’ is widely spread. Among its supporters in one form or other may be reckoned Justi, Sonnenfels, Bentham, Sismondi, Hermann, and J. S. Mill, and it long received recognition in the English system of taxation, in the avoidance of duties on the necessaries of life, while, as just mentioned, incomes up to £160 per annum are free from direct taxation.2 The different interpretations put on the doctrine need to be distinguished. The primitive and most natural meaning is that which limits it to the absolute necessaries of existence, though here there is room for doubt as to the correctness of including the expense of maintaining a family under this head. The wider use of the term to cover ‘the sum of the means of support which, according to the standard of a given period, is required for the conduct of an existence worthy of man,’3 would extend the exemption far beyond the limit of physical necessaries, and would almost reach to the exclusion of whatever expenditure is necessary for the earning of the person's income from the amount to be taxed.1 By regarding the outlay requisite for the support of each grade of income and its expenses of production, we might bring the fund available for taxation down to a very small amount.
Such a construction of the doctrine may be dismissed as impracticable. The subject's outlay is determined by himself and is directed for his own advantage. The only ground for doubt would be the possibility of expenditure on these ‘necessary’ items being curtailed in consequence of the tax. This effect would be very improbable unless the rate of taxation were so heavy as to show bad administration, but even in the limited case of physical necessaries the argument for remission is not so clear as might be thought. The danger of relieving the lowest class of labourers from nearly all the burdens of the State while it holds preponderating political power is apparent. Again, there is much force in the view that public expenses are a part of necessary expenditure. ‘The State,’ argues Cohn, ‘belongs as much to the life of every civilised man as his daily food or the air; without the State a civilised existence is not thinkable. The minimum of every moral existence includes the blessings of the State. It follows that the minimum of outlay for existence must also include the necessary expense of the State.’1 Why should not the poorest citizen pay something towards security as well as purchase the bread that supports him? The practical side of the question seems rather to favour the English policy of the later years of the nineteenth century. So far as the argument from ability is concerned, it is plain that those who barely possess the means of subsistence have little or no ability to contribute. In any country where legal provision is made for poor relief it would seem that to tax those at the point of minimum subsistence would be simply to drive them into the ranks of pauperism, and to take with one hand in order to give back with the other. The cost and trouble of raising money by direct taxation from the poorer classes, added to the foregoing considerations, strongly supports the method of exemption from direct taxation of the smaller incomes with the employment of moderate taxes on the luxuries of the poor.1 When exemption is claimed for the minimum it can only be on the ground that it will be employed in buying necessaries; any other application of this amount fairly brings it under the weight of taxation.2
§ 12. The question of justice may also be raised in respect of incomes that differ not in amount but in origin. As usually debated, the point is confined to the case of an income tax, but it is really wider, and applies to all forms of taxation. To put the issue in the simplest way, let us suppose that of two persons one, A, obtains by his exertions £500 per annum; the other, B, obtains the same sum from the rent of land or from interest on capital. Is it just or expedient that A should pay the same sum in taxes that B does? The most natural answer is a negative one, and many persons have proposed that the capital values of the two incomes should be taken as the basis of taxation.3 A little reflection will, however, show that under certain conditions there is nothing unjust in the arrangement. A's income, it is true, is less durable, but so is its chance of taxation. The permanence of B's receipts involves likewise permanence of taxation. So long then as the public charges are uniform, there is no reason for complaint. Special occasions will sometimes occur in which extraordinary expenditure actually is, or is deemed to be, necessary, and then it seems that as there is an extraordinary call it ought to come from the capital rather than from the income of the community. A convenient mode of realising this end would be the imposition of an additional property tax, which, being met out of the income of the holders, would accomplish the end of taxing permanent incomes at a higher rate.1 Another mode would be to meet the increased outlay by loans to be repaid in a series of years.
In practice the difficulty is not so great; the distribution of burdens can never be accomplished with mathematical precision. The avoidance of real and serious grievances is all that can be expected, and the actual working of the financial system meets these in a tolerably satisfactory manner. Necessity compels recourse to loans whenever there is any large extraordinary outlay, and thus the particular holders of incomes from labour are in fact relieved. Again, the two categories are not so sharply divided as is supposed; they shade into each other at many points; and, moreover, the return on property (as distinct from ‘unearned increment’) is itself the result of saving, and entitled to as liberal treatment as any other form of revenue. The technical difficulties that surround any attempts to differentiate incomes belong to a later part of our inquiry.2
The foregoing considerations are helpful in considering a very different proposal, also aiming at a departure from the rule of taxation in proportion to income, viz. that which asserts that expenditure alone should be taxed, savings being entirely exempt. The reasons given in support of this privilege are (1) that saving is not enjoyment, but a useful social process that deserves encouragement; and (2) that savings, unless exempted, would pay twice over, viz. first at their origin, and again when they yield a further return after investment. It may be freely allowed that to encourage providence is desirable, but it does not follow that exemption from taxation is the proper mode for so doing. If income be the normal fund from which taxation comes, and if it is on its amount that the measurement of the burden is to be taken, an arbitrary separation of a certain part is obviously objectionable. The line between saving and expenditure is besides a thin one; the true distinction should rather be between productive and unproductive expenditure, i.e. the result of outlay ought to be the test, a plainly impossible course in practice. Further, it may be said that many forms of productive outlay are just as enjoyable as any non-productive one, and some forms of the latter are socially preferable to others. There is, in reality, no reason for a sharp division into two classes, whether we take enjoyment or social advantage as the basis. Practical finance could not deal with such shades of difference as would be the apparently fair course. The same consideration may be applied to the case of temporary and durable incomes, the former of which are very variable in character.
To the plea of double taxation it may be replied that taxation is imposed on income as such, that the wealth which is taxed as income is not identical with the extra produce that is the result of its application, and the charge on each is distinct. The income out of which savings are made cannot be the same as the subsequent income produced by those savings.1
There is, it should also be noticed, a direct opposition between the proposal to relieve temporary incomes and that to exempt savings from taxation. What is the balance of advantage in getting a premium to save, only to discover that the earnings which result from that saving will be subject to heavier payments? The broad and simple principle of taxing all incomes alike, and of taxing all that is income (allowance being made for the action of taxes on consumption in the case of the smaller incomes), appears to attain the result of just distribution quite as well as the more refined discriminations so often suggested. Should any further adjustment seem necessary in a particular system, it may be reached by a nominal property tax,1 or by duties on inheritance.
§ 13. The principal theories and contentions on the subject of the just division of taxation have now been considered, and it remains to state the general results which seem to be warranted. The attempt to measure taxation by the amount of service rendered has been recognised as hopeless and due to an erroneous theory of the State's nature, but it contains a small element of truth. Where specific and measurable advantages are rendered to individuals or groups, direct payment for those services ought to be obtained, either in the course of exchange or by the payment of fees, or, if neither method can be employed, by a special tax. Cases of the latter are very rare in general, but they hold a more prominent place in local finance. Indeed, as we shall see, the division between local and general taxation is itself a case of making those interested pay for special services, and in the detailed division of local charges the same principle can often be applied.
The use of ‘ability’ or ‘faculty’ as a measure of taxation is encumbered by the necessity of defining its true meaning. We have seen reason, chiefly on practical grounds, for rejecting the interpretation which issues in the system of ‘progressive’ taxation. Its fiscal productiveness is slight, while its economical effects are likely to be injurious. Between the system of payment as recompense for state services, which would naturally lead to regressive taxation, and the system of progression, resting on the idea that sacrifice should be equalised, the intermediate method of taxation in proportion to income is on the whole the best standard for regulation. Its true foundation needs to be carefully appreciated. It cannot claim to be a realisation of exact distributive justice; it is rather to be accepted as a convenient and fairly definite working rule of finance, or at the utmost as supplying a measure of what may be called the objective side of ability. Income, when the lower grades are passed, is, we may hold, a fairly good mark of power to contribute, provided we make abstraction of individual circumstances.
In the same spirit we can solve the problem raised by the existence of incomes at the minimum. Financial convenience combines with economic conditions to make it desirable to exempt the smaller revenues from direct taxation where the duties on articles of common consumption are productive. Where it is possible to relieve necessaries from taxation, the minimum of existence is in fact free; where the needs of the Exchequer prevent this being done, the pressure placed on the lowest class is of a kind not much felt by them unless the rate of taxation is excessive. To tax the very poorest is a sad necessity, but where the want of revenue is urgent, not inconsistent with justice; there is a real advance when national wealth has reached so high a point that the lowest class are called on to contribute only through their luxuries, but the highest stage is that in which the improvement of society is such that all classes are in a position to pay their share as citizens for the common services of the State.
Thus it appears that the distinction between temporary and permanent incomes, as also that between expenditure and savings, may, speaking generally, be disregarded in practice as involving subtleties unsuitable for fruitful application and to a great extent cancelling each other, and the result is that on the whole, and speaking broadly, taxation should be proportioned to revenue, by which a fair approximation to justice and a convenient basis of working are supplied.
§ 14. One class of revenue is so peculiarly situated that its position deserves special notice, viz. that which arises from ‘unearned increment’ in the widest sense of the term, including the growth of rent from land, monopoly profits, and the gains of speculation.1 The characteristics of this class seem to have marked it out as peculiarly suited for taxation. The physiocratic tax on land was not, indeed, due to this idea of it as yielding a monopoly gain, but the practical result was just what it would have been in that case. Adam Smith distinctly notes the fitness of unearned gains for special taxation. ‘Ground rents and the ordinary rent of land are,’ he holds, ‘perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them.... Nothing can be more reasonable than that a fund which owes its existence to the good government of the State should be taxed peculiarly,’2 while later on he widens his view by declaring that ‘the gains of monopolists, whenever they can be come at,’ are ‘certainly of all subjects the most proper’ for taxation, a doctrine the truth of which as a general statement can hardly be denied. Regarded by itself, unearned wealth seems, as it were, designated to supply the public wants of the community,3 and there is no reason for surprise at the popularity of any proposals in that direction. But the imposition of taxation must be studied not simply with regard to a single general fact, but to the whole economic and financial constitution of the society. The obstacles in the way of this form of special taxation are serious enough. To begin with, it is not always easy to say what gains are ‘unearned.’ The rent of land and the receipts from pure speculation are the first examples, but the line that separates pure rent from profit rent is not so readily determined. As Adam Smith remarks in this connexion, ‘The ordinary rent of land is, in many cases, owing partly at least to the attention and good management of the landlord.’4 In a new country the gain from land is profit rather than rent,1 and as society advances the investment of capital in land improvements complicates the problem. In the case of commercial speculation it is not pure accident that determines gain. Speculation is rather, as Cohn well describes it, the struggle of intelligence against chance.2 To tax the profits of speculation would check the operation of the economising force of competition. Monopoly gains are better fitted for extra burdens, and where excessive profit is obtained, through natural or legal monopoly, there is good reason for obtaining at least some of the advantage for the public. But these cases are so few as to form but a trivial financial resource. Railways, banks, and some other companies are the principal examples of possible monopoly, and among them the amount of excessive profit is not considerable. Two further circumstances diminish still more the importance of this extra source of tax revenue, viz. (1) the existence of losses that counterbalance unearned gains. If individuals engage in a venture, be it cultivation of land or industrial enterprise, they can hardly be called on to give up their surplus gains unless they are guaranteed against possible loss. A landholder will not care to develop his property with the certainty before him that his accruing ‘producer's surplus’ will be appropriated by the State, while he has no security for ordinary interest on his outlay. The same feeling will be even stronger in industry and commerce than in agriculture. Just as weighty is (2) the fact that with a system of private ownership and a developed economic organisation the titles to these ‘unearned gains’ are in a constant process of transfer, and future values are estimated in the prices given. The anticipated future movement of rent is registered in the price of land. Premiums on shares measure the gain from speculation or monopoly. Justice could therefore be attained only by taxing each increase immediately on its existence being noticed, an evidently hopeless endeavour. For these reasons it is desirable to narrowly limit special taxation of monopoly values to the clearest and best established cases, and for the rest to rely on the increased productiveness that this unearned wealth will give to the ordinary taxes. This conclusion, it may be added, does not apply to any existing land taxes, which may be plausibly regarded as reserved rents, nor does it cover the specially interesting case of ground rents in towns, where the effect of public expenditure introduces a new and difficult element, and one which strictly belongs to the domain of local finance.1
§ 15. So far we have dealt with taxation as if it were applied to a single country or district in a state of complete isolation, and have sought to discover the just distribution of the burden between the inhabitants. This is, indeed, the most important part of the equities of taxation. But its examination does not exhaust the area of inquiry. Some interesting and difficult questions remain for discussion. One, which has lately attracted much notice, is the proper division of taxation between the several parts of a common realm. To put the issue interrogatively: Is there a rule of just distribution between districts or countries similar to that between individuals, and, if so, what is its nature? It is necessary in order to obtain a satisfactory basis for discussion to begin by distinguishing the different cases. Taking first the loosest form of connexion we find two, or more, countries under a common ruler, but with independent governments and distinct financial systems, and having to make provision for certain common expenses. Here it is hardly possible to lay down any general rule. The comparative benefit of a particular service to the countries appears the fairest standard, but this, owing to the great difficulty of estimating it, is generally replaced by some test of presumed service or comparative ability, no very clear separation being made between the two bases. Thus the diplomatic and consular services of Sweden and Norway have been met by joint contribution. The relation of the United Kingdom to India has led to more elaborate treatment of some joint services and a good deal of debate as to the justice of the particular arrangements.1 Political convenience and the spirit of compromise are the really controlling forces in such a situation.
The second class of cases is that in which a distinct financial system is formed to meet those expenses that are regarded as ‘common,’ the necessary revenue being obtained by contributions from the divisions in some settled proportion. The determination of the proportion necessarily raises the question of the proper rule to be applied, and the disputes as to the principle of benefit against that of capacity or ability are sure to make their appearance. In the most prominent actual examples a rough empirical rule has been employed. ‘The value of all land within each State ... as such land and the buildings and improvements thereon shall be estimated,’ was the standard in the United States under the ‘Articles of Confederation.’2 The respective quotas of Austria and Hungary by the compact of 1867 were 70 per cent. and 30 per cent. That any crude arrangement of the kind can realise justice is almost impossible. There is no single criterion of ability and no definite measure of proportional advantage. As Alexander Hamilton declared, ‘The attempt to regulate the contributions of the members of a confederacy by any such rule cannot fail to be productive of glaring inequality and extreme oppression.1 The most feasible course in the face of this difficulty is to provide for an automatic re-adjustment, based on the chief elements of ‘advantage’ and ‘capacity’ to take place at definite periods. It may, indeed, be said that the relation is too unsatisfactory to be durable unless in a very exceptional situation.2
In a true federal union the conditions of the problem are altered. Instead of an arrangement between separate political units there is a system of taxation operating on persons, natural or juristic, and enforced by sovereign authority. The question of equity is then reduced to the problem which has occupied the preceding sections of this chapter, viz., the just division of the charge amongst the ‘subjects’ of the tax-system. Nevertheless there may be room for complaint on the special ground that the actual taxes press unfairly on some districts as compared with others. In a federal union indirect taxation is allotted to the national government, ‘State’ governments being confined to direct taxes. By this division, which has undoubted advantages,3 the central government has the opportunity if so disposed of burdening some States to the advantage of others.4 Constitutional provisions are some slight safeguard, but, as in other cases, they prove to be inconvenient and not always effective.5
The unitary state ought, it would at first sight appear, to be free from any complication of the kind, but when several countries have been united into a single State the question of just distribution between those countries may be raised. A remarkable example is that of the United Kingdom. By the Acts of Union, Scotland (1707) and Ireland (1801) were combined in a legislative unity. From the first the excise and customs were applied to the whole of Great Britain, the land tax alone being arranged on a proportion. In the earlier years of the Irish union, in consequence of the large amount of the debt of Great Britain, separate Exchequers were retained and the unsatisfactory plan of quotas was adopted, the Irish contribution being two to the British fifteen. Owing to the real Irish contribution falling short of this proportion—it only amounted to ‘one’ out of ‘thirteen’—the Irish debt was so much increased that consolidation of the Exchequers became possible, and was carried out in 1817. One limiting principle was enacted in the Act of Union—that no higher tax should be imposed on an article in Ireland than in Great Britain, and for many years higher duties were levied in the latter country. Substantial equality of rates was not, in fact, reached till 1858.1 Since then there has been equal taxation of persons similarly situated in any part of the United Kingdom.
This, however, it has been argued, does not secure true equality. Though the rates of taxation are the same, the practical result is to impose on Ireland a charge, excessive as compared with her ‘resources’ or ‘taxable capacity.’ Deducting subsistence, which should be untaxed, the available surplus is small and is kept down by oppressive taxation imposed in contravention of the pledges given at the passage of the Act of Union.2
To this case the usual reply has been that under a common system of taxation the question of justice is one between persons, not between countries. If the several individuals are fairly treated the aggregates composed of them can suffer no injustice.1 The general principle that all taxation must fall on persons2 gives force to this plea. There are, however, some considerations in qualification of this generally sound principle. Taxation may be equal as between persons of the same class, but very unequal as between those in different classes. A large use of indirect taxes will press severely on the poorer classes of society: the income and inheritance taxes will fall chiefly on the rich. It can hardly be denied that duties on tea, sugar, spirits, and corn would be more felt by the Irish population than an equivalent increase of the income tax. Again, the articles selected for taxation may be those principally consumed in one country, while their substitutes in other countries may be free or lightly taxed. Further the tax system may injuriously affect the production of one country while sparing that of another. It is true that a well organised financial system will avoid these evils, which result from non-observance of established principles, but the fact that they come out prominently in the case of a country may lead to their speedier detection. It must also be remembered that two countries may not be suited for a common financial system. Difference of habits and institutions may be so great as to render it impracticable. On the other hand there can be no doubt that where it is possible fiscal union is an enormous benefit, and substantial unity of taxation, when once attained, is too great an advantage to be lightly surrendered. Attempts to prove inequality of taxation on the ground of supposed inferior taxable capacity rest on too indefinite a basis to be safely applied in practice3 Should it appear that one territorial part of a State is overtaxed the true remedy is a reform of the tax system; this course will have the additional merit of relieving those who are suffering in like manner in the other divisions, while not affecting those in the particular area who are not really injured. It besides keeps closely to the rule of dealing with persons as the real tax subjects.
§ 16. Another important class of problems is that connected with international taxation. The conception of a country or even a group of countries as isolated or self-contained is far from according with the actual conditions that prevail in any modern society. Owing to the development of trade and of international relations generally, the residents in a country have varied economical ties with other lands. Many of them draw part of their revenue from abroad and are interested in foreign industrial and commercial undertakings. Increasing liberality in bestowing the privilege of naturalisation and the reduction of aliens’ disabilities encourage foreigners to hold property, and thus bring themselves within reach of the taxing power of the State. This steady growth of international dependence gives much greater importance than formerly to the difficult problem of double taxation, and makes it essential to consider the chief cases coming under that title. But in so doing we need not enter into the imposition by a State of different taxes on the same object, nor into the apparent double taxation of persons. Whatever be the proper rule of distribution, any kinds of taxation, however complicated, which conform to it are justifiable. Thus the corporation tax—now being developed in the American States—is seen on analysis to be in reality taxation of the shareholders in the corporation, and is therefore to be counted in estimating the total burden on them.1
Exclusion of the cases of apparent double taxation leaves a clear road for the examination of international as distinct from domestic taxation, or—to put the distinction more accurately—the conflict between different tax jurisdictions. One instance may be easily disposed of, viz. that in which a citizen removes himself and his property from one country to another. Here the country that he leaves has no right, and in fact no power, to exact contributions from him. He belongs altogether to the country of his adoption. More difficult in practice is the case in which the owner of property resides abroad and draws his revenue for use in the country in which he dwells. Here it may be asked, how shall the charges of the two States be distributed in an equitable manner, or what guiding principle should be employed? On the old protection or assurance theory, it would follow that the country of residence should be paid for protecting the person, and that where the property lies for guarding it; but as this doctrine is now exploded, we must look elsewhere for an answer. It would seem reasonable that special taxes on property or local rates should be assigned to the country of situation, while the general income tax and indirect taxes on commodities consumed by the person would accrue to the country of residence. But this course is not free from difficulties. In the first place, it is by no means easy to draw a clear line between the general income tax and the special produce taxes. Then, certain forms of income derived from abroad, e.g. rent of land, may claim exemption. A still greater difficulty is found in the attempt to deal with those diverse forms of immaterial property which pass so often from hand to hand. The foreign stockholder and still more the foreign company give rise to almost insoluble puzzles.1 Finally the treatment of wealth passing at death when the deceased possesses property in two or more countries requires careful consideration.1 One broad principle—that of reciprocity—might seem to afford a satisfactory solution, but where the countries are very differently situated even this method fails. Taxation of colonial property when held by residents in the United Kingdom would not be counterbalanced by similar taxation of British property owned by residents in Australia. It becomes necessary to obtain fairness as well as nominal equality, and this can only be reached by international agreement.2 In a federal State such problems should, it seems, be decided by the central authority, or by constitutional provisions. In the analogous case of local taxation, another method—the separation and limitation of the forms of revenue used for local purposes—is advisable.3
§ 17. Our judgment as to the equity of any particular distribution of the pressure of taxation will depend on the view that we take of the results to be attained. Even when taxation is limited to the supply of the public wants the proper division of its weight may vary according to the amount and character of the services supplied by its employment. Where state functions are confined to the narrowest possible field, the poorer classes may claim to bear a smaller share than if—as in many modern societies—they were largely benefited by public expenditure. But from the difficulty of discrimination it seems better to adhere to the general rule of distributing taxation without direct reference to the results of expenditure on the different classes. Injustice of this kind ought to be corrected, not by redistribution of taxation, but by alteration of outlay.
There is a tendency in recent years to take a wider view of the functions of taxation than the purely financial one. Its agency is regarded as valuable, not solely for the resources that it brings into the State, but for the effect that it produces on the distribution of wealth. By the use of a properly adjusted tax-system the inequalities of wealth may, it is thought, be reduced, if not entirely removed, and one of the aims of Socialism approached without revolution. Such is Wagner's position when he declares for the ‘politico-social’ conception of taxation in opposition to the ‘pure financial’ one. This change in standpoint must of necessity change the mode of estimating the justice of taxation. What is wise and prudent when we aim simply at supplying the requirements of the public powers in the fairest and cheapest way ceases to be such when it is sought to bring about a supposed better distribution of wealth. Proportional taxation, caution in taxing unearned wealth, and moderation in expenditure may be admitted to be the logical results of the ‘financial’ conception: progressive taxation with a high rate of increase, rigorous fiscal supervision of all gains except those from labour, and bold attempts at improving the condition of the poorer classes by state outlay in various directions will be the natural outcome of the ‘social’ attitude.1 The change of aim necessitates a corresponding change in the methods adopted.
