Front Page Titles (by Subject) BOOK IV: public revenue—Concluded - the several kinds of taxes - Public Finance
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BOOK IV: public revenue—Concluded - the several kinds of taxes - Charles F. Bastable, Public Finance 
Public Finance. Third Edition, Revised and Enlarged (London: Macmillan, 1903).
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public revenue—Concludedthe several kinds of taxes
taxes on land
§ 1. In the preceding book we have dealt with the subject of taxation under its general aspects as the principal element of the financial system. We have now to complete our inquiry by examining the characteristics of the different kinds of taxes, and we may begin this discussion with one of the oldest and most widely employed forms of compulsory contribution—that levied on land. The interest and importance of this kind of taxation need not be insisted on. Perhaps some capitation taxes or a rude form of the property tax can claim a higher antiquity, but in ancient, mediæval, and modern times, in backward and in progressive societies, we meet with something in the shape of taxation on land as one of the primary agents of production. The economic nature of the impost and the particular methods adopted vary; the existence of some form of public charge on land is almost universal, and shows no sign of decrease. Greater financial knowledge and more efficient regulations produce considerable changes. Indeed, it is this development that chiefly needs our attention. From the first feeble attempts of early societies up to the elaborate processes of modern administration, we can trace progress through a series of stages which illustrate the historical movement.
§ 2. Regarding land itself as the ‘object’ to be taxed, the most obvious ‘unit’ in a new community would be that of a given area. Assume that none but very fertile land is cultivated, and that only in a simple manner, and the tax by area will be also the just one. Each unit is of about the same value and employs about the same amount of capital and labour. The early taxes on Jugera in Rome and on ‘hides’ in England were probably at first based on this system, though they soon departed from it, and at present a few of the English dependencies retain it.1 But as soon as differences in qualities of soil and in modes of cultivation become noticeable, the method ceases to be fair.
Another form of land tax, that in proportion to the produce, is of greater antiquity. Eastern sovereigns receive their revenue usually in this manner. One-fourth, as in India, one-fifth, as in Egypt, or more frequently one-tenth of the yield was claimed by the monarch. This ‘tithe system,’ as it may be called, arose out of the ruler's part-proprietorship of the soil. The proportional tax on produce was closely analogous to a métayer rent. It was partly adjusted to the fertility of the land, and did not press so heavily on the poor soils as the area tax. Under a competitive system its immediate burden would fall on the consumers of agricultural products through the rise of price, though the ultimate effect would be to check cultivation, and therefore to lower rent. As the system has been generally applied to societies in the customary stage the pressure came on the cultivator, who is at once the producer and the chief consumer of those commodities.
These primitive methods are improved, either by arranging land in classes according to its quality and applying a different rate to each class, or by varying the proportion of produce taken according to the method of cultivation. As soon as the elements of fertility and proximity to market begin to tell, it is evident that a uniform rate falls with undue severity on the poor and distant lands, either hindering their cultivation or raising the value of all produce. Consequently we meet efforts at differentiation in various countries. Under the Roman Empire land in some provinces was divided into that of first, second, third, or other fertility, and the rate was adjusted accordingly; in others one-fifth or one-seventh of the yield was taken.1 In later times the Duchy of Mecklenburg had its land graded into three classes, with a different rate on each, and some of the Indian assessments have a like idea as their base.2 These modifications show some consciousness that the real value of the agent, land, is not to be measured either by its surface area or its gross produce. They are, however, but imperfect attempts at reaching the true aim of a land tax, the value embodied in the object. A tithe or other proportional produce tax does not allow for the expenses of production; as equal amounts of produce are often due to very different quantities of outlay, such a tax discourages the employment of capital and is practically inconvenient in the form of assessment.3 A classification of soils gives some, though insufficient, recognition to the influence of natural fertility. Far more is required. The effort to get at the true value of the ‘object’ is attained in respect to the land tax when it is levied on the net yield. The capital of the cultivator and the profits due to it have to be estimated in order to ascertain the income derived from the soil itself. Political equity and financial expediency have both contributed to this result; the fairest and most productive land tax is, on the whole, that which takes the net return as its standard. Fiscal practice tended in this direction. The financial reform of Diocletian seems to have adopted a unit of value, not of area (Jugum), as the base for taxation of land. The English ‘hide’ came to be regarded as the ‘carucate’ of variable area but constant value.1
The mediæval land taxes are so much mixed up with rent and the incidents of tenure that little stress can be placed on their form; they are often parts of the older property tax, and only disentangled from it by degrees. Early English taxation ‘reached the landowner through his cattle, farming stock and corn and other produce of lands,’2 and the later subsidies had a rate on land as one of their component parts. In France the Taille was developed from the feudal dues and became permanent in 1445. But wherever the system of taxing land had to be applied, the idea of taking its value as the real object of taxation came to the front, though the difficulties in carrying it out caused the frequent adoption of the ‘apportioned’ tax, as in the case of the Taille, both the English 'tenths and fifteenths, and the subsidies, and, too, in the German and Italian land taxes.3 The defects of these systems, with their exemptions and inequalities, made reform essential.
§ 3. It is far easier to point out the conditions of theoretic justice than to overcome the practical obstacles to arriving at the true net yield. The land tax system requires as its basis a valuation, and in the attempt to furnish this requisite various methods have been tried. Perhaps the simplest is that which follows the indications of the market, and uses as its guide the rent at which land is let. There is an obvious advantage in keeping close to the facts, but there is also great difficulty in ascertaining them correctly and following their successive changes. Adam Smith approved of the use of registers of leases, which he would make compulsory, and by their aid assess the land of occupying owners.1 The selling value is another possible criterion; it is evidently related to rent as principal is to interest, and for short periods the proportion is steady. A tax directly based on the selling value of land is, however, a tax on property rather than on income.
The difficulties in ascertaining the actual rents, and in some countries the large proportion of occupying owners, have popularised the system of determining the value of land for taxation by official assessment based on survey and valuation. This method is evidently the older one. Thus the Roman provincial land tax had a survey as its foundation followed by valuation.2 Domesday Book is a less perfect example of the same kind in England, and in one form or another valuations were common enough in the Middle Ages, but were in general used only for the ruder forms of land taxation, and dealt with the gross produce from the soil or its supposed capital value.
Refinements in fiscal methods require a corresponding elaboration in the valuation, or, to use the serviceable French term, cadastre,3 on which they depend. Most of the controversies about the land tax turn on the method of cadastration, and the expediency of its revision at stated periods. For the completion of a cadastre a series of processes is needed; there must be the measurement of the surface, and its delineation by maps; the boundaries of properties must be marked, and the ownership specified. To this technical work the economic task of valuation succeeds. Estimates of produce and prices and of the cost of cultivation form the data on which the ‘net annual value’ is calculated. Each of these steps involves much labour, and is liable to error, more particularly in the economic part of the work. Produce must depend on the method and skill employed in cultivation, prices on many different conditions, and both, especially the latter, are fluctuating. Besides, to be really useful, a fiscal survey must deal with minute portions of the soil; each distinct piece (or parcelle) should be valued and revalued at intervals. Such an inquiry takes a long period to accomplish for any country, and by the time it is completed the results for the districts first treated have become antiquated.1 However perfect when first started, a valuation must soon fail to represent the actual position of the land it deals with. The opening of new lines of communication, the adoption of a different style of farming, and the growth of towns will completely alter the old results.2 The imperfections of the cadastre are grave enough from a theoretical point of view, but they also entail much hardship and injustice. Some persons and districts are unduly favoured, leaving to others to make up the amount that they have escaped paying. For example, in France (where the land tax is apportioned), some proprietors are taxed four times as heavily as others. The differences in Italian taxation were still greater, owing to the use of different cadastral bases for different districts.3 Between the difficulties that adherence to an old valuation causes, and those due to the expense and confusion of incessant renewals of the cadastre, it appears that the safer course is to keep the original valuations checked by the actual letting values of land. Apart from the expense of continual revaluation, it is also true that the ‘net annual value’ or the ‘net income’ of official estimations is in a sense hypocritical, as it depends on the accuracy of the assumptions made for the purpose. There is, however, the qualifying fact that a well-executed cadastre is of use for other purposes. A careful survey is essential for facilitating the transfer of land, so that it is merely the economic part that could in any case be dispensed with. There seems to be no great obstacle to a gradual revision of the general valuation, supplemented by local valuations strictly on the letting value. In this way the former would be a slowly changing norm, while the latter would recognise the actual movements of land value.
§ 4. But whatever may be the hindrances in the way of securing a perfect adjustment of the land tax, there is no doubt that most financial systems use it as a substantial resource. The so-called English land-tax has really been converted into a rent charge;1 but Schedule A of the income tax comprises land and houses, the former in 1899–1900 being £52,814,000 in value, yielding at the rate of 8d. less than £1,800,000. To this sum has to be added the portion of local rates falling on land. Using the proportion of land to houses under Schedule A as a guide to the division of rates between the two classes, we would get about 23 per cent. for the share of land. As the rates for 1898–9 were over £38,600,000 this method would give £9,070,000 as the local charge on land for England and Wales.2 As, however, the poor rate valuation differs materially from that employed for income tax, it becomes necessary to consider the estimated distribution of local burdens. According to Sir H. Fowler, land in 1891 bore a little over 15 per cent., while houses contributed nearly 85 per cent.; or, to put the matter in a simpler form, land paid only one-sixth, against five-sixths derived from houses. Thus the true contribution from land in England and Wales would be somewhat over £6,400,000.1 Scotland and Ireland show a larger proportion; 50 per cent. would in their case be the share of land, and, we may say that, of the total £7,000,000, £3,500,000 would fall on land. The extent to which the taxation of houses falls on ground rent is—at least for statistical purposes—an insoluble problem; but, omitting it for the present, we get a total taxation of nearly £10,000,000 on land for the United Kingdom. How far this represents a charge on pure land value, as distinct from that on investments of capital, is questionable. We need not in any case hesitate to ascribe the greater part to the value of the land, not to the improvements. When we add to the above the tithes and tithe rent charges, so far as they are devoted to ecclesiastical or other public purposes the total reaches £12,500,000. Allowing for considerable under-valuation in the figures of Schedule A,2 it is nevertheless beyond doubt that land contributes largely to the public requirements.
At the same time we must remember that a great deal of this burden is of long standing; the income tax has been for sixty years in continuous operation, and, in the early part of the century, the poor rate was excessive. There is no evidence of new and oppressive charges being imposed. The growth of local taxation, as Lord Goschen has shown,3 has chiefly affected the towns, while, until recently, the rent of land was rising.
§ 5. On passing to France we meet with a very different system of land taxation. The old Taille, whose defects were universally recognised, was supplemented in 1710 by the Dixième, and from 1748 a Vingtième was levied. These ‘tenths’ and ‘twentieths’ were rather income, than pure land taxes, but were abolished at the Revolution along with the Taille, and the modern system was inaugurated.
The decree of December, 1790, established the Impôt foncier, which was to be apportioned on all landed property in proportion to its ‘net revenue.’ This phrase is evidently due to physiocratic influence, and was explained to mean what remained over after all expenses were deducted from the gross produce. The tax was to be a fixed sum apportioned among the contributories, and to be payable in money. It was not to exceed one-sixth of the net revenue, and, on the loose estimate that 240,000,000 francs would be one-sixth, the contribution was fixed at that amount, with an additional 60,000,000 francs for local taxation. The disturbances of the Revolutionary period hindered the collection of this impost, and the unequal pressure, owing to the absence of proper valuations, was the ground of successive reductions, by which the total amount, from being 240,000,000 francs in 1790–6, fell to 150,000,000 in 1821. In 1835, the increased value of house property, which is included by the law of 1790, was taken into account. The additional centimes—really an increase of the tax—were given up in 1850, and by 1880 the total amount was almost 174,000,000 francs (£7,000,000). The extra centimes for the departments and communes were very nearly trebled in amount since 1820; in 1880 they were 94,000,000 francs and 82,000,000 francs respectively.1 The loud complaints of agriculturists as to the inequalities and unjust pressure of the Impôt foncier led to a reform in 1890, by which the house tax was separated from the land tax, and the latter, which had been 118,000,000 francs, was reduced to 103,000,000 francs. By a law of 1897 the smaller properties were relieved. The result has been that, in 1900, even with an extra charge of 8 per cent. on the original general tax, the total taxation on land stands at 253,000,000 francs or £10,120,000. The increase of house property and buildings has supplied a new object for the heavier taxation, as in the case of England. The land tax remains one of apportionment, while the house tax, or more strictly that on land with buildings (Propriété bâtie), has become rated, and is fixed for the present at 3.20 per cent. The next step in reform will probably be the abandonment of the apportioning of the land tax in favour of the more suitable rated system.1
§ 6. The Italian land tax is a development from the taxes of the several Italian States. As the simplest course, 110,000,000 lire was the amount fixed for apportionment among the different divisions. Measures of reform have been since attempted. The tax on buildings was separated in 1865 and made a rated tax, and redistributions of the total charge among the provinces were carried out. The defective scheme of the old cadastres has led to the enactment of a law prescribing the preparation of a new and uniform one for all Italy. The variations in amount of the land tax have been from 125,000,000 lire to about 96,000,000 lire, i.e. speaking generally, from about £4,000,000 to £5,000,000, but the local taxation has to be added. Thus for the year 1886–7 the provincial tax was 53,000,000 lire and the communal one 76,000,000 lire, which, with 110,000,000 lire, the general land tax for that year, made a total of 240,000,000 lire (£9,600,000)—a much higher charge than that of France. In qualification it must, however, be noticed that the whole taxation of Italy is far heavier. The most serious grievance is found in the instances of heavily taxed communes, where the greater part of the value of land is absorbed in taxation. So far has this been carried that there have been many cases of evictions by the State.1 Inequality in distribution and excessive weight in amount are the gravest possible defects in any tax. The new valuation, though costly, will remedy the former, but the latter is a question of policy as well as finance.
The Spanish land tax, which received its present form in 1845, includes stock, and is therefore more primitive. Owing to the want of a correct valuation, the charges are very imperfectly distributed. The proportion fixed for 1890–1 was 15½ per cent. on those places that have given a satisfactory declaration of value, for others 17½ per cent. The yield for 1900 exceeded 160,000,000 pesetas (£6,680,000), with over 17,000,000 pesetas (£680,000) for local purposes. The law of March, 1900, makes provision for a proper valuation of houses, land, and cattle, which will increase the efficiency of the land tax.
The Portuguese land tax is closely on the lines of the French Impôt foncier. It was originally rated, but since 1852 has been apportioned; it, is however, proposed to return to the rated method. The yield is nearly 3,000,000 milreis (about £650,000), after paying assessment expenses.
Belgium has a rated tax based on an elaborate valuation. Up to 1867 the method of apportionment was employed. The annual amount for national purposes for 1900 was over £1,000,000, with additional centimes for local government of nearly £700,000.2
Greece, which possessed the tithe system till 1800, has now a rather primitive but yet complicated group of ‘land taxes’ on labouring animals, on area, and certain products, yielding altogether about £500,000.
§ 7. The land taxes are confined to the several States of the German Empire, the imperial revenue being derived mainly from indirect taxation. With numerous differences in detail, there is the general system of basing the tax on official valuation. The Prussian land tax, inherited from the 18th century, was reformed in the period 1810–20; a new valuation was arranged, and inequalities in the distribution between the different provinces modified; but the survivals of the older system of privilege prevented complete success in this object. In 1821 its yield was under £1,500,000. These inequalities were dealt with by the legislation of 1861. The house tax was separated, and for the land tax the amount was fixed at 10,000,000 thalers (£1,500,000) from 1865, and a fresh valuation carried out The new Prussian provinces, acquired in 1866, added 3,200,000 thalers (£480,000) to this fixed sum, giving a total of £2,000,000. The amount of the additional local charges was somewhat uncertain, but for the year 1880–1 the communal and provincial extra land taxes were equal to those of the State in amount (£2,000,000), giving a total burden on land of £4,000,000, independent of the action of the income tax.
Under the legislation of 1893 the state land tax, in common with the house and business taxes, has been surrendered by the Prussian government in order to provide the local subdivisions with adequate objects of taxation. This long-proposed transfer only came into effect for the financial year commencing April 1, 1895.
Each of the smaller German States employs some form of land tax. Bavaria shows a less developed form in its reference to gross produce as the basis of calculation. The cadastral surveys are in most cases elaborate, and serve other than fiscal purposes, such as facilitating the transfer of land. The communes of the several States also receive contributions through additions to the land tax.1
Austria has developed a land tax on a similar type. By the reform of 1817 the valuation of the 18th century was to be replaced by a new one completed in 1856. The house tax was separated in 1820. In 1879 a law for revision was passed, and in 1881 the annual amount was fixed at 35,190,000 florins for fifteen years, a new valuation to be then made. The Hungarian land tax was almost the same sum (35,000,000 florins), and the local charges in Austria levied on land were believed to reach the like amount. Thus the burden on land in Austria proper is under £7,000,000.
Taxation of land in the United States is imposed through the general property tax, which, as we shall see, presses with undue weight on real property, but its discussion belongs to a later chapter.2 Nor need the Indian land revenue be again considered.
§ 8. The foregoing notices of the land taxation of some of the principal countries bring out its characteristic features Specially worthy of observation are: first, the considerable amount contributed on the whole, and to both general and local revenues. The absolute amount appears to be highest in England, but everywhere a good percentage of the net annual returns is taken for public use.3 Another very common circumstance is the employment of the system of apportionment. A total fixed sum is thus secured, and as each district must pay its part, it has a manifest interest in making all contribute fairly; nevertheless, the method has the great defect of rendering an important part of the tax revenue inelastic, and it is likely to reduce the land tax to a rent charge, as has happened in the case of England. The rated or percentage system is free from these faults, and is therefore the best suited for modern finance. A third question intimately connected with the land tax is that of valuation. If the ‘rated’ system be used, it is necessary in the interests of justice that the basis on which the estimate of value is made should be uniform. Thus e.g. the English valuation of land is believed to be closer to the true value than the Irish one, from which it follows that the income tax in its A schedule is not the same in the two countries.1 The Italian land tax affords a more extreme instance of the same evil. In all countries this inequality must in some degree exist between individuals and smaller districts, but this fact only strengthens the claim for all practicable efforts to secure the removal of proven injustices. Even if it be impossible to alter quickly the particular forms of the tax, there is an advantage in knowing the amount of inequality, which can then be compensated by the adjustment of other taxes.
Finally, the land tax is what has been called a ‘real’ tax; it deals with the object, land, and takes no note of the position of the proprietor. When properly developed it is proportioned to net produce, and therefore allows for the expenses of working the soil. For the same reason it should not take indebtedness into account.2 Charges on land are a part of the net return, and have no claim to deduction. A variable land tax may therefore press with great severity on encumbered proprietors who have to pay the tax on the interest of their debts. Any attempt to remedy this evil has the necessary result of creating a partial tax on interest of capital, and, if unaccompanied by taxation of other forms of capital, would either discourage loans to owners of land or raise the interest on mortgages. The conclusion suggested by these facts is that the land tax had best be absorbed in a general income tax, when part of the burden would, as under existing English arrangements, be paid by the creditors. If, on the other hand, the distinct land tax be retained, two courses are open: either to retain it at a fixed amount, when it becomes a rent charge, an undesirable proceeding, or to give it up to local bodies. We have seen that taxes on real property are a good form of local revenue,1 and both in France and the United States this treatment, which is in accordance with British practice, has been proposed. The actual condition in Germany with its numerous smaller States partly attains this result, which has been reached in Prussia by the reforms of 1893.2
§ 9. The incidence of the land tax is a final question for consideration. In its ruder forms the pressure fell chiefly on the actual cultivators, though the ultimate effect of heavy taxation must have been felt by the proprietors in the check to agricultural improvement and the diminution in their dues. On the hypothesis of competition, a proportional tax on produce, e.g. a tithe, would tend to raise prices, and thus at first fall on the consumer, unless there was free importation of the article from abroad. Such was Ricardo's reasoning in respect to tithes, which had to be paid from land at the margin of cultivation, and which consequently yielded no rent. He failed to see the inevitable effect of dearer food in retarding the progress of the community, and thereby preventing the increase of rent. The pressure of a tithe is surely, as time elapses, in greater degree passed on to the landlords.3 As soon as net return is taken as the standard for taxation, rent is the element affected. A land tax, therefore, in its developed form, may not inaccurately be regarded as a tax on rent, and the general principles of incidence applied to it. In actual working, however, various complications arise. The action of competition is not always found in full force, and so far as any portion of the pure economic rent is held by the immediate payer—tenant or other—he has to submit to the burden.1 A land tax may also affect the interests of labour. If investment of capital in agriculture is checked, and if the rate of wages is easily affected by the action of employers (as has been often the case), taxation on the cultivator may be shifted, not to the landlord by lowering rent, but to the labourer by lowering wages, or in a time of rising prices by preventing their proportional increase in money.2 Again, the fact that the land which is the object of taxation often owes its value to the capital sunk in it makes the burden fall on the yield of fixed capital, a point which has been already considered.3
A more difficult and disputable point arises in connexion with the incidence of a long-continued land tax. Here it is said that the tax is really a deduction from property. As land is sought for its revenue, whatever lowers its revenue lowers its selling price, and therefore a land tax falls altogether on the possessor at the time of its imposition. Subsequent acquirers take the land subject to the burden, and pay a lower price in consequence. This process of ‘amortisation,’ as it has been called, makes the subsequent removal of the tax undesirable; the persons who have lost by its establishment are not the same as those who gain by its remission. A purchaser buys land at a lower price in consequence of the tax, and gains a like advantage by its removal; in fact, he is allowed for it twice over, once at the time of purchase and again at that of remission.
The elements of truth in this theory, which has received much favour, appear to be the following: (1) as previously pointed out,1 when a land tax becomes definitely fixed, so that it can be foreseen, or even capitalised and redeemed, there is no inaccuracy in speaking of it as a charge on land which lowers its selling price; it is just the same as a mortgage, and is so regarded by purchasers; (2) a stable tax of any kind has some of the advantages to which Canard gives such exaggerated importance. Its pressure is more regular, and therefore less felt. An invariable land tax undoubtedly has this in its favour. On the other hand, there is no reason for regarding the modern land taxes as perfectly stable and fixed. In transactions with respect to land there are not merely the existing but the prospective burdens to be taken into account. To assume, e.g. that the French ‘centimes additionnels’ or the English local rates have been ‘amortised’ would be an obvious error. We cannot foresee the future movement of taxation in respect to land, and we cannot expect that the present systems will always continue. Another important consideration is the relation of land taxation to the other forms. If it should happen to be unduly heavy there would be a tendency to depress the value of the land so taxed, just as if it were too light its effect would be the opposite; but this is characteristic of all taxation. Tea, sugar, or any other commodity will have its value for the time being affected by the creation or remission of a special tax on it. But where there is a due proportion of taxation to the several forms of income, the investor in land will only receive the same proportional return as he would obtain in other directions. Any alteration in the land tax ought to have as its motive the effort to secure a more equal distribution of burdens, and to this there can be no valid objection. At the same time, where a tax has been recognised as at once special and definitely fixed, it seems to pass out of the ordinary category of taxes and into that of charges, a transformation only possible in the case of durable productive wealth, and most prominent in respect to land.
taxes on capital and business
§ 1. For fiscal purposes durable capital has the closest resemblance to land—the two are indeed sometimes inextricably mixed up together—and of its different forms houses and buildings generally are the most important from the same point of view. Sometimes as an integral part of the land tax, but more often with a distinct position, we find the charge on houses used both for local and general purposes. The reasons for its employment are to be found, partly in its connexion with land, partly in the universality of the use of houses, which extends taxation to all classes, partly in the convenience and readiness of assessment, and finally in the belief that the value of a person's house was a satisfactory test of his income. These considerations have very different weight at different periods. In early times the one object was to secure receipts, and for this purpose houses, or something connected with them, were convenient objects of imposition.