The general arguments on the subject of socialistic interference do not concern us here, but the results of financial experience are of some value in respect to the use of taxation for other than fiscal purposes. The taxing power has been often employed to encourage industry, to improve taste, to benefit health, or to elevate morals, but in none of these applications has the desired success been obtained. There is, therefore, a strong presumption against its use as an agent for remedying the inequalities of wealth. Its definite and universally recognised function is the supply of adequate funds for the public services. To mix up with one very important object another different and perhaps incompatible one is to run the risk of failing in both. It is within the power of financial skill to so select the forms and rates of taxation as to secure the requisite amount without unfair pressure on any class, but if the ulterior effects on the distribution of wealth have to be considered, and adjustments made to attain particular ends in that respect, the difficulties of the task are enormously increased. If the socialistic régime is the goal to be sought, there are more direct and more effective modes open than the manipulation of taxation.1
§ 18. At the opposite pole to the doctrine that finance should aim not solely at preserving justice, but at remedying injustices already existing in the social system, is that which refuses to see anything of justice in financial problems.2 For the upholders of this view the distribution of taxation is reduced to placing the burden where it will give the least trouble and friction in collection. McCulloch's often-quoted statement that ‘the characteristic of the best tax is not that it is most nearly proportioned to the means of individuals, but that it is easily assessed and collected, and is at the same time most conducive to the public interests,’3 is a sufficiently clear expression of the view which is a very natural feeling among practical administrators. An escape from the difficult questions that the problem of justice must always present is a pleasing prospect, though unfortunately based on illusion, since injustice in distribution is certain sooner or later to show itself in the very difficulties that the practical financier wishes to avoid. All the conditions of a good system of taxation are interdependent and the breach of one reacts on the others.1 The observance of the mere technical rules at the expense of justice will not be successful, any more than the utmost straining after fairness without regard to the other conditions which we proceed to examine in the next chapter.
the tax system: its forms
§ 1. The construction of a system of taxation, like all works of art, is the result of a combination of materials derived from different quarters. To attain success it is necessary to bear in mind certain general facts respecting the economic structure of society; the important aim of realising substantial justice in the apportionment of burdens must never be lost sight of, and in addition the technical and financial conditions require to be duly considered. It is to this latter class of problems that the present chapter will be devoted, and we shall see what form the tax system ought to take in order to satisfy these various requirements and be at the same time effective for what is after all its primary function—the supply of adequate resources for the public service.
The facts of past and existing financial institutions, when compared with the general principles discussed in the preceding chapters, present at first sight a curious contradiction. Taxation, we discovered, was normally a deduction from the national income, and ought to be divided among the citizens in proportion to the share of that income possessed by each. Though some qualifications of this statement were made,1 such was the broad general result: from which it would seem to follow that the amount needed should be levied from the taxpayer in a single payment in proportion to his ascertained income. In fact, the single tax would, we might think, be the necessary deduction from established principles.
On turning to the facts of practical finance the state of things is very different. No country possesses this simple and logical arrangement. Instead of a single tax we find a considerable number of imposts varying according to place and time, and very hard to reduce to any reasonable classification. Taxes on every form of production, on nearly every commodity, and on most of the transactions of life, may be found in the history or statistics of finance.
One partial explanation is that which attributes the complexity of the public charges to ignorance or love of routine on the part of practical financiers. The beginning of the tax system, obscured as it was by the other forms of state receipts, was due to fiscal necessity. Extraordinary levies were made by the sovereign on the wealth most easily reached and owned by the feeblest members of the community. ‘To raise the largest sum of money with the least trouble’1 is an inadequate description of the functions of a modern finance minister, but it was the chief aim of his mediæval predecessor.2 It may then be thought that the immediate pressure of the public wants has been the cause of the undue complication in the methods of taxation.
Such, however, is not the case. There is no doubt an element of truth in the assertion that it was want of funds that led to the creation of so many different forms of taxation. A war period is usually a time of financial pressure, and most new taxes owe their introduction to occasions of this kind.3 But when the pressure is removed and the work of financial reform made possible, though great consolidations of duties are effected, there is no example of recourse to that simple method that appears so natural and appropriate in the light of some elementary principles. It is, therefore, necessary to examine the grounds on which a multiple system of taxation is retained, notwithstanding the apparent advantages of the single tax system.
§ 2. In the face of the general, indeed universal, policy of employing diverse forms of taxation, there has been at times a strong disposition on the part of students of finance to propose some particular kind of impost that should tend to supersede all others and be the principal resource of the Exchequer. Prominent amongst such plans is that promulgated by the famous engineer Vauban in his Dîme Royale. He does not, as has been sometimes supposed, advocate the complete abolition of all other charges. Among the duties to be retained were a moderate salt duty, the customs, and some of the taxes on acts: but the taille, the capitation, the aides (internal duties chiefly on drinks), the provincial customs, and the miscellaneous sources of revenue classed as ‘extraordinary’ were to give place to a single tax—the ‘Royal tithe’—imposed on the product of land, industry, and, in short, all revenue, its amount to be five per cent. or ten per cent. according to necessity.1 His contemporary Boisguillebert, with whom he had so close an intellectual affinity, put forward the same idea of a single tax of one-tenth of the product of land and industry.
A similar tendency is shown in Sir M. Decker's plan2 (referred to and criticised by Adam Smith) of a licence for the consumption of luxuries as a substitute for the excise and customs, a scheme which, in spite of its obvious difficulties, has been reproduced in a modified form in later times.1 The popularity of duties on consumption favoured the growth of plans like this. Still more significant was Vanderlint's scheme for a single tax on land and its products, perhaps suggested by some remarks of Locke. The pamphlet in which Vanderlint stated his plan is a distinct anticipation of the physiocratic idea as to the true system of taxation.2
§ 3. The proposals already described came from individual thinkers, and had little or no influence on competent opinion or on financial practice. But in the circle of economists who regarded Quesnay as their master the dogma of a single tax—the Impôt unique—became an accepted article of belief. This doctrine was the natural result of their theory as to the limits of net produce. The rent of land was, they thought, the only ‘source’ of taxation, and it was therefore convenient that it should be its only ‘object.’ Vauban's idea of a Royal tithe was good so far as simplicity went, but it was unequal,3 inasmuch as it fell on capital employed in cultivation, which, in the physiocratic dialect, was not ‘disposable.’ In the application of their principles the Physiocrats were more inclined than is sometimes believed to admit modifications. The elder Mirabeau was prepared to raise two-thirds of the requisite revenue by an income tax, leaving only one-third for the land tax, and Turgot frankly concedes that the time had not come for an abolition of octrois.4
Besides the plan of a single tax on land rent, which has recently received support on different grounds from that of its originators, other forms of single taxation have been suggested in the nineteenth century. One is the general income tax, which would directly attack the normal source of taxation, and secure whatever distribution seemed desirable to the legislator. In the form suggested by some economists it would be proportional to receipts, and might be so framed as to cover acquisitions by gift or inheritance.1 Radical democrats would prefer that the single tax on incomes should be more or less rapidly progressive.
The plan of a single tax on ‘realised property’ has also received much support. It would be confined to property not engaged in production, ‘as land, the public funds, money lent on mortgage, and shares ... in joint-stock companies,’2 and was believed by its advocates to escape the inequalities of the income tax, and to present greater facilities for collection, since the objects of assessment would be definite and open to observation.
Of rather wider scope is the plan for a single tax on capital, put forward by De Girardin and Menier, and approved by M. Guyot. Under it taxation is to be imposed on ‘fixed’ capital—i.e. on ‘all such utilities as yield their products without changing their nature,’ to wit, ‘land, mines, buildings, machinery, implements, ships, carriages, animals employed productively, furniture, and works of art.’3 Raw materials and goods for sale would be exempt from charge. The basis of assessment proposed is the selling value of the taxable capital, one per cent. of which would, it was believed by Menier, be sufficient in the case of France to meet the public expenditure.
§ 4. These several plans have certain elements in common, and appeal to the very natural desire to secure a simple and inexpensive form of taxation. Were there no obstacles in the way, it is plain that direct imposition on the source of taxation would be preferable to the complicated methods actually employed. The cost of collection would be materially diminished, and the immediate incidence on the several individuals and classes precisely determined. Moreover, the community, as distinct from the State, would gain by the removal of restraints on industry, and it could measure definitely the cost of the public services.
Against such plain and obvious advantages there are weighty considerations to be set, which militate against the adoption of a single tax in any form. (1) The danger of a single tax, no matter how skilfully estimated, not being duly proportioned to revenue is a serious one to which any other proposed base, e.g. capital or expenditure, is equally open. With a combination of different taxes the errors in any one case will be small, and probably compensated by the operation of other taxes, but with a single tax there is no possible room for correction. Experience shows that what is in appearance a perfectly fair tax may be practically very unequal in its operation. Evasions and false returns may destroy the proportionality of the best arranged income tax. (2) The pressure of taxation in most modern States is by no means a slight one. On the average it exceeds ten per cent. of the national revenue. Now it is evident that ‘the ignorant impatience of taxation’ would prevent this amount being raised without much irritation through any single tax. To disguise the burden is, so far as sacrifice is concerned, to reduce it, and the breaking up of the system into several distinct forms undoubtedly has this advantage. (3) The use of a single tax would remove the advantage that is obtained at present by reaching the different forms of taxable capacity. Consumption, income as returned or assessed, property inherited, are all so many indications of the capacity arising from the possession of revenue, which, when duly considered, enable a better proportional rate of taxation to be maintained. Besides, in certain cases it is, as we saw, necessary to separate the tax-payer's contributions, and treat some as given for special service, or to assign the total amount between different countries and districts. A single tax would fail altogether in this respect. (4) It is, moreover, important to note that a so-called single tax is not necessarily a simple one. Thus a general income tax is often a combination of several special taxes, and may often prove just as troublesome and complex. A tax on fixed capital would be in fact a tax on land, mines, factories, furniture, works of art, &c., which would be so many separate categories for distinct assessment. A general tax on consumption or expenditure would be even more involved. The simplicity of such plans is therefore often only apparent, and covers a real complexity. (5) The results of the shifting of taxation increase the force of the preceding argument. A proportional tax in assessment may in the ultimate incidence be a very one-sided charge. Taxation in the simplest shape introduces a complicating element into the economic system, the effects of which are hard to follow and often very far removed from what first appearances would suggest.
§ 5. The foregoing considerations and actual fiscal practice have given countenance to the directly opposite doctrine, which has been perhaps most precisely enunciated by Arthur Young. ‘The mere circumstance of taxes being very numerous, in order to raise a given sum, is a considerable step towards equality in the burden falling on the people; if I were to define a good system of taxation, it should be that of bearing lightly on an infinite number of points, heavily on none. In other words, that simplicity in taxation is the greatest additional weight that can be given to taxes, and ought in every country to be most sedulously avoided.’1 This passage has at least the merit of placing the issue in a clear and definite form. To attain equality in distribution there ought on this theory to be an almost universal system of taxation touching the people at every point. Property, income, consumption, transactions, inheritance should all be moderately taxed in order to make the burden as even and as light as possible. Young's views were, beyond question, produced by repulsion from those of the Physiocrats, and went even farther in the opposite extreme, but they do not inaccurately describe the characteristic feature of the finance of the eighteenth century. As a standard for modern times they are evidently inapplicable and opposed to the most important and valuable reforms of the nineteenth century. To secure the placing of pressure ‘on an infinite number of points’ would require the interference of the revenue authorities in most of the industrial processes and the private life of the community. Taxes on all commodities, on transfers of goods, and on the different forms of production would be extremely prejudicial to the development of industry, irksome and inconvenient to the payers, and very costly in collection. Financial history affords abundant examples of these evils. The Alcavala, a duty levied on all sales, has been regarded by Adam Smith as the cause of the ruin of agriculture and manufactures in Spain.1 The English customs before the first reforms of Huskisson exemplified the evils of undue multiplicity in one branch of taxation, and the United States revenue system during the Civil War was an even more striking instance of the same defect.2 To properly arrange and combine a great number of duties is too difficult a task to impose on administrators, who are sure, even with the utmost care, to inflict much injustice and cause heavy losses.
§ 6. The defects of the opposed systems of single and of multiple taxation tend to countenance what may be called ‘plural taxation,’ in which the revenue is not on the one hand collected by a single form of duty, nor, on the other, divided into a great number of trifling charges. Under the existing conditions of society this is the course that has most in its favour as being at once most productive, least inconvenient, and on the whole approaching nearest to justice. But it is necessary to remark that this conclusion is limited to present circumstances. It does not follow that it may not be possible at some future time to adopt a single tax system, or at least a very close approach to it. Among the arguments urged against the single tax is that of the actual weight of taxation and the risk of exciting discontent by raising the required sum in a single payment. Suppose, however, that public expenditure were greatly reduced, so that, instead of eight, ten, or fifteen per cent. of national revenue, only three or four per cent. were required; it might well be that the relief to industry and the facility of collection would make an income tax advisable as the sole agent for raising revenue. So large a reduction of expenditure is hardly to be expected. When dealing with that part of our subject we saw that the tendency was towards increase, but it is not difficult to conceive how a very different state of things might have come into being. Let us suppose that England had never engaged in the Revolutionary and Napoleonic wars, and that her foreign policy had been for the past century that of rigid ‘nonintervention.’ Were such the case the financial results would certainly be (1) the entire absence of the national debt with its charge of £23,000,000 and whatever surplus may actually exist; and (2) the reduction of the army and navy estimates to probably one-quarter of their normal figure. Moderate reductions in the Civil Service would allow of further curtailment of expenditure, with the result that not more than in round numbers £25,000,000 would have to be provided by taxation. An income tax of 8d. in the pound (including as it should the smaller incomes now exempt) would be the most direct mode of procuring that sum. The position of the United States, if the Civil War had been obviated by prudent statesmanship, would be even more favourable. A very moderate income tax would have met all the expenditure of the years 1850–1860, as the low customs duties actually did.1
It thus appears that the form of taxation depends in a great degree on the amount of expenditure. With moderation in outlay it is possible to have simplicity in taxation, and the difficulties of the problem of expenditure, already hard enough, are increased by the need of weighing the greater difficulties of heavy taxation. It is eminently true that wise policy is essential for sound finance.2
§ 7. Financial pressure makes the retention of different forms of taxation, if not an absolute necessity, at all events highly advisable in the interests both of the State and of the payers. And this being so, we have next to examine the comparative merits of the different forms in use. The first broad distinction—that between direct and indirect taxes—has some connexion with the controversy as to single against multiple taxation. The most popular forms of the single tax are direct, while most of the charges in a multiple system are indirect. There has been accordingly a not unnatural tendency to confuse two separate issues by identifying singlewith direct and multiple with indirect taxation. This confusion is increased by the fact that the great advocates of the single land tax laid particular stress on its being direct. ‘The essential form of taxation,’ says De La Rivière, ‘consists in taking taxation directly where it is, and not wishing to take it where it is not.... To change that direct form of taxation in order to give it an indirect one is to reverse a natural order from which we cannot depart without the greatest inconvenience.’3 The idea that taxation should not lead to shifting and repercussion was one of the strong points of his school. The original conception of direct taxation as being that which is imposed immediately on the ultimate source from which it comes was, as we saw, altered for administrative convenience, and applied to cases where recurring payments were made and lists of tax-payers kept.1 But this use of the term, whatever its technical advantages, obscures the broad line of division that the older meaning gave, and which really possesses so much scientific importance. Whether a duty is assessed directly on the ultimate bearer or is passed through various intermediaries before reaching him, may not be capable of being precisely determined in all cases. There are no hard and fast lines in fact, and the instances on the margin may be numerous, but if we take the terms, not as giving a complete classification of taxes, but as marking the presence or absence of a certain characteristic, they may be employed with advantage, but rather to suggest reasons for discrimination than to definitely settle results.2
The expressions ‘direct’ and ‘indirect’ have received a further alteration which makes it more difficult to employ them without careful explanation. Taxes on property and income form a very large part of the direct taxes; those on commodities, collected from the producer or dealer, an equally large part of the indirect ones. These are, besides, the special forms of the two kinds of taxation that are usually selected as types in discussions about them, so that it is not difficult to understand how the comparisons between direct and indirect taxation have become for the most part an inquiry into the relative merits of taxes on income and property as against taxes on commodities.3
This employment of the terms is supported by the distinct origin of the two forms. ‘Taxes’ on property and persons (Steuern) present a marked contrast to the ‘duties’ on goods and commerce (Abgaben und Auflagen), in the fact that the former were direct, the latter indirect. A feeling of this original separation is at the root of much of the discussions on the merits of the two classes, and helps to make the issue more obscure.1
Still, the contrasts between the two groups of taxes that are usually regarded as being direct and indirect, quite apart from the question of incidence, has a sufficient value to make it convenient in estimating the merits of a given system. The peculiarities of the separate taxes that a more scientific arrangement exhibits may fitly be treated in dealing with particular taxation, but the broad general separation that is so familiar in financial discussion serves better for the purpose of showing the requisite conditions of taxation as a whole.
§ 8. Starting, then, with the conception of direct taxes as those levied immediately on the ‘subjects,’ or ultimate bearers of the charge, and therefore embracing taxes on income and property, or on their component parts, in opposition to duties on commodities and on exchange, where there is a shifting of the burden from the immediate payer to the ‘subject’ which justifies the name of ‘indirect,’ we have to consider the merits and defects of each class, and the most desirable mode of combining them.
At the outset the advantages of direct taxation seem to predominate. As income is the ultimate source of taxation, its immediate imposition is the most obvious and rational way of claiming a share in the produce for the State. The taxes on the different components of income have the same merit. Rent, interest, and earnings are the natural objects on which to place the charges of the State. Where it is thought desirable on grounds of justice to tax property, the direct mode of doing so seems the simplest and least involved. As a single tax appears better than a multiple system, so does direct taxation seem superior to indirect, and for much the same reasons. There is the greater facility and lower cost of collection, and the power of knowing the exact amount paid by each person liable. The drawbacks are also of the same kind. The greater dislike to direct levies of taxation is notorious; the demand for payment is more disagreeable than the fact of paying, as it brings home the existence of the charge without any possibility of escaping notice. Formerly financiers were too anxious to avert popular resentment to have recourse to this form, unless in extremities, and in modern days taxation must be suited to the taste of the voters. Another difficulty is the necessity of assessment in all direct taxes. If imposed on income, on property, or on any separate part of produce, there must be a valuation of the object which is charged, affording opportunities for evasion and for arbitrary official action. It is true that the progress of society may be expected to reduce these objections. As acquaintance with the operation of taxation becomes greater the payers form a more accurate estimate of the amount that they pay, and will feel that direct levy is really no worse than taxation through the enhanced price of commodities.
Moral progress may also diminish the disposition to evade payment by creating a higher standard of social duty, and the better organisation of the financial service will reduce the risk of undue official pressure. Still, these evils actually exist, and the extent to which they are likely to occur must limit the employment of direct taxation.1 Again, under a system of pure direct taxation it is very difficult to obtain their due proportion from the poorer members of society. The attempt to carry the income tax at a high rate down to the smaller incomes now exempt would be both costly and irritating, and the only produce tax that would much affect them—that on wages—would be still more obnoxious. No doubt with moderate expenditure and an improved standard of social morality the difficulty would become manageable, but we cannot assume the existence of these favouring conditions without adequate proof.1
It is, moreover, alleged that direct taxation is inexpansive, that it does not grow in proportion to the increase of national wealth. This, however, is not altogether correct, and so far as it is true can be accounted for without difficulty. The growth of so important a direct tax as the English income tax since its re-establishment in 1842 has been very remarkable. The yield per penny for the first year was only £730,000; in 1901–2 it passed £2,500,000, or far more than a threefold increase2 in sixty years. Indeed, the only explanation that can be given of a slower increase in an income tax than in income is that of evasion by the payers, an objection already considered. But in fact there are special reasons for the slow growth of certain direct taxes. A tax on rent will not increase in proportion to the growth of income, as it is generally fixed for a period of some length. The French land tax cannot increase, since it is apportioned and therefore fixed in amount, and in all cases of valuation it is not easy to keep the assessments up to the actual gains.3 The counter-advantage that, in a progressive society, these taxes tend to become lighter while yielding a definite amount ought not to be overlooked. It is a benefit to have one part of the revenue that can be depended on even in times of crisis. Taking the defects and merits together, we believe that direct taxation ought to be a part of every modern financial system, and that the extent to which it can be carried will depend on the particular conditions.
§ 9. The weak points of direct taxation are the strong ones of the opposed form. Indirect taxes are not felt by the payer in the same degree, and therefore cause him less annoyance. A tax mixed up in the price of wine, tea, or tobacco is not brought so clearly to his mind: it seems to be a part of the expenses of production, and to be due to purely economic causes. If ‘the best tax is that whose forms most effectually disguise its nature’1 there can be no doubt of the superior merit of indirect ones. A second advantage is the facility that they supply for taxing the smaller contributors. Duties on articles of general consumption touch all classes, though if necessaries are exempt they leave the minimum of subsistence unaffected, but only on the condition that the minimum revenue is expended for that object. Thirdly, they are both productive and in times of prosperity elastic without undue pressure. The growth of the English excise and customs, in spite of great reductions, has been remarkable. Again, it has been often pointed out that taxes on commodities are collected at a convenient time, since the contributor ‘pays them by little and little as he has occasion to buy the goods.... he is at liberty, too, to buy or not to buy, as he pleases.’2 This remark of Adam Smith's has been extended to the assertion that indirect taxation is preferable as being ‘voluntary.’ There is no necessity to pay unless the contributor is willing. This, if true, would be a disadvantage, but, as Mill has shown,3 it is untrue. A citizen can, indeed, escape a wine duty by not consuming wine. That course, however, has the double disadvantage of depriving the State of revenue and of diminishing his own enjoyment. In the case of a direct tax of equal amount the same saving would be made by giving up the use of wine, and the revenue would not suffer.1 The possibility of checking consumption is a bad rather than a good feature in taxes on commodities. Other defects are easily discoverable. The rule of equality appears to be frequently violated. Articles of general consumption are used in much larger proportion by the poor than by the rich, so that in any modern fiscal system the pressure of indirect taxation comes chiefly on the working classes. Expedients may be suggested to diminish this evil. Articles of luxury may be subjected to heavy taxation, and the rates of duty may be fixed according to the quality of the articles taxed. Such measures, however, give rise to further difficulties. Articles of luxury are easily smuggled, and ad valorem duties lead to evasion. In spite of any possible alleviations, the remaining inequality must be considerable. The elasticity of indirect taxes has its unfavourable side. At times of depression their yield cannot be relied on; as they grow in prosperous years so do they shrink in bad ones. Nor are they easily extended. Increased duties may possibly give stationary or even diminished receipts.2 Reliance on indirect taxation alone will therefore sooner or later cause financial embarrassment.
Expenses of collection are probably somewhat larger in the case of indirect taxes, though the difference is not so great as is often asserted. The cost of collection of the English Inland Revenue (about one-half of which is direct) is less than that of the customs, but so much depends on special conditions and the amount of revenue to be raised, that a general conclusion on the subject would be misleading.
By far the most formidable objection to the indirect taxation of commodities is the loss to the society through disturbance of industry. The evils of both customs and excises in this respect have been forcibly shown by Cliffe Leslie.1 The former close some ports altogether on the ground that there is not trade sufficient to justify the expense of maintaining custom-houses at them, and limit the imports of taxed articles at others. Towns without bonded warehouses are at a disadvantage in competing with those that possess them. Industries are either prevented from coming into being, or have their development retarded by such regulations and restrictions. The excise system is injurious to the industries under its supervision, as it controls the processes to be employed, and hinders the introduction of improvements. Routine is necessary for effectual regulation, but it is fatal to the spirit of enterprise that is the main cause of industrial advance. The various items of this indictment are supported by specific allegations,2 and there can be no dispute as to the gravity of the issue raised, nor as to the existence of the grievances stated. None the less are we compelled to hold that the retention of taxation on commodities is at present a necessity, and that by judicious measures it is possible, not indeed to remove, but to reduce the evils complained of. There are considerations other than those noticed by the assailants of these duties. All taxation is, it must be remembered, evil in its deduction of wealth and in the restrictive measures that must be used to make it effective. Direct taxation has its own inequalities and injustices, and is, besides, often vexatious and inquisitorial. A presentation of the faults of one particular form of tax-revenue is impressive, but should be qualified by considering the difficulties of any alternative method. In economics and finance we have always to be on our guard against the ‘fallacy of objections.’ Again, it is not clear that the taxation of a small number of articles has the very serious influence ascribed to it. Most of the instances of interference with industrial processes are taken from cases that no longer exist. The duties on salt, and glass, may have hampered invention, but in this country they are things of the past.1 Apart from intoxicating drinks and tobacco, the industry of the United Kingdom may be said to be free from control for fiscal purposes. A further point may be noticed. The customs staff is not purely a revenue agency; inspection and supervision of the shipping industry is, or is generally assumed to be, needed for sanitary and police reasons. It is but one part of the system described in an earlier chapter,2 and its whole cost should not be ascribed to the need of revenue. So far as the duties on stimulants seek to repress consumption, whatever hindrances they cause to the industry cannot be looked on as evil, since they conduce towards the object aimed at. The value of industrial liberty is doubtless great; whatever represses or diverts the economic forces that tend to increased production of wealth should not be allowed without adequate reason, and should be carefully watched; but on striking a balance it seems that the advantages outweigh the evils wherever a large revenue has to be obtained and where the system of indirect taxation is kept within narrow limits.
§ 10. On the borderland between direct and indirect taxation lies a large class, or rather several classes, of taxes, such as those on transfers of property, on ordinary contracts, on communication and transport, and in short the numerous charges on acts. All of them belong to the category of indirect taxes in the administrative sense, as do most of them in any sense of the term. They stand on somewhat different ground from duties on commodities, inasmuch as they in some cases approximate to fees for special services rendered, and in others are directly levied from the ultimate payers. They do not so much interfere with industry as with commerce in the strict sense, but they are open to the same kind of objections as those urged against the taxation of commodities. To hamper exchange is to prevent the passage of productive agents into suitable hands; a tax on communications is a check on commercial intercourse, and duties on legal transactions, if widely extended, prove very troublesome and annoying to the most active and intelligent members of a community. For these reasons it is desirable to keep taxation of this kind as a subordinate resource applied only to a moderate extent, and chiefly with the aim of completing gaps in the financial system. The difficulty of making the pressure of these taxes at all proportional, or even of analysing their incidence, ought of itself to prevent their being made a principal source of revenue. But when used partly as fees for special services, partly as affecting forms of wealth that are very likely to escape their due share of taxation in other ways, and finally as affording valuable tests of the correctness of the returns to direct taxation, they have a good claim to continue as a subsidiary means of revenue, and as a relief to the pressure on visible income of the purely direct taxes, and on the general consumption of the community from taxation of commodities. The extent of their application must be decided with reference to the particular circumstances of the country and the opportunity for employing direct taxation.
§ 11. The system of finance best adapted for a modern society is accordingly one in which the objects of taxation are judiciously diversified in such a manner as to realise the ends desired. The usual source of taxation is national income, the mass of fresh production during the period under notice, and one most desirable part of the revenue system is that which directly receives from the shares of this fund a contribution towards the maintenance of the State. The rent of land, the interest on capital, the earnings of management, and the wages of labour may all, as the component parts of income, be rightly made contributory. Whether they should be imposable in their separate forms, or simply as income, is in principle immaterial, but the method of distinct taxes on each share seems to belong to a lower stage of development than the general income tax. To escape the difficulties—partly technical, partly political—that direct taxation by itself creates, the taxation of various ‘objects’ on which income is expended must generally be adopted. Instead of attacking wealth as it is acquired, its use is made the object of charge. The method of taxing producers and dealers, in order that they may pass on the charge to consumers, is a recognition of the tendency of certain taxes to shift their weight, and an effort to utilise that tendency in facilitating the collection of revenue.
Taxation of income and of commodities are the two great forms of revenue receipts whose importance overshadows all others; but while this is apparent in every budget, it is equally true that a certain proportion of revenue can be obtained by the operation of other charges that cannot easily be brought under either of the leading categories. Some transactions are well suited for the imposition of moderate duties. Communications may be made to yield no inconsiderable resource to the State, and above all the inheritance of property is at once a means of testing the accuracy of returns as to income and an opportunity for taxing masses of accumulated wealth.
These ingredients of a well-ordered system require to be combined in very different proportions at the several stages of development. In a new country, with sparse population and little capital, a direct income tax would be a very defective instrument. Where there is little foreign trade, and most commodities are produced and consumed at home, taxation of commodities is not, and cannot be, productive. Peculiarities of social organisation have, too, considerable influence. Taxation of inheritances is unsuited for communities such as India, where the family is the unit of society and property is rather corporate than individual.
How important the special circumstances of social life may be in this respect can be better realised if we consider how much of existing English taxation rests on the circumstance that wine, tea, and tobacco are not native products.1
§ 12. We thus get a well-defined system of taxation comprising the three departments specified in the preceding section, and it seems beyond question that this will for a long period be the prevailing type. So far as any general course of development can be traced, the movement is towards a greater use of direct taxation. The income tax—a product of the nineteenth century—is on the whole increasing in favour, and the imposition of higher duties on inheritance is also probable.2 The great importance of both excises and customs is nevertheless a prominent feature. We cannot see how the existing outlay of any modern State could be maintained without their aid, though we shall indeed discover that they are confined to central finance, and are unfitted to be local resources.3 Still, the general conclusion is clear, that the great divisions of the tax system are likely to remain in active use, partly no doubt in consequence of their suitability to the existing financial organisations, but far more on account of their serviceable qualities.
A further advantage of this combination should be noticed—its elasticity. In modern finance it is desirable that receipts shall be capable of easy adjustment to expenditure without inflicting undue inconvenience on the contributors. The employment of different forms of taxation tends to realise this object. The steady growth of the receipts from commodities in times of prosperity, the definite yield of direct taxes, and the power of altering the rate of the income tax, taken together, provide the conditions for securing such growth or contraction of receipts as may be thought most desirable.
the shifting and incidence of taxation1
§ 1. Up to the present we have avoided all but the most incidental mention of the difficult problems connected with the real as opposed to the apparent pressure of taxation. This course has the great convenience of allowing an acquaintance to be made with the leading features and general guiding rules of the system, free from the complications that are inherent in any discussion of the question of incidence. The omission must now be remedied: we have to consider the nature and consequences of the series of processes usually known as shifting or repercussion of taxation, and to study the effects produced by them on the financial organisation. A correct solution of the problem is indispensable for full knowledge of the subject. Our judgments on every part of the tax system will be affected by our theory of incidence. Take, e.g. the question of justice. How can we say that any given arrangement of taxation is fair unless we know its real, not merely its apparent, incidence? The extent and limits of the shifting of taxation are elements in estimating the expediency of exempting the minimum of subsistence, of imposing a progressive income-tax, or of taxing articles of consumption. Instead of confining our attention to surface appearances, we must examine the underlying conditions, and estimate in their entirety the effects of fiscal regulations.
This complicated investigation will occupy the present chapter. We shall seek to establish the general laws of repercussion and their most important results, reserving the treatment of the several taxes for the appropriate place.1
Here a question as to the proper use of terms arises. Most writers distinguish between the ‘incidence’ and the ‘effects’ of taxation, employing the former to denote the falling of the actual burden, and reserving the latter for the various economic results. This is the position of Professors Seligman and Adams. But the latter at least appears to limit the burden to the actual payment to the State.2 It seems more in accordance with language and principle to treat the loss incurred by the citizen as coming under the head of incidence even though the State does not obtain revenue. The burden of many taxes is greater than their yield, but it is hardly admissible to cut up this burden into two parts, one, measured by state receipts, belonging to the topic of incidence, while the balance is treated as the ‘effect’ of taxation. Mr. Cannan proposes the heroic measure of discarding the term ‘incidence’ altogether.3 But the expression is far too well established, and also far too convenient to be thus summarily abandoned.
§ 2. Popular discussion of financial matters has always given a large place to this special topic. The real incidence of tithes, of import duties, and of local rates has been hotly debated at many a dinner-table and in many a tavern, and very positive conclusions have been reached in entire ignorance of the grave difficulties that surround any attempt to determine accurately these and similar points. It takes some training to see that confident decisions as to the division of rates between landlord and tenant, or of duties between producer and consumer, cannot be made in a ready and off-hand way. Such is, however, the case. The complications are too great; the subtle modes in which pressure applied at one point is diffused over a wider area are too hard to be followed without a clear appreciation of the general conditions and a careful use of the slippery instrument of abstract deduction. In dealing with the problems of incidence we are at that part of finance that touches most closely on economic theory in its hardest form.
Scientific students have long recognised the fact, and the earliest efforts of financial inquiry have been directed to the question of the incidence of taxation. In some instances it was apparent that duties temporarily paid by the seller of a commodity were only advanced by him, to be obtained later on from the buyer in the form of increased price.1 The extension of this result to all cases of taxation on producers or dealers was so plausible that it became an accepted doctrine of practical finance before passing into a theoretical form. This particular position dealt only with readily observed facts, and was confined to outward and apparent effects of taxation. A far more important step was made when the fruitful idea of a single source from which all taxes must, in the last resort, come suggested itself. The doctrine found a definite expression in Locke's statement ‘that taxes however contrived, and out of whose hands soever immediately taken, do in a country where their great fund is inland for the most part terminate upon land.’1 Put forward tentatively by Locke in connexion with his controversy as to interest, the conception of land as the true source of taxation was made the basis of a practical plan by Vanderlint,2 and more fully developed by the Physiocrats as a part of their view of the ‘net product.’
This earliest scientific theory of shifting rested on certain general assumptions, some of which we have already noticed.3 They are (1) that wages are at the minimum point of subsistance, (2) that taxation of profits will drive capital out of industry, and by thus reducing the supply raise the rate to its former point, the tax excluded, and (3) that expenditure for consumption is simply the employment of income, and that increased prices through taxation will compel a compensatory increase of money wages and profits. By aid of these propositions it was easy to establish that taxation of wages or profits or their outlay must be passed on to some other class in society. The gains from commerce and professional avocations were brought under the same principle by the ingenious argument that they also were necessary to secure the continuance of the particular trade or profession.4
We thus obtain a rigorously complete theory of incidence accompanied by a description of the mode in which the shifting is carried out from the points of initial pressure to the ultimate resting-place. The equalising agency of competition and the necessity for normal wages and profits are the forces that push the burden of taxation on to the landowner's revenue. This conception of society as a mechanism in which strains were distributed in obedience to general laws, quite independent of legislation or intention, was thoroughly grasped by the physiocratic school, and was applied by them to the incidence of taxation as well as to economic distribution in general.1
The contrast so often noticed between Adam Smith and his French contemporaries, appears clearly in his treatment of the question of incidence.2 The sharp and definite theory that regards all taxation except that on rent as necessarily shifted is changed into the broader doctrine that transference may or may not take place according to circumstances, and may fall on any one of the three constituents of income. In the application of these general positions several qualifications are introduced. Taxes on wages are always, Adam Smith holds, transferred, partly to the consumer in higher price, partly to the landlord in lower rent. The employer must have his ordinary profit, and he recoups himself for his larger wages’ bill by increasing his sale price, or, if a farmer, by giving his landlord a smaller amount of produce. The share of profit known as employers’ gain is also unamenable to taxation, as being merely the necessary reward of the entrepreneur.3 Interest, though capable of bearing some of the public charges, is difficult to estimate, and its root, capital, is apt to emigrate when placed under exceptional charges. Taxes on necessary articles of consumption tend to raise the wages of labour, and therefore are, like direct wages taxes, passed on to the consumer or the landlord. A house-tax tends to fall partly on the occupier, partly on the ground-landlord, the builder in the long run always receiving his normal profits.
The result of the inquiries on incidence in the Wealth of Nations is a modification of the Économistes’ view. Though the landlord is still the chief bearer of public charges which are shifted on to him from various points, while his special burdens are not transferable, he is not the sole bearer: the capitalist has to contribute a share, and the vague class of consumers has to pay on the taxed forms of expenditure which may come from rent, profit, or even (in the case of taxes on luxuries) wages. The landlord has, nevertheless, as Falck remarks, the ‘lion's share of the payment of taxes,’ and therefore in part Adam Smith occupies the physiocratic position.1
The title of Ricardo's treatise marks taxation as one of its subjects, and it may be said that the space devoted to that topic is altogether occupied with the question of incidence. Adam Smith's positions are corrected in the light of the newer theories of population and rent. In fact, Ricardo's doctrine of taxation is a development of his theory of distribution. Notwithstanding the generally loose form of his writings, there is an amount of precision about his statements as to the movement of taxes that has made him the leading representative of economic orthodoxy on these points. Reduced to a definite form his views are represented in the following propositions, resting, it must be noted, on the assumptions of (1) self-interest as the motive power of action, and (2) the complete mobility—at least within the same country—of labour and capital.
(1) A tax on economic rent is not transferable; it remains on the landlord. (2) A tax on the wages of ordinary labour is transferred to the employer, and is in reality a tax on profits. (3) A tax on profits in general is not transferable, and must remain on the capitalist; but (4) a tax on the profits of a particular employment will be transferred to the consumers of its product. (5) Taxes on commodities paid by the producer are passed on to the consumer, as in the case of taxes on particular profits. (6) In the case of commodities consumed by the labourers there is a further shifting from the consuming labourers to the capitalists who employ them.1
The main outlines of this theory of incidence reappear in J. S. Mill's Principles, with some not unimportant amendments. For example, the higher classes of wage-earners are admitted as possible bearers of taxation. In their case a tax on wages may or may not be shifted. The results as to tithes and profits are somewhat altered, and greater emphasis is laid on the tendency of profits to a minimum. But these are special points: speaking broadly, there is no part of Mill's work which so fully deserves the description ‘a readable Ricardo’2 as that which deals with taxation.3
§ 3. The very general adoption of the Ricardian theory in its developed form as the sole and exclusive scientific doctrine makes it advisable to note some of the objections that prevent us from accepting it as a complete interpretation of the phenomena of incidence.4 Some of these criticisms have been forcibly urged by Cliffe Leslie and Held, but they may be put in a more general form. The first weak point in Ricardo's position is his ambiguous treatment of consumption and consumers. In his general scheme of distribution there is no place for the consumers as a class, but we often find him asserting that a given tax does fall on ‘the consumer.’ How are we to explain this apparent discrepancy? The most natural answer is that landlords and capitalists make up this class, the labourers being normally outside it, as their consumption is a part of the expenses of production. This explanation is not completely satisfactory, for it is plain that all landlords and capitalists are not affected by particular taxes falling on consumers, and yet no criterion for distinction is suggested. The necessity for studying the forms of expenditure as a department of economics seems clear from this consideration. Besides the pressure that falls on the primary divisions of income, there is the additional one on the employment of that income, and differences in its employment produce differences in pressure. A doctrine of incidence that is confined to the receipt of income without regard to its expenditure is so far defective. A second objection to the theory is its dependence on a few unduly simplified conditions. Social forces are regarded as definite and precise in their action, and very positive statements are made on the strength of this insecure foundation. Thus taxes on wages and on labourers’ necessaries are regarded as being always transferred to the capitalist, a proposition true only on the assumption that wages are at the minimum, and that any change in them will at once act, and act proportionately, on population. In the same way the equality of profits and the complete dependence of rent on the margin of cultivation are made to support very sweeping propositions as to the incidence of taxation. If we allow that the economic forces of population, of competition in regard to the employment of capital, and the movement of cultivation are not quite so regular in their action, the deductions made from them must be qualified. Thirdly, the theory exaggerates the simplicity not merely of economic forces, but also of the forms of taxation. Taxes on rent, on profits, or on wages are not all the same, and the particular mode of imposition often affects the incidence. There is need for much care and discrimination in using those results of deduction that depend on the identification of so many different taxes. Finally, far too little notice is taken of the actual facts and of the unavoidable limitations in the application of theoretical principles. The orthodox theory of incidence professes to explain what will happen in the long run, ‘but taxes,’ as Leslie well remarked, ‘are paid immediately under the real conditions of life and out of the actual wages and profits or other funds of individuals, not out of hypotheses or abstractions in the minds of economists.’1 Knowledge of what will happen when the limit is reached is, no doubt, desirable, but what takes place during the process of adjustment should also be noticed.
The existence of these imperfections does not destroy the great service of the doctrine as a preliminary or introductory inquiry (Vorstudium). Without some such attempt the intricacies of incidence could never be explained, and it is by expansion and correction of the Ricardian procedure that advance can best be made in the explanation of these problems. As an intellectual exercise the abstract theory of the shifting of taxation has a high disciplinary value. The root-error of its followers lay in taking a part for the whole.
§ 4. The course of development in the preceding theories is clear enough. From the first suggestion of Locke to the compact exposition of J. S. Mill there can be traced a series of connecting links and alterations in consequence of wider knowledge. Adam Smith has the French theory constantly in mind, as Ricardo in turn has the ideas of the Wealth of Nations. All have in common the recognition of certain points on which the pressure of taxation ultimately rests, and all, it may be added, suggest the wisdom of adapting legislation to the conditions of incidence in order to secure a fair distribution, or at least to prevent unnecessary waste through friction.
Another group of doctrines has a quite different tendency. In place of investigating the complicated shiftings that settle the ultimate incidence, it either denies the possibility of ascertaining them, or assumes that they bring about a general diffusion of the burden over the whole society. The natural conclusion is that the particular forms of taxation are altogether immaterial, as, whatever be the immediate charges, the burden is finally distributed in an equitable, or inequitable, manner.
The first scientific statement of this view is ascribed to N. F. Canard, whose essay, attacking the theory that all taxation must fall on the owners of land, obtained a prize from the French Academy. The gist of his argument is that there is surplus product in labour and commerce as well as land, and that taxation falls on all of these ‘net products.’ The process of diffusion is carried out by exchange, buyer and seller in each transaction dividing the amount of tax imposed, and at every fresh exchange a division of the part of taxation transferred takes place until ultimately the charge is spread over all the parties concerned. Extending this conception to the whole society, taxation comes to be regarded as after a time diffused equably among all its members. The qualification as to time is important, for the process of diffusion is not complete at first; consequently old taxes are the best, and all new taxes, or even changes in existing ones, are to be deprecated as disturbing the beautiful and harmonious distribution which relieves the legislator of any trouble respecting the apparent merits or demerits of existing taxes.1
The comfortable nature of this theory has made it a popular one. Without adopting Canard's peculiar explanation of the mode of diffusion, Thiers asserts the general diffusion of the public charges; Stein, from a still different point of view, reaches what is practically the same result. In his opinion the whole theory of shifting is an error arising from imperfect comprehension of the real nature of the process, which in reality contains two different parts. For, first, a tax is a part of the cost of production similar to the expense of raw materials or labour, and like other expenses must enter into price, and taxation is through this medium ‘diffused from one to another’ until it extends to all. Again, from a higher point of view, the portion of product paid in taxes is a surplus product, the result of the services of the state administration, which pays back at least what it receives. The conception of incidence of taxation has to be replaced by that of the ‘production of taxes.’1
This theory has also had a good deal of vogue in England amongst members of Parliament and officials, but is often held along with other and inconsistent theories. Thus, Sir E. W. Hamilton, after discussing at considerable length the incidence of certain taxes, finally comforts himself with the reflection that ‘perhaps there is more truth than is popularly supposed in the optimistic theory of general diffusion, which is that “taxes equate and diffuse themselves, and if levied with certainty and uniformity they will, by a diffusion and repercussion, reach and burden all property with unerring certainty and equality.”’2 Sir R. Giffen expresses his full agreement ‘in the opinion that all old taxation tends to become equally diffused over the whole community.’3 So Lord Avebury makes the same quotation as Sir E. W. Hamilton, and approves of it in similar terms.4 This does not hinder him from asserting that ‘the Commissioners make out a very strong case for further relief to real property, especially after the additional burden thrown on it by Sir W. Harcourt's budget.’5
Closely allied to belief in the theory of diffusion is the disposition to regard the problem of incidence as insoluble, and at the same time to treat all questions of taxation as if it were non-existent.1 To deny that the incidence of taxation is discoverable seems to be the first step towards believing that it is unimportant.2
No lengthy criticism of the negative theory of incidence is needed.3 Facts speak for themselves: if the incidence of the public burdens be really so settled that legislative action has no effect, how comes it to pass that some forms of taxation are much more oppressive than others? It is impossible to escape entirely the weight of a load by judicious arrangement of it, but it is quite feasible to diminish the fatigue it produces. Canard's doctrine is contrary to experience, and is not established by abstract reasoning. There can be no doubt that taxes are not always a part of cost of production, but in any case the real question is whether they can always be shifted by the immediate payer, and to this the answer must be a decided negative. The desire to pass on the burden may be universal, but the capacity to do so is limited. Even in the special case of taxes on commodities it is not always open to the producer to shift the duty to the consumer. As regards other taxes, the very idea of cost of production is quite inapplicable.