As in the case of land, the precise form adopted varied; at first houses were taxed simply as part of the land on which they stood, being treated as a particular kind of improvement. The hearth or chimney tax was in use in the feudal period. The substitution of windows for chimneys made another variety, to be succeeded by taxation assessed according to the class of house, or the letting value. The problems and course of development of the land tax reappear with modifications in the case of the house tax.
§ 2. England shows this development. The hearth tax, established in 1662, was so unpopular that it was abolished in 1688, but soon replaced by the window tax, under which a scale of payment was fixed—ten windows and under, 1s., increasing at a higher rate for a larger number. With several changes in the rates, and with additional stringent provisions to check evasion, the tax continued all through the eighteenth century. In 1815 its yield was about £2,000,000. Sounder ideas of taxation led to its repeal in 1851. Adam Smith's suggestion that inhabited houses should be taxed on their annual value was adopted in 1778, in addition to the existing window tax. Houses under £5 value were to be free; those between £5 and £50 to pay 6d. in the pound (2½ per cent.); those over £50, 1s. (5 per cent.). Several increases of the tax were made for war purposes, till in 1808 the rate on houses of £40 and over was 2s. 10d., or nearly 15 per cent. By a curious selection the house duty was repealed in 1834 instead of the window tax, but on the repeal of the latter in 1851 it was reimposed. Houses under £20 were exempted, and business premises paid only two-thirds of the rate on ordinary houses, i.e., 6d. and 9d. per pound respectively. The last change has been made in 1890, when Lord Goschen restored the old system of grading. Houses between £20 and £40 pay only 3d., and those between £40 and £60, 6d., the corresponding rate on business premises being 2d. and 4d. The yield of the tax was by those changes somewhat reduced from its highest point of £2,000,000; in 1900–1 it amounted to £1,700,000.1
To arrive at the total pressure of taxation on buildings we must add (1) the income tax in schedule A, amounting at 8d. to about £4,850,000, and (2) the great mass of local rates. Taking the figures in the last chapter, if the balance of rates can be assigned to buildings, we would get the enormous sum of £35,700,000, as their local taxation.1 The occupier, the ground landlord, and, in the case of business establishments, the consumers of the commodities are all participants in the burden, but we must again note that a great deal of this expenditure is economically reproductive, so that the taxes are paid out of a fund created by their employment.
§ 3. France has not reached the same stage of development as England in regard to this form of taxation. The separation of the land and house taxes has only lately been accomplished, and the door and window tax still exists. in addition to the Mobilier, or tax on letting value. The latter, suggested under the monarchy as a substitute for the personal Taille, was in its origin, as established by the Constituent Assembly in 1791, a tax on income, based on the presumption that house rent was a measure of its amount, but owing to the belief that income increased more rapidly than the cost of housing, the tax was on a progressive scale so calculated as to be proportional to income, and some qualifications were made by using other elements. In 1798 these refinements were abolished, and the Mobilier became a house tax. The tax (which is combined with the personal tax, to be discussed in the next chapter) is apportioned, and amounts to about £3,500,000, of which nine-tenths come from the house tax part.2 The contributions to local taxation through the additional centimes1 are of an even larger amount.
The door and window tax was established under the Directory in 1798. At first a rated tax, it was apportioned in 1802, and, with the exception of 1831–2, it has so continued, with a steady increase in amount. From a little over £500,000 in 1830 it has risen to nearly £1,600,000 in 1885, and £1,900,000 in 1900, while the additional centimes, that were only £100,000 in 1830, exceeded £2,000,000 in 1900. The total may therefore be regarded as about £4,000,000, obtained by an inconvenient and vexatious method.2 To the foregoing the building tax, now separated from the pure land tax, adds a sum of £3,000,000 for the principal, with additions coming very close to £3,600,000 (£3,150,000 of that amount being for the communes and departments in about equal proportion). As the tax is now a rated one the increase in value of house property, even if the present rate is maintained, will add to the yield. The total burden on houses is therefore, speaking broadly, about £17,000,000.3
Italy had, as we saw, established a distinct house tax in 1865. The amount obtained by it in 1866 was £1,300,000; by 1886 it had more than doubled, being nearly £2,650,000. Moreover the local charges, superimposed on the principal, came to almost the same amount. For the year 1892–3 the total State taxation amounted to £3,435,000. Though the absolute amount is much less, the pressure is probably greater than in England or France.1
Belgium, Spain, and Portugal do not separate their land and house taxes; it is therefore impossible to deal with them under this head.
The Prussian house tax was made distinct in 1861, and separately collected since 1865, being proportioned to value—2 per cent. (or 4 per cent. in the case of houses let to tenants). It grew with the increase of wealth from £850,000 in 1878 to over £1,500,000 in 1889–90. The local charges came to less than half that amount, giving a total of about £2,200,000.2 Like the land tax it passed from the State to the local bodies in the financial year 1895–6.
In most of the smaller German States the house tax is a part of the land tax. Bavaria, as in the case of land, applies the ‘area’ and ‘productive power’ principle to the taxation of houses.
The Austrian house tax, in existence since 1820, yielded for 1893–4 about £3,000,000, and that for Hungary, about £1,000,000, not including the local charges.3
§ 4. From the facts just given, we can see that the course of development in respect to the taxation of buildings is towards taking their value, or, if possible, their annual yield, as the basis of assessment, and at the same time towards separating them from land. The French door and window tax may, therefore, be at once condemned as a pernicious survival of an antiquated method: its abolition, or absorption in the mobilier, is merely a question of time.
The problem of assessment has usually been dealt with in the way approved by Adam Smith, but with a large allowance for expenses and repairs, varying in the different countries. On the whole, it is easier to ascertain the letting value of houses than of land, and there is, besides, the element of cost of construction to be used as a corrective. Some difficulties, however, certainly exist. It is not easy to deal with deterioration and the resulting loss of value, more particularly in respect to buildings employed in production. Revaluation at short intervals is the only suitable way, but it is both troublesome and expensive. The opposite case, i.e. where improvements have been made, is also complicated. Increased value ought certainly to be taxed, but the effect in checking improvements is serious. The usual course of allowing a period to elapse before rating new constructions affords the best practical solution.
The taxation of expensive private dwellings, such as noblemen's mansions, has attracted more attention than its intrinsic importance warrants. In England such houses have been rated at a nominal figure on account of the supposed expense of maintaining them, which is thought to reduce their letting value. On the other hand, the cost of construction, or again that of reconstruction, has been proposed as the basis for valuation. Neither is, however, adequate. Letting value fails where the objects are not really and in fact let to tenants. Cost would give much too high a value in some cases, as expenditure is not always represented by additional value. The true test in such cases lies in the utility of the house and surroundings, which selling or market letting value would measure, but which, in its absence, must be estimated, either by reference to similar dwellings let elsewhere,1 or by the probable expenditure of the possessor on his house accommodation. The modern tendency to apply commercial principles, even to aristocratic residences and estates, will afford a means of readily gauging value in these instances.
§ 5. Far more important is the very difficult question of the incidence of house and building taxes.2 So many elements are combined that the assignment to each of its separate share is a task of some complication. The value of the ground on which the buildings stand is determined by the law of rent, and a tax that falls on it would, therefore, appear to be untransferable. A house is a particular kind of commodity, and its share of taxation may be supposed to come under the laws that determine the incidence of taxes on commodities. Accordingly, Adam Smith, Ricardo, and Mill have agreed in asserting that taxes on ground rent fall on the landlord, while those on building rent fall on the occupier. The builder must, they thought, get his fair profit and will therefore escape taxation. The solution is unluckily not quite so simple. First, as to ground rent, wherever there is an alternative use for land, it is plain that a tax on it, if employed for building, is strictly limited by that other use; thus until the rent of land for building exceeds that of agricultural land by the amount of the tax, no landlord will let it for that purpose. The tax on this minimum ground rent would be passed on to the builder, and by him to the occupier; but once it is reached the ground landlord has a differential gain, and cannot escape by withdrawing his land, as he would thereby lose still more. We can, therefore, accept the doctrine of the non-shifting of a tax on ground rent as generally true. The other part of the doctrine requires more consideration. The rent of houses depends proximately on the conditions of supply and demand; taxation levied from the occupier is equivalent to so much additional rent; it resembles a rise of price in the case of an ordinary commodity. The consequent check to demand tends to take off part of this increase, and therefore the initial effect is to throw some of the tax on the house owner.1 As houses are a very durable commodity, the adjustment of supply to the altered demand may take a long time to accomplish. It will largely depend on the economic position of the locality; if it is progressing, the tax will hinder building until rent rises to its old level; but if it happens to be stationary or declining the burden remains on the house owners, who are the possessors of a particular kind of fixed capital. Even in an advancing locality the shifting may be on the ground rent. The increase of house rent that checks building thereby reduces the demand for building ground, and consequently lowers its value. It is highly probable that some at least of the burden will be so distributed. Or, again, it may happen that, owing to their situation, the premises command a specially high, or what is popularly called a monopoly value, in which case the owner, having obtained the highest possible rent, must submit to pay the public charges; the mere building owner will recoup himself at the ground landlord's expense.1
In the case of buildings used for production or business there may be a further shifting. The taxes levied on factories and shops form a part of the expenses of the manufacturer or trader, and tend to raise the prices of the commodities supplied by him; but where the taxation is uniformly distributed, a general rise of prices from this cause being impossible, the tax would not be transferred. As this uniformity is never really found, there will be a disturbance of values through taxation, with an ultimate incidence on interest and employers' gains. The taxation of houses in all countries varies according to locality, and the modern improvements in transport and business organisation have brought retail prices nearer to a general level. The result is that the shifting of building and house taxes to consumers of commodities is hardly possible, prices being limited by outside competition, and it must therefore be on the owners of the ground, in so far as it does not rest on the house owners, traders, and manufacturers in question. Still the levelling force of competition is not universal, and shifting is not always possible, and it may be that in the influence of taxation we have at least a partial explanation of two important economic facts: (1) the curious local diversities of prices, and (2) the failure of various local industries.1 The creation of various interests makes the matter more complex. Between the ultimate owner of the soil and the immediate occupier there are often, as already noticed, several intermediate interests, and the house and building taxes may be placed on them in different degrees. The tenant, free to leave, can, if the economic conditions favour, throw back his taxes, but the leaseholder cannot. For this reason legislative provisions are urgently required to secure a due division of burdens that the process of shifting cannot fairly distribute, and the problem of devising a fair house tax is made more difficult. Division of rates between occupiers and owners is an old proposal tending in this direction. More radical is the plan for taxing ground rents, either by a special charge imposed on them or by the method of deduction, the holder of each interest retaining the amount of the tax on the payment made to his immediate superior.2 The policy of confining general taxation of land and houses to their contribution in common with other kinds of revenue to an income tax appears to be the soundest. Local finance is thereby supplied with a special kind of taxes and the question of unequal valuation between localities is reduced in importance.
§ 6. The taxation of land and buildings covers most fixed capital. Many doubtful points may arise as to the treatment of machines and fittings, but they usually come in connexion with the taxation either of mines (a form of land) or of factory buildings, and are taken as part of a general property or income tax, or come in as indications to be used in the taxation of business. Proposals to tax fixed capital as such have been made, but they have not as yet been reduced to practice. Apart from the taxation of land and buildings and the taxes on particular commodities, we have next to examine the taxation of floating capital.
The question of a tax on interest presents itself in practical finance chiefly as to dividends and mortgages. They represent the great mass of wealth that is invested by its owners for gain without their direct supervision. Floating capital as such is so closely combined with other elements and is so hard to trace, that its separate taxation is scarcely ever presented. Unless this large part of wealth is reached in some way there is an undue encouragement given to it. Investments in land and industrial enterprises are checked, and the distribution of taxation is so far unfair. These reasons point towards the adoption of the general income tax, which will necessarily include the revenue from floating capital.
The separate taxation of floating capital for general or local purposes in a direct form is not found in England, but Schedule C (and part of D) of the income tax discharges this function, and loans in the form of mortgages come under Schedule A. The yield of Schedule C for 1900–1 came to £1,671,000. The taxes on acts are of service, as they compel these forms of wealth, so difficult to be reached by direct means, to contribute to the revenue.
France has employed a substitute for this part of the income tax in the Impôt sur les valeurs mobilières, introduced in 1872, by which 3 per cent. was imposed on the shares of companies either home or foreign; the yield, which in 1873 was £1,250,000, increased by 1880 to nearly £1,600,000: by 1890 to over £2,000,000. The rate was raised to 4 per cent. in 1890, and the estimate for 1902 is £3,130,000, or nearly double the receipts of 1880.
Italy, like England, reaches interest by means of a general income tax, and such is the usual method. In fact, one of the strong reasons for its introduction is precisely the desire to make capital contribute its due share. In some of the South German States a special capital tax has been developed. Bavaria has a capital tax besides its income tax, and both Würtemberg and Baden have somewhat similar imposts.
The great objection to a separate tax on the yield of capital is the extreme difficuty of making it effective. The necessary result of the ease with which it is escaped is injustice in its distribution. The French tax on valeurs mobilières falls on the shares of companies; it is analogous to a corporation tax and tends to discourage those associations. Investments abroad are much more easily kept out of the tax collector's ken, and thus the progress of home investments is checked. On the whole the reasonable conclusion is that the distinct tax on interest has no place alongside of the land, building, and business taxes that form so large a part of the fiscal receipts.
Its incidence, which in the case of a complete and comprehensive tax on interest is on the holders (unless in so far as the supply of capital is checked by the lower returns) is affected by the partial form that it usually takes. A tax on, e.g. mortgages lowers the profitableness of that particular kind of lending, and will therefore force the mortgagors to pay at a higher rate under the penalty of getting a less amount of accommodation. Thus the incidence will probably be partly on landowners requiring loans, partly on capitalists in general, as some of the capital that would have gone to land will seek other outlets and lower the rate in them. The same reasoning applies to other similar cases—taxation of corporations or any special use of capital. The question, already noticed in connexion with land, of the wiping out of the tax by the sacrifice of the capital of the original holders presents itself here. Stocks or shares subject to a tax must sell for less than if they were free from it, and it may be thought that the transactions of the Stock Exchange speedily discount these public charges and estimate the taxed shares on their net revenue. In dealing with this case two considerations deserve notice, (1) the ever present possibility of the repeal or alteration of the tax, and (2) the extent to which other primary forms of revenue are burdened with like charges. If revenue from land, buildings, capital, and personal exertions is all subject to the same charge there can be no depression of their relative values. The so-called ‘throwing off’ (Abwälzung) of taxation means simply that taxation as a whole is a deduction from the resources of the country where it is imposed.
§ 7. The scantiness of direct and special taxation on loan floating capital is further accounted for by the greater prominence of industry as an object for the financier. Pure interest is not so readily taxed as profits; the older English writers have in fact preferred not to separate this compound element of income. Taxation of profits takes the joint yield of capital and business ability for its object, a course justified by the close connexion that exists in reality. The financier must deal with external characteristics, and, as rent has to be taxed through land, so have earnings been selected as a mark for imposition in preference to the more refined elements of interest and employers' gains. The actual taxes on industrial receipts may indeed include the several factors of rent, interest, wages, and employers' gain, since both land and labour may contribute to the creation of what is popularly and legally described as ‘profit.’
The original form of this taxation is found in the licenses for trade so common in earlier times. Traders who at first were supposed to pay the import and export duties imposed on their commodities were besides subjected to duties for pursuing their particular avocation. The whole mediæval system of incorporations and guilds, which survived till the French Revolution, placed certain burdens on those engaged in industry, and the modern ‘tax on business’ may regard this as its precursor. Within the present century there has been a marked development of this form of taxation, influenced very much by the French system to be presently described.
Some very difficult questions are raised by the taxation of profits, questions that it is to be feared can in practice admit of only a partial solution. Foremost of these is the ascertainment of the actual amount earned. Valuation of land and of buildings is a complicated and expensive process, but it is light compared with the task of measuring the fluctuating gains of industrial production. It would sometimes be impossible for the taxpayer himself to say what were his gains in a given year, but a greater difficulty lies in his unwillingness. The unchecked declaration of the contributor is quite ineffectual, while official assessment involves a considerable amount of arbitrary interference with private affairs. Taxes on industry and profit as distinct from a general Income Tax are usually based on certain legal presumptions. The letting value of the area occupied, the character of the business, the number of persons it employs, the population of the district in which it is carried on, may be used separately or in combination as indices of taxable capacity. None of these tests can be expected to give an exact result, but their use tends to obviate the dangers of fraud on the one hand and inquisition on the other. Productiveness and a tolerable approach to just distribution are the two essentials in taxation: the unfairness that the use of presumptions must more or less cause is on the whole a less evil than the encouragement to dishonesty that self-assessment gives. Moreover the gains of industrial occupations are now too large a part of the national revenue to be allowed to escape taxation without causing greater injustice than their exemption would remove. Profits hold the place that land revenues formerly occupied.
§ 8. The actual taxation of profits in England apart from the license duties on particular trades and occupations is carried out by Schedule D of the income tax. The former element is a small one, and is mixed up with various direct taxes on consumption. Thus out of £3,900,000 received for the local authorities in the year 1900–1 on account of licenses, £1,640,000 belonged to taxes levied on consumption, leaving £2,250,000 for industrial taxation, which, as the total return of licenses has not within the last twenty years varied more than 3 per cent., we may take as representing the normal contribution from this source.1 Schedule D, which at the rate of 1s. 3d. gives a yield of £16,400,000, is the main tax on profits; but to it the taxation of farmers' profits under Schedule B should be added, though the latter has some points of connexion with the strict land tax under Schedule A, since the assessment is based on the rent,2 and the real incidence of the tax is not clear. The yield from this Schedule is not more than £223,000. We thus get a total taxation of nearly £19,000,000.
§ 9. The French system of taxation of profits commenced with the law of March 1791.3 One of the first measures of the Constituent Assembly had been the abolition of the restraints on industry, and no intention of taxing it otherwise than through the general tax, which the mobilier was intended to be, existed. Fiscal necessities forced the establishment of the Droit de Patente, which, like the mobilier, was estimated on the letting value of the establishment, the tax to be 10 per cent. for rentals under 400 livres, 12½ per cent. for those between 400 and 800, and finally 15 per cent. for those above 800 lives. Abandoned in 1793, it was restored in a different form in 1795. Subsequent changes in 1796–7–8 established the outlines of the present system, which has, however, been developed by a series of later measures.1 The tax applies to all occupations and professions not specially exempted. It is divided into a fixed and proportional duty, and, unlike the other direct taxes, it is ‘rated,’ not ‘apportioned.’ Of its four classes or ‘tables,’ one (D) is imposed on salaries; the others embrace the various kinds of trades. The so-called ‘fixed’ duty is really graded. For the first class (Table A) its amount depends on (1) the kind of trade and (2) the population of the commune in which it is carried on—e.g. a trader in the first group of Table A in a commune with over 100,000 inhabitants pays £12 (300 francs), one in the eighth group only 10s. (12 francs). Were they in a commune with less than 2,000 inhabitants they would pay 28s. (35 francs) and 1s. 8d. (2 francs) respectively, and the latter would be exempt from the proportional tax. In the second class (Table B) special rates are laid down, ranging from £80 to £1, according to business and population of the commune. The third class (Table C) has a fixed duty for each trade, with additions for each workman employed.
The proportional duty is a certain percentage on the letting value of the trader's residence and establishment, varying from 10 per cent. to 2½ per cent. on the first class, 10 per cent. on the second, and in the third varying from 6.60 per cent. to 2 per cent., imposed at different rates on residences, warehouses, and factories. Thus a pin manufacturer who falls under the third group of Table C pays 18 francs, plus 3.60 francs per workman employed, 5 per cent. on his residence and separate shop, and 2½ per cent. on his factory. A Paris banker (Table B) pays 2,000 francs and 10 per cent. on his house and bank.2
The object of this very complicated system is evidently to escape the arbitrary pressure of officials. External marks supply the materials for assessment, and prevent the honest from suffering through the evasions of other tax-payers. There is in addition an advantage given to the more successful producers and traders, as their extra gains are free from taxation. The State assumes that, in a given situation, so much profit will be made, and taxes accordingly; any defect or excess concerns the trader alone.
Certain gaps in the Patente tax are noticeable, especially that caused by the absence of agriculturists. The farmer is free from this tax; his profits do not contribute to the services of the State. The Impôt foncier is a tax on rent in the main, and cannot be regarded as counterbalancing the taxation of in lustrial profits.
In spite of its complication, inequalities, and failure to include agricultural profits, the Patente has the two great advantages of being productive and not very unpopular. As a contribution to the State it has risen from less than £1,000,000 in 1830 to over £2,000,000 in 1860, over £3,000,000 in 1880, and £5,200,000 in 1900. The additional centimes for local purposes have grown from being under £30,000 in 1830 to £900,000 in 1860, £2,200,000 in 1885, and £2,680,000 in 1900. With the small extra items there is thus a total amount of over £8,000,000 obtained from this source.1 Licenses are also used in the French financial system, but their return, under £500,000 in 1883, was only slightly over it in 1889. To these should be added the duty on mines, which does not amount to £100,000.
§ 10. Italy, as already stated, has followed England in adopting the income tax. Profits come under Schedule B, which comprises ‘mixed revenues’ as distinct from those due to capital or personal action solely, and their taxation is very imperfectly carried out. Profits are taxed at one-half only of their amount.
The German States developed a tax on industry (Gewerbesteuer), probably suggested by the French Patente. The Prussian tax was established in 1810, and modified after the French war in 1820. Further alteration took place in 1843, 1861, and 1872. It grouped contributors into three classes: (1) traders and manufacturers, (2) hotel and inn keepers, and (3) hand-workers who employ assistants. The rate of duty varied according to the population, there being four different scales. A medium rate was fixed for each trade on this basis, and the total amount for the district (arrived at by multiplying the medium rate by the number of contributors) is redistributed by the local authorities. Some industries were specially charged, while agriculturists and the professional classes were exempt. In 1810 it returned only £90,000, by 1864 it had risen to £580,000, and in 1887–8 to £1,000,000—i.e. less than one-sixth of the Patente, or of Schedule D. By the law of 1891, which came into force in 1893, the structure of the tax was altered, and while the method of grouping was retained, the amount of product and the capital employed became the principal elements in arrangement. Contributors are grouped in four classes, the highest consisting of those with a product exceeding £2,000 or a capital over £50,000. The later legislation of 1893 provided for the transfer of the reformed business tax from the domain of state to that of local taxation.1
The secondary German States have been influenced by the example first of France and later of Prussia. Saxony since 1874 has used the general income tax as the method of taxing industries. Bavaria, Würtemberg, and Baden have employed a special trade tax (Gewerbesteuer), on the model of the French Patente. The recent tendency, however, is in the direction of the general income tax. As yet Bavaria and Würtemberg have not adopted this form, but retain the produce taxes in a developed shape.1
Austria also employed a trade tax yielding a revenue of about £1,000,000 annually until the reform of 1896, by which a system of taxation equivalent to an income tax was introduced. The product of the ‘industrial’ and ‘company’ taxes in 1900 amounted to £3,400,000.