§ 5. In proceeding to examine more closely the conditions of our problem, it is well to remember that the total denial of the existence of shifting and the assertion of its universal existence are both unfounded. That, e.g. taxes on commodities are sometimes transferred by the immediate payers is an obvious fact. No one can believe that the distillers bear the whole burden of the English spirit duties. On the other hand, it is just as incredible that a landlord could entirely shift a tax on rent to his tenant or any other class, or that the payers of income tax could completely relieve themselves at the expense of others. The existence and the extent of the process of transference must depend largely on the conditions of the case, and it is these conditions that a general theory of incidence has to consider and explain.
The course of transference may be in different directions, and according to its starting-point and direction it is necessary to distinguish. Where the movement is from the producer to the consumer, or, more generally, from the seller to the buyer, there is ‘forward shifting’; where it is from the buyer to the seller, there is ‘backward shifting’; where the process of shifting affects more than two parties, it leads to ‘diffused incidence.’1
The simplest instance of shifting is, as more than once mentioned, that in which the producer of a commodity passes on the charge in increased price to the consumer. A closer examination of this familiar case will suggest some important conditions. Why does the buyer submit to this additional charge? An increase in price tends to reduce demand, and will not the falling off bring about a return to the old level? The usual reply would be that the dealer or producer had been obtaining normal profits before the imposition of the tax, and that without an increased return sufficient to compensate for the new charge he would not, or could not, continue in the business. The doctrine of average profits resulting from the effective mobility of capital is thus the foundation of the proposition that taxes on commodities levied on the producer are shifted to the consumer. The reason for the proposition also shows its limitations; wherever an industry is yielding such exceptional gains that taxation will not reduce them below the supposed normal level, the motive for abandoning the employment not being present, the force that produces shifting will not be in operation. It may therefore be allowed that, so far as producers’ gains are at all of the nature of monopoly, taxation will specially affect them. But here a further qualification is presented. Exceptional gains may be made by some producers, but not by others; in fact in nearly every industry some of those engaged in it can barely hold their ground. This unfortunate class must, on the increase of taxation, either raise their price or leave their business; if they can succeed in the former attempt, their successful competitors will gain by it, and shift their charge to the consumer; if they fail, the margin of pure profit is raised, and the burden will remain on the producers. It is possible, and indeed likely, that the actual result may be a compromise. Some of the weakest producers may be driven out, but the price may also be somewhat raised, in which case there will be division of the charge. Therefore the true conclusion is, that when there is complete mobility taxation will be shifted from producer to consumer. Again, the possibility of shifting taxation of the kind under notice does not depend simply on the elasticity of supply; the effect that changes in price will produce on demand must be considered. Taxation imposed on a necessary article, or one which forms a very small part of the total outlay of the consumer, will, since demand is inelastic, be more likely to pass on at once to the consumer than if the commodity belonged to that large intermediate class, the demand for which is speedily checked or increased by an upward or downward movement of price.1 Again, if increased expenditure has to be devoted to taxed articles, less remains to be applied in the purchase of other goods; the consequent reduction may lower prices in other industries from which withdrawal is not economically expedient, and accordingly diffuse the indirect incidence of the tax to a different set of producers. Further, it must be remarked that as all industrial processes are really complex, it is quite possible that a tax may not affect the holder of floating capital who is ready to seek other investments, but may fall entirely on the owners of land, or specialised capital suitable for the production of the article. Both land and fixed capital are indeed capable of different uses, but the alternative ones are necessarily less profitable than that in which they are actually engaged. Hindrances to mobility are hindrances to shifting of taxation. The very application of a tax of itself produces disturbing effects. Additional capital has to be employed, restrictions, which mean the sacrifice of time and money, come into force, both tending to reduce the number of producers and to concentrate industry. The production approaches to a qualified monopoly, and thus the weight of taxation falls, so far as actual receipts are concerned, on the consumers, with a further loss to the small producers excluded from the business.
The case of a strict monopoly is of sufficient theoretical importance to receive some special notice. Starting from the admitted fact that the normal monopolist endeavours to make his net return as high as possible, it follows that a tax on the commodity that he produces will, by increasing his expenses of production, tend to reduce his net receipts, but whether the whole or even the greater part of the tax will be borne by him or by the consumers will depend on (a) the conditions of demand, and also (b) on those of supply. If a slight rise of price seriously checks consumption, or, in other words, if the demand is elastic, the monopolist suffers more than in the case of inelastic demand. Again (b) if the condition of diminishing return operates, the tax may, and probably will, be in part compensated by the cheaper production of the marginal portion of the reduced supply. The condition of increasing return makes a tax more oppressive, since the cost will rise with contraction of supply.
But the theoretical conception of a pure monopoly is of little direct service in dealing with the question of incidence; for in very few cases is a monopoly strictly so called to be found. There is in truth rather a number of instances of limited or qualified monopolies, arising in part from natural, in part from legal limitations. Both monopoly and competition have to be considered, and in particular the interaction of these opposed conditions as well as the effect of financial changes in readjusting these areas.1
The precise method of taxation employed will have an important influence; whether the duty be imposed at an early stage or allowed to lie over till the article is ready for the consumer; whether the measure adopted is supposed capacity of production or actual product are very material circumstances in deciding the exact incidence.
Thus the apparently simple case of taxation of commodities appears to be really surrounded with complications that need close and careful study. The same questions would arise if the tax were levied directly from the consumer; there would be the possibility of a backward shifting, just as there is of failure of the forward one. In fact, as the position is sometimes explained, there is a struggle between producer and consumer, each striving to throw the loss on the other, and much will depend on the relative strength of the parties. As a rule producers are a smaller and better organised class, and therefore have the chances in their layout, though where they possess any differential gain, this advantage is lost to them. Fresh increases of taxation are passed on to the consumer more readily than reductions are restored to him. This element of friction has another effect. Small additional amounts of taxation are not easily shifted; a few pence on or off the gallon of spirits cannot directly influence retail price. The initial shifting always implies an effort, which, however, very readily takes place in industries accustomed to alter prices as the various expenses of production change. Additional taxation and a rise in the price of hops are events of exactly the same kind to the brewer, and their final result is distributed in the same way.
The diffusion of the burden may be still more complicated. In modern society products pass through the hands of several distinct classes before reaching the consumer, and the struggle of buyer and seller will be repeated at each separate stage. The existence of monopoly or of some form of limitation at any point may prevent the shifting passing any further. An economically strong intermediate group may throw a charge back to the producer, send it forward to the consumer, or divide it between both.
The foregoing analysis of the actions and reactions that may accompany or result from the imposition of a tax on a commodity shows the general conditions that are influential.1 They are (1) the presence or absence of mobility; in the former case, the normal shifting to the consumer will take place; in the latter it is retarded: (2) the law of demand for the particular commodity; on this depends very much the extent to which there will be a reflection of the burden either back to the producer or to other industries: (3) the presence or absence of monopoly: (4) the method of taxation as affecting the preceding conditions: (5) the organisation of the industry and its division, and (6) the amount of taxation. In regard to this last circumstance, it may happen that additional taxation will increase the force of competition. The new element may be just the last thing wanting to break up the existing settled conditions. This will be easily understood by considering the effect of successive very small additions to the duty on a given article. Each of these will tend to remain on the payer, but as soon as the additions are sensible, or easily distributed, the shifting movement will begin to act. Even in the case of the most rigid and gainful monopoly, the producer must, if taxation be carried sufficiently far, either pass on the weight or abandon the undertaking.
§ 6. The comparatively easy case of a tax on goods enables us to perceive the general character of the changes in incidence produced by the process of shifting. We have now to deal with the more important and interesting question of the movements of incidence in respect to the incomes of the different economic classes. The whole tendency of modern economic science has been in the direction of emphasising the fundamental similarity between the departments of exchange and distribution.1 Rent, wages, interest, and employers’ earnings are exhibited as the prices of the respective services of land, labour, capital, and business ability. Might we not say that a tax on any of these commodities would be amenable to the same reasoning as that already applied to material goods, the consumers of each of the factors of production being those other factors that need its co-operation? This mode of treatment is, we believe, unsuitable, owing to the distinguishing pecularities of the shares in distribution. Their production is not in the same form or subject to the same conditions as that of ordinary commodities. Nor is the nature of demand the same in respect to them. The attempt to bring commodities and services under a common heading seems to be an undue straining of the analogy that undoubtedly exists. A better mode of dealing with the question is rather to consider it in the light of the theory of distribution, while availing ourselves of whatever is applicable in the case of taxation of material commodities.
There is no need for attempting here to re-state the economic theory of distribution. The work of Ricardo has been filled in and placed in closer relation to actual conditions by the ablest workers of the past and present generations,1 who have carefully elaborated the originally fragmentary doctrines on the subject. The main conditions affecting changes in distribution must, however, be noticed; for the effect of taxation is plainly a deduction from the total produce—i.e. so much loss to be re-distributed among the parties concerned.2
Assuming competition, the main circumstances on which the amount of rent depends are the position of the margin of cultivation, and the several qualities of land that lie above it. Change either the worst land in cultivation, or the relation to it of the superior soils and the quantity of rent will be altered.3 In estimating the incidence of a tax on rent, its effect on these conditions is the first consideration. The usual way of showing that a tax on rent cannot be shifted is to point out that it does not affect that particular land that pays no rent, and consequently leaves the determination of the total amount, including the tax, as before. Ricardo and some of his nearest disciples differed as to the incidence of tithes or proportional taxes on the raw produce of land. The former maintained that such a tax must fall on the consumer, since in the case of produce from the worst land in cultivation there was no rent on which it could be placed, and it was the yield from this land that determined price; as the cultivator would need his average profit, the shifting to the consumer was necessary. Senior and McCulloch, on the other hand, held that the rise of price would check demand, and therefore by changing the position of the margin in an upward direction would reduce rent.1 Without discussing the special point at issue, which belongs to the group of land taxes,2 we see that the criterion used by both is the effect on the general condition of agricultural industry. That on the hypothesis of perfect competition a tax on rent must remain on the payers is an indisputable truth, but for the cases of actual taxation it is important to bear in mind that economic rent is mixed up with other elements. The investment of capital in land yields a return in many instances indistinguishable from economic rent, but at the same time it is ‘really the profits of the landlord's stock.’3 So far as no discrimination can be made between these components, the incidence of a tax will fall to some extent on the return to capital, and, if sufficient to discourage its investments, will tend to be passed on to the consumers of agricultural products, since land of inferior natural quality must be cultivated in order to supply the required quantity.
The opposite cases of taxes imposed elsewhere falling on rent is much more probable. The class of differential gains of which rent is one very conspicuous instance is peculiarly liable to be affected by taxation. The influence of competition is, speaking generally, effective in distributing special burdens on a particular industry; but where special gains have been obtained an equivalent tax is the restoration, not the destruction, of equality. This is the kernel of truth in the Physiocrats’ belief, and on it their exaggerated doctrine was based. No kind of actual tax can be imagined which might not under certain conditions diminish the fund that goes to the landowner. Wages, interest, employers receipts, duties on goods, or on acts, all supply such examples, and they all accomplish their effect by operating on the margin of cultivation in the widest sense. The complicated working of the tax-system is very well shown by this circumstance. It is, as we discovered, very difficult to single out differential gains for exclusive or extra taxation, but the ordinary agencies of economic life are tending to that object, though of course in a very limited and imperfect way. They strike alike the earned and the unearned increment, the investment profitable through the foresight of the prudent employer and the lucky chance of the rash speculator, the rents of careful and improving as well as of inattentive and tyrannical landlords.
§ 7. Taxation of the capitalist's share of the national income gives rise to more difficult problems than those connected with rent. Between the doctrine of Turgot, that a tax on profits is always, and that of Ricardo, that it is never, shifted,1 we have to take an intermediate position. A general tax on interest, as it affects all employments equally, would appear certain to remain on the payers. The mobility of capital cannot here, so long as we confine our attention to a single country, have any effect. Where the tax does not extend to capital invested abroad it is evident that it would discourage home investments and lead to the emigration of wealth to other places. ‘The proprietor of stock,’ as Adam Smith tells us, ‘is properly a citizen of the world, and is not necessarily attached to any particular country.’1 Even within a limited area another feature of capital will affect the incidence of special taxes imposed on it. Unlike land, it can be indefinitely increased by human foresight and providence, having as a chief inducement the return to be obtained by investment. Taxation on interest lowers that return, and is therefore a direct discouragement to saving.2 So far as it is effectual, the diminution in the supply of available capital tends to raise the rate of interest and transfer the incidence to the consumers of capital, i.e. the other factors in distribution, and as rent is not likely to be much affected, in reality to the producers, including both employers and labourers. How far the check to production will show itself in a higher cost of production and therefore fall on the consumer is not easily determinable; if there were to be a substantial check to the investment of capital this would be a probable result, causing a diffusion of the incidence, some of it returning to the capitalist in his capacity of consumer.
For most purposes of economic reasoning there is an advantage in neglecting the differences between the different forms of capital and dealing solely with the characteristics common to all. But in handling the problem of incidence, it is necessary to see that there are two broad classes of reproductive wealth, the one free and capable of being turned in any direction, the other fixed in some particular industry. It is primarily to the former that the arguments from the mobility of capital apply. Capital once invested, the difficulty of withdrawing it places the possessor for the time being in the same position as the landlord. A tax on fixed capital would thus seem to resemble in its effects a tax on rent, and to be equally untransferable. One instance —that of land improvements—has been already discussed, and in considering it we saw that the mode of relief to the capitalist was simply by reducing future investments. The single tax on fixed capital in the sense used by Menier and his followers would be at first a heavy burden on the owners of those forms of wealth, that would show itself later on in reduced investment and retarded production. Free capital, if separately taxed, has much readier modes of escape. Employment outside the particular tax area makes it very difficult, even if the law enacts it, to enforce collection; consequently the chance of placing an effective tax on movable capital is much reduced by both economical and technical circumstances.
The chief condition, then, on which the incidence of a tax on interest depends is its effect on the accumulation and investment of capital, including its action on the saving propensities of the inhabitants and their disposition to move their wealth to escape taxation. If the rate of interest is determined by what Jevons calls the ‘final utility’ of capital, it is plain that the possibility of shifting the tax will depend on the effect produced on this margin of investment. If it is forced up the weight will be transferred from the recipients of interest to that intermediate class which gains by the cheapness of capital.1 A tax on the returns of fixed capital will at first rest on the payers, and only be transferred with difficulty, but it will ultimately, when the old supply is sufficiently contracted, come under the same influences.2
Mixed up with the interest of capital in Ricardo's treatment of taxes is that element of profit variously described as ‘wages of superintendence,’ ‘earnings of management,’ or ‘employers’ gain.’ It has, however, strong claims to separate treatment. The profit of the entrepreneur has some points of resemblance with wages, as it has others with rent, and we must therefore be prepared to find that the movement of taxation is different in its case from that of ordinary interest. The analogy of rent would lead us to believe that a tax on the gains of the employer could not be transferred, since there would be no opportunity for escape on the part of the immediate bearers. A tax on this very indeterminate element of the gross profit of business would, however, be certain in practice to trench in some degree on the other constituents. It is almost impossible to avoid levying such a tax on that minimum ‘employer's return’ which is sometimes regarded as equivalent to ‘no profits.’ The struggling marginal producer will then need an increased price in order to recoup himself for the tax, and unless he obtains it will have to yield to the pressure of the ‘last straw,’ and therefore abandon his business. Taxation of this kind would operate somewhat as taxation of commodities. It may be urged that when the gains of all industries are taxed there is no reason for the weaker employers giving up business. They can, however, pass down to the class of labourers, as others by taxation may be hindered from leaving it.1 The effect on the marginal employer appears as the condition determining the shifting of taxes on the employer's gain.
This share of national income may also suffer through the operation of taxes on commodities. When such a duty is not transferred to the consumer the burden is likely to fall on the differential element in profits; the tax has to be paid without the compensation of a rise in price, and there is no way of shifting the burden, unless in the case of raw materials, where rent may be curtailed. It is quite in accordance with the analogous case of rent that taxes should be shifted to the peculiar gains of the employer. It is, besides, possible that a tax on interest may be transferred to profit in the limited sense. When the rate of interest is raised, as we have seen that it may be, by taxation, the employer has to pay dearer for his borrowed capital, and, so far as what he works with is his own, loses on one hand what he gains with the other. On the whole we may confidently say that the broad and simple statement that taxes on profits fall on the capitalist, who can in no wise transfer them to others, requires to be very much limited before it can be accepted as correct. We must separate the two essentially different elements of interest and employer's gain, and recognise that while the one is affected by changes in the point of final utility of capital, the other is connected with the opportunity for profitable industrial effort.
§ 8. If the older theories on the subject of incidence assumed too hastily that rent and profits had to bear their own immediate burdens and under certain conditions those of others, they made amends when dealing with wages. The transference of taxes on this part of revenue was asserted in the most positive manner.1 The landlord, the capitalist, the consumer might all be affected by a tax on wages, but the labourer was always exempt from contributing to the requirements of the State. This immunity was believed to extend to the higher kinds of wages and salaries, since they had a fixed relation to the ordinary rate.2
The historical explanation of this belief is afforded by the evolution of the system of hired labour from the earlier condition of serfdom. The slave as an instrument of production received what was needed for his maintenance; any reduction in its amount would reduce his efficiency. Taxation was paid altogether out of his master's income, it did not concern the living machines engaged in the creation of wealth. This conception survived in the earlier period of free labour, and gained support from the doctrine of a ‘natural’ rate of wages common to the French and English economists. Any reduction in the rate would, it was held, act on population, and by diminishing its number restore the former real reward of the labourer. In spite of occasional concessions, such was the opinion of Turgot, of Adam Smith, and of Ricardo,1 and, given the premise, the conclusion was sound enough. It is also true that in both the France of the eighteenth century and the England of the Napoleonic war wages did seem to have touched the subsistence point, and to give a direct verification of the economical doctrine. But, strange to say, no notice was taken of the fact that one of the causes of this deplorable situation was the heavy and unequal pressure of taxation. The French peasant and the English labourer were the greatest sufferers by the fiscal systems under which they lived, and financial reform was one of the means of their relief.
No account of the incidence of a tax on wages can be satisfactory that does not fully recognise the existence of varying standards of comfort, even among the lowest unskilled labourers at different times and places. Beside and above the physical minimum, there is what Mill calls a ‘moral’ minimum. The conditions must be exceptionally unfortunate that do not allow the labourer something above mere subsistence, and, when that minimum point is exceeded, there is something on which taxation may fall. To estimate the incidence of taxation we must know its effect on the standard of life. If that is maintained unaltered there will be a transference of the tax to the capitalist or employer; if it is lowered the labourer bears the tax himself. This consideration applies to each industrial grade, but it is evident that the higher the usual scale is placed the less is the probability that it will be readjusted to suit taxation. When a group of labourers possesses a monopoly, it, in common with all holders of differential gains, has no power to throw off the burdens imposed on it, and, as most skilled labourers have more or less special advantage, the shifting of taxes is in their case beset with difficulty.
Thus, as in the case of rent, interest, and profit, we find that the ultimate incidence of a tax on wages will vary according to the special conditions under which it is imposed; and of these the most important are the effect on the usual standard of living, and, so far as the higher kinds of wages are concerned, the extent to which their receivers are privileged through natural or artificial causes. Peculiar gains of labour are just as much at the mercy of fresh taxation as any other differential advantage. The process of shifting requires the actual exertion of force to carry it out, and those forces can only be the agencies that work through supply and demand. If the same supply of labour of any particular kind is forthcoming with an unchanged demand, then direct taxation of labour will not be transferred. The great difficulty of adjusting the supply of labour is a reason for believing that any shifting of taxes imposed on it must be a slow and uncertain process.
A similar conclusion applies to the case of taxes on the labourer's consumption. We do not find that duties on food produce higher wages; they only bring the starvation point nearer, as the history of the English Corn Laws shows. When Ricardo argued that taxes on articles of the labourer's consumption are exactly the same as a tax on profits he assumed far too rigid a connexion between the cost of living and the supply of labour. A tax on the food of animals used in production would increase cost, because food so given is regulated to secure efficiency, but the labourer seeks to procure the best terms for himself. The element of free contract present in the latter case entirely alters the position. For completeness of statement it is desirable to add that a great deal of wages is really the return on capital invested in the education of the workers, but in reality this does not produce as much practical effect as might be expected. A tax on wages, unaccompanied by an equivalent tax on the yield of material capital, would apparently discourage expenditure in the formation of personal or immaterial capital, and turn it towards the production of goods. This check to the supply of trained workers would tend to raise the price of their services, and shift the pressure to the consumers of the goods produced by them or to the employers. In practice the calculations of parents and others who make the investment in the education of the young are not so carefully worked out as to be influenced by the existence of a tax on the wages of the higher employments. Still, even with the actual imperfect estimates, some effect would probably be traceable if the tax were a heavy one. The necessary expenses of living in a suitable way and the cost of training are the two agencies that give some justification for Adam Smith's doctrine of a balance not to be disturbed by taxation between the different employments.
§ 9. Our examination of the general conditions that help to determine the true incidence of taxes on the different constituents of income, though necessarily brief, at least makes it plain that the theoretical explanation of the subject is not the simple process sometimes imagined. The movement of a given tax is not invariably in the same direction: its course will be guided by the surrounding circumstances. Without knowing what these are we cannot tell the direction, much less the precise extent, of its incidence. To pretend to say where, e.g. a tax on profits will fall, without possessing further data, is as vain as to seek to determine the space traversed by a moving body whose initial velocity and period of movement are both unknown.
The difficulty of estimating the incidence of taxation is increased by the complementary alterations that take place in the economic system. A change in rent implies changes in the amount and probably in the relations of the other shares in distribution; a rise or fall in the price of one article leads to other changes of price, and we may therefore expect that even in the most precise and determinate cases of incidence some additional diffused effect will be produced.1
At the best, and after the exercise of the utmost care, there will remain some obscurity as to the exact extent to which shifting takes place, owing chiefly to the difficulty of employing statistical verification.2 Deduction from general propositions cannot overcome this obstacle, and special vigilance is therefore necessary to avoid errors arising from the want of a check such as the process of verification provides. The earlier theories are so many warnings of the danger of hasty deductions from insufficient premises.
But, subject to these cautions, the use of the theory is by no means slight. We may not be able to give confident answers to general questions on the subject, but in dealing with particular instances we shall have the advantage of knowing what conditions we ought to notice and what effects we may reasonably look for. So understood, the theory of incidence is an indispensable part of financial doctrine.
the principles of local taxation
§ 1. Besides the system of taxation intended for the support of the central government, and therefore usually described as ‘general,’ or ‘imperial,’ the compulsory revenue needed for the due maintenance of local authorities requires to be considered. This latter class of charges is just as much entitled to the name of taxation, and in many respects exhibits the same features, as the imperial tax revenue. Local and central government are simply different forms of the state organisation, and clearly show their fundamental resemblance in their financial systems. The need of revenue, the general characteristics of that revenue in respect to its origin, and the influence that it exerts on individual and national wealth are the same in the case of central and local bodies, and thus it might almost seem that no necessity existed for a separate treatment of the tax receipts of those smaller units that historical circumstances or the needs of social life have called into being.
But, notwithstanding this general similarity, there are certain peculiarities in the methods of local finance that make it desirable to devote a separate chapter to the consideration of the principles that should guide its working. Without in the slightest abandoning the conception of the unity of all taxation, we may examine those aspects of local taxation that give it in some degree a distinct and special character, and enable us to contrast with advantage the two categories of revenue belonging respectively to supreme and to subordinate political bodies.
One very obvious though rather superficial reason is found in the great magnitude of each class. The British Imperial revenue for 1898–9 was, in round figures, £108,000,000; that for local purposes (excluding loans) was £80,000,000. In other countries there is the same possibility of opposing the two sets of charges without finding any such difference as to warrant us in regarding either as entirely insignificant. When we add that local charges are, on the whole, increasing more rapidly than imperial ones, it is easy to understand the interest that has been excited respecting them.
There are other and deeper reasons. Local institutions have a special function as representing the interest of particular districts; they are confined to a somewhat narrow range of duties, and as a consequence their revenue system is simpler and less involved than that of the State. A rural commune must have a comparatively primitive form of financial organisation, and even in the case of the largest subdivisions the absence of military and naval expenditure and the large portion of other public duties discharged by the agents of the central government keep down their requirements. The expenditure of a great municipality or a large American State is no doubt considerable and for very varied objects, but cannot compare in extent or in comprehensiveness with any national budget. Moreover, the restraints imposed on their financial action, either by legislation or (in federal States) by constitutional limitations, are a serious check on the power of local bodies.1
Another reason may also be assigned: the subjects with which local administration has to deal are mainly of an economic character, and very often admit of rather definite measurement. Water-supply, lighting, drainage, and the care of roads are instances. The conduct of such matters, if it has some resemblance to the duties of the national government, has others no less strong to the management of an industrial company. The propositions that ‘contributions should be proportional to advantages received,’ and that ‘political power should depend on the amount contributed,’ are much more plausible when applied to local than to general government. The extent of this resemblance will, of course, depend on the special character of the subdivision. A rural parish, or commune, is in this respect very different from London or Paris, but the prominence of economic interests in the widest sense is traceable in all forms of subordinate governments.
§ 2. The history of local institutions has already been briefly noticed in connexion with expenditure,1 and it throws light equally on their receipts. One prominent class of these bodies is really a ‘survival’ of what were at one time sovereign powers.2 The ‘States’ of Germany and America and the ‘cantons’ of Switzerland are well-known examples. Lower down in the scale the commune is the primitive political ‘unit’ whose importance has decayed with the growth of the State. In all of them the taxing power has been limited by the pressure and competition of the national government, and in the earlier forms by the slow development of taxation. The manor or village community depended on economic revenue not on taxation in the modern sense. One striking feature in state development has been the absorption of the more productive forms of compulsory revenue by the central financial system. It was only natural that the monarchical State, with its hostility to feudalism and to local privileges and immunities of all kinds, should endeavour to take into its own hands the customary taxes of districts and municipalities. The centralising movement of the sixteenth and seventeenth centuries was specially noticeable in respect to taxation.
Motives of convenience assisted in promoting this change. Some of the principal forms of revenue were manifestly unsuitable for small territorial divisions. The taxation of commodities or of income was far better fitted for the control of the central government. Thus both political and economic reasons existed for the failure of the older tax revenue of towns and localities.
The existing systems of local administration have in many cases a quite different origin; instead of being older than the State, they are its direct creation. In France, for example, the whole tax-system of the ‘departments’ and ‘communes’ rests on legislation not a century old, and though English institutions have a longer history, they are equally the expression of the State's will.1 Thus local institutions are not always survivals, or even revivals, of the past; they are often entirely new formations, devised to satisfy the needs for which devolution of authority has been deemed expedient.
In such instances their power of taxing is a concession strictly limited by the terms of the grant. The adoption of new expedients is precluded, so that very often merely the amount of one particular tax has to be settled, and that only within definitely fixed limits. Local taxation becomes, in fact, a kind of supplement to the general system, admitting of little independent movement. The two opposing tendencies that affect local administration are in full operation here. On the one hand there is the desire of skilled financiers to keep the errors and mistakes of the smaller bodies under supervision. Party spirit and class-interest are intensified when confined to a small area, and are but too ready to employ taxation as an engine of oppression; and even when no injustice is intended, the ignorance of the real working of taxation that is so common amongst local administrators would, if unchecked, prove disastrous to the national interest. Hence the limitations on the form and amount of taxation as well as on its application. The citizen who is unfairly burdened by his local taxes has as legitimate a claim to relief as if the general charges were too heavy in proportion to his income.
Side by side with this idea of more careful control there is the disposition to extend the sphere of action of local authorities. It is felt that political education is promoted by inducing citizens to manage their common affairs in an independent manner. To awaken or to strengthen the feeling of responsibility is impossible unless power to act is also bestowed. A local body cannot be expected to feel any great interest in its work if all the important parts of the system are predetermined. To secure a vigorous municipal life there must be a good deal of latitude given to the corporations engaged in its management. Wider taxing powers and new forms of local revenue are, therefore, often suggested as indispensable steps in reform. To understand the position of the question, we must bear in mind the existence of these apparently contradictory sentiments, both, in some cases, vehemently held by the same persons.
§ 3. The first step in an examination of the principles of local taxation is the determination of the proper line of division from the general state revenue. We have seen that the distribution of duties between central and local administration conforms on the whole to certain general principles,1 and the most natural course would be to apportion the charges on a similar system, but, in fact, there is no real correlation between the two: the division of duties is largely independent of the division of taxes, just as both are distinct from the distribution of public property and quasi-private receipts. The partition of taxes between the two classes must depend on, or at least be guided by, financial and economic considerations.
Some important taxes are at once on sound principles shut out from use as local resources. The customs are only levied at the national frontier; any attempt to restore the provincial customs boundaries that hampered the trade of France before the Revolution, and in the 19th century that of the German and Italian States, would be a retrograde as well as an unpopular step in finance. The taxation of commodities in transitu is only legitimate when exercised in a way calculated to cause the smallest amount of delay and inconvenience. To regulate trade between small areas for fiscal purposes would be at once costly and unproductive, and therefore uneconomical.1 The earliest step towards federation between independent States has been the abolition of custom-houses at their frontiers, and there is no probability that a reversal of this salutary process will be witnessed. Octroi duties are, indeed, an exception, but their continuance can be readily explained. They are confined to towns, and therefore are regulated with comparative ease, having, in fact, some resemblance to the market dues once so common in British towns. They make as near an approach to direct taxes on local consumption as can well be devised, with some additional incidence on the surrounding country through their effect on demand. Besides, they are unquestionably a decaying form. France and Italy are the only countries where they are in full force, and even in these they are looked on as a necessary evil. It is almost certain that in the progress of reform they will ultimately disappear. On the same grounds local excise taxes are practically prohibited. To impose a duty on an article without having the power of levying an equivalent customs duty would mean the sacrifice of local producers, unless they had a strict monopoly up to the amount of the tax: such a tax would be easily evaded by moving outside the boundary. Thus the great forms of indirect taxation on commodities are withdrawn from the list of local resources. Direct duties on consumption might be used, but, as will appear,1 they are difficult to manage and only moderately productive.
Income and property taxes are equally unavailable, though for a different reason. Both are essentially personal and apply to a given individual. Now to tax a person on his income for the service of the locality in which he resides is open to the double objection that it is likely to be evaded and is grossly unfair. Local authorities have no efficient machinery for detecting concealed income: they are in a worse position than the English revenue officials in regard to foreign investments, where failure is admitted. The mere moving from the area for part of the year would upset the arrangements. As to unfairness, Lord Goschen's view seems conclusive: ‘It appears to be impossible to devise an equitable local income tax, for you cannot localise income. An attempt was made in Scotland, and it broke down when an English Lord Chancellor, who drew his £10,000 a year in London, but had a small place in Scotland, was made to pay income tax on the whole of his income in that country as well as in this.’2 No real correction could be made without exempting all income earned outside the district, or, in other words, changing the income tax into a partial produce tax. No matter how large the local division may be, the same objection lies. American States and Swiss cantons are as little suited for the application of separate income taxes as England, Ireland, and Scotland. Owing to the variety of modern incomes and the trouble of following them to their sources, the income tax should always be general. A property tax is in much the same position in local taxation, though its defects as a part of any tax-system are so great that it is doubtful whether it should be admitted even into the list of good national taxes. It appears to have the two great faults of injustice in distribution and liability to evasion.1
The reasons for the removal of taxes on income, property, and commodities from the list of local resources are in a great degree technical, and rest on the difficulties of their fair or economic application. But it is further plain that there must be a large body of productive taxation reserved to the central government. Even if all the taxes mentioned were eminently fitted by their nature to contribute to local revenue, they would have to be kept for the still more important services of the national administration. So much depends on division of duties between the two sets of organs and their relative cost, that it is hardly possible to lay down any general rule on this part of the subject. We may, perhaps, fairly assume that at lowest one-half of the total sum collected in taxes will have to be taken by the central government.
§ 4. On the other hand, there is a different class of taxes well fitted for local treatment. Such are those levied locally on fixed property and permanent occupations carried on in the locality. First in natural order is the land tax. Both abstract reasoning and experience tend to show that a large proportion of local taxation must be obtained from this important ‘object.’ In rural districts there is little else to be taxed, and in the case of towns the value of land is so much increased by the action of social conditions that it forms a most suitable mark for the larger taxation that the wants of urban societies make necessary. The theory of incidence also supports this view. Other charges are often shifted to rent, while it can hardly ever transfer its peculiar burdens. As a land tax tends to become a tax on rent, and can generally be so regulated as to take that shape, it has definiteness of incidence in its favour; while its pressure falls on a form of wealth that is likely to grow without effort on its owner's part. The doctrine of taxation in proportion to service, though untenable in general, has here some force. The chief gain of local expenditure accrues to those who own property in the district. Some advantages may be more evident in their effects than others, but in a broad general way the advance of a locality means an advance in the rent of its area. There are, no doubt, exceptions: unfortunate proprietors have sometimes had to pay for ‘improvements’ that lowered the value of their land,1 but on the whole the opposite effect is more common.
Next to the land tax we may place the house tax as a convenient form of local impost. It is, indeed, somewhat more complicated in its operation; its incidence, which by regarding houses as a particular manufactured commodity, would appear to be on the occupier, really varies according to the method of imposition and the particular local conditions, and it has the disadvantage of affecting one of the most important elements of necessary expense,2 but on the other hand it is easily collected, tolerably proportional to income, and does not touch those unconnected with the district. If houses are to be taxed the revenue thence derived should, we believe, go to local, not to general revenue. The same reasons that have been noticed in the case of land apply, though with less force, to that of houses. This form of property gains in value by expenditure, but it also deteriorates through use, and therefore the indeterminate portion of the tax that falls on the house-owner should be kept within moderate bounds.
A third form of local taxation is discovered in the taxes on the exercise of occupations known as ‘licenses.’ These are better suited for local than for general taxation. They can be readily collected, and, if properly chosen, do not hamper industry. The system of low license duties on most trades and employments has the chief attributes of a fair local tax. The English method of appropriating the spirit licenses to the local bodies might with advantage be further developed.
Very similar in outward appearance are the licenses for direct enjoyments, and, though they differ in their essential character, they also may without impropriety be assigned to the several localities.1 Certain difficulties do indeed arise in this connexion. A license taken out in one place may be required for use elsewhere, or may even be exercised in several different localities. In practice the right of transfer may be allowed, or, better still, such cases may be reserved for the central revenue, leaving only the localised privileges to the smaller bodies. As a further resource, some of the taxes on acts may be usefully employed by localities. Thus the transfer of property, registration of companies, and other charges on legal transactions would provide a fund for the payment of the expenses connected with these administrative functions. Those taxes that closely resemble fees will come under the same rule as to their division.2 Each administration will retain for itself what it collects.
The foregoing suggested distribution must necessarily be modified to suit the needs of particular financial systems. Thus the house tax forms a part of general taxation in several countries: its complete surrender to the local authorities when proposed in England was made contingent on the position of imperial finance, and has not yet been carried out.3 We can hardly imagine the Indian Government yielding up the land revenue to the provinces. The line of division has to be varied, but it is nevertheless well to know the general principles that should assist in determining it.
§ 5. But given the partition of revenue between the two forms, we have next to see whether the rule of justice that we accepted for general taxation can be applied without reservation in local finance. Taxation in proportion to income gives a substantially just division of general burdens, but in the case of smaller districts the burden is not a general one. Many important local services are specific, and can be dealt with on the rule of payment for benefit received. A large part of the so-called English ‘rates,’ such as those for water supply, lighting, cleaning, drainage, &c., may be best measured for each payer by the advantage, or rather the quantity of the service. The citizen, in fact, pays for the supply of certain useful commodities. The local authority is performing a strictly economic duty. Taxation so far should be in proportion to advantage. Difficulties, however, soon arise in the attempt to apply this principle. In addition to the direct service rendered there is a margin of advantage accruing to the whole society, some of the service is not done for specified persons and some of the duties of local governments are of national advantage. The necessity of investing capital, the repayment of which is spread over a long period, complicates the case. To get a fair division of the charge between owners of land, possessors of fixed capital, including houses and the immediate users of these public services, is no easy task. It involves (1) a determination of the real incidence of the different modes of taxation, and of the extent and rapidity of the process of shifting; (2) an estimation of the truly equitable division between the several interests; and (3) a full recognition of the practical limits that any effective system must observe.
As regards the first head the general principles of incidence have to be considered, but the special incidence of land, house, and capital taxes are of particular importance. For convenience we may here so far repeat and anticipate the result elsewhere stated.1 The immediate consumer, i.e. the occupier of a house, or the user of other taxed convenience, looks on local taxation as simply a part of the price of the utilities he receives. So far as the outlay benefits him directly, he bears it as payment for increased advantage, and taxation is only shifted by him when the sacrifice it imposes reduces demand; heavy local taxation, unaccompanied by corresponding increase in utility, tends to diminish demand for the services so charged, and gives a backward shifting on the producers, i.e. the house-owners or other holders of the articles. The check to these particular forms of industry will ultimately reduce the capital and labour employed in them, and thereby pass the pressure on to the landowners in the shape of lowered ground rents so far as land entered into the supply of services. Such seems to be the process by which the ‘orthodox’ views on the incidence of rates were reached, the burden being ultimately distributed between the owner of land and the consumer. In respect to taxes on agricultural tenants, the same train of reasoning suggests that the incidence is ultimately on the landlords, as outside competition hinders any forward movement to the consumer of produce.2 It is hardly necessary to say that this doctrine assumes a uniformity in the course of shifting that has no real existence, since it omits some circumstances that are essential elements in the problem. Amongst these are: the long duration of the arrangements between owners of land and of capital; the position of qualified monopoly that owners of land in towns possess, and which with its advantages has the disadvantage of exposing them to the action of shifting; the slowness with which adjustments are made, which hinders much reliance in matters of legislation being placed on the operations of shifting in securing a proper division of the burdens.
The second head, that respecting the true interpretation of the rule of just taxation, is made more difficult by the complicated interests, some present, some future, that modern society is ever creating. In apportioning taxation between occupier, house owner, and ground landlord, we may discover that each of the two latter interests is divided into three or four parts, all in equity bound to share in the burden for the common advantage. Still greater difficulty is caused by the manifold duties of local government, some of which are merely delegated for convenience, not because they are solely of local interest. Police, prisons, poor-relief and education may be cited as examples. We cannot with any reason maintain that owners, whether of land or other property, and ordinary householders, are alone interested in the efficient management of these important matters. The policy of defraying all these charges out of particular funds with the practical exemption of others no less liable is a grave injustice. The cost of expenditure that is in essence for general purposes should follow the same distribution as that of general taxation.1
Thus the rule of taxing according to interest affected is not a complete and absolute principle for the distribution of local finance. Certain forms of direct public services can be so dealt with. Another portion may be fairly placed on the owners of durable property, as those who benefit most by an active and judicious local administration. A third and not inconsiderable share may be levied from the community generally by the agency of local licenses and taxes on transactions, and still more by a tax proportional to house rent, which is a good rough measure of taxable capacity.1
§ 6. The especially economic character of local administration is particularly noticeable in its direct effect on the value of portions of private property situated within its jurisdiction. The opening of a new street or the removal of insanitary buildings may add greatly to the utility and even the selling price or rent of adjacent property, and the fortunate owner discovers that his wealth is increased by the action and at the expense of the local governing body. Here there is at all events a seeming unfairness. It may be plausibly urged that where there is special gain there should also be special contribution. When property is improved, or, in current language, ‘bettered,’ there is some reason in calling on the owner to pay a part of the cost of that improvement, as otherwise the rule of just distribution of the burden would be violated. Notwithstanding the very plain and simple reasons which would appear to dictate this method of providing some of the revenue necessary for important improvements, it is noteworthy that there are very few traces in Europe of any such expedient.2 It has been reserved for the state legislatures of the American Union to give it a wide development under the title of ‘special assessments,’3 by which a special charge is imposed on property that has gained through municipal action. The particular machinery by which the amount of the assessment is determined varies from state to state (and even from town to town), and need not be considered here; but the general principle deserves some consideration. On the one hand there is very strong ground for believing that where outlay is incurred for the advantage of a limited class of owners they may justly be required to pay for the peculiar advantage that they have obtained. Besides, there can be little doubt that the wide use of special assessments makes the work of improvement easier. The ordinary ratepayer will not feel the same hostility that he does at present to costly but necessary alterations. But on the other hand these very advantages suggest some serious objections. The local administrators and the owners of the ‘bettered’ property may form widely different estimates as to the value of the improvements in question, and in such cases the latter will not always be mistaken. Again, the relief given to the general ratepayer is not wholly beneficial; it tends to weaken his vigilance—at best not very keen—in respect to unprofitable schemes, and to foster the undesirable feeling that the voters should support extensive municipal works, leaving part of the bill to be paid by a limited, and perhaps politically powerless, class. Rigid limitation as to the share of cost to be assessed on the owners1 will greatly reduce, but cannot altogether remove, this evil. A further difficulty arises in connexion with the fixing of the properties to be assessed, and the amount of ‘betterment’ given to each. To attain any satisfactory result a careful judicial inquiry before a competent and impartial tribunal is an essential condition. On the whole, it seems most in accordance with the evidence to conclude that the employment of special assessments, while justifiable in principle, and in some important instances desirable, needs to be carefully controlled; the proof of benefit bestowed must be very clear and well established, and the amount diffused over the general community, and therefore, even on the strict ‘benefits’ principle, payable from the rates, must be taken into account. With the observance of such precautions it is possible to secure a contribution out of the fund created by the direct action of the local government, and at the same time to avoid unfair pressure on individuals.1
§ 7. After all these different expedients have been carried as far as circumstances will allow, it may be necessary to readjust the balance between the central and local governments, either (1) by a transfer from the funds of the former in the shape of (a) payments for certain services, or (b) assignment of revenue, or (2) by the employment of its taxes as a base on which to raise additional local resources. Most financial systems have adopted one or both of these expedients. To begin at home: Complaints as to the pressure of local burdens led by degrees to payments from the central government for various services that appeared to be of a general character. This process began in 1835 by small payments in connexion with criminal administration. It was later on applied to the support of the police force, and gradually extended to other services, until in 1885–6 the total amount came to £5,775,523.2 The objections to this hap-hazard system were obvious. Additional grants were made to buy off opposition in Parliament and were always arranged on the basis of a compromise. The Imperial Exchequer was burdened and there was confusion between the two classes of revenue and expenditure, as what was outlay on one side was income on the other, the same sums being counted twice over. Accordingly the extensive reform of local government by the establishment of County Councils in 1888 was accompanied by a change in the relations of the Exchequer to local finance. The Grants-in-Aid were, speaking broadly, abolished, and a separate local taxation account created to which certain portions of the central revenue were assigned.1 The aim of this reform was to secure the complete separation of local from central finance, thereby restoring simplicity to the national budget, and also to prevent the further demands on the part of the localities, while by the assignment of a part of the Probate Duty the alleged unequal treatment of real property was at least reduced.2 Unfortunately the new scheme was imperfectly carried out, and the old policy of grants was revived in a new form. The large grant in relief of rates on agricultural land, introduced by the Act of 1896 and extended to Ireland by the Local Government Act of 1898,3 placed an annual burden on the Exchequer of over £2,200,000. A further difficulty arose in the distribution of the funds assigned to the local taxation account. As the automatic rule of payment in proportion to expenditure or efficiency had been abandoned, it became necessary to take some arbitrary basis of distribution, which must from the nature of the case be unsatisfactory.1 There is an entire absence of equity in the actual system of distribution, either as between localities, or between the several countries that make up the United Kingdom. The effect of these contributions on local finance was not encouraging to either economy or administrative efficiency. Finally, so far from improving the form of the public accounts, the system of assigned revenues has made budget statements more complicated, and has, to some extent, obscured the real growth of important branches of revenue.2 Still, on weighing the two systems, there is a slight balance of advantage in favour of the assignment of revenue, provided (a) that suitable taxes are selected, and (b) that the true relations of local and central finance are properly explained.