§ 11. In the United States the taxation of industry by the Federal Government has been confined to occasional licenses on some trades. Nor have the ‘States’ gone further in this direction. One increasingly important section of industries has, however, received special treatment, viz. the public companies that have been so largely developed under the liberal provisions of American commercial law. The corporation tax is in the main an American institution, and its growth is instructive both for the economist and the student of finance.2 Regarded from the economic point of view, the corporation is a means of distributing income to its members, and therefore taxation Imposed on it falls on some or all of the classes that receive from it. Viewed as a business tax, the great defect of this impost is its inequality. It selects one form of industrial undertaking and penalises it. The amount of the penalty indeed varies with the particular form of the charge, which may be imposed on business transacted, on capital value, on gross receipts, or on net earnings,1 but the defect is to be found in all these forms, though as between different corporations the last mentioned basis is unquestionably the right one. Perhaps the best plea for the tax is that it, to some extent, relieves the property tax, which has even greater defects. Scientifically considered, the corporation tax is an imperfect business tax, just as the latter is but one section of a true income tax.
§ 12. The principal features of the taxation of profits, as actually carried out, show that two alternative methods are open. Either the taxpayer may be assessed on his (supposed) real net receipts, or certain external indications may be taken as a guide. The former is generally found where profits are taxed through a general income tax. England and Italy supply us with the leading examples. The difficulties in the way of arriving at the true net profits have hindered other countries from completely following this course. The French method has seemed, if less equitable in the abstract, yet in reality fairer. It does not, in Mill's phrase, ‘tax conscience.’ Nevertheless there is a cumbrousness and, in part, a want of elasticity about it. The long lists of trades coming under the Patente, with the great varieties in the permanent and the proportional charges, must add to the labour of administration. Its inequalities must also be great. Neither the population of the district nor the rent of residence and business premises can give anything more than a faint presumption of profits. The Patente is very far from being a proportional tax on industrial gains. It rather resembles a charge on certain necessaries of the business, such as buildings, labour, or motive power. It accordingly marks a lower stage in the development of taxation. The fair assessment of profits may be at present beyond the power of financial administration, but efforts should be made in that direction. It may be suggested that the external marks, which are now regarded as conclusive, should rather be used as presumptions, whose weight will be affected by other conditions, and it is probably by this method that advance will actually be made.
Another noticeable feature of the Continental taxation of industry is its aid to local revenues. The £2,500,000 that the Patente gives to the French departments and communes is paralleled on a smaller scale in the case of Germany. There the local revenues are recruited partly by additions to the direct taxes, and, with some exceptions, this applies to the taxation of industry.1 Austria follows the same method, by which a branch of income that is free in England is compelled to contribute to the public revenues of the locality in which it is situated. We have already seen reason to reject the plan of taxing income, or its separate parts, locally, and it appears better to use the license system for the purpose of recruiting local funds. Thus the Patente and licenses in France might be so remodelled as to create (1) a general tax on trade incomes, (2) a considerable local receipt from the ‘fixed’ part of the Patente, in combination with a further development of the existing licenses.
§ 13. The incidence of taxes on industry is not quite so definite as writers on finance often suppose. Pure or economic profit is made up of two distinct elements, and the extent to which the receiver of interest and the earner of employers' gain can shift taxation is not the same. In the actual forms of taxation a proportional tax on profit may cut away more of one element than of the other in different cases. Thus the distribution of the burden between interest and earnings may be unequal, but as regards outsiders, shifting to them can only be effected by the possible check to accumulation of capital. Where, however, taxation is not proportioned to pure profit the effect may be very different. It is not hard to understand that taxation so unequal as the Patente may drive out some of the producers, and enable the survivors to shift the charge to consumers. The tax becomes one of the expenses of production. Again, the local inequalities may allow of higher gains in some districts, and cause higher prices in others, in which latter case the consumer suffers. Differences between trades may, and probably will, affect the distribution of industry, and thereby cause a diffused incidence too complicated to trace. The same consequences must follow the use of taxes with different rates within a connected area like Germany. Specially heavy taxation in one State may actually, in some degree, increase the profits of producers elsewhere, by raising the price of the commodity within one district; but it is still more likely to press on the producers subject to it.
On the whole, the taxation of industry has not approached so closely to a tax on pure profit as that on land has to a tax on economic rent. This circumstance is partly due to the greater complication of the matter, but also to the less perfect development of fiscal methods.
personal and wages taxes
§ 1. Older than the taxes that we have been engaged in considering, but now of little importance, are the capitation or poll taxes, so familiar to students of mediæval finance. Their origin is evidently found in the idea that persons, as such, should contribute to the wants of the public power. Capitation and property taxes were the two great categories of receipts in early times. When the greater part of a community possessed little accumulated wealth, the method of taxing each adult for a fixed sum was natural. What is very suitable in a rude state of society is altogether unfitted for a progressive and civilised one. No modern State could employ a capitation tax as a substantial source of revenue. Its inequality and directness combine to make it unpopular. The remains of this form of personal taxation are, however, very general, though their interest is rather historical or political than financial.
The equal taxation of persons by poll taxes or capitations generally develops by some form of graduation into an income tax,1 or, as happened widely in the seventeenth century, is replaced by an excise on the necessaries of life. The sense of proportion accounts for the former, as the great dislike to the capitation tax does for the latter. But several countries, notwithstanding, retain a small charge on the person of each contributor.
§ 2. English history supplies us with some illustrations of the poll tax. The first was in 1377, followed immediately by those of 1379 and 1380 (the latter the proximate cause of the Peasant Revolt). The two latter were graduated according to rank. At intervals the graduated poll tax reappears, as in 1453, 1513, and 1641. Its last employment was under William III. in the French war, and it ceased completely after 1698.1
The French capitation was first levied in 1695, and continued with changes up to the Revolution. It was graduated; at first twenty-two classes were formed, but this part of the system was altered in 1701. The constituent Assembly created the personal tax (1791), which consisted of the value of three days' labour, and added it to the mobilier. The price of the day's labour is determined for each commune by the Council of the department, within the limits of 5d. and 1s. 3d. No addition can be made for local charges, and where an octroi is levied, the personal tax may be paid out of it. So far as can be ascertained, the total yield is between £600,000 and £700,000.2
The Italian States possessed complicated capitation taxes which have not survived the establishment of the present kingdom. So did many of the German States;3 of which, the class tax of Prussia was the most noticeable. The poll tax of 1811 was replaced by the class tax of 1820 by which the mass of the population was grouped in four classes, paying various rates, from £1 16s. to 9d. The income tax and the class tax were separated in 1851, and the latter, confined to incomes under £150, was divided into twelve classes, which, under the law of 1875, paid from 3s. to £3 12s., incomes under £21 being exempt. By the law of 1891 the class tax was absorbed in the income tax, and incomes under £45 are exempted. The Saxon income tax in its lower part is practically the same as a capitation tax. The poll tax also survives in Switzerland, where it is chiefly employed for local purposes, and not in all the cantons.
Russia, which had long preserved the capitation, abandoned it in 1887. The nobility had been always exempt, and, since 1866, the commercial classes. While it was in force the rate varied from district to district, and its amount was about £9,000,000 (taking the rouble at its nominal value).
In the United States poll taxes have been used from the colonial period. At present, more than half of the States have them in force, mostly for the state or commonwealth revenue, but, in some cases, for the counties, and in others for education, or road making. In some commonwealths the payment of the poll tax is a condition of the suffrage.1
In addition to the taxes already noticed, we should mention the services demanded by the State from its citizens. Military service is the most prominent, and it is a large part of the real, as distinguished from the nominal, cost of Continental armies. The real nature of this service, as a tax, is best shown by the compensatory tax (Wehrsteuer), imposed on those who do not serve, which has given rise to so much controversy in Germany.
The method of Prestations in France for the repair of roads is another example, and there too the alternative of working or paying is open. The mediæval system of finance availed itself more extensively of this direct method of procuring resources; the surviving instances in modern times are—with the exception of military duty—more curious than important.
§ 3. The poll or capitation tax is far from being a pure tax on wages: the taxation of professions through Schedule D of the English Income Tax, and by the fourth division (Table D) of the Patente, is a nearer approach to that point. Attempts to reach the great body of wage-earners are generally made by means of indirect taxation. The enforcement of a capitation tax is certain to meet with, at least, passive opposition, and in any case its productiveness cannot be great. The method of using it as a necessary condition to acquiring full political rights may be admissible if the receipts are given to local bodies, but this regulation is political rather than financial.
The general result is that this form of taxation is decaying. Its persistence is due to the financial conservatism that is so strong in most countries. It is altogether out of place in the modern financial system, and though it may for a time survive in some Swiss cantons or American States, its importance will, we believe, steadily diminish.
The incidence of personal taxes, especially in the form of capitations on day labourers, has been regarded by many writers as wholly on the employers, or through them ultimately on the consumers of the products they turn out, but this conclusion is not by any means certain. It is far more probable that a small tax on the poorer classes will lower, or prevent a rise in, their mode of living. Its action on population is far too indefinite to be used for laying down an absolute rule. Much will depend on the exact form of the tax, whether uniform or graduated, confined to the head of the family or extended to its other adult members. No proposition in finance has been more dangerous in its application than that which declares that the labourer cannot permanently suffer from taxation.1
taxes on property and income
§ 1. At the opposite extreme to capitation or personal taxes are those that are imposed on property. The antithesis between ‘persons’ and ‘things’ or, in economic language, between services and commodities, is apparent in the earliest stages of society. When the period of contributions in kind is passed, the first objects of taxation are the persons and property of the subjects. The property tax is probably older than the separate charges on the yield of land, or capital, or even labour; the sum of existing wealth is an easier, though not so fair an object for imposition. Land, slaves, and oxen—the res mancipi of Roman law—with household goods generally are the commodities that first fall under taxation: they are on the spot, easily estimated, and in most cases proportioned to the land under cultivation. As society advances and new forms of wealth come into existence, the injustice of the old system becomes evident, and taxation is extended to movable property, either by special taxes, or, more generally, by including it in the category of taxable objects. The difficulties in the way turn out to be too strong: personal property gradually escaped from the duty of contributing.1 Such seems to have been the fate of the property tax wherever it has been tried; in ancient Rome, in the various attempts in England, as also with the French Taille and the later Dixièmes and Vingtièmes of the eighteenth century.
This very general tendency to disintegration in the property tax is partly due to its economical defects, partly to technical difficulties in its administration. As regards the former there can be no doubt that, speaking generally, the property tax is merely a form of assessment, the payment being really made out of income. Taxation that falls on capital in the strict sense must diminish the sum of the community's wealth, a process that cannot continue indefinitely. In using property as the basis for taxation there is always a danger of trenching on the accumulated resources of the society. A second obstacle lies in the fact that property is not really a fair gauge of taxable capacity. Some forms of wealth give a lower return than others, and in special cases may even involve outlay. If, as we saw,1 income or revenue is on the whole a satisfactory standard for taxation, a property tax, unless carefully balanced by other charges, is unjustifiable. It is the result of a confused idea as to the true measure of taxation.
The technical difficulties result from the nature of property. In many cases it is only an abstraction obtained by capitalising revenue. This is pre-eminently true of the great mass of property in which the modern stock exchange deals. Shares of companies and public debts are only of value in consequence of their revenue, and their capital value is reached by a process of estimation; it is besides constantly varying in a way that does not allow of precise measurement. Income is a definite receipt during any given period, and is therefore a better object for charge. The difficulty of reaching the multifarious forms of personal property is a further objection. To arrive at the amount of taxable wealth and to assess it fairly is quite impossible. The ‘slipping away’ that always takes place leads to grave inequalities and injustice. The owners of certain forms of wealth are unduly burdened by having to pay the share of those who have evaded their duty. These are sufficient grounds to justify the very general abandonment of the property tax as a leading source of revenue.1 Taxes on produce (Ertragssteuern), such as those discussed in preceding chapters of this book, take its place or survive it, while they in turn tend to develop into the income tax.
§ 2. The property tax has, however, maintained its ground in two countries. Switzerland still possesses, but in most instances with great modifications, this ancient method. Though the central government does not avail itself of the property tax—except in the charge for military exemption—all the cantons employ it. The forms adopted are varied, complex, and often changed.2 Their characteristics will be best understood by taking a single canton and examining its system. That used in Zürich divides property-holders into classes. The lowest, those under £800, pay on one-half only; the second, those between £800 and £2,000, pay on one-half of £800, and on three-fifths of the excess. Between £2,000 and £4,000 taxation is imposed on seven-tenths of the excess over £2,000; between £4,000 and £8,000 on four-fifths of the excess. For property under £16,000 only nine-tenths of the excess over £8,000 is charged, while any amount over £16,000 is charged at its full value.3 Under such a scale the smaller properties escape very easily. The Zürich method is modified in other cantons. In Graubünden the lowest class is charged at the ‘simple’ rate; in the next class 10 per cent. additional is placed on the entire property; in the third 20 per cent., and so on till in the eleventh class the rate is double. The more primitive canton of Uri has a higher rate of progression; from 1/20; of 1 per cent. on property under £1,200, it rises to 3/20; of 1 per cent. on properties over £16,000. The town canton of Bâle makes but three classes: 1/20; of 1 per cent. is paid by estates under £4,000; 3/20; of 1 per cent. on those between £4,000 and £8,000; and ⅕ of 1 per cent. on those over £8,000. In some cantons there is no progression, all properties being taxed at the same rate. Communal taxation is also in many cases levied on property, but it is rarely progressive (e.g. in Zürich communes are forbidden to impose a progressive rate), and generally moderate in amount.
The Swiss system of property taxation suggests several points of financial interest. Though a long-established form, it has been gradually adjusted in accordance with modern ideas, and is used to supply gaps in the other kinds of taxation. The aim of taxing permanent incomes at a higher rate is accomplished by a tax that does not touch pure earnings. Non-revenue-yielding wealth is also reached, and the democratic ideal of reducing the burden on the smaller incomes is in some degree realised. But notwithstanding this tendency, the rates are so moderate that the effect on capital is hardly perceptible. Evasion perhaps accounts for a good deal of this indifference on the part of the wealthy, and shows that the administrative system is far from perfect. Again, the very narrow areas within which the several systems are applied, and the smallness of the populations affected, make the operation of the taxes more difficult to use for generalisation.1 They are, in fact, a remarkable form of local taxation, and should be so regarded.
§ 3. One of the many points of likeness between the American States or ‘Commonwealths’ and the Swiss Cantons is their use of the general tax on property. But on closer examination the special differences are more important than the general resemblance. The American tax is not in any case progressive, and is rarely accompanied by anything resembling an income tax. Another feature of difference is the apportionment system adopted in the United States. A given sum has to be divided over the several counties of a State in proportion to their assessment, and the valuation of property is in consequence put by the county officials at the lowest figure admissible. The system adopted in Ohio may serve as an illustration of the general methods. By a constitutional provision all property (with some insignificant exceptions) must be taxed. To carry out this law real property is valued once in ten years by assessors appointed for the purpose, who are to take each plot ‘at its true value in money.’ As the assessors in each county compare results they are probably uniform, but as between different counties there is often great difference, which is corrected, though imperfectly, by a board of equalisation. For personal property an elaborate series of queries is issued to each adult, who is bound to answer them, and to swear to the truth of his return. The number of cattle, watches, pianos, merchandise, money, stocks, bonds, &c., have to be declared, and their selling value stated.1 Nothing could apparently be more searching and effective. Other States possess tax laws quite as rigorous. In Georgia both land and personalty are included in the queries issued, which, moreover, contain a question as to evasion. Unfortunately the universal experience is that the greater part of personal property is not returned. Assessors' reports, Governors' messages, and reports of tax commissions all dwell on this fact. The New York report of Mr. Wells in 1871 is quite in agreement with the Maryland report of Professor Ely in 1886 while Professor Seligman declares emphatically that ‘the general property tax as actually administered to-day is beyond all doubt one of the worst taxes known in the civilised world.’1 The reasons for this general condemnation are not far to seek. They are, first of all, lax administration. Officials elected for short terms cannot be expected to scrutinise very closely the answers of their constituents. Palpably inadequate returns are accepted with little question, and the wealthiest get off best. A second cause is the local nature of the property tax, as compared with the national, or even universal movement of the finer forms of personal property. Bonds and shares are easily moved outside a State during the time of assessment, and more obvious forms of capital have to be leniently treated to avoid their emigration. Mr. Wells has pointed out very forcibly the discouragement to capital that the New York system gave,2 in contrast with those of Pennsylvania and other adjoining States; but in practice the pressure is very slight. One fact suffices to establish the defectiveness of the property assessments. It is the decline in the declared value of personal property during a period in which wealth has beyond question increased enormously. The personal property in New York State in 1869 was assessed at $434,000,000, in 1875 it had fallen to $407,000,000, and in 1885 to $332,000,000, i.e. a decline of over $100,000,000 in the commercial centre of the Union. The similar figures for real property are, for 1869 $1,532,000,000, for 1875 $1,960,000,000 and for 1885 $2,762,000,000, or an increase of nearly $1,230,000,000.3
The defects of the American property tax are, it would appear, beyond remedy, and therefore it may be anticipated that it will in the future be transformed into a land tax with additional charges on other selected receipts, and perhaps finally into an income tax.1 We may, however, conjecture that a system of state income taxes will also fail owing to the difficulty of localising income. The conclusion already reached2 that the income tax is best suited for the national government applies fully to the United States. The most promising sources of state revenue seem to be land and license taxes.3 But whatever be the new forms adopted the property tax is decisively condemned.4
§ 4. Notwithstanding the weight of past experience, there has been during the last few years a distinct reaction in favour of the taxation of property. Democratic sentiment and the latest financial theories have conjointly supported the reintroduction of a charge on realised wealth as such. The most important instances of the actual adoption of this policy are supplied by Prussia and Holland. In the former country there has been an extensive recasting of the revenue system, which has as one of its salient points the imposition of a tax on property. It should, however, be noticed that this new tax is closely connected with the reform of the income tax,1 and is expressly described as a supplementary tax (Ergänzungssteuer). Its functions, according to its promoters, are (1) to impose heavier taxation on ‘funded’ property, (2) to cover the gaps left by the income tax, and (3) to put the financial position on a sounder basis.2 The rate chosen is moderate, amounting to about one mark for each 2,000 marks of property, or to one shilling for £100.3 Consequently the anticipated yield for the first year of levy, 1895–6, was 35,000,000 marks (£1,750,000). The actual receipts in 1897–8 were £1,555,000 (31,100,000 marks) in 1899–1900 they reached £1,680,000. Now this, as we shall see, is less than 20 per cent. of the return obtained from the reformed income tax, and hardly seems enough to justify the employment of an intricate and complicated system of taxation.
The Dutch measure, though the outcome of similar tendencies, yet differs in one most important respect. It is intended to be at once an income and a property tax, and is correlated not by a general income tax, but by a professional or vocation tax. It is thus complementary rather than supplementary. A combined income and property tax, in a country like Holland, must necessarily be more productive than a tax on earnings; and accordingly the estimate of the property tax for 1894 was double that of the tax on professional incomes. In this case too, the rate is not excessive. Properties under 13,000 florins escape altogether. Those a little higher pay two or four florins, according as the excess is 1,000 or 2,000 florins. Higher properties pay one-eighth of 1 per cent., the first 10,000 florins being exempt. Possessions beyond 200,000 florins pay one-fifth of 1 per cent. on the excess.1 Both the taxes just considered are very slightly progressive, or rather degressive in character, and the Dutch, which, it must be remembered, is intended for both income and property, is the milder. The estimated produce for these taxes for 1901–2 is somewhat under £3,000,000.
§ 5. The failure of property taxes in so many separate cases, and the clearer comprehension of income as the true normal source of taxation, have made the plan of a general tax on revenue or income appear advisable. We have noticed the imperfections and dangers of the single income tax: it is now rather as one of the constituents of a general system of taxation that we have to estimate it. In this aspect we find that the income tax is a distinctly modern product, and one that is likely to grow in importance. A well-balanced financial system will derive a large part of its receipts from direct taxation, as otherwise an approach to just distribution would hardly be possible. Amongst the objects of these direct charges the produce of land, capital, and labour must take their place, and when they have each come under contribution the elements of the income tax are present. The close analogy between the four direct contributions in France and the five schedules of the English income tax is evident, and this resemblance extends to the German ‘produce taxes.’ There is, however one very important difference; the taxes on the several elements of wealth are far less elastic in yield. Thus the French, German, and Italian land taxes have a fixity that is not found in the income tax; and the other produce taxes, though possessing more expansive power, are not yet at all as effective as is desirable: the Patente expands more slowly than Schedule D. There are besides various gaps in the most developed of the Continental ‘produce taxes.’ State creditors in France escape taxation, while the English and Italian fundholders pay on that part of their revenue. Mortgages and other forms of loanable capital also manage to avoid their proper share, which would be impossible with the income tax. But the actual institution of a tax on income is not due to refined considerations of justice: like most imposts, the income tax is the child of necessity. When other contributions have been carried to their productive limit the financier has perforce to fall back on the direct taxation of income. This method is the more necessary in a country where taxation of the several parts of income is absent or inadequate. Both conditions were combined in the case of the first English income tax (1798),1 and were also present in a great degree in Italy in 1864.
The result of this originating cause is seen in the use of the income tax as a complementary receipt, to be employed in cases of pressure and to meet what would otherwise be a temporary deficit. The aim of keeping a correct balance of expenditure and receipts can be best realised by having a varying income tax adjusted to suit the special circumstances of each Budget. Thus in England the rate has varied from 1s. 4d. (if we include the earlier income tax from 2s.) to 2d. per pound. Italy has been unable to follow the same course, as the highest rate is in her case requisite in order to procure funds, but the desirability of having a movable tax of the kind is indisputable.
Another advantage of the tax on income is the opportunity that it offers for fairly distributing the burden of taxation. Indirect taxation, and particularly that on consumption, falls with greatest weight on the smaller incomes, and lets the rich escape too easily. An income tax with a suitable scale of exemption goes far to correct this inequality, which duties on acts and inheritances also aid in remedying. Both on financial and equitable grounds there is a strong case for the use of the income tax, not as the sole source of compulsory revenue, but in due proportion with other receipts, and with close attention to the special circumstances of the country.
§ 6. The development of the English income tax throws light on many of the problems connected with its general use. Its history is divided into two periods, (1) that of the war income tax (1798–1816), and (2) that of the peace tax since 1842.1 The former, preceded by ‘the triple assessment,’ consisted at first of a tax on the sum of income to be ascertained by the taxpayer's declaration. A lengthy form of return was required, and a number of deductions were allowed, for repairs, support of children, insurance premiums, &c. The yield was about £6,000,000,2 at the rate of 10 per cent. on the national income, estimated by Pitt at £102,000,000. Repealed at the Peace of Amiens in 1802, it was reimposed in 1803, with the important change of substituting ‘particular returns of particular sources of income’ for the previous general return. Thus arose the well-known five schedules, and inquiry as to the total amount of income was avoided.1 The rate was 1s. per pound; incomes under £60 were exempt, and those under £150 taxed at a lower rate. The yield for the first year was over £5,000,000. In 1806 the rate was raised to 2s. in the pound, and several changes in the regulations were introduced. The exemption limit was lowered to £50, and the allowance for children withdrawn, also that for repairs, in Schedule A. The method of stoppage at the Bank was applied to Schedule C. With the high rate of charge the yield was at first £12,000,000; in 1815 it had risen to £15,642,000. On the conclusion of peace the Government desired to continue the tax at half the existing rate, but they were defeated and had to abandon it.