An analogous policy has been pursued in Belgium, where the octrois were removed in 1860 and replaced by parts of several indirect taxes.3 Prussia has also used the system of subventions.4 This method receives an extension by making the local taxes merely additions to the general ones. Thus the French communes and departments draw important tax revenues from the ‘Centimes additionnels,’ i.e. charges added to the four direct contributions. The same plan has been used in the German States and Austria though under the reforms of the ‘Miquel’ laws independent communal taxes are now developed in Prussia.1
Some high authorities approve of this policy of making local taxation a mere appendage to general taxation. ‘It is rightly asserted,’ says Leroy-Beaulieu, ‘that the French system of movable additional charges on the existing direct contributions, of uniform accountability, and the collection of direct local taxes by the agents of the State, makes the management of local finance simpler, clearer, and less costly, and gives the taxpayers much greater security against peculation and exaction. We do not hesitate for our part to declare for that system.’2 But notwithstanding this weighty judgment we are forced to believe that there is an advantage in having a separate system of local taxation. The aims of the two classes are so different and the rule of distribution varies so much, that a decided boundary between them is rather desirable. Both will naturally avail themselves of such material and agencies in the shape of valuations and officials as exist, but this does not necessitate the treatment of local taxes as merely added percentages to established general taxes. The success of local government depends on the energy and vigour with which it is worked, not on restraining its action within the narrowest limits. ‘The ideal condition of finance in a perfect system of local self-government’ has been described as ‘one in which each local authority levies its own taxes upon its own subjects within its own area; in which it has the power of applying the proceeds of these taxes within certain limits fixed by the general law, for the local advantage of its own citizens; and in which it has power to increase or diminish its taxes at its own discretion, according to its means and its wants.’1 The benefits of fiscal autonomy may perhaps not be so great as in certain conditions to compensate for the want of the harmony and regularity that state intervention secures; they are, however, sufficient, in conjunction with the reasons already given, to justify strenuous efforts for securing a distinct tax-system, and this is possible without any sacrifice of the guarantees for good government.2 At the same time we may fully recognise the convenience of supplementing local revenue from general taxation with the double object of securing adequate funds and more equitable distribution of burdens, though, while granting this, we must also insist that the extent to which the process is applied ought to be confined within the narrowest limits consistent with attaining the end in view. The allotment of part of the taxation available to meet the general expenditure is a measure that always stands in need of justification; it has a presumption against it which must be rebutted by sufficient evidence.3
§ 8. The relations of local and general finance suggest another closely related point, viz. the extent of the fiscal liberty to be bestowed on the local financial powers. Between the extremes of complete regulation and almost complete independence we may discover a series of steps corresponding to the size of the bodies and the political training of the people. The national government may fix the particular taxes and their amount, or it may, as with the French communes, let the latter be varied if its permission is sought. Again, it may lay down the forms of taxation and place bounds to its amount, either definitely determined or variable. Or, finally, the duty both of selecting the taxes and determining their amount may be given up to the local government. The first mode means the reduction of the local authority to impotence so far as taxation is concerned; it simply executes the Sovereign's orders. The other extreme approaches closely to independence. The taxing power is always an attribute of sovereignty: a body that had full taxing power would have got very near that position. Accordingly, we find that the customs duties in all Federal States come under the control of the central government. The extent to which the right of independent taxation has been restrained is a mark of the progress of the State towards unity. Co-ordinate fiscal authorities have to be kept within bounds by constitutional rules, but we may safely conclude that in a durable State the supreme power in financial matters will sooner or later be vested in the central government.
The extent to which the liberty of experiments in taxation should be conceded to the subordinate bodies must, we believe, be carefully limited. For the smaller units the taxes should be absolutely laid down, and also the maximum to be raised, but the opportunity of economy should not be denied them on the condition that they duly discharge their necessary functions.1 The larger circumscriptions are fairly entitled to greater latitude. A higher standard of intelligence may be expected from their representatives, and their economic resources are more varied. But even with them the need for supervision cannot be said to be absent. They may impose taxes that press heavily on unpopular sections in their district; they may deal unjustly or ignorantly with important economic and social interests, or they may go counter to the financial policy of the State. For these reasons the unitary form of government is in its financial aspects superior to the federal one, even though the larger liberty of levying new varieties of taxation is a certain advantage in the latter.
the canons of taxation
§ 1. In the general survey of the problems of taxation contained in the preceding chapters of the present book, we have implicity given the rules that should govern the management of this part of state revenue. The mere statement of a general maxim is of little use unless its real bearing and its actual value are realised by acquaintance with the facts of taxation as shown by history and present fiscal practice. It may even reduce to a dead formula what should be rather a matter of vivid experience. But it must at the same time be allowed that the condensation of results into the precise shape of general canons may prove of service to the theoretic student by enabling him to estimate exactly the effect to be ascribed to the conclusions that critical examination of the revenue system has tended to establish. And such a course, we may add, has been almost invariably followed by writers on finance, who have devoted their best efforts to the framing of rules which should be regarded as imperatively binding on the statesman and administrator. High support may therefore be claimed for an attempt to exhibit in a stricter form the results that emerged from our previous inquiry, even though no special authority can be ascribed to the particular shape in which generally recognised principles will be formulated.
§ 2. When finance was regarded as purely a matter of practice, it was natural that those concerned with the collection and disbursement of the public revenue should have felt the advisability of framing general rules by which to guide their mode of procedure. Unfortunately the limited view taken by the earlier administrators as to their proper function, which led them to consider almost exclusively the immediate returns obtained, the prevalent ignorance of economic principles, and the immature condition of the state economy, all combined to hinder the establishment of even sound empirical rules. The most famous financiers of so relatively modern a period as the seventeenth century—Sully and Colbert—have left little material of this kind. It is rather by theorists or officials of speculative tastes that the earliest canons of taxation have been produced.1 The students of economics and finance in the eighteenth century supplied the first really meritorious collection of general rules. In Germany, Italy, and France we find instances of very varying merit, but all affording evidence that the time for the enunciation of maxims had come.
Amongst the more remarkable rules are those propounded by Vauban, Justi, and Verri, partly on account of the reputation of their authors, but also for their indication of the really important points. Nevertheless they can at present only lay claim to importance on historical grounds.2 The physiocratic maxims were vitiated by the undue prominence given in their system to the rent of land as the sole net product, and therefore the only source of taxation. This fundamental error prevented the great French school from leaving a durable heritage in this respect to their successors.3
§ 3. Very different is the position occupied by Adam Smith. The maxims inseparably associated with his name1 were in his own day accepted by theorists and statesmen, and have by constant repetition become an indispensable part of any exposition of finance. Though fully in harmony with the spirit of the 18th century, they have not been found inapplicable to modern conditions, and in spite of much hostile criticism bid fair to hold their ground in the future.2
These famous maxims—to once more repeat them—are four in number, and run as follows:
One obvious comment on these rules is that which notes a difference between the first canon and the remaining ones. The former is a rule of taxation; the latter are rules respecting taxes. The first canon is therefore applicable only to the tax-system, as a whole, while the second, third, and fourth should be observed in the case of each separate tax. Mill, therefore, has some justification when he declares that they belong to ‘the discussion of particular taxes,’2 since every tax must be separately tested by them, though of course this circumstance does not remove them from the category of general rules.
Another feature that has been often noticed is the mixture of different classes of considerations. Thus they have been described as ‘partly ethical ... and partly economical in the strict sense’;3 and it seems unquestionable that the second has chiefly a constitutional significance, as prescribing the taxpayer's immunity from arbitrary exactions, but more generally the three last may be regarded with Wagner as administrative precepts.’4
This attempt to separate the Smithian rules according to their character, though in appearance plausible, tends to obscure their really compound basis. The first maxim is, it may be said, undoubtedly ethical, since it refers to the justice of taxation. Granting this, it should also be remembered that inequality in taxation diminishes its productiveness and impairs industrial energy; and so viewed, the canon is an economic one. Violations of the rule of equal treatment are, again, offences against constitutional liberty quite as much as absence of certainty. In like manner each of the remaining rules has an economic side; the certainty, the convenience, and the economy of taxation, like its equality, are highly promotive of a well-filled treasury and a prosperous industrial system. The true point of view for understanding these maxims is to regard them not as economic, ethical, or constitutional, but as essentially financial; they therefore rightly combine the different elements that must enter into problems connected with that subject.
With reference to the first maxim, it is plain that Adam Smith regarded revenue as the index of ability to contribute, and it may be conjectured that the words ‘under the protection of the State,’ regarded by Walker as either irrelevant or inconsistent, refer to the case of persons having property in different countries, and therefore imply a prohibition of double taxation.1 For it must be remembered that international problems were much more prominent in the thought of Adam Smith and his contemporaries than is usually supposed.2
§ 4. One natural consequence of the lofty position given to the Smithian canons is the depreciation of rules formulated by other writers. Variations of, or additions to, the four established maxims were regarded as peculiarities or vagaries of the propounder, which, if noticed at all, were rightly to be placed in a very subordinate situation. Nor, indeed, was there anything very novel in the formal contributions made by the successors of Adam Smith. Perhaps the most noticeable exception is that of the eminent historian Sismondi, who, beginning his career as a rigidly orthodox economist, showed in his latter work tendencies of a very different character.3 But his revolt did not extend to the subject of finance. Like, and probably in imitation of, Adam Smith, he prescribes four rules dealing with other points than those already covered by the accepted maxims. He asserts (1) that every tax should fall on revenue, not on capital; (2) that in the assessment of taxation gross produce should not be confounded with revenue; (3) that taxation should never touch what is necessary for the existence of the contributor; and (4), that taxation should not put to flight the wealth which it strikes.
The mere statement of these rules suffices to show their substantial accordance with the ideas of Bentham and Ricardo.1 They are evidently intended to carry out the principles of saving capital from taxation, of confining the area of imposition to net revenue, and of relieving those who only possess the physical minimum of existence. Though not as fundamental as the rules given by Adam Smith, they yet, taken together, make no inconsiderable addition to the prescriptions of practical finance, even if, as we have seen, it is not always possible to secure their complete observance.2
Other expositions may be passed over with still slighter notice. Of French writers Garnier, with a formidable list of sixteen rules—twelve general and four special—is the most elaborate,3 and also probably the most confused. Among the Germans of the older school Von Hock of, the later writers Held and Wagner, are most important.4 The last-named in his elaborate examination groups his canons under different heads according to what he regards as their primary character, a course which, whatever be its disadvantages, enables him to lay special emphasis on the purely financial element.1 But in truth the whole tendency of modern German financial study has been rather towards description and analysis than the formulation of rules of supposed universal validity. Thus Wagner, while stating his elaborate canons (Grundsätze), takes the utmost pains to insist on the need for careful discrimination in each particular case.2
§ 5. The foregoing survey of the most prominent attempts to supply a series of precepts gives sufficient material for selection. It is only necessary to place in their proper order and connect with each other the rules that seem to possess the generality and weight required for inclusion in the list. First and most important of the principles that should guide the practical financier is that which declares that ‘taxation should be productive.’ The very object for which the revenue system exists is to provide for the maintenance of the State, and therefore the minister in charge of the finances naturally estimates the merits of a tax by the amount of its yield. Other considerations will no doubt occur to him, but this is after all the one that can never be neglected. And it is on this point that the amateur in such matters is most likely to fail; he will be attracted by the equity, popularity, or some other pleasing feature of imposts which nevertheless want this primary quality. It is here, too, that the masters of finance have won their greatest triumphs. To keep steadily in view the idea of productiveness, and select the objects most suitable for that purpose, requires firmness, as well as wide and accurate information.
Next in value we should place the rule that ‘taxation should be economical’—and this, as we have seen,1 includes much more than mere saving in the cost of collection. Undue outlay on the official machinery of levy is but one part of the loss that taxation may inflict. It is a far greater evil to hinder the normal growth of industry and commerce, and therefore to check the growth of the fund from which future taxation is to come. Thus the rule of ‘economy’ is naturally subdivided into two parts, viz. (a) ‘taxation should be inexpensive in collection,’ and (b) ‘taxation should retard as little as possible the growth of wealth.’ It may also be remarked that there is a close connexion between ‘economy’ and ‘productivity,’ since the former aids in securing the latter.
Our third rule is no other than the famous one that ‘taxation should be justly distributed,’ a vague and plastic proposition, which we may further explain by the interpretation that it should be measured by the comparative abilities of the contributors, and this again may be taken in general to mean ‘taxation in proportion to income.’ The many explanations that such a maxim requires have been already given and need not be repeated.2 But here we may add that so far as the ‘benefits’ or ‘service’ principle is applied, it excludes the rule of taxation according to ability.
‘That the tax system should be elastic’ is a further canon, the observance of which is very desirable. It may, indeed, be regarded as the agency for realising at once ‘productivity’ and ‘economy.’ Where the public revenue does not admit of easy expansion or reduction according to the growth or decline of expenditure, there are sure to be financial troubles.3 For this purpose some important taxes will have to be levied at varying rates. In the British system the income tax is selected to perform this service; but some article of general consumption might be placed under a sliding scale duty for the same reason. The particular taxes chosen will vary according to circumstances, but the general principle of flexibility should be recognised and adopted.
Of high importance in earlier times, but now requiring less emphasis owing to its general observance, is the canon that ‘taxation should be certain.’ When arbitrary power was able to alter imposts at its will, the uncertainty connected with the demands of the tax-collector was a great aggravation of the evil of the heavy burdens imposed. That the citizen in his dealings with public officials should be under the rule of settled law, not of caprice, is not only a financial but an important constitutional maxim.
Regarded from a somewhat different standpoint, the rule of ‘certainty’ or ‘stability’ is one that still needs enforcement. Frequent changes in the tax system have a disturbing effect. The economic arrangements of society are adjusted to the actual state of things, and reasonable expectations are formed, which are disappointed by sudden and unforeseen changes. Hence the strong objection that business men feel to even beneficial tariff changes, though the rule of stability is of comparatively little weight in the case of taxes on commodities. But where, as in the case of a long-established charge, such as the French land tax or the English local rates, contracts for lengthened periods have been concluded in the belief that the existing arrangements are permanent, then so-called reform is often a violation of security. It is in relation to this rule of stability that the popular maxim ‘an old tax is no tax’ finds its proper application. This conception of stability, moreover, comprises the fragment of truth wrapped up in Canard's erroneous doctrine of equal diffusion.1
‘That taxation should be convenient’ is another of the accredited maxims, which almost carries its justification on its face. It includes the selection of suitable objects for taxation, and also the choice of convenient periods for requiring payment. This rule of convenience is but the expression in a special form of the general principle that the public power should as far as possible adjust its proceedings to the habits of the community, and avoid any efforts at directing the conduct of the citizens in order to facilitate its own operations. The sacrifices that inconvenient methods of fiscal administration impose may indeed be treated as violations of both economy and equity.
§ 6. Such are the general canons that experience seems to prescribe, and which should be observed in a well-ordered State. They are, it is true, of a rather elementary character, but general and comprehensive maxims could hardly be anything else. Besides, their simplicity has not saved them from frequent violation. Their value lies in their assertion of truths ‘plain and intelligible to common understandings,’2 but for that very reason too often passed over. A system of taxation which conforms to them may without hesitation be pronounced a good one. Where they are neglected and broken through, the evil consequences will be almost certainly conspicuous.
A further point deserves notice. There is at first sight a probability of conflict between the several canons. A productive tax may be inconvenient, as a convenient one may be unjust; and how, it may be asked, is a solution of the difficulty to be reached? The plain answer is, By the surrender of the less important rule. The successful administration of the State is the final object, and therefore convenience, or even equity, may have to yield to productiveness. But though opposition is possible, agreement is on the whole the ordinary case. We have seen that economy increases productiveness, but so do certainty and convenience. Elasticity aids both productiveness and economy, while growing productiveness in turn permits of better observance of all the other canons. There is thus a harmony in a properly administered financial system that tends to promote its improvement in the future.1
‘The theory of the incidence of taxation has been generally treated as a branch of the application of economic science to the practical art of government. But really it is an integral part of the general theory of value.’ Marshall, 519 n.; cp. Edgeworth, Economic Journal, vii. 46.
Sir E. W. Hamilton's definition, ‘A tax or rate is an obligatory contribution by persons in respect of, or incidental to, something which they possess or something which they do’ (Memoranda on Classification and Incidence, 33), seems to be a variant on the above, but hardly covers the case of a poll tax.
See on this point the Memoranda on Classification and Incidence [C. 9528] issued by the Commission on ‘Local Taxation,’ especially pp. 85 (Courtney), 112 (Marshall), 160 (Cannan). The position in the text is fully supported by these authorities.
De Parieu, i. 5; Roscher, § 33; Cossa (Am. Trans.), 50.
In the later editions of his Scienza delle Finanze, Professor Cossa has altered this definition, omitting the last clause, which was intended to emphasise the ‘general’ nature of taxes (imposte) as opposed to ‘fees’ (tasse), regarded by him as special, not at all to assert the ‘benefits’ theory of taxation, which he rejects.
Montesquieu, Liv. xiii. ch. 1; Stourm in Dictionnaire d' Économie politique, art. ‘Impôts,’ ii. 3; cp. Leroy-Beaulieu, i. 113.
See Bk. i ch. 8, § 4 sq.
The definition of the dictionary of the French Academy.
Quoted from Cooley by Ely. Taxation, 4.
‘Taxes are simply one-sided transfers of economic goods or services demanded of the citizens, and occasionally of those who are not citizens, but who nevertheless are within the reach of the taxing power, by the constituted authorities of the land for meeting the expenses of government or for some other purpose, with the intention that a common burden shall be maintained by common contributions or sacrifices.’ Taxation, 6–7. Cp. the definition given by Wagner, ii. 210, which brings in the complication of a distinction between ‘pure financial’ and ‘politico-social’ taxation; also i. 499–500, where ‘taxes’ are marked off from ‘fees’ (Gebühren) by their ‘general’ character.
There seems to be no foundation for Mr. Cannan's suggestion that the ‘rate’ is ‘apportioned,’ while the ‘tax’ is a ‘percentage’ charge (History of Local Rates, 4–5). The only plausibility that it possesses is due to the fact that in the United Kingdom rates are practically a single-tax.
Cp. Roscher, § 33; Wagner, ii. 223.
Professor Seligman (Political Science Quarterly, vii. 715) demurs to this use of the terms ‘subject’ and ‘object,’ but it is convenient to have a word to denote the ultimate bearer of the burden of taxation, and ‘subject’ seems to be the only one at hand for the purpose, while ‘object’ is employed by eighteenth century writers to denote the commodities placed under taxation; e.g. Hamilton, Report on Manufactures (ed. Taussig), 78; A. Young, Tour in Ireland (Bohn ed.), ii. 230.
This mistake is somewhat like that committed by Blackstone in speaking of ‘the rights of things’ (Jus rerum).
Cp. Roscher, § 33; Wagner, ii. 226–8; Schäffle, Steuerpolitik, 52–3, for the use of these terms in German finance. The use of ‘subject’ in the text differs from that of the above writers, as they apply it to the person legally responsible for payment.
Principles, Bk. v. ch. 3, § 1.
The questions here raised are further discussed in Bk. iii. ch. 4, ‘The Tax System, its Forms.’ See for a full treatment of the history of the terms a valuable article on ‘Direct and Indirect Taxes in Economic Literature,’ by Professor C. J. Bullock, Political Science Quarterly, xiii. 442–476. The use of the term ‘direct’ in the Constitution of the United States has given rise to much controversy, culminating in the decision of the Supreme Court on the income tax of 1894, pronouncing it invalid as being ‘direct.’
These terms seem to be the least unsuitable equivalents of the French impôts de quotité and impôts de repartition. Professor Seligman prefers the American term ‘percentage’ to ‘rated,’ but where the units are of unequal value its use would be incorrect.
The old English ‘tenths and fifteenths’ and the later ‘subsidies’ were apportioned, Dowell, i. 88. The recent change in the French house duty is an illustration of the tendency to abandon the system.
Wealth of Nations, 347.
It is noteworthy that Adam Smith makes this separation in his account of taxes on profit: ‘The revenue or profit arising from stock naturally divides itself into two parts, that which pays the interest and which belongs to the owner of the stock, and that surplus part which is over and above what is necessary for paying the interest,’ 357.
Bk. v. ch. 3, § 1.
See Introduction, ch. 1, § 8.
Rau, i. § 292; Hoffmann, Lehre von den Steuern, 69; Cohn, § 332; Wagner, ii. 233 sq., 515.
De Parieu, i. 12–14.
Abgaben und Schulden, 15–17.
Ib. 82 sq. Stein's classification of taxes into (1) direct, (2) indirect, and (3) income taxes—the first falling on capital, the second on labour, and the last on individual economic activity—is decidedly unsatisfactory; nor are his subdivisions better. Thus the direct taxes are divided by him into those on (a) produce, (b) acquisition, (c) commerce, but the land tax comes under (a) and the industry taxes under (b), though the latter are evidently produce taxes. Stein, ii. 495 sq., and iii. passim.
The question of classification is discussed in the Memoranda on Classification and Incidence [C. 9528], but the only result reached is a negative one. The attempt to divide taxes into (a) those incidental to the ownership occupation, or transfer of property, and (b) those ‘not incidental to property,’ was thoroughly exposed, and was abandoned by the Commission.
They are (1) Contribution foncière, (2) Contribution mobilière, (3) Contribution des portes et fenétres, (4) Patentes.
Bastiat, Œuvres, v. 344 sq.; cp. Leroy-Beaulieu, i. 118.
Leroy-Beaulieu, i. 125–6. See above. Bk. i. ch. 8, §§ 2, 3. Also Bk. v. ch. 5, for a discussion of the expediency of public borrowing for this object.
Essays (ed. Green and Grose), i. 356. Prof. Seligman (Essays, 86 n.) is mistaken in supposing that the doctrine is here ‘ascribed’ to Hume, as any reader of the text can see.
Taxation and Funding, 7 sq.
Principles, Bk. i. ch. 7, § 6.
Ib. Bk. v. ch. 3, § 3.
For a good refutation of the idea that low wages make workmen active, see Wealth of Nations, 34. Arthur Young approved of high rents as promoting industry, Northern Tour, ii. 80–83; and Sir J. Caird deprecated under-letting, but wisely remarked that the opposite error of overletting is much more hurtful English Agriculture, 477.
McCulloch, 151–2; Leroy-Beaulieu, i. 258–260.
For further discussion on this point, see ch. 4 of the present Book, also Bk. iv. chs. 6, 7.
Wealth of Nations, 348. The fourth of Adam Smith's ‘classical’ rules See Bk. iii. ch. 7.
Wagner, ii. 467. In Jevons's phrase, ‘The maximisation of utility.’
See on this Dowell, ii. 249, 261, who quotes Sydney Smith's humorous account.
Works (ed. McCulloch), 87.
‘Tout impôt doit porter sur le revenu, et non sur le capital’ is the first of Sismondi's maxims. Nouveaux Principes, Liv. vi. ch. 2.
Bk. v. ch. 2, § 7.
See Marshall, Principles, Bk. ii. ch. 4, for a discussion of the diverse application of the term ‘capital.’ ‘There is, and from the nature of the case there must be, something artificial in every broad distinction between capital in general and other forms of wealth.’ Ib. ‘Preface’ to 3rd. ed., vi.
See Bk. v. ch. 5, § 9, for further treatment of this point.
Quesnay in Daire, Physiocrates, 83; Du Pont, ib. 351; Mercier de la Rivière, ib. 474. See also Quesnay's Œuvres (ed. Oncken), 332.
The often-quoted passage of Turgot, ‘En tout genre de travail il doit arriver et il arrive en effet que le salaire de l'ouvrier se borne à ce qui lui est nécessaire pour lui procurer sa subsistance’ (i. 10), shows this.
Turgot, i. 63.
Principles, Bk. i, ch. 11, § 1.
Bk. i. ch. 8, § 2.
Cp. Bk. i. ch. 6, § 1, for the relation of state expenditure to industry and commerce.
On the whole question cp. Wagner, ii. 315 sq.; Cohn, §§ 236 sq.; Roscher, § 35: Held, Einkommensteuer, 66 sq. For Hermann's theory of income see Staatswirthschaftliche Untersuchungen (2nd ed.), 582–598. Professor Marshall has developed Hermann's view, Principles of Economics, i. 139 sq.
Giffen, Growth of Capital, 124–139.
See on this point the Report and Minutes of Evidence of the Royal Commission on ‘Irish Financial Relations’ [C. 7720 and 8262]. Special reference may be made to the memorandum of Sir R. Giffen, C. 7720, ii. p. 166, and the note by Prof. Sidgwick, ib. 182–3.
J. S. Mill, Principles, Bk. ii. ch. 1, § 1; cp. Marshall, Principles of Economics, Bk. vi. note to ch. 2; also see Nicholson (Principles, Bk. ii. ch. 1) for a vigorous criticism of Mill's view.
Bk. iii. ch. 1, § 4.
For a statement of this theory see Thiers, De la Propriété, 348, who compares taxation to an insurance premium.
‘sunt igitur ea vectigalia ... probanda quae in omnes ordines pro singulorum facultatibus exaequantur,’ Bodin, De Rep. Liv. vi. ch. 2. See Neumann, ‘Die Steuer nach Steuerfähigkeit,’ in Conrad's Jahrb. 1880, for a history of the doctrine. For earlier recognition of the doctrine in England see Cannan, History of Local Rates, 17–22, where the phrase juxta facultates is quoted from ‘Rhymer’ as having been used in 1345.
Wealth of Nations, 347; cp. 342.
Principles, Bk. v. ch. 2, § 2.
This view has been specially developed by Professor Edgeworth. See his articles on ‘The Pure Theory of Taxation,’ Economic Journal, vii. 550–566; also x. 174–177, and the summary of his views in Memoranda on Classification and Incidence, 127–8.
Professor Edgeworth speaks of ‘the enormous interposing chasms which deter practical wisdom from moving directly towards that ideal,’ Economic Journal, vii. 553. Professor Nicholson recognises that ‘the great merit of the faculty theory’ is that it is objective. Principles, iii. 275.
Dîme Royale (ed. Daire), 48; cp. Meyer, Principien, § 2.
Wealth of Nations, 347.
‘Nous l'avons adoptée et nous devons la défendre,’ is the expression of Leroy-Beaulieu, i. 139.
See for a full exposition of this point of view Léon Say, Les Solutions democratiques de la Question des Impôts.
Ib. i. 167.
The literature of progressive taxation is an extensive and growing one. The most important work in English is Professor Seligman's Progressive Taxation in Theory and Practice, which gives a full account of the chief theories on the subject. Masè-Dari's L'Imposta Progressiva is the chief Italian work. Other writers deserving of mention are Neumann, Mazzolo, and Cohen-Stuart.
Esprit des Lois, Liv. xiii. ch. 7.
Garnier calls his system ‘progressional.’ See J. B. Say, Traité, Bk. iii. ch. 9; Garnier, Traité des Finances, 68.
‘This doctrine seems to me too disputable altogether, and, even if true at all, not true to a sufficient extent to be made the foundation of any rule of taxation.’ Mill, Principles, Bk. v. ch. 2, § 2. Cp. McCulloch, Taxation, 65; De Parieu, i. 38; Levasseur, Précis, 343; also Neumann, Progressive Einkommensteuer, 112.
Sax, Staatswirthschaft, 503–513; Wieser, Natural Value (Eng. trans.), 236.
The English assessed taxes might have been thus employed.
Professor Seligman, Progressive Taxation, 212–215; West, The Inheritance Tax. See Bk. iv. ch. 9.
Amongst specimens of this class the plan of the late F. W. Newman, by which the tax rate increased 1 per cent. with each additional £1,000 of income, may be mentioned. A common formula is that ‘the tax should triple as the income doubles, the starting point being selected according to the propounder's fancy. But there is evidently no limit to the varieties of arrangement.
Impôts Démocratiques, i. 172. It may be suggested that the scale that would give the maximum revenue should be chosen, but this is (a) extremely difficult to determine, and (b) is not consistent with the aim of proportional sacrifice. It is besides quite possible that several different scales would satisfy the condition.
The objection to progressive taxation on the ground of its arbitrary nature has been a leading point with French economists, e.g. Leroy-Beaulieu, i. 148, and was emphasised by the older English school, but is treated as of slight importance by most recent writers. Prof. Seligman declares that ‘all governmental actions which have to do with money relations of classes are necessarily more or less arbitrary.... a strict proportional tax.... is really more arbitrary.... than a moderately progressive tax. The ostensible “certainty” involves a really greater arbitrariness.’ Progressive Taxation, 194. Mr. Devas, while allowing the objection where the aim ‘is not to equalise sacrifice but to equalise property,’ regards it as inapplicable to ‘moderate graduation.’ Political Economy, 529. Prof. Nicholson holds that the ‘objection is purely formal. It is equally applicable to the relative proportion of direct and indirect taxes.’ Principles, iii. 278. In reply it may be remarked that though it is true that all action of a sovereign government is in a sense arbitrary, the adoption of a definite principle based on ‘simple and obvious’ grounds limits the capricious exercise of the power. Such a limiting principle exists in the case of proportional, but is absent in that of progressive, taxation. The distribution between direct and indirect taxation is regulated by reference to the effect on the different classes concerned, and, though unavoidably imperfect, ought to be directed by a general rule. But in any case the adoption of progression brings in an additional element of arbitrariness in the selection of the particular scale, which may be compared with the additional uncertainty in a double standard currency owing to the possible varieties of the ratio between the two metals. The appeal to the analogy of judicial decisions suggests the difference between the settled rule of ‘law’ and the fluctuating judgments of ‘equity.’ As Selden could truly say that ‘equity is a roguish thing,’ so can it be said that the policy of progressive taxation, particularly in a democratic society, is an uncertain thing.
Prof. Nicholson, in questioning the force of this objection, seems to have misconceived its real bearing. ‘Though the personal method of declaration must be applied to the surplus, it will still be as effective as in other cases, and the chance of evasion may be allowed for.’ Principles, iii. 278. But the essential point is that the introduction of progression necessitates the adoption of the comparatively ineffective method of personal declaration for all income, and thereby increases the opportunity, as the higher rate stimulates the desire, for evasion, which no doubt must ‘be allowed for’ in estimating the yield of the tax, just as the encouragement to smuggling must be considered in the case of heavy duties on luxuries. The need for making this allowance is generally regarded as weighing against such duties, and similar reasoning in respect to progressive taxes seems warranted. The experience of Italy with its income tax gives support to the belief that reliance on declarations of income is unsatisfactory.
This objection is regarded by some writers as applicable ‘to the whole system of taxation on property or income’ (Seligman, Progressive Taxation, 195), or to ‘all taxes on capital’ (Nicholson, Principles, iii. 278), and therefore ‘not applicable to progressive taxation as such’ (Seligman, loc. cit.). This view, however, does not take into account the extra pressure on the growth of accumulation that a progressive rate must cause. The case is similar to that of increasing fines for each repetition of an offence, the wrongdoing consisting in the saving or production of a given amount of wealth. As stated in the text, there may be some compensation in the effects of moderate progression, but this gives no support to Professor Seligman's courageous assertion that ‘If a moderate progressive tax is really more equitable than a strictly proportional tax, progression will be less of a fine on thrift and industry than proportion would be’ (loc. cit.). The usual arguments against progressive taxation are given in Lecky's Democracy and Liberty, ch. 3, in an old-fashioned form and with no consideration of recent theoretical discussion.
Cp. Wealth of Nations, 375.
As pointed out by Professor Seligman and Nicholson, the slight increase in return obtained by progressive taxation is not an objection to its use. It can at most be regarded as showing that its advantage must be looked for else where. ‘If it is conceded that the progressive tax is more equitable than the proportional tax, it is utterly immaterial whether it yields more revenue or not.’ Seligman, Progressive Taxation, 195. In deference to this criticism, the text of earlier editions has been altered. It is nevertheless true that as a great engine of fiscal reform progressive taxation is in Proudhon's words ‘un bilboquet, un joujou démocratique,’ which will not relieve the poorer taxpayers.
See Wicksteed, Alphabet of Economic Science, for a clear statement of the general principle applied in the text. Signor M. Pantaleoni argues that the richer person (B) may even suffer more (1) if the additional wealth happens to be of special importance to him, or (2) if his sensibility be keener.
Cp. Sax, ‘Die Progression ist keine vollständig regelmässige. Je nach der Beschaffenheit der einzelnen Bedürfnissgruppen kann sie bald geringer sein, vielleicht zum Stillstand gelangend, bald in raschen Sprüngen emporsteigen. Staatwirthschaft, 512.
§§ 210, 211.
The progression à rebours of French economists.
Neumann, Progressive Einkommensteuer, passim; Léon Say, Les Impôts Démocratiques, i. 203–258; ii. 225–264; Leroy-Beaulieu, i. 152–156, 160–168; Cohn, §§ 213, 214; Palgrave, ‘Progressive Taxation in Switzerland,’ Journal of the Statistical Society, ii. 225–267; Seligman, Progressive Taxation, Part I.
See § 13; also ch. 6 of the present book, ‘Principles of Local Taxation.’
Particular instances of progressive taxes will be considered in Bk. iv. chs. 4 and 9, ‘Taxes on Property and Income,’ and ‘Taxes on Successions.’
Bk. iii. ch. 2, § 6.
The effect of local rates and the shifting of taxation do in fact put some of the pressure on the very poor, but the statement in the text is true of the immediate effect of imperial taxation up to the recent changes by which sugar and imported corn have been put under taxation.
Schmidt, Steuerfreiheit des Existenzminimums, 4, 5.
The criterion of ‘necessaries’ varies according to the class concerned. ‘We may say that the income of any class in the ranks of industry is below its necessary level when any increase in their income would, in the course of time, produce a more than proportionate increase in their efficiency.’ Marshall, Principles of Economics (3rd ed.), i. 139.
In Political Science Quarterly, iv. 64–5. Cp. ‘Der Staat ist für alle ein Bedürfniss, seine Existenz ist für die Gesammtheit nothwendiger als das Leben eines Einzelnen.’ Held, Einkommensteuer, 103.
Mill's view on the subject, though his conclusion is the same as that in the text, appears to be inconsistent with his views on population and his criticism of allotments (Principles, Bk. ii. ch. 12, § 4). Would not taxation of the minimum tend to check population, and exemption tend to increase it?
The doctrine of the exemption of the subsistence minimum received a new application in the discussions on Irish taxation. The error pointed out in the text was adopted by Mr. Sexton in his report, and countenanced by Sir R. Giffen. See The Final Report [C. 8262], 70–1. Cp. Book iii. ch. 2, § 8, and infra, § 15.
See the reports and evidence of the Parliamentary Committees on the Income Tax 1852–53 and 1861, especially the evidence of Newmarch, Farr, and J. S. Mill.
See the proposal of Mr. Blunden for a tax on the yield of property (i.e. in fact, a differential income tax). Economic Journal, vii. 607 sq.
Bk. iv. ch. 4, ‘Taxes on Property and Income.’
See Vocke, Abgaben, 471–2.
I.e. a tax assessed on amount of property, but really paid out of income.
All included in the German ‘Conjuncturgewinn.’ Cp. Professor Marshall's explanation of ‘Conjunctur,’ Principles of Economics, i. 656.
Wealth of Nations, 356, 378.
For a forcible statement of this view see George, Social Problems, 205–208.
Wealth of Nations, 356.
Cp. Sumner, Life of Jackson, 184–5; Marshall, Principles, 486–7.
‘Die Speculation ist nicht bloss, wie Lassalle behauptet, “ein Rathen auf die Wirkungen, welche die unwissbaren Umstände hervorbringen werden.” Sie ist mehr als das. Sie ist der Kampf der mit Kenntniss der wissbaren Umstände ausgerüsteten Intelligenz gegen die rohe Uebermacht des Zufalls.’ Cohn, § 343. On the important functions of speculation in the modern economic system see Hadley, Economics, ch. iv., and the fuller discussion in Emery, Speculation on the Stock and Produce Exchanges of the U.S.
For state ownership of land see Bk. ii. ch. 2, § 4. On the Land Tax, see Bk. iv. ch. 1; and for taxation of ground rents ch. 6, § 5 of the present Book.
See the Reports of the Commission on ‘Indian Expenditure’ [C. 8258. 9; Cd. 130. 131] especially iv. 90–127 (ch. 3 of Final Report) for an examination of the heads of outlay where joint contribution was suggested. The governing principle propounded was that of ‘common interest,’ which apparently means ‘common benefit.’
The Federalist (Letter 21) 123 (Lodge's edition).
The financial weakness of the ‘Confederation’ was one great reason or the adoption of the present Constitution of the United States. ‘Finance was the great overwhelming trouble which laid bare the fatal vices of our political system, and it was on financial rocks that the rickety Confederation was dashing itself to pieces.’ H. C. Lodge, Alexander Hamilton, 39. The peculiar condition of the Austro-Hungarian Empire accounts for the retention of the present system.
See infra, Bk. iii. ch. 6, § 3.
The history of the United States, Switzerland, and Germany supplies instances. Hamilton admits the difficulty but seeks to extenuate it. ‘Imposts, excises, and, in general, all duties upon articles of consumption may be compared to a fluid which will, in time, find its level with the means of paying them.’ Federalist, 124. The whole paragraph is worth reading as an early example of the equal diffusion theory. Cp. Seligman, Incidence, 133–4.
The provision in the United States’ Constitution respecting direct taxes was designed for this purpose. It has had the serious effect of preventing the establishment of an income tax.
The Income tax reimposed in England in 1842 was not extended to Ireland till 1853. The Irish spirit duties were equalised only in 1858.
See the Report of the Commission on Irish Financial Relations, especially the memoranda and evidence of Sir R. Giffen and Mr. M. O'Brien. For a more extreme view see Lough, England's Wealth, Ireland's Poverty.
This was the position occupied by Mr. Gladstone, Sir S. Northcote and English finance ministers generally in dealing with this question.
Bk. iii. ch. 1, § 3.
Cp. the several estimates made for the ‘Financial Relations’ Commission. Also Sidgwick's ‘Note,’ ib. ii. 182; see in addition, Economic Journal, vi. 189–94, and Béla Foldes, Finanz-Archiv, xvii. 798–9.
For scientific discussions of this question see Adams, Science of Finance, 449–64; Seligman, Essays, ch. 8. The great development of industrial companies in America, and the peculiar restrictions of the federal constitution have given the corporation tax prominence which it has not received elsewhere. The formation of international trusts and combines will probably increase its importance in European finance.
Interstate taxation of companies in America and the income derived from colonial investments by residents in England may be referred to in illustration.
The discussions on the Finance Act of 1894 respecting the levying of the estate duty on property simultaneously taxed in the Australian colonies supplies a good illustration.
It should be noticed that the introduction of progression into the tax-system tends to increase the difficulties connected with double taxation, as in the case mentioned in the preceding note.
See Bk. iii. ch. 6, §§ 3,4, and on the whole subject of ‘double taxation’ cp. Cohn, §§ 223–228, Roscher, § 63, Wagner, ii. 406 sq. Recent contributions to the subject are Seligman, Essays, 95–120; Walker, Double Taxation in the United States; Westlake, Economic Journal, ix, 365–374; Flora, Le Finanze degli Stati Composti; A. Garelli, Diritto Internazionale Tributario. Prof. Westlake's article is the first indication of study of the subject in England.
See Wagner, i. 47, 500; ii. 381 sq. 455–459, for a statement of the ‘social’ view.
Cp. Prof. Nicholson's judgment on ‘the social function of taxation.’ Principles, iii. 282–4.
And yet this doctrine has a curious affinity to that of minimum sacrifice. See supra, § 4.
Taxation and Funding, 18. Cp. ‘The problem which every Chancellor of the Exchequer professes to solve is not how to levy taxes in proportion to capacity to bear them, but how to get the money he requires with a minimum of suffering and discomfort to the nation.’ Cannan, Economic Review, vii. 111.
This is, of course, not inconsistent with the doctrine that ‘economy’ is of even more importance than ‘equity,’ which is so vigorously expounded by Mr. Cannan (Economic Journal, 469–80). Cp. Bk. iii. ch. 7, §§ 5, 6.
See Bk. iii. Ch. 2, §§ 6–7; ch. 3, §§ 11–12.
A dictum credited to Sir G. C. Lewis.
The need for drastic fiscal expedients was greater in mediæval times than it is now, and this explains much of the seeming harshness of the earlier regal policy.
The war period (1793–1815) affords a good illustration of the disposition to impose fresh taxes, Dowell, ii. 208–245; cp. also the recent sugar, coal, and corn duties.
Vauban, Dîme Royale, 50–98. A remarkable proposal was placed before the States-General of 1577 at Blois. Besides the duties whose repeal was advocated by Vauban, the salt tax and the customs on wine were to be removed, and a graduated duty on households, called taille égalée, was to be employed. Clamageran, ii. 217–219.
It is doubtful whether this plan should not be really ascribed to Richardson. That was McCulloch's opinion. See Seligman, Incidence, 57 n 1; also Professor Gonner's article on ‘Decker’ in Palgrave's Dictionary of Political Economy.
For Adam Smith's criticism see Wealth of Nations, 371. The idea of a general consumption tax was propounded by Revans, A Percentage Tax on Domestic Expenditure, and by Pfeiffer, Staatseinnahmen, ii. 538–554.
Vanderlint's Money answers all Things appeared in 1734. See Ricca Salerno, Dottrine Finanziarie in Inghilterra, 23–26.
See Turgot's advocacy of the single tax on land. He declares: “Cette proposition est contraire à l'opinion de ceux qui avaient conçu le système de la dime royale.... Ce système peut effectivement éblouir par sa simplicité, par la facilité du recouvrement, par l'apparence de la justice distributive.... Il pêche cependant par différents inconvénients,” i. 404.
Mirabeau, Théorie de l'Impôt, 316; Turgot, ii. 114.
An ingenious plan of this kind was proposed by the late W. N. Hancock. See his General Principles of Taxation as illustrating the advantages of a perfect Income Tax.
Mill, Principles, Bk. v. ch. 2, § 3.
Guyot, l'Impôt sur le Revenu, 222. See also Menier's various works, especially his L'Avenir Économique.
Political Arithmetic. A statement quoted with approval by Sir G. Lewis Northcote, Financial Policy, 309. Mr. B. Holland has recently sought to revive it, Economic Journal, vii. 219–20. As shown in the text, it has no support either from theory or experience; see Economic Journal, vii. 420–22.
Wealth of Nations, 381.
For the English tariff, Dowell, ii. 249–261; Buxton, Finance and Politics, i. 18, 19. For the United States, Wells in Cobden Club Essays (2nd series), 479.
Cp. Leroy-Beaulieu, i. 179–185.
Cp. the well-known saying of Baron Louis, ‘Faites-moi de bonne politique et je vous ferai de bonnes finances.’
Physiocraets, 474. The italics are in the original.
See Bk. iii. ch. i. § 8.
‘The classification of taxes as direct and indirect, it may be as well to premise, has been objected to on the ground that it cannot be consistently applied.... But this objection applies only to the wording of the ordinary definition of direct and indirect taxes, and we may safely continue to employ the terms to denote the radical distinction intended; namely between taxes on the one hand levied either directly from the contributors themselves or from funds on the way to them, and taxes on the other hand on producers or dealers, in the intention that they shall recover them in the prices finally paid by consumers,’ Cliffe Leslie, in Cobden Club Essays (2nd series), 192.
See for further discussion Prof. Bullock's article already referred to (Book iii. ch. i. 1, § 8). He supports the treatment in the text.
See Dowell, Hist. of Taxation, Pref. xii.; Vocke, Abgaben, 1–16.
Cp. Vocke's remarks, Abgaben, 624–5; also Finanzwissenschaft, 355.
See Cliffe Leslie's forcible argument in Cobden Club Essays (2nd series), 252 sq.
Ireland was not included till 1853, but the abatement limit was raised, which probably compensated for this addition, and since then there have been great extensions both of exemption and abatement.
E.g. in Ireland Schedules A and B of the income tax, so far as land is concerned, are taken on a fixed valuation, and therefore cannot expand in the same way as in Great Britain. They may, however, decline, as the landowner has the option of paying on rent instead of on valuation.
Gaudin, Mémoires, i. 217.
Wealth of Nations, 348.
Principles, Bk. v. ch. 6, § 1.
The doctrine that indirect taxation is voluntary is accepted by Sidgwick. ‘It is urged that direct taxation, being inevitable, is a greater burden than an equal amount of taxation voluntarily incurred by purchasing commodities. And I think that this cannot be denied,’ Elements of Politics, 175. He applied it to the case of Irish taxation (Financial Relations Commission, ii. 182), and was followed by Mr. A. J. Balfour. Assuming, however, that a certain amount has to be raised by taxation, it follows that abstinence from the consumption of taxed commodities will make it necessary to tax fresh commodities, and when all have been taxed to use direct taxation, which might better have been employed at first. Taxation which checks consumption is unproductive and burdensome through privation to the people. Prof. Edgeworth ingeniously points out that under indirect taxation there will be ‘a loss of consumers’ rent, which does not occur when the amount is directly subtracted from income,’ and therefore regards taxes on commodities as ‘more burdensome than direct taxation,’ Economic Journal, vii. 568. Consideration of this matter shows the inaccuracy of estimating the weight of taxation by the yield of taxes. Thus the yield of the tea duty in Ireland for 1901–2 is only 25 per cent. more than that for 1899–1900, though the duty is 50 per cent. higher. In studying the effect of taxes the privative side of their action should never be overlooked.
The increase of duties in 1840 by Baring is an instance; 5 per cent. extra all round did not give increased receipts, Dowell, ii. 313.
‘Financial Reform,’ in Cobden Club Essays (2nd series), 189???263; also reprinted separately.
Leslie, ut supra, 204, 205, 207–8, 219, 225–231.
The re-imposition of the sugar duty in 1901, though justified by the need of revenue, is open to the objection of hampering industry.