The difficulties of English finance during the succeeding quarter of a century were largely due to this mistaken step. The retention of the income tax would have allowed reforms in other branches to have been carried out with comparative ease. Accordingly competent opinion as expressed by Sir H. Parnell and Sayer advised its reintroduction.2 This prudent counsel was adopted by Peel in 1842. His measure—really the old system with unimportant modifications—was enacted for only three years, and the rate was fixed at 7d. per pound (or under 3 per cent.). The yield in the first year was over £5,600,000, the same as at the rate of 10 per cent. in 1801. At its expiry there was an extension to 1848, and again to 1851. It was voted for one year in 1852; in 1853 it was extended to Ireland, and fixed for seven years by Mr. Gladstone, who held out the prospect of ‘its relinquishment’ at the end of that term. The Crimean war, during which the rate rose to 1s. 4d. per pound, prevented this result, and since 1860 it has been continued as an annual tax at rates varying from 10d. to 2d. until 1901 when it was advanced to 1s., and then in the two following years raised to 1s. 2d. and 1s. 3d. respectively for war purposes. It is now a permanent and, indeed, indispensable part of our financial system.1
In studying the English income tax the first noticeable point is its composite character. It is, in Mr. Gladstone's words, ‘rather a code or system of taxation’2 than a single tax. The five schedules may well be regarded as so many distinct taxes, since they deal with separate kinds of revenue. The connexion between them comes out only in cases of exemption or abatement. Inequalities are, however, removed by the comprehensiveness of the tax. Mortgages pay under schedule A by deduction; but there is no inducement to capitalists to put their wealth into the forms included by B, C, or D, as there also they will have to pay on their receipts.
Another important part of the system is the extensive use of stoppage at the source. The result is that a large body of taxpayers never receive the sums due by them to the State. The public funds, dividends, mortgages are all so treated, and evasion and fraud are thereby reduced to a minimum. The separate sources of income are tapped, and supervision is made much easier.3
Thirdly, we may bear in mind the very large yield of the tax. At its commencement it contributed £6,000,000 in a time of great pressure, while its latest service has been as a mainstay of the national finances during the recent war. Its contribution at the rate of 14d. per pound for 1901–2 amounted to £34,800,000. The yield derived from the penny per pound is in fact an indication of national progress; from £700,000 in 1842 it has swelled to £2,500,000 in 1901–2.1
This productiveness accounts for its great services both in war and peace. It supplied the means for carrying on the struggle against Napoleon, and it rendered possible the reforms of Peel and Gladstone, besides saving the country from deficits.2
The extension of exemptions and abatements is a further interesting point. The original limit of exemption (£60) was soon reduced to £50, in order to include the large class who returned their incomes at £59 10s., and £200 was the point at which the full charge was enforced; this also came down to £150 in 1803. Under Peel's measure the exemption limit was placed at £150, and, though subsequently lowered to £100, it was again raised to the higher figure. In 1863 a deduction of £60 was allowed from all incomes under £200; in 1873 this was increased to £80 from incomes under £300; and in 1876 to £120 from incomes under £400. In 1894 the exemption was raised to include incomes of £160; a deduction of £160 was allowed from all incomes between £160 and £400, and an entirely new abatement on £100 for incomes between £400 and £500 was introduced. In 1898 this abatement was increased to £150 while a deduction of £120 was allowed on incomes between £500 and £600 and one of £70 on those under £700.
§ 7. The Italian tax on ‘movable wealth’ has strong points of resemblance to the English income tax, and has been much affected by its example. It commenced in 1864, when a sum of 30,000,000 lire (£1,200,000) was apportioned among the several provinces, and raised by a tax on revenue (that from land excepted). In 1865 the amount was more than doubled (66,000,000 lire), and in 1866 the tax was changed from an ‘apportioned’ to a ‘rated’ one, and the rate fixed at 8 per cent. In 1870 it was advanced to 12 per cent., which, with the additional tenth, levied since 1868, made the total 13.20 per cent., in 1894 it was raised to 20 per cent. Many changes have been made in the methods of levy and assessment. The original law of 1864 has been frequently amended; a new and comprehensive measure was passed dealing with the whole subject in 1877, and a further revision of the classes was adopted in 1894. After the English pattern, the contributors are grouped under several schedules, but the arrangement is different, and used for a different purpose. Class A comprises two divisions, (a) revenue from interest on railways and local government loans assessed at its full value, (b) other permanent revenue paying only on three-fourths. Class B contains what are called ‘mixed’ revenues, or those in the production of which capital and labour co-operate: these escape with payment on one half of their amount. Class C contains revenue from labour, assessed at nine-twentieths of its total. The incomes of public officials are placed in Class D, and pay only on three-eighths of their amount. To these four classes should be added the Metayers as forming a fifth, paying 5½ per cent. of the land tax. A complicated scale of allowances for small incomes is also part of the system. Incomes under 400 lire in classes B, C, D are exempt, and up to 800 lire the taxable sum is reduced. The declaration of the contributor is the basis of charge, but is tested by inquiry, and, as far as possible, the tax is collected by stoppage.
Notwithstanding the very elaborate provisions of the law, it is found impossible to reach a great deal of the national revenue. Incomes in classes B and C are very generally returned at much below their true amount. Like the property tax in the United States, the Italian income tax is ineffective through evasion. Thus, though the method of stoppage is only applied to a limited set of cases, its receipts are nearly as large as those from direct collection. Again, the proportion paid by companies is about 40 per cent. of the whole, a ratio quite inconsistent with all other available statistics. An analysis of the actual returns of revenue leads to the same conclusion. In 1874 639,302 persons made returns, and out of this number only 986, or 1 out of 640, admitted incomes of more than £1,000 per annum. Even though the wealth of Italy is much less than that of England or France, these figures cannot be accepted as a true representation; they simply prove the existence of fraud on a large scale.
One cause of such widespread evasion is the very high rate of taxation. Twenty per cent. is equivalent to 4s. 5d. in the pound,1 and so high an income tax would even in England lead to much dissimulation of income. The most obvious remedy is a diminution of the tax rate, combined with greater powers of assessment, more particularly in respect to professional and industrial incomes. The differentiation of the classes of income, which originated in an attempt to apply certain theories very popular at the time in England,2 also tends to make the returns inaccurate and to embarrass the officials.
These drawbacks notwithstanding, Italian Finance has found a powerful resource in this form of taxation. The original £1,200,000 of 1865 had increased to £7,000,000 in 1875, to over £8,000,000 in 1885, to over £9,000,000 in 1890, to nearly £9,500,000 in 1894, and to £11,500,000 in 1899. It must besides be remembered that owners of land are excluded from the operation of the tax, since they come under the land tax discussed in a preceding chapter.3
The latest addition to the group of income taxes is that introduced into Spain by the law of March 1900. It is framed on the Italian type and comprises three categories (a) incomes from labour, (b) incomes from capital, (c) mixed incomes. In the first, the rates vary from 5 per cent. to 20 per cent., salaries under £60 being exempt. In the second group the variation is from 3 per cent. to 20 per cent., the last applying to certain classes of the public debt. The third class is charged at rates from 2 per cent. to 15 per cent. No additions for local finance are permitted. The estimated yield for 1902 is £4,200,000.4
§ 8. The German income taxes are best represented by those of Prussia and Saxony. The Prussian Einkommensteuer was introduced in 1851 as a development of the older class tax. It was only applicable to incomes over £150, and dealt with them by groups. A sum was fixed for each group amounting to 3 per cent. on the lowest incomes in that group: thus, e.g., incomes between £600 and £720 paid £18, those between £12,000 and £15,000 paid £360, and all incomes over £36,000 paid £1,080, the highest sum due. Along with the reform of the class tax in 1873 the income tax was settled on a somewhat different scale, but with a general rate of about 3 per cent. The objections to this system as unequal have been so strong as to lead to the reform of 1891, by which the class tax1 is absorbed in the income tax, and all incomes under £45 exempted. From that point the rate rises by degrees; between £525 and £1,475 it is 3 per cent.; on incomes over £5,000, 4 per cent. The idea of progression is thus realised, though in a very limited way. The method of assessment has also been changed. It was previously settled by official valuation, based on the materials possessed by the administration, but is henceforth to depend on the declaration of the taxpayer.2
It is evident that the Prussian income tax differs in some important respects from those in England and Italy The function of supplementing the other branches of receipts is entirely absent, as the rate is fixed, not movable from year to year. The produce taxes are not brought under the income tax, but are continued quite separately: the taxes on land and industry present, accordingly, apparent cases of double taxation. Finally, the productiveness is much less. In 1864 the amount received was over £500,000, in 1876 it was nearly £1,500,000, in 1884 over £1,750,000; for 1889–90 the estimate was over £2,000,000. Under the new system (with the class tax included) the estimate for 1892–3 was £4,000,000, but the amount obtained was £6,240,000. It fell off slightly in the two following years, but has risen steadily since, and for 1901–2 exceeded £9,300,000.1
Saxony set the pattern to Germany of a classified and progressive income tax. Introduced in 1874, it was developed by the laws of 1878 and 1894, the last modification taking place in 1900. Incomes under £20 are free Those between £440 and £2,000 pay 3 per cent. Incomes of £4,000 pay 4 per cent. The yield of the tax in 1880 was over £600,000; in 1890 it rose to £1,030,000, in 1900 it amounted to £1,760,000. Austria adopted a so-called income tax in 1849 which was really a tax, partly on industry, partly on salaries. The ineffectiveness of this system led to the law of 1896, which introduced, besides the industry taxes already mentioned,2 taxes on (a) interest, (b) personal revenue, (c) salaries of high officials. In 1900 these taxes brought in over £2,200,000, five-sixths of which was due to the taxes on personal incomes.3
To the foregoing may be added the taxes of the Swiss cantons. Their property taxes already mentioned are supplemented by income taxes, in many cases on a progressive scale. No two cantons have adopted exactly the same system in all details, but there are, as might be expected, general points of resemblance. The Zürich income tax follows the pattern of the property tax. The smaller incomes are taxed on a part only of their amount, and at each higher stage the excess over the preceding one is placed under greater pressure until the point of full liability is reached. Graubünden follows its property tax by grouping incomes in classes, and by raising the percentage rate as they get higher. Switzerland is in fact the classical country of progressive income taxes, though the moderation of the rates, and still more of their application, weakens the conclusions that might otherwise be drawn.
§ 9. The income tax was first introduced into the United States during the trying period of the Civil War. At its commencement the rates were moderately progressive—3 per cent. or 5 per cent. according to amount of income, but were soon raised to the higher points of 5 per cent. and 10 per cent., until the close of hostilities allowed of a return to a uniform rate of 5 per cent. in 1867, and reduction to half that amount in 1871, with finally complete abandonment of the tax in 1873.1 The highest yield was in 1866, in which year it brought in $73,000,000.
The severe depression in 1893 so affected the United States revenue as to cause a serious deficit for the year 1893–4.2 This, coupled with the measure for tariff reform, led to the passage of an income tax fixed at 2 per cent. on incomes over £800 ($4,000), those below that level being exempt. Property acquired by gift or inheritance was to be treated as income. The Supreme Court by a majority of one declared the tax to be ‘unconstitutional,’ inasmuch as, being ‘direct,’ it was not apportioned in accordance with the provision of the Constitution. Though this decision, considering the meaning attached to the term ‘direct’ in the 18th century, is doubtful, it will prevent the employment of the income tax until a counter decision is given by the Supreme Court, or the unlikely expedient of a constitutional amendment is adopted.3
Since the establishment of the third Republic several attempts have been made to introduce the income tax into France, but hitherto without success. One reason for this failure is found in the character of most of the proposals, which aim at a progressive system, and are consequently obnoxious to the conservative sentiment of the country. The system of personal declaration which progression necessitates, but which is regarded as inquisitorial, is another reason for the failure. Of late years, however, the feeling in favour of an income tax seems to be increasing, and successive finance ministers have sought to satisfy it. M. Doumer in 1886, M. Peytral in 1898, M. Caillaux in 1900 have each devised a measure, and in 1902 M. Rouvier seems about to follow their example. All such measures must provide for the abolition of the Personelle mobilière and the door and window taxes, but logic would seem to require in addition the inclusion of the Impôt foncier and also the Patente. Were the idea of progression definitely abandoned, it is not unlikely that the income tax would prove a good substitute for (or perhaps more truly a development of) the four direct taxes, to which the tax on movable values might be appended. Still the question is one of great difficulty and complexity.1
§ 10. We have deferred a discussion of some fundamental questions relating to the constitution of an income tax until the leading facts of its use were known. Most of them have been already encountered in connexion with the general principles of taxation, but they take a different shape when the income tax is treated as but one part of a larger system, and need to be handled specially with a view to that fact.
One important question is that of progression in the rate of charge. The general conclusion that we reached1 as to the inexpediency of any progressive system has to be reconsidered when the income tax is used as a complementary resource. Progression in the case of such a tax may be necessary for true proportional taxation. If the smaller incomes are unduly weighted by taxes on consumption, their exemption, or milder treatment, under the income tax appears so far justified. A variation in the rate of charge is not open to the objection of arbitrariness, as it is determined by reference to the amount of other taxes. The other objections are not so readily refuted. Risk of evasion and unproductiveness may both be urged against the graduation of even a moderate complementary tax. Where the area is a large one, the effect on accumulation and investment will not be serious, as the distribution of taxation will, ex hypothesi, be equal, but the existing attempts at progression are, it may be said, hardly worth the trouble they involve. The English method of exemption and abatement has great advantages from the technical point of view, since it allows the sources of income to be taxed without reference to their amount.2 The treatment of each person's income as a whole compels recourse to returns of a complicated kind, is disliked as being inquisitorial, and gives opportunities for escape to large masses of income. For these reasons the proportional rate is, on the whole, advisable.
The answer just given helps us in deciding as to the adoption of different rates on different kinds of income. The proposal that life incomes and those derived from industry should be charged at a lower rate has received influential support, and is illustrated by Italian practice. When considering the distribution of taxation we noticed the general arguments as regards the income tax in England. It was for so long looked on as a temporary charge, that the idea of capitalising incomes subject to it gained a good deal of support. The defence of the strict proportional rate rested on two admitted facts: viz. (1) that no ingenuity could avoid some injustice, and (2) that any alterations would mean the destruction of the tax.1 Its gradual passage into a permanent charge has greatly strengthened its position in this respect, though the cry to remedy supposed grievances in its distribution may gain greater support.2
The working of the Italian tax does not support the system of different rates. The lower scales for profits and salaries are confusing, and account for much of the loss through concealment of incomes. The single general rate would prove advantageous from a fiscal point of view, and with stricter assessment could be effectually carried out. The attempt to group incomes into ‘permanent,’ ‘mixed,’ and ‘temporary’ is, moreover, too rough to give satisfaction or to realise justice.
Allowance for necessary expenditure and repairs is one of the practical difficulties in the administration of the income tax. On principle, as the tax is one on income, not on gross produce, deduction of the expenses of production of the income taxed should be allowed. Where much fixed capital is employed, this is very hard to determine, and we can understand the preference of French administrators for the self-acting rules of the Patente. In respect to land the English system till recently failed to recognise the cost of repairs; it, therefore, treated this class of revenue with unusual harshness, and gave some support to the view that Schedule A should be regarded as a distinct land tax. The Finance Act, 1894, has partly remedied this grievance, as it provides for an allowance for expenses and repairs.1 The exceptional treatment of farmers' profits is another fact pointing in the same direction; but it may be hoped that this anomaly will be gradually removed.
The exemption of savings has been already discussed, but one method—that of life insurance—appears to be a case of capitalisation; it is in fact turning a life income into a smaller permanent one, just as the purchase of an annuity is the opposite process. Up to a certain limit—one-sixth of the income—the English system allows exemption of insurance premiums, a privilege not extended to savings in general. Though the desirability of encouraging providence may be granted, it would seem that an exemption from duty on transfer after death would be a more fitting mode of bestowing the favour. It cannot be contended that an insurance premium is not a part of income and the principal created by its use will not contribute to the payer's income in the future. The case is, as Mill puts it,2 one of concession to ‘human feeling,’ rather than a sound deduction from general principles.
The problem of assessment is another of the difficulties to be faced: between the Scylla of the contributor's evasion under self-declaration and the Charybdis of official inquisition it is hard to take an intermediate course; but the dealing with each separate part of income, the combination of declaration and official control, and above all the use wherever possible of taxation at the source of revenue, so characteristic of the English method, are undoubtedly the best safeguards against abuse. The direct contact of the citizen and the tax-collector is the most delicate part of the fiscal machine, needing care and use of the results of experience to prevent friction. Allowing for the inevitable margin of error, the results of the English income tax are eminently satisfactory.
§ 11. Any notice of the question of incidence may seem unnecessary in respect to a tax which falls on all the constituents of revenue. On whom can income receivers in general shift their burdens? Some of the suggested objects are certainly not available. Thus the vulgar idea alluded to by Mill, that the income tax falls on the poor by checking the expenditure of the rich, has no foundation in fact. Nor is there much force in the contention that in so far as the tax is paid out of capital it falls on the labourers,1 as this is no peculiar quality of the income tax, but one common to all taxation. The State must obtain revenue, and unless the income tax were specially obstructive to saving, it would produce no peculiar effect. Looking at the subject in a rather different way we obtain a better result. The income tax is composed of taxes on rent, interests, profits, and the higher forms of wages; therefore it may be said that the incidence of these several parts of the tax will, taken together, give the incidence of the whole. This, however, brings us back in a large degree to its non-transferability; for taxes on rent, on the higher kinds of wages, or on employers' gains, are not easily shifted. Even in the case of interest, unless the growth of capital is checked, a tax tends to remain on the payer. Therefore, speaking broadly, we may say that the shifting of an income tax is not to be expected, and in the rare cases where it does happen is brought about, either by a check in the growth of capital through diminished interest, or by disturbances in the relations of the several industries and trades through its action. A progressive income tax will of course have a stronger tendency to cause the former effect. But though this reasoning is true in respect to an income tax imposed with scientific accuracy on the various components of income it needs to be qualified in considering the actually existent taxes. Thus we should say that the mild treatment of farmers' profits in England tends to disturb the distribution of capital and affects rent. The incidence of an imperfect income tax can only be traced by analysing the tax into its elements, and examining the course of shifting in respect to each
taxes on consumption: their classification: direct consumption taxes
§ 1. The income tax as developed in the present century, marks the highest point attained in the methodising and skilful use of direct taxation. From the rude land, property, and poll taxes up to the existing system of charging the net receipt of the subject, regarded as a whole, or its several parts, there has been an unmistakable improvement in justice, productiveness, elasticity, and that absence of irritation which is so important from the political point of view. The natural order of advance has been in great measure the historical course of financial movement. If existing direct taxation is very far from being perfect, it is, at least, better now than it ever was before. The true aims to be reached are better understood, and there is a more intelligent effort made towards their realisation. In the present and immediately succeeding chapters we have to see how far another large department of taxation has received the benefits of like improvements. We have spoken of the taxes already discussed as being ‘primary,’1 since they include all possible parts of the sole normal source of taxation—income. In contrast to them, the great mass of charges imposed on consumption and enjoyment, on transfers and juristic acts is secondary, since in a thorough analysis its several elements may be decomposed into taxes on some form of income. But the realities of practical finance do not easily adapt themselves to this mode of treatment; whatever be the ‘source’ of taxation, its ‘objects’ are many, and the mode of imposition is too important a circumstance to be entirely neglected.
The same conclusion is attainable from another direction. The classification of taxes most in favour in Germany1 places first those that fall on wealth in the making and next those imposed on its possession, and under either of these heads the various taxes already examined would be grouped. To these it, however, consistently adds an additional set of taxes levied on wealth in the using, and it is to the study of this form of taxation that we must now proceed. On both historical and financial grounds it is to the full as important as the taxation of income and property.
§ 2. The great body of taxes on consumption is capable of division on several different grounds. Thus the kind of commodity used may be employed as the basis of arrangement, giving the classes of (1) eatables, (2) drinks, and (3) other articles.2 The subdivision of the second class into alcoholic and non-alcoholic drinks, and of the third into raw materials and manufactured articles, naturally follows. Another mode of arrangement divides taxes according as they fall on necessaries, conveniences, or superfluities, and is supported by reference to the important differences in the economic and social effects of these different kinds of charges. From a financial point of view, however, the best grouping is that according to the mode in which the tax is levied. It may (1) be obtained at once from the consumer, in which case it is, in one use of the term, direct. It may, on the other hand, (2) be charged within the country on the manufacturers or dealers, who are expected to shift the burden to the consumers. Or again, it may (3) be realised by a state monopoly of the industry or sale; while finally it may (4) be collected at the frontier. It is true that the same article may be differently treated in different countries,1 but this circumstance does not affect the general principle. In fact, it is quite safe and convenient to follow the usual fiscal practice and deal separately with (1) the immediate taxation of enjoyments and commodities, (2) the excise or internal duties, including state monopolies under this head, and (3) the customs.
The order just given is also the best to adopt in a scientific inquiry, as the immediate taxation of consumption is the closest to the direct taxes on property and income, the border-line being in some cases indistinct. This absence of quite precise boundaries has been more than once noticed; the difficulty that it places in the way of rigid lines of demarcation is best escaped by placing the nearest groups in close connexion with each other. The real relations are in this way best perceived, and the grounds for the actual classification are better understood.
§ 3. Historically the system of direct taxes on consumers can be traced very far back. The levies of commodities in kind by the sovereign may, where they consist of articles used by the contributors, be regarded either as taxes on produce or on consumption, though the former is the more natural interpretation. In like manner the taxation of movable property may be regarded as a charge on its use. Thus the tax on consumers capital in the shape of furniture, plate, and works of art is plainly the same in effect as a tax on their use. Taxes on direct consumption and use seem to have originated in the sentiment to which sumptuary laws are due—the desire to repress luxurious expenditure. The first measure of the legislator was to prohibit; when that failed, the next was to tax the supposed injurious expenditure.1
There is thus a double origin for the existing taxes of this kind; they are stray remains, either of the older property taxes or of sumptuary enactments. With one doubtful exception their financial value is slight. No modern country derives any noteworthy revenue from their use. The reasons for this small return are to be found partly in the development of the excise, under which most commodities are taxed in the hands of the producer or trader. By adopting this method the State gains the double advantage of having to deal with a smaller number of persons, who can be watched with comparative ease, and of avoiding the annoyance that direct taxation causes. Direct taxes on consumption seem to combine the defects of the two classes of taxes as described in an earlier chapter.2 They have the unpopularity and inelasticity of direct taxes, without the equality and definiteness that are the chief recommendations of the latter. Industrial progress has further curtailed their area. They are the readiest way of reaching commodities produced and consumed at home, but this once large group of articles has shrunk to a very narrow space. The factory system has been destructive to the method of direct taxation on the consumer. Where industry on the large scale prevails, the employment of an excise has very decided advantages; e.g. the concentration of breweries has made the license tax on home brewing insignificant. It may also be remarked that the system of indirect taxation through producers tends to promote production on a large scale. Heavy taxation on an industry is a grave danger to the smaller producers.3
There is, moreover, another reason for the decline of the direct consumption taxes. They have been in many cases imposed on luxuries, or, at least, on the consumption of a limited class. The power of changing the direction of expenditure is here at its greatest, so that even a moderate tax diminishes consumption very rapidly. This fact explains the small productiveness of the old assessed taxes in England, though a limited field of action is still left to this particular fiscal expedient.