Bk. i. ch. 4, ‘Administrative Supervision.’
The last-named only through the legislative prohibition, slightly relaxed in the past few years.
The great increase in the English death duties in 1894, and the recent changes in France, support this statement.
See Bk. iii. ch. 6, § 3.
On this difficult subject reference may be made to Professor Seligman's masterly study, The Shifting and Incidence of Taxation, the first edition of which appeared at the same time as the first edition of this work. It, especially in the second enlarged edition (1899), enters into special points both of history and of theory at much greater length than would be allowable in a general manual. The large amount of agreement between Professor Seligman's conclusions and those set forth in the text affords a gratifying confirmation of their correctness. Professor Edgeworth's series of articles on various aspects of incidence are highly important. See his ‘Theory of International Values,’ Economic Journal, iv. 435 sq.; ‘Pure theory of Taxation,’ ib. vii. 46 sq., 226 sq.; ‘Incidence of Urban Rates,’ ib. x. 183 sq., 340 sq., 487 sq. See also the collection of opinions in Memoranda on Classification and Incidence [C. 9528].
See the sections on incidence in the several chapters of Bk. iv. (ch. 1, § 9, ch. 2, §§ 5, 13, ch. 4, § 11, ch. 6, § 16, ch. 7, § 7, ch. 8, §§ 2, 6, ch. 9, § 11).
‘Manifestly there can be no payment by the citizen unless there is a corresponding receipt by the Government.’ Adams, Finance, 388–9.
‘I have no doubt that it is desirable to eschew the use of the term “incidence” of taxation.’ Memoranda, 166.
Tacitus notes the fact in the case of slaves: ‘Vectigal ... venalium mancipiorum remissum, specie magis quam vi, quia cum venditor pendere juberetur in partem pretii emptoribus accrescebat,’ Ann. xiii. 31.
‘Considerations on the Lowering of Interest,’ Misc. Works, 595.
For a full account of the views of the earlier English writers on these questions, see Seligman, Incidence, 11–91 (Part i. Bk. 1).
Bk. iii. ch. 4, § 2.
See Turgot, i. 442–4, for an application of this argument to the case of Holland, which had been brought forward to refute the doctrine of Quesnay.
For the physiocratic doctrine of incidence see Quesnay, Second Problème (ed. Daire), 127 sq.; Turgot, i. 392–444; Seligman, Incidence, 96–112.
There can, however, be little doubt that Adam Smith was much influenced by the physiocratic teaching on this subject.
Wealth of Nations, 357.
See Wealth of Nations, Bk. v. ch. 2 pt. 2. For exposition and criticism of his views see Kaizl, Überwälzung, 3–8, and Falck, Steuerüberwälzung, 30–48.
On Ricardo's doctrine of incidence see Falck, 48–70; Kaizl, 8–11.
Nicholson, Introduction to Wealth of Nations, 9.
On J. S. Mill's differences from Ricardo see Falck, 71–90. He points out that ‘Mill's doctrine of the operation of taxes differs but slightly and only on special points from that of Ricardo,’ 71.
Cp. Professor Seligman's remarks on Ricardo, Incidence, 117–121.
Essays (2nd edition), 384.
Canard's Principles d Économie politique appeared in 1801. See Kaizl, 11–15, for a clear summary, and also Seligman, Incidence, 125–128. An early statement of the theory, limited to taxes on commodities, is that of Alexander Hamilton. ‘Imposts, excises, and in general all duties upon articles of consumption may be compared to a fluid which will in time find its level with the means of paying them.... In the course of time and things an equilibrium, as far as it is attainable in so complicated a subject, will be established everywhere.’ Federalist, 124. Cp. supra, Bk. iii. ch. 3, § 15.
Stein, ii. 550–591. For the views of Thiers and Stein see Seligman, 129–132.
Memoranda on Classification and Incidence, 51–2. (The quotation is from Mr. D. A. Wells.)
lb. 99. It is quite in keeping with this school of thought that he should immediately add, ‘The case of old rates which tend to become a rent charge on the property affected is, however, a very special one,’ thus mixing up the ‘diffusion’ theory with the ‘capitalisation’ theory.
Address on ‘Imperial and Local Burdens,’ Statistical Journal, lxiv. 566.
Statistical Journal, lxiv. 559.
This attitude is adopted in the ‘separate Report’ of Sir E. W. Hamilton and Sir G. Murray, in which the problem of incidence is characterised as ‘insoluble.’ ‘Incidence,’ it is added, ‘must in short be merely a matter of conjecture and speculation.’ Final Report on Local Taxation, 109 [Cd. 638]. Lord Avebury also approaches the same position, Statistical Journal, lxiv. 559. (It may be noticed that he misrepresents Prof. Nicholson's opinion. That writer's assertion, ‘that an answer is impossible,’ is limited to the incidence of import and export duties, it does not apply to ‘rates or taxes’ generally. See his Principles, iii. ch. 10.)
A prominent representative of this attitude is Held, who declares: ‘Die Überwälzung ist gewiss kein reines Phantom, aber sie ist noch weniger im einzelnen Falle nachweislich.’ Einkommensteuer, 145–6.
Lord Avebury remarks that ‘Prof. Bastable also condemns Canard's view.’ He quotes the statement in the text, and adds, ‘But unfortunately he gives no refutation either short or long.’ Statistical Journal, lxiv. 567. Considering that the remainder of the chapter is devoted to setting forth a theory of incidence which is quite inconsistent with Canard's theory, and which, if true, completely overthrows it, this desire for a ‘refutation’ appears rather unreasonable. The best refutation of an erroneous view is the exposition of the true one. As Prof. Seligman well says (in a passage not quoted by Lord Avebury), ‘The optimistic theory is so superficial that it scarcely deserves a refutation..... Our review of the eclectic theories as well as the whole positive and constructive part of the present monograph will show the shallowness of the doctrine. Were the theory true there would be no need for any investigation like the present.’ Incidence, 134. It is only necessary to add that none of the passages of this work quoted by Lord Avebury bears the meaning he appears to attribute to them. See § 9, infra, and Bk. iv. ch. 3, § 3.
The terms in the text are the nearest equivalents of ‘Fortwälzung,’ ‘Rückwälzung,’ and ‘Weiterwälzung,’ which are used by German writers, but with various minute differences. The process called ‘Abwälzung’ by Hock and Wagner should not be regarded as belonging to the subject at all. See Hock, 96; Wagner, ii. 346–8.
Cp. Seligman, Incidence, 148 sq.; also Jevons, Theory, 161 sq.
For the economic theory of taxation of monopoly, see Marshall, Principles. (3rd ed.) Bk. v. ch. 13, § 4. Also the articles by Edgeworth already referred to, especially The Pure Theory of Taxation, No. ii. (Economic Journal, vii. 226–38). Cournot seems to have laid the foundation of the scientific analysis of monopolies in his Principes Mathématiques, chs. 5, 6.
Cp. the more elaborate enumeration in Seligman, Incidence, 181, which applies to taxation in general rather than to the special form of taxation on commodities.
‘The theories of the values of labour and of the things made by it cannot be separated; they are parts of one great whole.’ Marshall, Principles, Preface, viii.
See Ricardo, Principles, chs. 1–6; J. S. Mill, Principles, Bk. ii. Sidgwick, Principles, Bk. ii. chs. 6–9; Walker, Political Economy, pt. iv. Marshall, Economics of Industry (1st edition), Bk. ii. chs. 6–12; Principles of Economics, Bk. vi. chs. 4–11; Nicholson, Principles of Political Economy, Bk. ii.
The increased produce that wisely expanded taxation provides is not a determinable quantity, otherwise it would perhaps be possible to regard it as the source of taxation, as the older theory of State services suggests.
The facts that land may vary in productiveness either from fertility or situation, and that cultivation may be either extensive or intensive, make the statement more complex, but do not alter its essential nature.
See Ricardo, Works, 104; Senior, Political Economy, 123; McCulloch, note 30 to Wealth of Nations.
See Bk. iv. ch. 1.
Turgot, i, 63; Ricardo, 122.
Wealth of Nations, 358.
The effects of a rise or fall in the rate of interest are not quite simple. Speaking broadly, the tendency on balance is that a rise in interest encourages, and a fall checks, accumulation; but ‘the growth of material capital depends on a number of variables,’ Nicholson, Principles, i. 394, cp. 209–10. Cp. Marshall, Principles, 316–8. For an attempt to minimise the effect of the rate of interest on accumulation, see S. and B Webb, Industrial Democracy 610–627.
‘Either the labourers themselves or the public generally as consumers’ is Jevons's statement. Theory, 278.
Prof. Marshall's conception of ‘quasi-rent’ is useful here. Principles of Economics (3rd ed.), 477–8. During the short period the capitalists bear taxation; in the long period the process of shifting is carried out.
‘It is laid down that taxes on the profits of all employments fall on capitalists only, and cannot be shifted on any other class. But there is in reality a perpetual migration along the borders between capital and labour, as there is also an intermediate class who individually may be regarded as capitalists or workmen.’ Leslie, Essays, 390–1.
‘Les taxes établies sur les salariés, ou sur leurs dépenses, sont done évidemment payées en entier por ceux qui payent leurs salaires.’ Quesnay, ‘second Problème’ in Œuvres (ed. Oncken), 706.
‘The recompense of ingenious artists and of men of liberal professions ... necessarily keeps a certain proportion to the emoluments of inferior trades.’ Wealth of Nations, 366; cp. Turgot, i. 444. The salaries of state officials are the only exception allowed by Adam Smith.
See the passages already quoted.
Lord Avebury (Statistical Journal, lxiv. 567) regards this statement as ‘an admission which amounts almost to a surrender’ of the hostile position taken above (§ 4) in regard to the theory of equal diffusion. He fails to perceive the difference between a complicated adjustment and an equal distribution, and has overlooked the explanation of ‘diffused incidence’ as being ‘where the process of shifting affects more than two parties,’ supra, § 5.
The most elaborate attempts at statistical investigation of the shifting and incidence of a tax is the study of Laspeyres on the effects of the abolition of the Prussian ‘meal and meat’ tax. Finanz Archiv, xviii. 46–282. The results reached are quite in accordance with those obtained by the deductive method.
In such governments as England or France the legislature can completely control the fiscal expedients of municipalities and other smaller territorial administrations. The powers of the American ‘state’ are limited (a) by the federal constitution, (b) by the state constitution. Cities are controlled by state legislation. Cp. Bryce, American Commonwealth. i. 498.
See Bk. i. ch. 7, §§ 2 sq.
This is true even of the American colonies in the period between the separation from England and the establishment of the present constitution.
The great measures of legislation on local government are (1) The Poor Law Act, 1834; (2) The Corporation Reform Act, 1835; (3) The Local Government Act, 1888, creating County Councils; (4) The Local Government Act, 1894, establishing Parish and District Councils.
Bk. i. ch. 7, §§ 6, 7, 8.
The following is curious as coming from a strong supporter of free trade: ‘I should be inclined to suggest as a possible means of taxation ... a customs duty or octroi on the admission of articles of general consumption into a locality.’ Giffen in Memoranda, 98; see also Row-Fogo in Economic Journal, xi. 356–7
Bk. iv. ch. 5, § 6.
Local Taxation, 204.
For further discussion of the property tax see Book iv. ch. 4, §§ 3, 4.
Cp. Report of Town Holdings Committee (1891), Questions 176–180.
See Bk. iv. ch. 2, § 5, for a discussion of the incidence of house taxes.
The Final Report of the Royal Commission on Local Taxation recommends the transfer of ‘licenses’ to the local authorities.
Bk. ii. ch. 5, § 3.
Goschen, Local Taxation, 205: ‘It may happen that owing to events at present unforeseen, it will be impossible for the Imperial Exchequer to part with so important a source of revenue as the house tax.’ The Majority Report of the Local Taxation Commission approves of the surrender.
See Bk. iii. ch. 5, §§ 5, 6, 7; Bk. iv. ch. 1, § 9; ch. 2, § 5.
On the question of incidence see Goschen, Local Taxation, 163–168, and the fifth Report of the Committee on Town Holdings, No. 341 (1890), especially Questions 41–5, 88–101, 331 (Sidney Webb); 1804–32, 2024–26 (Munro); 1243–46 (Farrer); 2714–22 (Rogers). The Memoranda on Classification and Incidence, issued by the Local Taxation Commission, contain the latest views on this important matter, see also ‘The Incidence of Urban Rates,’ Edgeworth, Economic Journal, x. 172 sq.; 340 sq.; 487 sq.
The distinction drawn in the text between expenditure for general purposes and that for the particular advantage of the locality has been well expressed in recent discussion by describing rates levied for the former as ‘onerous,’ those for the latter being ‘beneficial.’ The serviceable terms, which seem to have been first applied in this connexion by Sir G. H. Murray (Economic Journal, iii. 701), are employed in the Reports of the Royal Commission on Local Taxation and are best used with direct reference to expenditure. It should be added that the distinction between the two classes has been long recognised by scientific students; cp. e.g. ‘Da die Gemeindewirthschaft in so vielen Punkten eine Art von Mittelstellung zwischen Staats- und Privatwirthschaft einnimmt, so darf man auch bei ihren Steuern nicht vergessen dass zwar manche ihren Ausgaben nur decentraliserte Staatsleistungen betreffen,’ Roscher, 159. Cp. also Cohn, §§ 125–6, and 459.
‘It is one of the fairest and most unobjectionable of all taxes. No part of a person's expenditure is a better criterion of his means, or bears on the whole more nearly the same proportion to them.’ Mill, Principles, Bk. v. ch. 3, § 6. Supported by Engel's researches.
See Rosewater, Special Assessments, 2–21, for instances.
Rosewater, ib. chs. 2, 3. It may be added that the rapid growth of towns in America made this system almost necessary. Owners of property hardly felt aggrieved when they really got full value for the charge. Though they did not contract with the municipal authorities (as not seldom happens in Great Britain), there was in fact a quasi-contract, which saved trouble.
For the provisions in various American towns see Rosewater, 64–65.
Special assessments in the United States represent a capital sum; but as they can be collected by instalments this is really non-essential. Either a fixed rate extending over a number of years, sufficient to pay off the principal expense, funds for which could be obtained by borrowing (cp. Bk. v. ch. 8), or redeemable rent charges seem to be the best technical forms.
See the history lucidly given in Sir E. W. Hamilton's ‘Memorandum’ (C. 9528), reproduced in Memoranda, 11–19; also Chapman, Local Government and State Aid, ch. 7. Each of these ‘grants in aid’ was clearly due to ‘the pressure brought to bear on the government’ by interested parties, as, indeed, Sir E. W. Hamilton's narrative shows. One important item is the cost of the Irish police, which exceeded £1,408,000 in 1895–6, and is still paid by the central government.
These were (1) the license duties; (2) a proportion (one-half) of the probate duty; (3) 6d. per gallon on spirits and 3d. per barrel on beer, i.e. taxes on acts, property, and commodities. In 1894 a portion of the new estate duty equivalent to the previous probate duty was substituted for the latter.
See Final Report of Commission on Local Taxation, ‘The principles on which Mr. Goschen's scheme was founded are in our opinion broad and sound.’ 17; cp.112. For a more unfavourable view see Farrer, Mr. Goschen's Finance, 80 sq.
See the vigorous criticism by Hamilton and Murray in their separate Report, Local Taxation Commission, Final Report, 116–120; and Chapman, Local Government, ch. 8.
It has been alleged that ‘ear-marking’ of certain sources of revenue for the local taxation account is a mere fiction, since, whatever funds may be assigned, it is necessary to impose fresh or retain existing taxation to meet the gap in the national revenue, and it is this fresh (or retained) taxation that goes to the aid of local finance. This is true, but it is equally true of the transfer of any form of taxation, owing to the fact that imperial and local finance are essentially connected. The revenue system is fluid, and the ultimate adjustment always operates on the ‘marginal’ expenditure and the ‘marginal’ revenue. See Bk. i, ch. 8, § 4.
75 per cent. of the coffee duty, 25 per cent. of the spirit duties, the excises on sugar and wine, and 40 per cent. of the postal receipts. See De Parieu, iv. 386 sq. for a full discussion.
Particularly by the Lex Huene of 1885, repealed in 1893; see ‘Die Lex Huene.... und ihre Wirkungen.’ Finanz Archiv, x. 488–498.
i. 712. Mr. O'Meara℄Municipal Taxation, ch. 5℄pronounces in favour of the Continental system of Centimes additionnels, but the much higher authority of Mr. Blunden may be cited in support of the position in the text. Local Taxation and Finance, 72. The Prussian reform which practically abandoned the system of Zuschläge, except in the case of the income tax, also supports it.
For a detailed account of Prussian local finance and the recent changes therein, see Wagner, iv. 64–97; also ‘Local Government and Finance in Prussia,’ Diplomatic and Consular Report, No. 487 (year 1899), and J. Row-Fogo, ‘Local Taxation in Germany,’ in Economic Journal, xi. 354–78. The last-named writer seems to have in some way misunderstood the brief statement in the text, which is in accordance with the facts.
Farrer, Mr. Goschen's Finance, 54.
Mr. Row-Fogo (Economic Journal, xi. 355) refers to the text, and confesses himself ‘entirely unable to appreciate the weight of this argument,’ which is natural enough, as he has misconceived its meaning. The question is not one of ‘making up the roll.’ The real point is the amount of discretion given.
The various Reports made by the Commission on Local Taxation agree in recommending additional aid from the central Government to local finance. The chief feature of difference is respecting the form of the relief. The proposal of a definite grant from the Consolidated Fund, adjusted at intervals of ten years, and equal to one-half of the ‘onerous’ expenditure (see supra, § 5), is strongly urged in the separate Report of Sir E. W. Hamilton and Sir G. Murray. The crux of such schemes is the discovery of a just method of distribution. The plans suggested for this purpose seem to involve a series of arithmetical calculations resting on no solid basis of equity. See Final Report [Cd. 638], 23–32, 73–83, 133–140.
Bk. i. ch. 7, § 9, for these duties.
Mr. Hewins mentions Milles, a commissioner of customs, as advocating ‘certainty’ and ‘indifference of assessment’ in respect to taxation of commodities. English Trade and Finance, xviii.
For the maxims of the writers mentioned in the text see Vauban (ed. Daire), 47; Roscher, § 44, note 1; Garnier, 324. For Verri see Ricca-Salerno, Dottrine Finanziarie in Italia, 276–282.
Quesnay's maxims have been already referred to: Int. ch. 2, § 6. Those of the elder Mirabeau are to be found in his Théorie de l’ Impôt, 201, and are also given by Roscher ut supra, and by Garnier, 325.
Thorold Rogers speaks of ‘The famous canons of taxation which Adam Smith borrowed from Turgot’ (Economic Interpretation, 115), but gives no evidence in support of his statement, which is clearly unfounded. On the interesting question of Smith's relation to Turgot, see Léon Say, Turgot, 45; Rae, Life of Adam Smith, 203 sq. Cannan, Introduction to Adam Smith's Lectures, pp. xxiii-xxiv. According to Cunningham, ‘Adam Smith's celebrated maxims about taxation are improved in form, but in substance’ are adopted from Moreau de Beaumont. English Industry and Commerce, ii. 436 n.
The prevailing sentiment of his time is conveyed by J. S. Mill when he calls the Smithian maxims ‘classical.’ The extreme limit of hostile criticism is reached by F. A. Walker, who declares that ‘These maxims have been quoted over and over again as if they contained truths of great moment, yet if one examines them he finds them at the best trivial, while the first and most famous cannot be subjected to the slightest test without going all to pieces.’ Political Economy, 489. Cohn's judgment is quite as severe. § 333.
Wealth of Nations, 347–8.
Principles, Bk. v. ch. 2, § 1.
Nicholson, note 45 to Wealth of Nations, 418.
Wagner, ii. 292; cp. Sidgwick, Political Economy, Bk. iii. ch. 8, § 6.
F. A. Walker, Political Economy, 490. See also Bk. iii. ch. 3, § 14, and the words there referred to for the discussion of double taxation.
Cp. the questions discussed by the Physiocrats and Adam Smith, respecting the effect of Dutch taxation on France and Germany, and the movement of capital in order to escape taxation. Bk. iii. ch. 5, §§ 2, 7.
Nouveaux Principes d’ Économie Politique, 2 vols. 1819 (2nd ed. 1827). For Sismondi's general position see Ingram, History of Political Economy, 165 sq.; also Roscher, Geschichte, 845; and Cohn, Grundlegung, § 85.
See Ricardo, Works, 87–9; Bentham, Theory of Legislation, 107–8; also cp. Bk. iii. ch. 2, § 5, and ch. 3, § 10.
See passages referred to in preceding note.
These are given at length in his Traité (ch. 13), 156–165.
According to Hock taxation should be (1) just, (2) logical, (3) economical. Held lays down the rules of (1) generality, or that all who have incomes should contribute; (2) equality, i.e. income should be taxed without reference to its source; (3) the greatest possible care of the national well-being and its increase. Einkommensteuer, 121.
Wagner divides the chief principles (oberste Grundsätze) into four classes, arranged in the order of their importance, and distinguished as (a) financial, (b) economic, (c) ethical, (d) administrative. Under (a) come (1) taxation should be adequate to meet expenditure, (2) it should be elastic; under (b) are placed (3) the sources of taxation should be rightly chosen, (4) the kinds of taxes should be selected with reference to their effects; class (c) includes rules (5) taxation should be general, and (6) it should be proportional; while, finally, class (d) contains the rules that taxation should be (7) determinate, (8) convenient, and (9) collected with the smallest cost, in fact Adam Smith's last three maxims.
‘Ilier muss die Finanzwissenschaft vielmehr specialisiren und casuistisch verfahren, als sie bisher gewöhnlich gethan hat,’ ii. 305.
Bk. iii. ch. 2, § 4.
See Bk. iii. ch. 3 passim.
The experiences of the United States Treasury since the Civil War may be referred to as supplying an excellent series of illustrations. Enormous surpluses have been followed by considerable deficits, accompanied by grave economic disturbance.
President Hadly in his valuable Economics lays stress on the advantages of ‘certainty,’ but he connects it with proper assessment, which is essential in order to avoid ‘uncertainty of primary incidence,’ Economics, 451–9. Journal of Political Economy, v. 86–9. This, however, seems as much a matter of ‘equality’ as of certainty.
Wealth of Nations, 286.
Cp. with the maxims given in the text those enumerated by Mr. C. S. Devas, Political Economy, 606. It would be possible to frame many derivative rules℄as e.g. ‘Taxation should be diversified’℄but they could not lay claim to general application, and most of them belong more fitly to the treatment of special taxes (Bk. iv.).