§ 4. One important tax, which might be regarded as coming under the present head, has been considered at an earlier stage. This is the tax on dwelling houses when levied on the occupier. A very plausible case could be made out for this view. A house is as much a commodity as other more perishable articles, and it may fairly be classed among necessaries. A great part of the taxation go collected comes out of the occupiers' pockets, which lends further support to the conception of it as a consumption tax. It is, however, on the whole, more convenient to deal with it in immediate succession to the land tax, and in connexion with the taxation of buildings in general. The difficulties that arise respecting its incidence, and the undoubted fact of its falling back, under certain conditions, on ground rent, seem to justify that course. We may therefore limit any notice of it in this place to a reference to the earlier discussion.1
The other English taxes of the same character originated in the eighteenth century. Carriages, men-servants, dogs, and armorial ensigns were brought under taxation, and have continued in the same position up to the present. Plate, horses, watches, clocks, and hair powder have also, for a longer or shorter time been made contributory. The bare enumeration of these several items shows sufficiently the character of the taxation. It is imposed on certain kinds of expenditure, which, if not superfluous, are, at least, not necessary, and only possible where a considerable amount of wealth exists. The plate tax, so long as it continued, was a tax on one part of consumers' capital. The licenses for killing game, and the later one for guns, are strictly ‘taxes on enjoyment,’ and might indeed be placed under the taxes on ‘acts,’ but they find a more natural place in the present group.
The fiscal history of these taxes is instructive. At first separately levied by special commissioners, they were formed by Pitt into the ‘assessed taxes,’ and used by him as the basis of his ‘triple assessment,’ which was substantially a property tax. Its failure showed the defects of the system, and led to its replacement by the income tax. In the present century, after many alterations and extensions of exemption, the system of assessment has disappeared, and that of licenses been substituted, while the latest event in their history has been the transfer of their yield to local bodies in 1888. Points for criticism abound in respect to the English consumption licenses,1 and the taxes that preceded them. In the first place they are unproductive,2 as the subjoined figures for 1900–1 show. They are far better suited for the purposes of local taxation, and their transfer may be unreservedly approved of. But the further question arises as to their fitness for use in any part of the financial system. They have the great disadvantage of being very often unequal as between persons. It requires much watchfulness to prevent evasion in the case of sporting and gun licenses, and armorial ensigns, particularly the latter. The tax on male servants is so far a check to their employment, and special exemptions have to be made for occasional hirings. The carriage tax is rather complex and often presses unfairly on some classes. There is either the alternative of including all vehicles to the injury of trade and agriculture, or where, as at present, there are large exemptions, the difficulty of administration is increased. A more comprehensive tax, such as the horse and wheel tax, proposed in 1888, would avoid much of this difficulty, and as a local resource would have the merit of making the users of roads contribute towards their maintenance, but its unpopularity and complicated incidence are both against it. The dog tax is perhaps, on the whole, the least objectionable, on account of its service as a measure of police, but for that very reason its rate, to be effective, should be so low as to deprive it of any great financial value.1 The conclusion suggested on the whole is that which recognises the consumption licenses as a possible local contribution, but one entirely unfit for imperial taxation. It might be possible within limits to give the local authorities the privilege of selecting the particular articles to be taxed, and regulating their number and the rates of charge by the needs of the particular district.
§ 5. France has made a more sparing use of direct consumption taxes, and when employed they have had a sumptuary aim. Those established under the Directory were given up in 1807. Some, however, have been reintroduced: thus the horse and carriage tax was passed in 1862. A local dog tax was enacted in 1855, and the legislation as to game licenses dates from 1844. The tax on servants has not been restored. Among taxes that may be placed in the present category is that on societies, introduced in 1871–20 per cent. on the subscription of the members—which is practically direct.
The revenue derived from these imposts is small, being about £1,000,000,2 though as, with the exception of the horse and carriage tax, they serve as a measure of police, it may be expedient to retain them.
The development of direct taxation of consumption in other countries is less marked. Taxes on dogs, servants, and carriages, are a part of the optional communal resources in Italy, but their yield is unimportant. The dog tax, e.g., was in 1883 only applied in about 1,400 communes, and produced less than £25,000.
Prussia tried these forms of taxation between 1810 and 1814, but abandoned them at the latter date. The tax systems of the Empire present some variety in the use of these taxes, so far as they have been continued. The dog tax is a communal receipt in Prussia; it is a state one in Bavaria and Würtemberg. The amount obtained from these direct taxes is inconsiderable.
In the United States the direct consumption taxes are assigned either to the States or smaller divisions, and they vary from State to State. The almost universal employment of the general property tax does in practice bring most of the objects of consumption taxes under charge. Some of the licenses so extensively used fall on enjoyment rather than on trade or production, but they are insignificant in their yield.
§ 6. From the foregoing notice of past and present taxation of this kind, we get a confirmation of the view already expressed that it is a decaying form of impost. No modern State has managed to raise a large revenue by its aid; on the contrary, its relative importance is much less than formerly. There is quite enough evidence available to prove that it can without inconvenience be surrendered to the local bodies, whose requirements make all new resources desirable, and who at the same time have not to meet sudden changes in expenditure. It may even be questioned whether the American or German State is not too large a division. The town or rural commune, or at highest the county department or circle (Kreis), is the proper area for the application of the direct consumption taxes collected within it.
There is in fact a kind of resemblance between the poll taxes and those now under discussion. Both are employed rather freely in early communities, but decay as Society advances. The causes that reduce their services are different, though the result is the same. The poll tax is both unjust and unproductive, where wealth is unequally distributed; taxes on enjoyments and luxuries are too easily evaded to be of practical use in an advanced financial system.
internal taxes on commodities
§ 1. Direct taxation of enjoyment or consumption is, as we have seen in the preceding chapter, of comparatively little financial significance. In this respect it presents a marked contrast to that system of indirect taxation that has now to be examined. All European countries rely on what is known in England as ‘the Excise’ for a substantial part of the revenue receipts.1 Any failure in this branch of taxation would be a fiscal disaster very hard to retrieve. Even the United States, which in times of peace can dispense with internal taxation of most commodities, had, under the pressure of war, to apply this system in a particularly rigorous form.2 Nothing but a much higher standard of morality in regard to the payment of direct taxes, or a very unlikely reduction of expenditure, will render the remission of taxes on commodities possible. Another noteworthy feature of the taxes under consideration is their modernness in their present form. The English Excise is hardly 250 years old,1 and the corresponding branch of revenue in other countries cannot claim much higher antiquity. A reference to general economic conditions supplies the explanation of their relatively recent origin. An extended and productive system of indirect taxation requires for its effective operation a large development of money transactions, with an accompanying separation of employments. Any attempt to tax producers or dealers in the expectation that they will recoup themselves by charging an increased price for their wares is obviously impracticable where most production is for domestic use, and such exchanges as do take place are transacted by means of barter. Besides, the natural tendency of financial policy is to begin with customs duties, partly as being easier to collect, but also as, in the popular belief, falling mainly on foreign producers. A further pre-requisite for the creation of an excise is the formation of an administrative organisation capable of effectively supervising the production of the dutiable articles within the territory of the State.
The tax system is, however, in all its divisions, the result of a gradual evolution, and therefore we need not be surprised at finding earlier forms of taxation falling on the production of commodities, and hence ultimately on consumers. The claim of the feudal over-lord to ill-defined prerogative rights is one source. Market fees and tolls were the foundation on which a system of indirect taxes could without difficulty be constructed, and the older import and export duties presented a convenient analogy. A charge on the sale of a domestic article did not seem a greater violation of the subject's liberty than if it were imposed on the introduction of a foreign one. The licenses on trades and occupations supplied another means for attaining the same end. When confined to particular industries they must evidently be regarded as part of the expenses of production, and—unless there is a differential gain—will be ultimately shifted to the consumers of the products.1 A license graduated in proportion to the out-put or amount of sales is hardly distinguishable from a tax on the commodity produced. The relations of mediæval traders and craftsmen to their rulers and municipalities brought this kind of taxation into use as an expansion of the general property tax. Still more important was the influence of the quasi-private receipts of the Sovereign, which led to the monopolising of certain forms of production in order to increase the royal revenue. The state monopolies, of which so many examples are to be found in ancient and mediæval finance, are, however, so far as the price of the commodity is thereby raised, nothing but a special form of taxation. As already explained,2 the normal profit on the capital employed is a part of the economic receipts, but any excess is unquestionably taxation.
In these different ways the indirect taxation of consumption has been attempted, and the last-mentioned—monopoly—is even yet employed as being, under certain conditions, a convenient mode of levying taxation.
§ 2. The problems presented to the financier in connexion with the whole system of indirect taxation are numerous and important. The earlier methods were directed simply to obtaining resources for the immediate wants of the State, without regard to the ulterior effects on the economic position of the nation. This irrational and almost instinctive procedure was soon replaced by attempts to use taxation as a means of guiding private expenditure in the supposed best direction. The desire to employ taxation as a moralising agency is even at present—as the duties on alcoholic drinks prove—an element of no inconsiderable weight. The proper development of the taxes on commodities has, moreover, been hindered by mistaken views as to the true effect and operation of this part of the tax system. The earlier excises aimed at including all the various articles of consumption: it was thought that the maxim of equality demanded nothing less than this comprehensive procedure. The often described alcavala and bolla were imposed, the former on the sale, the latter on the manufacture of all kinds of goods. The excises of the seventeenth and eighteenth centuries were regarded by financiers as the principal form of taxation, destined, if not to replace all other kinds of imposts, at least to hold the principal position in the fiscal system. Dutch methods of taxation had shown how productive taxation on commodities could be made, and the greater the number of the taxed articles the more perfect was the system deemed to be. Popular sentiment by no means agreed with this idea of theorists and statesmen. The unpopularity of direct imposts has often been noticed as one of their defects, but no form of taxation has ever excited more genuine dislike than the ‘general excise’ which Walpole was unjustly accused of attempting to introduce into England. We have seen the weighty reasons that forbid the adoption of indirect taxation on a great number of articles,1 and here we may add that the historical movement of the eighteenth century made such a course impossible as a permanent system of finance. The political revolution placed power in the hands of a class that would not tolerate it, while the less-noticed, but quite as important, industrial revolution established conditions under which it would not be endurable.2
The influence of economic doctrines is also to be traced in the later legislation on the matter. Without at all asserting that modern taxation in this department is in full conformity with the prescriptions that result from economic principles, it may be said that there has been a decidedly beneficial remodelling of internal taxation, which has removed many of the objections that might be urged against its cruder forms, and there is every reason to hope that this progress will continue.
§ 3. The first problem to be faced in determining the character and extent of the taxation on commodities is the number of articles to be taxed. As we cannot with prudence bring all, or even the greater part, of the commodities produced under duty, it is necessary to make a selection, and to do so on certain definite principles. The old and simple rule of taxing whatever is most easily reached can hardly claim scientific justification. It is the product of fiscal necessity, not of providence and deliberation. One very important condition is the amount of revenue required; the expediency of taxing a given article will always, in some degree, depend on this condition. If, as we have found,1 the whole category of indirect taxes is the outcome of the heavy expenditure of the modern State, it is plain that the greater the outlay the more imperious will be the calls of the Exchequer for receipts from this source. A great growth of expenditure means heavier taxation of commodities.2 It is next necessary to settle the proportion that can be obtained by the various kinds of direct taxation, as well as by those further imposts that we have grouped under the title of taxes on acts and communications, before we can say what sum must be gained through the excise and customs. This, again, suggests a fresh consideration. From the economic and fiscal point of view, the existence of import duties establishes the expediency of corresponding excise ones. Any other policy is detrimental to the revenue and therefore to be condemned. We may, however, escape the discussion of this question at present by regarding the protective import duties as being equivalent to bounties on production, and therefore forming a part of expenditure.1 When the amount to be raised through internal taxation of commodities has been fixed, the more difficult question of distributing the total charge among the several dutiable articles, and of saying what these shall be, arises. One very plain limit is supplied by the condition of maximum productiveness in the case of each article. The rule of charging only what ‘the commodity can bear’ has not always been as carefully observed as it should be, but it is now well understood that increased rates may give diminished receipts. No single class of goods could yield the amount that modern fiscal systems require. But it is not merely the need of attaining the highest productiveness that leads to an extension of the list of dutiable goods; considerations of equity also come into play. The different classes of society do not expend their incomes in the same proportion on the many articles of consumption, and even persons in the same class have very different habits and tastes. A tax that presses heavily on one individual or class may scarcely affect another. Hence it is necessary to make a judicious selection of objects, in order to secure a fair distribution of the charge in accordance with the general rule adopted as a guide.2 The inclusion or exclusion of necessaries will depend on the view taken as to the treatment of the minimum of subsistence. If its exemption be deemed proper, all taxation that would trench on it is to be peremptorily forbidden: where the duty of all to contribute to the service of the State is recognised, duties on such articles as corn and salt may be the easiest way of enforcing that responsibility. At the opposite extreme, the mode of dealing with articles consumed only by the rich will be affected by the amount already obtained through income and property taxes and duties on the transfer of wealth, as well as by the extent to which the idea of progressive taxation is accepted. Heavy imposts on luxurious expenditure tend to press more heavily on the rich, and are in principle the same as a progressive income tax,1 though their actual operation may vary more according to circumstances.
The main brunt of indirect taxation will, in most modern communities, fall on the great intermediate class of goods that form the staples of consumption. It is one of the earliest observations in finance that taxation on the expenditure of the working classes will yield much better results than that which is placed on the apparently more profitable outlay of the comparatively few rich persons.2 The objects of general expenditure must be brought under contribution, in order to secure the high return that is needed as a justification for the imposition of so vexatious a system as the excise.
Thus far we have reached rather limits within which the field of taxation has to be kept, than direct indications as to the suitable articles and the rates to be imposed. Another class of considerations will help us to make some further progress. An excise system must depend largely for its success on the technical conditions of the industries that it supervises. Where industrial improvement is rapid, the restrictions needed for the protection of the revenue are felt as a serious hindrance. The adoption of new processes, so necessary for the most effective production, is not readily carried out, and the system of taxation violates the maxim of ‘economy’ by inflicting loss on the community without corresponding gain to the State. The only escape is found in restricting the objects of taxation to a small number of articles, and in so choosing them as to include only those industries in which invention is not very active, or in which interference with it will not be seriously felt.
Again, it is evident that some commodities are far more closely connected with the work of production than others. A duty on manufactured silk would obviously have less effect on industry in general than one on iron. The former would—apart from its diffused effects—only concern the producers and consumers of silk goods; the latter would affect almost every industry of importance by enhancing the price of one of the most essential auxiliary materials of production. This contrast between auxiliary articles and those destined for direct consumption1 leads to the rule that taxation of raw materials or goods that aid production should, as far as possible, be avoided. Not only are the real effects of duties on such articles harder to estimate; there is the further evil that the taxes have to be advanced by the producers for a longer period, and the ultimate increase of cost to the consumer is made greater by the interest on those advances. It is true that the State receives the money at an earlier time, but its gain is not sufficient to counterbalance the loss through interest on the locking up of what would otherwise be active capital.
The system of taxing commodities is consequently most effective when it is confined to a comparatively small number of goods, which form the typical objects of the general expenditure of the various classes and grades of the community, and which, at the same time, are not important elements in auxiliary capital. The production of these goods must, moreover, not be in a very scattered form, or in the hands of small producers, as excise supervision then becomes too burdensome to the industry and too costly to be effective. All the real aims of taxation on commodities can be accomplished without including many items in the list of dutiable goods. Productiveness, economy, and equity, are the ends in view; and they cannot all be secured without this limitation of the field of the tax collector; while equity, which seems to be violated, is really and substantially attained by a small, as well as by an extensive number of taxes. One article of general consumption is a better object for purposes both of revenue and justice, than thirty or forty minor commodities on which the cost of collection would be high and the ultimate incidence uncertain.
The last important influence that affects the selection of the objects of indirect taxation is the desire to discourage certain forms of outlay that are regarded as pernicious, or, to take the mildest view, not promotive of economic or other virtues. This idea, which lies at the root of all sumptuary taxes, is represented in modern finance by the treatment of intoxicating drinks and tobacco. In nearly every country these articles form the mainstay of the revenue from indirect taxation, owing to the two conditions of large consumption and heavy taxation. So far had this movement been carried in England, that it was quite within the limits of probability that both excise and customs would be confined to these commodities of doubtful advantage, as the former virtually was.1 The recent pressure due to war expenditure has for the time checked this tendency, and, indeed, in the customs revenue reversed it.1 Though the French contributions indirectes have a broader basis, they are yet largely dependent on the wine and spirit duties; while the tobacco monopoly is highly productive. The internal revenue of both the United States and Russia is in a similar position, and the inferior yield in Germany is admittedly one of the weak points in the fiscal system of that empire.
§ 4. One result of the preceding inquiry as to the conditions that should be taken into account in framing a system of duties on commodities is to give strong support to the position that such duties must be varied according to the country in which they are applied. The really productive objects of taxation are not quite the same in any two countries. The tastes and habits of each community have to be carefully observed and taken into account, otherwise the revenue receipts will suffer. But the financier has not merely to study the direction of demand; he must further pay attention to the agencies of supply. The system required for a wine-producing country, such as France or Italy, is not the same as that best fitted for districts in which alcohol is produced by an elaborate manufacturing process. Adjustment to the economic environment, so exceedingly desirable in the arrangement of taxation, necessitates the adoption of special taxes in different cases in order to gain the best results.
The same point is further enforced by the varying amount of revenue that is required, and the extraordinary differences in the amount of consumption on which taxation can be imposed. The exemption of necessaries from duty must be contingent on the power of obtaining the required amount from other objects. Thus salt, which is rightly free in England, has to be taxed in India owing to the absence of other resources, and sugar, which was released from taxation in Great Britain in 1874, has again (1901) in consequence of financial pressure, become an important object of imposition.1 The true test of financial competence is to be found in the application of the general principles to the varying circumstances of each particular nation in such a way as to realise the ends of a sound and prudent policy.
The modern developments of financial conditions have, it must be said, tended to bring about a greater approach to uniformity in the taxation of consumable commodities, both in respect to the objects taxed, and the procedure employed. Economical and political causes have both contributed to this result. The modern industrial system with its uniform and mechanical methods of production, the general diffusion of a taste for articles of convenience, and the formation of powerful fiscal administrations have all helped to make the excise systems of European States more nearly resemble each other. Scientific investigation has also aided in producing this situation. The skilled financial advisers of a government are acquainted with, and ready to adopt, what is effective in the forms and methods of other nations.
Even greater progress in this direction may be anticipated in the future. We may not unreasonably hope that some of the anomalies at present existing will be removed, and that by due co-ordination and uniformity in method the hindrances to production and exchange that indirect taxation now causes may, if not entirely removed, be at least reduced to a minimum.
§ 5. The freedom of this country from internal taxation of commodities was one of the boasts of Englishmen so late as the seventeenth century. Under Elizabeth the granting of monopolies was the first step towards what might have become an effective system of taxation, but this encroachment was successfully opposed. The introduction of the excise on the Dutch model, said to be the proposal of Pym, was due to the needs of the Parliament in its struggle with Charles I.; it included a large number of articles of necessary consumption, chiefly food and clothing. Retained during the Protectorate, with some modifications, as an important source of revenue, the excise was re-established after the Restoration in the form of a tax on beer and ale, partly as a compensation for the abolition of the feudal dues, and partly as a resource for the growing needs of the Sovereign.1 At the close of the reign of Charles II. the yield of these taxes was £620,000.
Whatever may have been the advantages of the Revolution of 1688, reduction in the burden of taxation was not one.2 The cost of the French war and the entanglement of England in the European disputes respecting the Balance of Power, along with the colonial and commercial policy that resulted from the predominance of the moneyed interests, largely augmented the annual expenditure. During the eighteenth century the process of building up the excise by the inclusion of fresh articles and the increase of the rates on those already taxed was in process. Breweries and distilleries were soon placed under charge; the malt duty was imposed (1697), and later on developed into an important tax. Several articles of necessary consumption were brought within the fiscal net. Salt, leather, soap, and candles are enumerated, and their taxation condemned, by Adam Smith.3 The extension of the system was, however, carried on in a tentative way; new taxes were tried, and if they proved to be unpopular or unproductive were repealed, perhaps to be soon reimposed under more favourable circumstances. The best known incident in this part of fiscal history—Walpole's excise scheme—was really a reform in the customs treatment of tea and tobacco, and excited prejudice rather by what it seemed to lead to, than by its actual provisions. The financial result of the many measures passed respecting the excise during the eighteenth century is best shown in the increased receipts. At the commencement of that period they had averaged £1,200,000;1 by 1792 they had risen to £10,000,000. From the latter date the extraordinary drain of the Revolutionary war with France affected the financial policy of the country, and caused those fresh applications of taxation that have been so often described by historians. The existing rates were in nearly every case raised to the highest productive point (often as experience proved beyond it). The duty on salt was doubled, and later on again subjected to a 50 per cent. increase. Glass, tiles, and leather were also made liable to additional charges. Beer and ale, as might be expected, received specially severe treatment. At the commencement of the French war the various taxes on these articles or their constituents yielded £3,578,000; in 1815 they came to almost £9,600,000. The spirit duties were trebled during the course of the war, until in 1811 they stood at 10s. 2¾d. per gallon, or almost the present rate.2
Such very great increase of taxation, accompanied as it was by corresponding advances in respect to other classes of imposts, could not long survive the return of peace, aided by the application of proper fiscal methods. Unfortunately the abandonment of the income tax, and the injudicious methods of borrowing pursued by Pitt and his successors, made reform a work of some difficulty. The debt charge of £32,000,000, and the heavy military and naval expenditure, not readily brought back to a peace footing, both hindered immediate remissions or exemptions. The national industries had, besides, become adjusted to this very heavy taxation, and caution was needed in the attempt to alter the situation. At first the want of revenue was so great that certain excise duties were increased, e.g. those on soap, malt, and British spirits. This extreme pressure did not, however, last long, and it became possible to carry out some moderate reforms. The salt duty was reduced, and its abolition fixed for an early date (1825). That on leather was lowered one-half, and the very high tax on British spirits (11s. 8½d. per gallon) was placed at 7s. in order to meet the illicit trade and in connexion with the lower duties on wine. The exertions of Huskisson were, however, chiefly directed towards the improvement of the customs, which, indeed, most urgently required reform. The internal taxes were not directly affected by the disturbing influence of the Protectionist system, and therefore the changes to be carried out were of a comparatively moderate character. They may be said to consist in (1) the elimination of raw materials from the list of goods liable to duty, (2) the contraction of that list to a very small number of articles, and (3) the placing of the weight of internal taxation on intoxicating drinks. A further aim has been to secure a complete hamony between the excise and customs systems, which has been reached by the abandonment of Protection, and the establishment of exactly equivalent duties in both departments. In fact, that substantial unification of the excise and customs, for which Walpole vainly risked his popularity has been definitely accomplished so far as financial effectiveness is concerned.
Some of the facts of this reform of the excise are not without interest. After the disappearance of the salt tax the duties on leather and candles did not long remain. In 1830–1 they were repealed. The impost on soap—that ‘tax on cleanliness’—survived till Mr. Gladstone's first Budget in 1853. Glass was released in 1845, but paper continued liable to duty till 1861. Starch and bottles were exempted in 1834, bricks and tiles in 1850. These repeals of duty, which seem so trifling, were really, taken together, a considerable boon to British industry, and to the bulk of consumers. The progress of the chemical industries may be dated from the repeal of the salt duty. Bricks, tiles, and glass are constituents of that most necessary commodity—a house, besides being of use in numberless other ways. The paper tax was even more than a ‘tax on knowledge’: it hindered the development of an important industry, and raised the price of an article capable of many different uses. These advantages were well worth the sacrifice of the revenue obtained from the abandoned duties.1
The treatment of alcoholic drinks stands apart from the general system pursued with respect to industries. In their case there has been no remission, except when there was a prospect of increasing productiveness. The only exception to this rule—the repeal of the beer duty in 1830, by which £3,100,000 of revenue was sacrificed—had in part the aim of making the malt tax more productive, and this was in good degree attained. Besides, the double system of taxing both malt and beer was recognised as inconvenient. During the half-century 1830–80 the malt tax was the mode in which beer and ale were taxed, and supplied a standing grievance to agriculturists. Its large yield—£8,000,000 in 1877—made it impossible to repeal it, but in 1880 the existing duty on beer was imposed in its place, partly to relieve the depressed farmers, but also in accordance with the principle that a tax should be as near the point of consumption as can be arranged, in order that the preliminary processes may be released from excise restraints. The returns from the beer duty for the twenty years 1881–1900 quite realised expectations. For 1899–1900 the amount was £11,887,000. An increase in duty (1s. per barrel) raised the yield to only £13,500,000 in 1900–1, indicating a decrease in consumption. The year 1901–2 gave £13,300,000, thus showing a slight decline.
The duty on hops, first imposed in 1710, became later on a subsidiary duty to the main tax on beer. It had the grave defects of being uncertain in its yield and pressing on the raw material, which was moreover an agricultural product. Accordingly this tax was repealed in 1862, leaving nothing of the kind, except the trifling duty on chicory, in the English excise. Its yield had varied from £86,000 in 1852 to £728,000 in 1855.
British spirits have presented greater difficulties. If the principle of fixing the duty in proportion to the amount of alcohol contained be adopted, the rate on spirits should much exceed that on beer, and the aim of encouraging temperance would lead to the same result. On the other hand, the principal seats of production of spirits are in Ireland and Scotland, and the average consumption in their case is also greater. Heavy taxation of the more alcoholic drinks therefore presses unfairly on those parts of the United Kingdom. Finally, the enforcement of the revenue laws in wild and mountainous districts was no easy matter, and consequently the limit of productivity was at first rather low. Existing methods are the outcome of the efforts to meet these several obstacles.
The scale of duty, previously fixed on different principles in the three countries, was unified by Robinson (1825), the only difference being the higher rate in England (7s. per gallon). By a series of measures the Scotch and Irish duties were brought up to the level of the English one, itself raised by degrees, until in 1858 a uniform duty of 8s. per gallon was imposed. The increase in return was considerable. In 1829 the yield had been £4,800,000; by 1851 it was over £6,000,000. For 1859 the amount received was a little under £9,000,000. An increase to 10s. per gallon in 1860 made the tax still more productive, till in 1868 it was £10,500,000. The great prosperity of trade, and the more efficient excise administration, caused large annual increases, until in 1875–6 the highest return—£15,150,000—was obtained. From that date there was a decline for several years, but the yield again increased, and a new maximum was reached in 1891–2, when the receipts from this source were £15,693,000. After some fluctuation 1899–1900 gave another maximum yield with £19,335,000, followed by a slight fall in the succeeding year, and a heavier one in 1901–2 to £17,630,000.1
It is therefore apparent that the excise system of England, so far as it applies to commodities, is almost exclusively a tax on alcoholic drinks, and is carried out by supervision of the brewing and distilling industries, which involves a very complete control of their operations. The modern tendency to concentrate the production of both beers and spirits at a few centres makes this system less troublesome, and the heavy taxation in turn favours the larger producers. Further steps in this direction have been taken in the last few years by the extensive creation of limited companies, possessing a qualified monopoly of special forms of beer, ale, or whisky, and who therefore bear the first weight of increased taxation. The whole situation is a highly artificial one; by it the State draws very large resources from the taxation of what is an instrument of luxury, in many cases one of vice. The aim of reducing the national consumption of these drinks is naturally postponed to that of maintaining so material a support of the public revenue, and the problem of adjusting the duties between the different classes is very imperfectly dealt with. There may be some reason for favouring such beverages as are believed to possess some nutritive power and to be less likely to cause intoxication; but the present scales of duty seem unfair as between the consumers of spirits and those of beer.
The trade licenses which accompany and are officially regarded as a part of the excise have been already discussed.1
From one point of view the internal tax system also deals with the important article of tobacco; but until within the last few years it has been confined to the negative function of preventing its cultivation in the United Kingdom. This system of prohibition, which seems to be a direct violation of industrial liberty and an interference with a probably gainful employment, dates in England from the times of Charles II.,2 and has been justified on the grounds of the inferiority of the home-grown plant and the great trouble of collecting a very high duty on an article of local production. At present licenses are granted for the purpose of experimental growing, though there is little probability of the cultivation extending.
The processes of the English taxation of commodities are reduced almost entirely to levies on the producers of the taxed articles, the sale licenses being rather charges on the profits of the occupations, which, however, does not prevent their being useful as adjuncts of the excise by bringing all producers and dealers under the notice of the authorities and facilitating supervision. Duties purely on sale are not employed, though the bonding system, by which goods are retained under official control free of duty until withdrawn for use, nearly approximates to that form. Neither are duties on the land under cultivation for a crop of the taxed article in use. Finally, the method of monopoly is not a part of English policy. Spirits, beer, and tobacco would be the only objects for its operation, and each of them is treated in another way. In fact, the great characteristic of this form of British taxation is the simplicity alike of its objects and its processes.
§ 6. The French organisation is much more elaborate and possesses a longer history. Under the Ancien Régime indirect taxation had been extensively employed. The necessities of the State had led to the heavy and unequal salt tax, to the duties on drinks, on leather, iron, and other useful articles, to the monopoly of tobacco, and the costly and vexatious inter-provincial duties. The origin of the system may be traced to the fifteenth century, in which the monarchy was reconstructed after the English wars. A great expansion, however, took place in the seventeenth century, when the administration of Colbert had recast the financial system, and when such a new source of revenue as tobacco was secured.
The continuous development, apparently broken by the Revolution, soon returned to its old course, though purged of many of the defects that had previously existed. The vices of pre-revolutionary taxation arose rather from defective administration than from the inherent badness of the articles selected for duty. There were innumerable personal and local discriminations; the noblesse were exempt from various charges, and some districts were free from duties that pressed heavily on others. Thus salt was under six different systems, according to the particular province, not to speak of the many local privileges. Similar complexities were connected with the duties on wines and brandies. But far greater was the evil of the mode of collection, which was by the system of farming or letting out to companies, who contracted to pay a certain sum in return for the collection of the duties. This system, so characteristic of Roman Finance, recurs in the French indirect taxes, and did much to increase their unpopularity. The ‘Farmers-General’ were objects of universal dislike, and some of the members of the body paid the penalty during the Revolution.1
One of the first results of the disturbances that broke out in 1789 was a check to the collection of the indirect taxes. The offices for the duties on salt, on wines and spirits, and also the internal customs were attacked. Contraband salt and tobacco were freely sold, and the toll-barriers of the city were thrown down.2 The failure to collect the Taille was more than paralleled by the case of the indirect taxes. The strong popular sentiment undoubtedly encouraged the Constituent Assembly, already imbued with the physiocratic dislike to taxes on consumption, to take the somewhat rash course of abandoning the greater part of the obnoxious duties.
After an ineffectual attempt to maintain it provisionally the salt tax was abolished in March 1790. In 1791 the aides, or drink duties, met the same fate, as did also the tobacco monopoly. The abolition of the octrois was decreed in February 1791.
So complete a break with past financial conditions could not continue,3 and accordingly we find that the work of the next ten or fifteen years consisted in building up the structure on the same general lines, but without the serious faults that it had previously contained. The salt tax was restored in 1806, but the old inequalities and the system of monopoly were not brought back. The suitability of tobacco as an object of heavy taxation made it advisable, after a series of ineffective attempts at taxation in the ordinary way, to re-establish the state monopoly of that article in 1810. The octrois were gradually re-introduced, beginning with that of Paris in 1798, and soon extending to other towns. Finally, the complete freedom of spirituous liquors from taxation was put an end to by the law of 1804, which imposed a tax on wine and cider when in the possession of the producer. Further taxation of this promising source speedily followed in the duties on the transport of drinks, and the tax on the amount sold by dealers. Thus in less than twenty years the system apparently overthrown at the Revolution was again in force, freed from its most objectionable features.1
§ 7. The existing French system, which in its main outlines was established at the fall of the first Empire, shows, when compared with that of England, a number of suggestive resemblances and equally suggestive differences. There is the same broad general treatment as respects the commodities selected for taxation and the proportionate burden placed on each class; there is also the same readiness to levy the duty at the most favourable point, and lastly there is the same prominence given to this kind of indirect taxation in the fiscal system. On the other hand the French system has a wider basis. Salt, so necessary both for domestic and industrial uses, is an object of charge. So is that very general article of consumption, sugar, whose treatment has so often harassed financiers, and which was for over a quarter of a century freed from duty in the United Kingdom. The paper tax has only been suppressed in the last fifteen years, while matches—whose taxation in England Mr. Lowe could not propose without losing whatever financial popularity he had possessed—are placed under a state monopoly, as is also gunpowder, while dynamite is taxed. Oil is another important commodity that has to suffer taxation, to which may be added candles. Acid and vinegar may close the list, which establishes that France possesses that diversity of indirect taxes which McCulloch believed to have been too hastily abandoned in England.1
Again, the procedure of the French administration is much more varied. Up to 1901 the drink duties were levied partly on wine in circulation, partly on the retailers who sold it, partly on its entry into towns, but this system only applied to the country districts and smaller towns. The two latter charges were, in 1875, in the case of towns over 10,000 inhabitants, combined in a single tariff (taxe unique). For Paris and Lyons a single duty—the taxe de remplacement—covered all three.2 Beer and spirits are taxed at the point of manufacture, in fact on the system of the English excise. Salt and sugar are similarly dealt with, but in all these cases the duty on transport may come into operation.
A more remarkable feature is the use of monopoly as a fiscal agent. It is true that in England the Post Office is under this régime, but ordinary commodities are quite free from it. In France, besides the small monopolies of gunpowder and matches—the latter created in 1872, and conceded to a company, but taken up by the State in 1890—there is the great tobacco manufacture, which is altogether a state concern. Experience has shown that only by this means could sufficient revenue be obtained from it.3
These contrasts are to some extent due to the more rigorous administrative system of continental countries. Interference with internal trade would be much more difficult, and cause more irritation in England. But the different position of the two countries is a far more powerful cause. It is comparatively easy to watch the manufacture of drinks in the United Kingdom owing to the concentration of the industry. The problem of supervising the vineyards of the French peasantry proved too difficult for the revenue officials of that country, and led to the repeal of the inventory duty of 1804. The insular position of Great Britain has been a further assistance in protecting her excise system from the introduction of contraband goods. Thus the price of the state manufactured tobacco in France has to be varied according to the proximity of the district to the frontier. The methods of each country are in fact adapted to meet the circumstances peculiar to its situation.
At the same time it must be said that in certain respects French taxation of home commodities falls short of the highest attainable standard. Some of the duties are of too small a yield to justify their retention. The salt tax, even though it is confined to that used for domestic consumption, is too irksome and unequal a charge to be maintained when its return for 1901 was only £1,360,000.1 The taxes on oils, matches, candles, and explosives might also be removed. The sugar duty is a more doubtful case. Its yield is very considerable—£6,280,000 in 1901—and with the heavy burdens that the country has to meet such a resource should not be lightly abandoned.2 Unfortunately the treatment of the duty on sugar has been complicated by the bounty system, which is evil alike for the treasury and the producers. Moreover, the technical problems connected with the measuring of the quantity and quality of sugar yielded are very difficult, as is also the question of substitutes. A uniform duty on the finished product, adjusted to equal the import duty on the article, is the best financial arrangement. The Brussels convention (1902) appears to give a satisfactory solution of the bounty question from the point of view of French financial interests.
The wine and spirit duties are an indispensable part of the system, and should be very cautiously treated. The exemption of wine consumed by the grower is a gap in the tax that at once reduces the receipts and makes its incidence unfair. Nothing but the hopelessness of levying the duty could excuse this omission. A system of licenses for private consumption, such as that adopted for private brewing in England, might in some degree remedy the grievance. A further cause of complaint has been found in the comparatively high duty on retail sales. The artisan who buys his wine in small quantities is more severely taxed than the large consumer, who has only the moderate duty on transport to pay. The impossibility of raising the latter tax without provoking an extensive contraband trade, and the loss that any lowering of the duty on retailers would cause, are the hindrances to reform. The duty levied on the entry of wine into towns with more than 4,000 inhabitants is a further pressure on the residents in them, though its consolidation with, or perhaps more accurately speaking replacement of, the duty on retailers, where the population exceeds 10,000, carried out in 1875, is on the whole a desirable measure. The attempt to exercise surveillance over the very large number of agricultural distillers has proved a failure, compelling resort to the tax on circulation of spirits. These difficulties—which are good examples of the inevitable dilemmas that indirect taxation gives rise to—are due in a great measure to the position of France as a wine-producing country. Taxation of the cheaper wines falls necessarily on the bulk of the population, as it is imposed on their usual consumption. The cry of a ‘free breakfast table,’ once so popular in England, would need for its realisation in France the removal of the wine duty. An important influence affecting the drink duties has been the desire to promote temperance, shown in the various proposals to exempt or tax at a low rate, the less injurious beverages (boissons hygiéniques) and place heavy duties on spirits. These efforts bore fruit in the law of 1900, which placed a low circulation duty on wine and cider, with a similarly low duty on the circulation of beer. The duty on spirits was so adjusted as, it was hoped, to balance the loss on these reductions. The result of the first year's operation of the new system has been a very heavy falling off in the wine and cider duties (from over £7,000,000 in 1900 to less than £3,000,000 in 1901), a like fall in the beer tax (from £1,070,000 to £540,000), and a comparatively slight increase of £700,000 in the spirit duties (12,980,000 in 1901 as against £12,280,000 in 1900).1
Notwithstanding these grievances and gaps in the French system, it must be pronounced to be, on the whole, and considering the problems to be dealt with, a skilful application of well-devised administrative principles. Tried by the great test of productiveness, it answers the object for which it exists. The various indirect contributions bring in close on £26,000,000, of which the drink duties provide about £16,500,000, and the internal sugar duty £4,450,000. The monopolies gain over £18,000,000 (90 per cent. of which comes from tobacco). When the total is taken it comes to the large amount of £41,800,000. Of this great revenue, spirits, beers and wines, tobacco, and sugar are the principal sources, the other duties forming but a trifling supplement. As in England, these articles are the support of the Exchequer, while in France the drink duties further contributed £5,900,000 in 1900 to local finance.2
§ 8. Italian finance has not had the same opportunities for the development of a productive system of indirect taxation as those possessed by England and France. The poverty of the people and the short duration of the present kingdom have both prevented the creation of a complete system. Nevertheless, the eminent statesmen and economists to whom the conduct of affairs has been entrusted have made great progress in this direction, and have endeavoured to apply scientific principles so far as the difficulties of the situation would allow.
The tax system of Italy had to be built up on that of the several States out of which it was formed, and it had to supply sufficient funds to meet the growing expenses of the new government. These conditions made the adoption of taxes, in other respects very undesirable, a necessity. The grist tax, which fell on the main item of subsistence, was at once oppressive and unequal, but it became a source of revenue from 1869 to 1882, bringing in 83,500,000 lire (£3,340,000) in 1878, and an average of over £2,700,000 for each year of its continuance. Salt—another necessary—has been kept under a state monopoly, as it was in most of the smaller Italian States, and its estimated yield for 1901–2 was £3,000,000. Spirits, beers, and mineral waters have also been placed under an excise; so have cotton oil, chicory, gunpowder, and the more important article of sugar. A monopoly of tobacco has been conceded to a company, and the net return from this source is one of the largest items in the budget (over £8,000,000 in 1901–2).1
Italy, however, differs from both England and France in making use of the town duties on goods as a source of state revenue. The Italian octroi duties are notorious for their severity, falling as they do on articles of necessary consumption, as well as on the common enjoyments. Flour, rice, meat, butter, sugar, wine, beer, and spirits are all subjected to these local customs for the benefit of the State, with additional charges for municipal purposes. The inconvenience of this method is indisputable: it causes local variations in taxation levied for common purposes, and it is, besides, open to the general objections to the octroi system. The tax on wine may be defended on the same ground as the (now repealed) French entry duty, viz. that it is the only possible way of reaching an article of such general production and consumption, but this very difficulty seems to point to some other form of taxation as the most desirable solution. The total yield of £2,000,000 from octrois for state purposes is not large enough to justify the employment of so unfair and unpopular a method of taxation.
In extenuation of these seemingly oppressive and burdensome taxes it is necessary to remember the smaller amount of the national wealth1 and the impossibility of limiting taxes to such articles of superfluous, or at best convenient, expenditure as alone are dutiable in England. Where good objects of taxation are wanting, the financier must perforce adopt those that are indifferent or bad. The direct taxation of the country is also heavy, and therefore the question of fiscal reform is primarily one of expenditure. Curtailment in the military and naval outlay and in the cost of administration would allow at least the removal of the octrois, combined with a reform of the tax on movable wealth, that would be a great relief to trade and secure a fairer distribution of the total load. A judicious reform of the drink duties might even raise their productiveness without injury in other respects. The whole position of Italian indirect taxation is a useful illustration of the modifications necessary in applying general principles to the economic system of a people at a somewhat low stage of industrial development. Such taxes as the grist tax or the existing salt monopoly would be unhesitatingly condemned on a priori grounds, but they were required in the particular situation.
The relation of indirect taxation to the consumption of the people is here shown afresh. It is not possible to gain large returns from a southern people through the duties on the stronger alcoholic liquors. Such taxation as that of England would check the use of spirits completely. The same statement would hold true of any particular article. The theoretical doctrine that the minimum of subsistence should be exempt from taxation, however well it may sound, can only be applied in a society that has a considerable disposable surplus. When dealing with such populations as those of Italy or India, taxation, in order to be effective, must fall on objects that constitute a part of necessary consumption.
§ 9. The system of excises had a comparatively early and wide application in Germany. Without entering closely into the details, it suffices to indicate the general fact. That the German cities should adopt a system of the kind was quite natural; it was merely an octroi applied by a virtually sovereign State, but it seems that the method was imitated by the various princes, and notably in Brandenburg, where ‘the general excise’ was introduced in 1640 for some towns and gradually extended. This tax, which was limited to the towns, affected corn, meat, drinks, raw materials, and imported goods. It was intended to fall on the country through the process of shifting, and was undoubtedly one of the principal sources of revenue. The reconstruction of the Prussian finances after the French wars resulted in the substitution of the ‘meal and meat’ tax (1820), which was imposed only on the towns, as a kind of compensation for the ‘class tax,’1 that affected the country districts. The yield of these taxes, which were given up in 1873, was about £400,000.
Other taxes, more in accordance with modern practice, were added. Breweries and distilleries came under excise supervision, and a moderate tax on the production of wine was imposed. Beet-root sugar was placed under duty in 1840, the old salt monopoly was retained, and tobacco was made to contribute through a tax on the land given up to its cultivation.
The chief interest of this part of Prussian finance lies in the fact that it has furnished the basis for the system of the present German Empire. Its development had in turn been influenced by the need of adjusting internal taxation to suit the regulations of the Zollverein, as, e.g. in the cases of the sugar and tobacco duties. The advances in technical precision and productiveness since the formation of the Empire have not been as great as might have been expected. The salt monopoly was changed in 1867 into a tax on the article, which has been retained up to the present. The other subjects of taxation are, it must be said, treated in an unsatisfactory way. The sugar duty, which ought to be fairly productive, is affected by the bounty system, which in some years has absorbed the greater part of the receipts.1 But this difficulty has been much reduced, and will soon be removed by recent legislation, and now by international agreement. The yield of the tax may therefore be expected to increase with the increase of home consumption. The tobacco tax is suffering in a different way. At present it is levied through the inefficient excise system, and its amount is consequently low, £630,000 (12,600,000 marks) in 1899–1900. The remedy proposed in 1885 was the establishment of a monopoly, on the same system as that existing in France, Italy, and Austria, but it was defeated, and no further reform has been carried out. A like attempt which was made with regard to the refining of spirits met with the same fate. However, the rate of duty has been increased considerably, in the latter case with very beneficial results to the revenue, the receipts for the year 1899–1900 amounting to almost £7,730,000. Beer is also a source of revenue, but to a much smaller amount, owing to the lower rate, and the retention of separate duties by the state governments of Bavaria, Würtemberg, and Baden, which reduces the receipts of the Empire. The yield for 1899–1900 was £1,750,000.
German internal taxation is in some respects unfortunately placed. The separate interests of the different States hinder the most effective forms of duty being imposed, but still more the articles to be taxed are specially important products. Spirits, beer, and sugar are all exported, and engage a good deal of the national capital and labour. Taxation is, therefore, more keenly felt, and strict supervision by the revenue officials is more injurious. The treatment of agricultural distilling is a particularly difficult matter, and one that only admits of a compromise. Fiscal presumptions, whose operation we have already noticed,1 are employed to escape the cost and trouble of more exact determination.
The economic and social conditions have, therefore, prevented as great a development of the modern excise system in Germany as has taken place in France: the duties are less productive—the total amount from this source for 1899–1900 was just over £18,000,000—and the deficiency is noticeable in those very articles that form the mainstay of British and French finance. Tobacco and alcoholic drinks do not pay what might be expected from them, while the sugar duty has been far under its real productiveness in consequence of the expenditure on bounties. The removal of this difficulty will be one addition to the receipts, and may be taken at £5,000,000, though production may fall off somewhat under the new regulations. An increased yield from tobacco, the end most needing to be accomplished at present, is to be reached—as a monopoly seems impracticable—by more effective excise supervision. Beer might also be made to provide a larger revenue than it does at present. But even if these reforms were accomplished, it is not to be expected that the revenue could equal that of more favourably situated countries. A large revenue from taxation of commodities implies either extreme rigour in the tax-system or a high standard of comfort in the bulk of the population. Revenue may be wrung out of the subsistence fund of the nation, or it may be obtained from its comforts and luxuries. Neither condition is found in Germany, and consequently the returns of the indirect taxes are comparatively small.2
§ 10. The tax-systems of other countries repeat with modifications and new combinations the phenomena already described. The position in Austria-Hungary is somewhat exceptional as the two parts of the Empire form a single customs-area, but each section collects its own excises. Salt and tobacco are state monopolies in both countries, and the latter is an important contributory (for 1893 the net yield on tobacco in Austria was £5,600,000, in Hungary £3,000,000).1 The spirit and wine duties are another productive item, Austria yielding slightly more than Hungary. Beer contributed £3,000,000 in 1900 to the Austrian excise, but barely one-fourth of that in Hungary. In respect to sugar also Austria is by far the larger contributor. Other taxes not usual in European countries are the cattle tax and the duty on mineral oil. The total yield of the combined consumption taxes (the salt and tobacco monopolies excluded) in 1899 was £16,390,000 (393,395,349 crowns) and of this Austria contributed less than £12,000,000 and Hungary less than £4,500,000. Vienna, Puda-Pesth, and Trieste pay octrois to the state revenue.
The chief commodities under taxation in Russia are sugar, tobacco and, most important of all, spirits. The first mentioned has been rapidly growing owing to the increase of home production. In 1890 the duty yielded 21,600,000 roubles, in 1898 it had risen to 47,700,000 roubles, in 1899 it was 67,300,000 roubles. Tobacco has also increased in yield, but in a smaller proportion, the duty for 1890 being 27,775,000 roubles, that for 1899 38,900,000 roubles. Both are, however, insignificant in comparison with the revenue from spirits, which amounted to 268,000,000 roubles in 1890, 298,000,000 roubles in 1898, and to 310,000,000 roubles in 1899.
This immense sum shows how the existence of a particular habit may affect the revenue of a country, and how it is possible under certain conditions to tax a very poor population. The contrast with the already noticed cases of Italy and Germany is very remarkable. Mineral oil is a minor contributory.
A further point of interest is the method employed in the collection of these taxes. Tobacco, as in the United States, is taxed by requiring stamped paper for its sale. Sugar is subjected to a strict supervision at the factories. The treatment of alcohol has varied. It was subjected to a monopoly which was farmed out until, in 1862, the excise system was introduced on financial grounds, and an increase of revenue obtained. The increase of intemperance amongst the peasantry has been the ostensible reason for a return to a monopoly strictly controlled by the State, which was inaugurated as an experiment in certain provinces in 1893, and next year was extended to the whole Empire, and has been accompanied by a further increase in return.
§ 11. Except in the crisis of war the internal taxation of the United States has always been very restricted. Hamilton's attempt to tax whisky (1791) had led to a rebellion, and the duty was given up, to be again tried during the war with England (1812–14), and abandoned at its close. From that time till the outbreak of the Civil War (1861) there were no duties on domestic goods, not even on spirits. The war requirements of the Federal Government compelled recourse to heavy taxation; in addition to the income tax and the customs, an extensive system of internal taxation was formed. ‘Raw cotton was taxed at the rate of 2 cents per pound..... Salt was taxed at the rate of 6 cents per 100 pounds tobacco from 15 to 35 cents per pound; cigars from 3 dollars to 40 dollars per 1,000; sugar from 2 to 3½ cents per pound. Distilled spirits were first taxed in 1863 at the rate of 20 cents per gallon; the next year 60 cents; then 1 dollar 50 cents and subsequently 2 dollars.’1 Most manufactured articles were also taxed, sometimes both in the raw material and the finished products, without any attention to the conditions of justice or productiveness. This very rigorous and on the whole effective application of taxation did not long survive the close of the war. By a series of enactments during the next five years all the duties, except those on tobacco and spirits, were repealed. The former, which is carried out by means of a stamp imposed on the tobacco as manufactured, varied between £5,000,000 and £9,000,000 during the twenty-five years ending in 1898. In 1897–8 its amount was £7,250,000.1 The duty on spirits, which underwent several changes, being reduced to 50 cents in 1868, and raised to 70 cents, and then to 90 cents, and lastly in 1894 to $1.10 per gallon, was far more productive. The amount realised in 1897–8 was over £18,500,000.
In consequence of the war with Spain the duties on beer and tobacco were increased from July 1st, 1898. The beer duty was doubled, and by this means its yield was increased from $39,515,000 in 1897–8 to $75,669,000 in 1900–1. Tobacco likewise gave a return of $62,482,000 in 1900–1 against $36,230,000 in 1897–8. The speedy conclusion of the conflict has permitted the partial removal of the extra duties in 1901, and their complete repeal in 1902. The return from the spirit duties also has been higher ($116,000,000 in 1900–1). In its simplicity and absence of interference with industry the United States excise system closely resembles the English.
In the Indian system excise taxation is on a limited scale. The principal objects of duty are salt and spirits. The former article, which is, next to land, the most important contributory, is taxed in different ways, partly by the method of monopoly, partly by excise duties. Previous to 1879 the methods of taxation were complicated and oppressive, but that year Sir J. Strachey succeeded in reforming the system by introducing a uniform scale of duty. The proper balance between the different forms of production in India and the product imported from Cheshire is difficult to determine. The salt duty has yielded about 80,000,000 rupees annually for a long period. Spirits are taxed either at central distilleries or by farming out at auction. Opium and Indian hemp also come under taxation. The yield from spirits and drugs (which form the excise receipts proper) was estimated for 1899–1900 at £3,860,000 (or nearly 58,000,000 rupees). The excise duty of 3½ per cent. on cotton is attached to the customs.
§ 12. We are now in a better position for examining some general features of the taxation of goods. Certain points have been impressed by repetition. One is the great prominence of drink duties. England, France, Russia, and the United States regard them as the principal resource of the revenue. Improvements in the methods of German taxation will probably bring about the same result there. This circumstance suggests some important considerations. The moral difficulty of basing the financial prosperity of the State on the growing consumption of what is useless, and in many instances injurious, will be more and more felt in the future. The advocates of temperance can hardly remain contented with the present state of things in which the revenue from drink so far exceeds other receipts. But the possibility of sweeping restrictive legislation, extending perhaps to prohibition, raises the further question of the effect of such measures on the State's income. A reduction of fifty per cent. in the duties on spirits and beer would mean a great deficit in the English Budget, hardly to be replaced by any readily available substitutes. A much higher rate of income tax or the introduction of a property tax would probably have to be tried, perhaps combined with higher customs duties on tea and sugar. The difficulties surrounding any of these courses need not be dwelt on; the limits of productiveness are reached sooner in the case of other indirect taxes, while an extension of taxation on income or property would involve a shifting of its present distribution that would need the greatest caution before it could be justly applied.
Connected in certain respects with the drink duties is the tobacco tax, which is so important a resource in France and Italy, and—as a branch of the customs—in England. This impost has the advantage of falling on a luxury and affording a means of taxing the poorer classes who cannot well be made to contribute directly, but it is also open, though in a less degree, to the danger of shrinkage through a change of habits, and is, besides, in common with the drink duties, hard to levy in countries where the production is extensively carried on, as a high rate inevitably leads to illicit traffic.
It is in great part owing to a recognition of these complications that the method of monopoly has been so much employed. To place the manufacture of an article in the hands of the State is a strong measure, to be justified only by very cogent reasons; but where the need of revenue is great, this sacrifice of a particular business to secure complete freedom for the others may be desirable. It cannot be disposed of by an appeal to the principle of noninterference as a rule peremptorily binding on the State. The real point to be aimed at is to secure the needed revenue with the smallest amount of restriction, a result sometimes best attained through monopoly. This, among other considerations, has led to the proposals for a state monopoly of alcohol, which have been brought forward both in Germany and France, but which have not proved acceptable in either country. The reasons advanced in favour of such a measure are weakened by the great extent of the industry and the elaborate appliances needed for its proper working. That a state department could with financial profit undertake the production or sale of spirits is not likely, though it was confidently believed that this result could have been reached in Germany.1 A rigid excise system appears to be, on the whole, better both for the industry and the State. The progress of invention is certainly retarded by the routine that state management sets up, and therefore, where it is desirable to secure the continual development of new processes, production should be left to private initiative, and as far as possible released from surveillance. But whatever be the form adopted, intoxicating drinks and tobacco must in the immediate future be the principal resource—so far as indirect taxation is concerned.
Among the other dutiable articles sugar holds a high place, and if revenue be needed, it is one of the most eligible objects for taxation, much more so than a necessary commodity like salt.1 The latter, again, is a preferable object to either corn or meat. A fiscal system that includes all these duties reaches a high degree of harshness, the addition of duties on raw materials being all that is necessary to make it attain the maximum in this respect.
The technical operations connected with the levying of duties deserve some notice. Modern appliances have made it far easier to gauge the exact product in most taxed industries; the strength of spirits or the sweetness of sugar can be ascertained with great precision by the use of special instruments, and in other cases similar aids are more or less available. As a means of checking fraud and stopping that ‘leakage’ and waste that has been so prevalent in the earlier attempts at taxation, they may be regarded as valuable contributions to finance. In another way the progress of invention has hampered the administration of both the excise and customs. For every product substitutes are now devised which cannot easily be brought under control. The application of a duty to a particular article involves the inclusion of perhaps forty or fifty different items with a carefully calculated scale of rates in order to avoid unfair preference or encouragement to evasion. This is, indeed, one great barrier to an extension of the excise system. The best-devised duty from a purely economic point of view may fail in consequence of technical obstacles. In fact, the application of taxation is always dependent on a careful observance of these special circumstances. All the details of a duty are important in this connexion. Thus, the rate to be imposed must be regulated with reference to the intensity of the demand for the article, the gradations of the several qualities, and the effective power of testing that exists. The reasons for the repeal of the English paper and sugar duties were partly founded on the difficulties of discrimination: the adjustment of the American spirit duties, in order to meet the risks of illicit distilling and secure the highest return, has been shown by Mr. Wells to rest on similar grounds. The treatment of the several forms of spirits and beer in Germany has been largely conditioned by consideration of the effects produced by different methods of levying duties on the development of the industries and on the receipts of the State.
Nor is it merely the conditions that exist within the particular country that have to be considered. With the modern agencies of transport no community can be regarded as an isolated unit. Its method of taxing commodities will be influenced by the economic and fiscal systems of other countries. Due adjustment ought to be reached between excise and customs, and the trade relations with outside producers and consumers should be carefully studied. The greatest prospect of advance in financial arrangements probably lies in this direction.1 To expect uniform taxation in all European countries would be Utopian, but there is room for approximation in the selection of the articles to be taxed, and in the rates of duty imposed. Thus, the treatment of alcohol and tobacco might possibly be made the same in a good many nations, and thereby the obstruction to industry and risk of contraband traffic in great measure avoided. Even at present the monopoly system, as regards the latter article, is in force in France, Austria, Italy, Spain, and some smaller States, and may possibly be introduced into Germany. The rule of imposing higher duties on the more intoxicating spirits is now very generally adopted, though there is room for more complete agreement in both the mode of taxation and the rates fixed.
Finally, then, while it is evident that the forms and extent of internal taxes on commodities must depend on the financial necessities and the particular conditions of each country, it is also beyond doubt that what is vaguely called ‘the progress of society’ must lead to greater uniformity in both respects, though it would be premature to conjecture what will be the exact form of that common system.
§ 13. To complete our account of internal taxation it is necessary to notice its position in local finance. The United Kingdom and the American Union are very markedly distinguished from other countries by their freedom from indirect taxes for local purposes. There have been some cases of ‘ingate’ tolls in English and Irish towns, and the London wine and coal dues were a more important instance, but with these exceptions internal trade has been altogether relieved of duties. This freedom of commerce was according to Adam Smith one of the reasons for the greater prosperity of the country. The Constitution of the United States, enforced by the resolute action of the courts, secured internal free trade over the whole area of the Union1 and prevented the establishment of any local barriers.
In continental countries a very different state of things has prevailed. Everywhere, in one form or another, duties have been levied on goods entering into cities. These taxes, which may be traced back to the dues (portoria) imposed by the cities under the Roman Empire, were adopted by the communes as a ready means of acquiring funds. So early as the thirteenth century we find them in force in France, and their development continued till in the seventeenth century nearly every town possessed them. The ministers of Louis XIV. saw in this form of tax a valuable resource for the hard-pressed finances of the kingdom, and accordingly a part of the octrois was appropriated for the use of the State, a system that continued down to the Revolution. Other countries had the same system; the German towns levied duties on the commodities entering within their walls, and both the empire and the territory of Brandenburg derived revenue for their general purposes through the town taxes.1
The abolition of the octrois by the Constituent Assembly, and their reintroduction a few years later, have been already mentioned.2 In other countries the same popular sentiments and the same pressure of actual facts have made their influence felt. No form of taxation is more oppressive on the artisan and small trading classes, and it has, besides, an indirect effect on the rural producers. On the other hand, where direct taxation is extensively employed by the general government, it is hard for local authorities to devise any less inconvenient form of duty that will supply an equal revenue. The opposed forces are seen in operation in the history of octrois in the present century. There has been a disposition to, as far as possible, get rid of these troublesome imposts, while at the same time they continue in several countries as a source of local, and even of general revenue.
§ 14. France in particular possesses a carefully arranged system. Municipal councils are empowered, and in certain cases compelled, to establish an octroi, which is distinctly recognised as a tax on consumption. The objects to be taxed may be food, drinks, fuel, fodder, and materials, but the power of taxing is limited by restrictions, which exclude articles already heavily taxed by the State or monopolised by it. Octrois on intoxicating drinks are specially regulated so as to bear a proportion to the general taxation of those objects.1
The system applies to 1,504 communes, or about one in twenty-four of the entire number; but as it includes all the large towns, its operation directly affects one-third of the population (13,434,000). The greater number of communes (864) raise the duties themselves. State officials manage 291, and 349 are farmed out at a rent. The city of Paris has a special régime, which extends to the outlying communes, and is administered by the Préfet of the Seine. A considerable revenue is obtained from this source. In 1900 it amounted to £14,200,000, one-half of which was raised in Paris. This amount is an increase over earlier years. From less than £2,500,000 in 1823 it has risen to £3,800,000 in 1853, to nearly £8,000,000 in 1872, and to almost £13,000,000 in 1895. This growth is due to the larger population of the towns and their improved condition.2
The Italian octroi duties in their present rigorous form only date from 1864; some of the smaller States had used them, but Sardinia and Tuscany were comparatively free.3 Since the first measure on the subject several further orders and decrees have extended the system, until it has come to be productive of a large revenue as well as extremely oppressive. Without again considering that part of the duties which goes to the general revenue,1 it appears that in addition to further charges on the articles already taxed by the State octroi, there are duties on a large number of goods arranged in the same categories as in France, with an extra division for colonial produce. The result is that, in contrast with the French duties, foreign goods already submitted to customs taxation are taxed over again on their entry within the ‘closed’ communes, and that both the cost of living and the distribution of industry are injuriously affected. The duties vary according to the population of the town, and are levied on sales in the ‘open’ or rural districts. The revenue received by the Italian communes from these taxes in 1897 was £6,300,000, which taken together with the part that goes to the central government, represents a much heavier burden than that imposed in France by the same class of duties. A complete separation between the tax systems of the general and local governments would seem desirable, and might be accomplished either by the exchange of the state octrois for local direct taxes, or better still by a complete reform of the methods of indirect taxation.2
The various German States have gradually reduced their indirect local taxation. Some German towns retain the octrois as a supplemental resource. In Bavaria this method is adopted, but the list of articles is not at all so extensive as either in France or Italy. North Germany is for the most part free from octrois, though a beer duty is levied, as e.g. in Berlin. In any case this form of taxation is of minor importance for the German cities. Austria and Hungary use the octroi system more extensively; some of the funds obtained in this way are taken for the central government, and the local taxes appear as additions to these state charges.1
More radical measures have been applied in some other countries. Belgium, as we saw,2 abolished these taxes in 1860, and was followed by Holland in 1866, and by Spain in 1868, though the last-named country had soon to return to the old method. Denmark and Switzerland are practically without octrois, which are also of little importance in Portugal and Sweden.3
§ 15. When considering the general principles of indirect taxation, we concluded that its employment in local finance was objectionable, and certain to disappear under the influence of sounder ideas on the subject of taxation. The fact that so many countries can successfully manage their municipal administration without recourse to indirect taxes is of itself a strong point against their continuance. They have the unfortunate peculiarity of combining the defects of customs and excise duties; for they hinder trade between town and country and impose heavy pressure on urban industries and consumers. Thus the materials for house-building are taxed both in France and Italy; the ordinary articles of the labourer's consumption are compelled to pay toll before they reach him, and so are many of the materials on which he works. Inequality of distribution is another glaring defect in the octroi system, which varies in its incidence from place to place and between different classes. The one valid argument in its defence is the plea of necessity. To surrender £13,000,000 of the French communal revenue would be a hazardous step until an assured equivalent was provided. This is the problem that reformers have to face, and the usual proposal has been the introduction of direct local taxes as a substitute. The difficulty of this plan lies in the resistance that most of the communes would offer to it. M. Léon Say's more fundamental method would alter the existing relations of the general and local governments, and place the direct taxes at the disposal of the latter, giving them at the same time increased functions.1 Another and, perhaps, more feasible proceeding would be to follow the Belgian precedent, and pay over a part of the general indirect taxation to the communes in lieu of octrois. One important consideration indicated by M. Say is the distinction between the sixty towns having over 30,000 inhabitants, whose net revenue from this source is £10,400,000, and the remaining 1,444 communes that gain only £2,600,000. It is obvious that the latter class might easily replace their indirect taxes by additions to the contributions directes. Even the remaining towns—when Paris with its net receipt of £6,460,000 is deducted—ought to be able to furnish the £4,000,000 that would be needed by a development of the general taxation of spirits.
The case of Italy is a harder one; though the burden of the duties is greater, so is also the need of revenue: and thus for the present it seems that reform, rather than abolition, is advisable. Exemption of the materials of industry, low rates on articles of necessary consumption, together with greater uniformity in the different tariffs, might be carried out with advantage to the revenue.
The first step in this direction has been taken by the law of January 1902, which provides for the gradual abolition of the octrois on cereals, and arranges for a subvention from the State for 70 or 80 per cent. of the revenue sacrificed. Further adjustments of local taxation, e.g. increased charges on real property, are specified, but this is evidently transitional and intended to lead to a more thorough reform.
§ 16. The last question that has to be discussed is that of the incidence of taxes on consumption. Everyone is familiar with the proposition that they fall on the consumer, and are intended to be a deduction from his income when he comes to employ it. It, however, appeared that the process by which taxes are shifted is not so simple or uniform as this statement assumes.1 That ultimately and ‘in the long run’ the bulk of the taxation of commodities falls on the general body of consumers is undoubtedly true, but this is in fact the case with a general income tax, which arrests the funds previously to their expenditure. But before we assert that a tax on a particular commodity comes out of the pockets of the consumers of that commodity, we must be satisfied of three things—viz. (1) that none of the burden remains on the producer who pays the tax immediately, (2) that none of it is thrown back on other producers or owners of land or capital who contribute to the production, and (3) that the consumer has no way of passing on the burden to another set of persons. But these conditions are not always to be found. In some cases the producer has a complete or qualified monopoly, or more accurately a differential advantage, and, when this is so, he bears the burden in whole or part. Again, the limitation of demand caused by taxation leads to a lower value of land, or fixed capital, or specialised labour suited for the industry, in which case some of the loss falls on the particular agent so affected. Finally, and this fact has been even exaggerated in the ‘orthodox’ theory of incidence, the additional cost of living may lead to a higher rate of wages, which must inevitably lower interest or employers' gain, unless indeed it is limited to certain groups of workers, when the consumers of their products may bear the burden.
Applying these general facts to existing tax-systems, it is an interesting question to consider how far the abolition of the present English excise would (a) increase the profits of brewers and distillers, as well as retail traders, (b) allow of higher prices for barley, hops, sugar, and other materials of the kind, or (c) cause a lowering of wages in consequence of the smaller outlay on drink by labourers and artisans. That each of these effects would in some degree be produced is, we believe, indisputable; but so much depends on conditions which cannot be even approximately estimated, that it would be impossible to offer a conjecture as to their relative strength. The effect on other industries through the sums set free from the purchase of drink, or the increased labour and capital required in the distilleries and breweries if the total expenditure on drink remained as before, would be a further puzzle. Now, if the remission of these duties would produce such effects, it is unquestionable that the development of the modern excise has caused, not perhaps quite the same, but quite as complex and important changes. When we take—as financiers and statisticians too readily do—the actual distribution of taxation as a guide to its real effects, we should never forget the far more intricate problems that the working of a set of taxes imposed on a complex economical system is certain to produce.
If this be true of the very simple and easily examined excise of England it holds good with still greater force of the more elaborate systems of France, Germany, and Italy. Where several articles are taxed the effects become intermixed; e.g. a duty on sugar tends to combine with duties on breweries where that article is used as a material. Especially where taxation is different in different cases we may expect complicated results; the duty on wines entering French towns is an element in the cost of living, and probably in the wages of the workmen residing in them, and hence on the price of the goods produced in such places, while this altered price may cause a redistribution of industry.
The octrois exhibit some of the best examples of the practical existence of these—at first sight far-fetched—positions. One of the arguments of the defenders of local taxation of commodities is that their incidence is not really on the consumer, who would not benefit by their abolition. It is pointed out that in many cases the reduction or removal of the town barriers has not lowered prices. The gain is reaped by the producer or trader.1 So far as this argument has any truth it illustrates the proposition that we have already laid down, though it is hardly a good defence of the system.2 In like manner it has been argued that the Italian octroi system has compelled manufacturers to establish their industries in agricultural districts where the cost of subsistence is not artificially enhanced.3 But what is apparent in the limited sphere of local taxation must be equally operative, though its influence is harder to trace, in the wider field of state economy.
§ 1. The taxation of goods at the frontier or on passing a fixed boundary line—what is known in England as the customs revenue—is far older than the system of internal duties. Almost from the origin of commerce we can find traces of its employment, and can note its gradual development into an important source of state income. Nor has it as yet lost much of its prominence. Notwithstanding the great increase of other branches of taxation, customs are still a conspicuous part of nearly every national budget, and in some countries are regarded as the only convenient mode of levying dues on consumption.1
The most primitive form of this kind of taxation is probably that known as a transit duty, imposed on goods passing through a district. Modern African travellers have made us familiar with the I ‘gifts’ demanded by each petty chief in return for leave to go through his country, an exaction which in the trader's case is practically a tax on the wares that he carries. How natural such a system is its revival in the earlier Middle Ages shows. In that disorderly condition of society each lord or seigneur asserted his right to charge dues on goods in passage, basing his claim on the services that he rendered by keeping the roads, bridges, and water-ways in fit condition, and by protecting the trader against violence. The collection of the tolls was, however, far more regular than the performance of the corresponding services, and therefore the first efforts of reviving commerce and increased royal power were directed towards the curtailment of such vexatious dues, which were either abolished or confined to payment for actual service done.1 The use of transit duties was, however, continued in state taxation, and they have only been given up in the present century.
Next in historical order comes the export duty, levied on commodities as they leave the State's territory. The reasons for the employment of this kind of duty in early times can hardly be adequately appreciated, without considering the differences in economic beliefs and conditions. By taxing exports it was thought that the foreigner was made to pay a high price for native wares, or at worst that a more abundant supply was kept for the home consumer. Even if the burden should fall on the native producer, the article taxed was generally an important one, and its proprietors were bound to contribute to the public revenue. In fact the export duty is often a mitigation, introduced in the interests of the Exchequer, of the more rigorous prohibition of export.
The field of action for export taxes has been greatly diminished by the influence of the mercantile system,1 which, looking on exportation as advantageous, was naturally hostile to anything calculated to restrict it. The few exceptions that it admitted for special reasons2 have since been removed by the change in commercial policy, so that the use of export duties is now on a very limited scale.
The decline of the older forms of customs taxation has not affected the import duties, which indeed have come to be regarded as synonymous with the customs. The complete abolition of duties on exports would hardly affect the finances of European States, but anything that disturbed the revenue from imports would be the cause of grave concern to nearly all nations.3 Though probably of somewhat later origin than transit or export dues, duties on imports were well established at an early period. They were employed under the Roman Empire, with separate customs lines or points for each province,4 but the rates were moderate, not exceeding five per cent. ad valorem. The break-up of the Empire brought back the ruder state of things already described, and it was not until the royal authority became somewhat firmly established that duties on imports were effectively levied. The cities exercised the power of taxing goods, each in its local market and the adoption of this course had in many cases the same effect as the imposition of an import duty, but the great agency in the development was the expansion of the king's administration. England supplies the earliest example with its ‘customary’ dues on wine, accompanied by the heavy tax on exported wool.5 Other European countries followed the same course. France, e.g. adopted import taxation at a later date, export and transit dues being at first more prominent. As trade increased, and as the desire of encouraging national industry took a firmer hold, resort to import duties became more frequent. The rise of mercantilism, discernible in England from the time of the Tudors, and in France from the sixteenth century,1 supplied a fresh force in favour of this form of taxation, while it tended to lower its financial importance in comparison with its use in assisting native producers against their foreign competitors.
Amongst the great services that Adam Smith performed for the cause of sound finance, his establishment of the true function of import duties was undoubtedly one. His vigorous attack on their employment as an instrument of economic policy helped materially to bring out their true use as a fiscal agency. To gain a large revenue and at the same time protect native industry from the entry of foreign goods was, he plainly showed, impossible.2 The revenue duty is not protective, and the protective duty is not revenue-yielding. The influence of Adam Smith's teaching on administrators, and the need of revenue in consequence of increasing outlay, have led to at least a partial recognition of the financial aims of import taxation. Even in countries that adhere to a rigid system of protection, some of the duties are solely productive of revenue, and in all, the financial aim crosses and modifies the political one. A great deal of the modern protectionist revival is really due to the need of revenue to meet growing expenditure. The general adoption of a purely financial customs system with complete exclusion of all other aims, may be long deferred, but State requirements will always secure that the gaining of funds shall be one of the ends sought. The real danger lies rather in the probability of the methods employed being wasteful and unduly oppressive to the consumers.
§ 2. In order to understand the position of the customs in the fiscal system, it is essential to see that they are in reality a form or mode of collection, rather than a distinct branch of taxation. This point has been indicated before,1 but it is worthy of repetition. Whether a given commodity—say salt—is taxed directly in the possession of the consumer, or indirectly, either by excise supervision over the producer, by making the production a state monopoly, or, finally, by levying a duty at the frontier, is in one respect immaterial, as any of these methods secures taxation of consumption. The separate treatment of the customs is only defensible on historical and technical grounds. This fundamental unity of the various forms of taxation on consumption at once leads to the conclusion that most of the conditions governing the excise may be applied without hesitation to the customs. Thus the whole formation of the tariff should be determined by the parallel system of internal taxation, and the rates of duty in both should be exactly the same. No one has disputed the justice of imposing a customs duty where an excise one is already in force. To allow, e.g. foreign spirits to enter duty free, while native ones paid heavily, would at once reduce the revenue and divert the normal course of industry. But exactly the same reasoning applies to the case of an import duty without an equivalent excise one. Expenditure is in this case also diverted, with the double evil of forcing some of the consumers to take what is in their opinion an inferior article and depriving the State of funds.
The problems of the excise as to the number of taxed articles and their selection reappear in connexion with the customs, though some modifying circumstances also occur. As regards the first, it is abundantly established that in order to secure productiveness only a small number of commodities should be taxed. This is best shown by the fact that in all countries the really productive articles are few in number. Before the restrictive system had been seriously altered in England (1839), five-sixths of the receipts came from nine articles. Forty years later (1880), three-fourths of the French customs revenue was raised on eight principal commodities; in 1900, more than half of it on four commodities: in 1887, corn, coffee, tobacco, and wine provided more than one-half of the German customs, and in 1899 corn, petroleum, and coffee performed the same service.1 The lesson of the excise is repeated in respect to the customs. It is further clear that more than a single article will have to be taxed. To secure the maximum of revenue with the minimum of friction, it is expedient to get a sufficiently broad field on which to operate. By this means the stability of the revenue is best secured. A particular commodity may fluctuate in its yield from year to year, but the general customs revenue can be made to annually approximate to a certain amount for a long series of years.2 The adoption of a pure revenue system greatly assists in the attainment of this desirable result.
The administration of the customs is relieved from one of the technical difficulties of the excise. Its treatment of all commodities is very much alike, and there is no interference with the work of production, or the development of industries; nevertheless other complications arise. The supervision of a long frontier is an arduous task, and where high duties are imposed, contraband trade can hardly be prevented. The more portable commodities are therefore not fitted to bear heavy duties, and, in fact, the limitation of taxation to products of distant countries, and to fairly bulky articles, would, from this point of view, be advisable. It has been suggested as a rule of fiscal policy that customs duties should, as far as possible, be placed only on those goods that are not produced at home.1 This, however, is hardly practicable, since, even where the exact commodity is not of native production, some available substitute is, and a tax that stimulates the use of substitutes is, in principle, as vicious as a protective duty. This problem arises in connexion with the English tea and coffee duties, but is not in their case of much practical weight.
The further questions as to the treatment of necessaries and raw materials must be answered in the same way as in the excise. Both are injurious, if they can be avoided, but the wants of the State may, as we saw,2 compel the taxation of such articles as salt and corn, in which case the customs system must levy its part on the tax. Taxes on raw materials, though they impede industry and raise prices unduly, may, on the whole, be the least vexatious mode of reaching a particular class that would not otherwise contribute its share. A tax on raw cotton might, e.g. be the most effective and least irritating way of taxing the consumers of calico.3 In fine, the customs system requires to be thoroughly adapted to the conditions of the general taxation on consumption, of which it forms a part, and has besides to conform to the technical limits imposed by its constitution and mode of working. Productiveness, equity, and economy both with regard to the cost of collection and the loss imposed on the community are the ends to be realised, and of these, the first and last are the most important, as unfairness in the pressure of taxes on commodities can be rectified by alleviations in other parts of the tax-system.4
§ 3. The English customs system is remarkable for its rigorous adherence to the principle of purely financial duties. All traces of a political aim in the imposition of customs charges have now disappeared.1 This result has, however, been reached only as the result of a long development, during which other principles were operative. England, from its insular position and its stronger government, was more favourably situated than any continental State in respect to this form of tax. From being merely customary charges on wine and wool, the port duties expanded in the seventeenth century into a broader system. The receipts—derived from the general tax of five per cent. on all imports and exports, and the duties on wine, cloth, tobacco, silk, brandy—rose from £127,000, in 1604 to nearly £500,000, in 1641, and nearly £1,000,000, in 1688.2 After the Revolution they fell off, owing to the French war and the increase of duties to ten per cent., but by 1702 they came to £1,500,000.
All through the eighteenth century, war and the influence of the mercantile doctrines hindered the growth of the customs revenue; profitable lines of trade were closed, and prohibitive duties encouraged smuggling. The most prominent features were the imposition of special duties and the increase of the general import duties. Wines, spirits, sugar, tea, and coffee had all to pay extra charges, while the ten per cent. general charge of 1698 became fifteen per cent. in 1704, twenty per cent. in 1747, and twenty-five percent. in 1759. The pressure of the American War of Independence brought further additions in the shape of two separate five per cent. increases on the total duties existing on each article, with further extra duties on sugar and tobacco. Far greater, however, was the effect of the French wars (1793–1815), with the enormous outlay in which they involved the country. At six different times the import duties generally were raised, besides heavy special increases on particular commodities. The final result was that at the close of the conflict in 1815, the tariff contained nearly 1,400 items, and the rates were in many cases prohibitive.
In this unfortunate course of development but two periods of mitigation occur. Walpole's long peace administration (1722–39) secured the carrying of some desirable reforms; such as the abolition of the general export duty, the reduction of the more onerous duties on raw materials and the adoption of a new valuation of goods.1 The opening of the younger Pitt's ministry also promised well. The duties on tea and coffee were lowered (1784); the Eden commercial treaty with France (1786) enabled an open trade to be carried on between the two countries, and in 1787 the customs laws were consolidated. These measures, however, had but a temporary effect; the need of securing revenue made recourse to bad taxes necessary, when the productiveness of the better ones was exhausted. But from the fiscal point of view it is plain that a simpler and better regulated system would have been far more effective. In spite of the oppressive duties on almost every article, and the frequent increases of rates, the returns were not what might have been expected. In 1739 the yield was less than in 1702, and the growth up to the accession of George III. was slow.2
In the period 1820–1860 this complicated and uneconomic tariff system was completely transformed. The old prohibitive duties were removed; so were all the surviving export taxes. Raw materials, articles of food, and, finally, manufactured goods disappeared from the customs list, until the attention of the customs staff was concentrated on a small number of productive articles, taxed at suitable rates. Thus the customs system became nearly as simple as the excise, though, owing to the conditions of production, it included somewhat more articles. Notwithstanding this notable diminution in the number of dutiable goods, the yield was fully maintained. We are not concerned here with the history of this important reform, carried out in more logical and consistent manner than is usual in English legislation.1 Still less have we to consider the economic issues of the free trade contest;2 but it is in place to note the real cause of the financial success achieved. It was by singling out the fiscal element in import duties, and neglecting other considerations, that the revenue was maintained so close to its former level. The great number of duties created or increased between the Revolution of 1688 and the Battle of Waterloo had two grave financial defects, for (1) they were not really productive of revenue,1 and (2) they violated the rule of ‘economy’ by taking far more out of the taxpayers' pockets than they provided for the State Treasury. The successive prunings of the customs tariff removed what had little life, and gave room for growth to the branches that remained. Cheaper raw materials made industry more effective; cheaper food left a larger surplus to be spent on enjoyments, and lower duties on the productive articles stimulated consumption, while they diminished smuggling. Consequently there was an apparently immense remission of duties without any real loss to the revenue.2 It must however, be noticed that the low rates of duty—those on tobacco and spirits excepted—were accompanied by the development of direct taxation, and the stamp (including the succession) duties. The emergency of war or any weakness in financial management3 was certain to lead to a return to higher customs duties and the extension of the list of ‘objects’ under charge.
Accordingly, in 1900 the tea duty was restored to the rate of 6d. per lb., at which it had stood previous to 1890, and the customs duties on spirits and beer were raised to correspond with the excise. In the next year sugar was taxed at 4s. 2d. per cwt., with a number of equivalent duties on substitutes, while the long disused export duty was revived in respect to coal, 1s. per ton being the rate. In 1902 the so-called registration duty on corn, which had been repealed in 1869, was reimposed. Thus the financial policy which prevailed since 1846 has within the last two years been decidedly modified by increasing the area of taxation.
The chief contributories to the customs revenue are now tobacco, tea, sugar, and spirits. The first mentioned article paid £12,839,000 in 1900–1, but the return fell to £10,365,000 in 1901–2. Tea has been increasing in yield for several years; in 1899–1900 it gave £5,552,000, in 1900–1 with an additional duty of 2d. per lb. its yield was £6,275,000. The sugar duty for its first year (1901–2) produced £6,390,000. Imported spirits paid £5,133,000 in 1900–1. The other articles deserving notice are wine, coal, and corn. The wine duties have been falling off, their yield in 1901–2 was only £1,450,000, £38,000 less than in the preceding year. The export duty on coal during the year that it has been in force produced £1,314,000. The duty on corn is estimated to yield £2,350,000, and, if the expectation is realised, will rank fifth in order of productiveness. The present situation of the English customs tariff is of peculiar interest. Before the recent changes it seemed quite possible that the normal growth of revenue and the accompanying extension of direct taxation would have allowed of the removal of the tea duty, together with the smaller imposts on coffee, cocoa and dried fruits. The customs would thus have been limited as the excise is to taxation of intoxicating drinks and tobacco. At present the most prominent consideration is whether there will be a further extension of indirect taxation or a return to the simpler tariff of the end of the 19th century.1
As regards the particular objects of charge, the chief difference from the excise lies in the fact that certain exclusively foreign products are taxed. Tea, coffee, figs, raisins, currants, and wine are not British products, a position that fiscal regulations have also given to tobacco. Hence these commodities are contributories to the customs only. Beer and spirits come under both departments. An important development in fiscal expedients has led to what is practically a connexion between the two branches. The bonding or warehousing system, by which goods can be landed and stored free of duty, if they are placed under official control, is extensively used, and is now available in several inland towns, with the result that customs and excise become practically intermingled. Of the advantage of this concession it is needless to speak, but it is found rather difficult to extend it as far as traders desire, owing to the extra cost that it causes.1 At all events, the sacrifice imposed on traders and on the community is minimised by this means, especially when the very small number of dutiable articles is taken into consideration.
§ 4. France, on the whole, shows a greater difference from England in customs (douanes) than in internal taxation. Not only are the dutiable articles much more numerous, but the aim of gaining revenue has never been the sole end in view. To reach the position of England, an entire recasting of the tariff would be necessary. All the points in which reform was carried out in the latter country remain for treatment. Food, raw materials, and manufacturers are all subject to import duties, often high in amount. The development of this system can be traced from the sixteenth century, but its most striking period was under the administration of Colbert (1661–1683), when the old export and transit dues were diminished and the import ones, especially those on manufactures, increased. The whole customs system was, however, affected by the absence of unity, the internal duties between the different provinces being just as heavy, and far more injurious to trade. These obstacles were finally removed by the Revolution, and the reform tariff of 1791, which is the basis of the present structure, was established.2 Unfortunately the liberal provisions of this measure were not continued in subsequent legislation. From the outbreak of war in 1792 to 1860, political rather than financial considerations governed the framing of tariffs in France.
The more liberal policy introduced by the Cobden Treaty (1860) prevailed for some twenty years. Under it both revenue and protective duties were lowered and the total yield was less.1 From £6,000,000 in 1859, the net customs revenue fell to £4,880,000 in 1869, but this, as Leroy-Beaulieu has shown, was due to the reduction in the duties on coffee and sugar. After the Franco-German war (1870–1) the need of revenue made the imposition of heavier taxation imperative. This coupled with the growth of protectionist sentiment led to the denunciation of the treaties of commerce and the re-establishment of corn duties in 1881 (increased in 1888 and 1891), and a general increase in duties. The customs revenue rose in 1872 to £6,000,000, in 1880 to £13,360,000, in 1885 to £15,440,000.2 The effect of the latest adjustments in the tariff are exhibited in the yield for 1892, which exceeded £18,000,000. The highest point was attained in 1898, when the customs and salt duty almost reached £20,000,000. The returns for 1900 show a decline to the yield of 1892.
One result of this system is the comparatively small amount of revenue received. Contrasted with the English system, where for many years a revenue of £20,000,000 was obtained without any direct pressure on the necessaries of life, or the raw materials of industry, the highest yield of the French customs has not reached £20,000,000, though the list of dutiable articles is a long one. Nor does the French customs revenue possess the expansive power of the English one, as proved in the great increase of the last year (1901–2). The smaller return may be partially due to the lower standard of living in France, the difficulties of supervision, and the different position of taxed products, e.g. wine and tobacco are taxed solely by the customs in England. But the full explanation is to be found in the unproductive character of so many of the articles taxed. Thus, out of a total yield of £13,400,000 in 1887, but six articles produced more than £500,000 each, and they made up £9,800,000 or nearly three-fourths of the total. All the remaining goods produced only £3,600,000 or £400,000 less than the single item of coffee. The same feature appears in 1900. Out of the total of £18,000,000 only three articles—coffee, petroleum, wine—contributed more than £1,000,000 each, and their yield came to £7,700,000, or over 42 per cent. Only six others yielded more than £500,000 each. Thus the duty on nine commodities came to £12,500,000, or almost 70 per cent.1 Even of the productive duties many are seriously inconvenient, especially those on coal and timber. The corn duty, in addition to its protective operation, is very uncertain in yield, varying from £3,750,000 in 1894 to £668,000 in 1900. It is quite evident that the revenue is really supported from a small number of commodities, and primarily from coffee, which supplied £4,280,000 in 1893, and £5,050,000 in 1899. The duties do, it is true, bring in some revenue, and thus help to make the budget balance, but only at an excessive cost—a reform of the direct taxes and readjustment of the more productive duties would be the best course.
The absence of any due relation between the customs and the internal taxes is a further blot from the financial point of view. An import duty, uncompensated by an equal charge on the corresponding native product, causes a diversion of demand that is unprofitable both to the State and the consumers. Regarding such a method as—what it really is—a bounty on home production, we can see how an unnecessary cost is incurred through the system. More particularly is this true of the duties on raw materials, such as the various yarns, and on machinery and implements. Though such taxes have little direct financial significance they do much to dry up the source of all taxation by retarding the development of industry and the growth of commerce. While, then, the French customs system could hardly be as productive as the English with its duties on tea, tobacco, wine, and foreign spirits, it might yield a satisfactory contribution of at least £12,000,000, or probably more, by duties concentrated on a small number of commodities and this revenue would further be steadily increasing, as the relief to industry from the other remissions came to operate.1
§ 5. The Italian customs system, with its comparatively brief history, shows the same faults and illustrates the same general principles as the French one. From less than £2,500,000 in 1865, the return rose to £11,000,000 in 1889–90, but this increase, which was due to the imposition of much higher rates of duty, pressing heavily on raw materials and necessaries, has not been maintained. In 1893–4 it sank to £8,800,000, the highest point since reached being £10,400,000 in 1895–6, and again in 1900–1. The really productive articles are few in number. In 1883 sugar, mineral oils, and coffee contributed more than half (53 per cent.) of the total, or £3,200,000 out of £6,000,000. One important contributory in later years has been the corn duty, which yielded £2,550,000 in 1895–6, and nearly £3,000,000 in 1900–1. Like the similar French duty, and for the same reason, it varies much from year to year, falling to under £1,100,000 in 1898–9. The customs revenue has been kept up to its present point only by very severe pressure on the consumers generally, which, it should be said, is in keeping with the general character of Italian taxation. Reform therefore is not so easy as it would be in France; the high duties bring in a much-needed revenue, and remissions of taxation are not likely to be compensated by rapid recovery through increased consumption.2
The German system is specially interesting as supplying one of the best possible examples of the gradual absorption of smaller customs areas in a common unity. The conditions of the German States, each with distinct custom-houses that were so many obstructions to trade, led the wiser financiers to promote the establishment of fiscal unions between the States. These efforts brought about the series of agreements by which the Zollverein, or customs union, including Prussia, Bavaria, Würtemberg, Saxony, Baden, and most of the smaller territories, was created, and which was the forerunner of political union. The immediate effect of the removal of internal restrictions was an increase in customs receipts, and a reduction of the proportionate cost of collection by one-half. The moderate rates of duty, derived from the Prussian tariff of 1818, assisted this expansion, which was hardly checked by some partial protectionist movements.
The customs union when transformed into the German empire at first continued its moderate financial system, and even (1873) made further reductions. But the need of revenue and the stronger protectionist sentiment brought about a much higher scale of duties in the tariff of 1879. That this important measure increased the receipts is indisputable; from £5,700,000 in 1878 they rose to £11,750,000 in 1885, to nearly £19,000,000 in 1890, to £20,750,000 in 1895, and reached £25,250,000 in 1900. Whether the mode adopted was the best one is not so clear. The corn duties, as in France and Italy, press on the working class, and, owing to the large home production, are decidedly uneconomic. The cattle duties have not even the advantage of yielding revenue. Still more objectionable are the taxes on wood, iron, and machinery in consequence of their effects on industry.
The limitation of the productive articles to a small number is, as we saw, also found in Germany. If corn, petroleum, and coffee were removed from the tariff, more than half of the revenue would disappear; and it is more than probable that a reform of the duties on these articles, accompanied by an adjustment of the inland taxes on commodities, would allow of a great curtailment, if not an entire removal, of the remaining items.1
The tariff systems of Austria-Hungary, Russia, and the United States are even more remarkable for their subordination of financial to political objects. Under the influence of a protectionist policy the revenue duties on tea, coffee, and sugar have in the last-named country been either abolished or cut down to a very low amount, while the duties on raw materials and manufactures are many and high. There is no approach to equality between the internal taxation and the customs tariff; on the contrary, the duties are designedly fixed so as to give a preference to native producers.2
§ 6. The broad result of an examination of the customs systems of different countries is to indicate that financial operations are greatly hindered, and their effectiveness diminished, by the intrusion of politico-economic objects. We may indeed conveniently divide import duties into two classes: (1) the small number that contribute to the revenue in a satisfactory way, and (2) the far larger number that only provide income as it were incidentally. The protective duties of modern societies are in fact often rather a mode of expenditure than of revenue, since by the increased cost of collection that they make requisite, and by their indirect efforts on the financial duties, they take more from the Exchequer than they bring in to it. The line is not always clearly drawn; the same duty may be at once revenue and protective, as in the case of the French and German corn duties; but this situation really indicates either that the protection given is ineffectual, or that a great deal of the tax is wasted by the virtual bounty given to the home producers. Whatever view we may take of the wisdom of a protective policy, we must allow that it means a certain outlay on the part of the State by the sacrifice of what would otherwise have gone to increase the revenue.
Another noticeable feature is the great prominence of import duties. Transit dues have been completely abandoned,1 and export duties have a very subordinate place. They do not exist in France, Germany, or the United States, and until the adoption of the export duty on coal by Great Britain in 1901, might be said to have been confined to countries at a lower stage. Brazil has a productive duty on the export of coffee, as Chile has on nitrates, but India takes the foremost position with its opium and rice duties. The English coal duty, with its yield of £1,300,000, must come next in order. Some of the English colonies also levy duties on the export of their staple product, e.g. sugar in the case of the West Indian Islands.2 But these exceptional cases only tend to confirm the rule that under modern conditions imports are the most effective objects of taxation. Nor is it hard to see the reasons that have made them preferred. The excise taxation of commodities almost necessarily carries with it the use of corresponding duties on imports, and some imported articles are very suitable objects for imposition. Hence their employment for revenue purposes. The desire to encourage native industry accounts for the duties on many articles that are very decidedly unfit to be taxed, and especially for the use of import duties with respect to them. We may indeed trace a general movement by which the transit duty has been abandoned, and the once prevailing export taxes reduced to insignificance, while the import tax comes to the front.
There is a further movement in respect to the customs system that is deserving of notice, viz. its extension over, or application to, wider areas. The case of Germany has been mentioned, but France in the last century, Italy in the present one, and even the United Kingdom are additional instances.1 The latest example is the federation of the Australian Colonies into a single Commonwealth with a unified customs system in 1901. It is highly probable that further advances will be made in this respect. Proposals for customs unions of the British Empire, of Central Europe and of all the American nations, however they may differ in practicability, are all signs of the times, and show the direction in which movement will be made. To understand the real meaning of this tendency it is well to reassert a point previously noticed, viz. that financially considered, customs duties are but one form of the taxation of commodities, and that therefore the formation of a customs union is pro tanto, the substitution of excise for customs. How far this method can be carried at present is not easily determinable, but it may be suggested that ultimately the boundary duties on imports will share the fate of those on the export and transit trades. The taxation of goods at the frontier, in spite of the improvements in the mechanism of collection, is a serious obstruction to trade, especially under modern conditions in which rapidity and despatch are of such great importance. Just as the town octrois would be intolerable in England or America, so it may come to pass that a customs line between England and France will be too inconvenient to be endured. For the immediate future, however, the customs system must remain as a necessary element in the taxation of commodities that the heavy outlay of modern States makes indispensable.
§ 7. The problem of incidence—always a difficult one—is especially involved in the case of taxation of foreign trade. The various parties affected and the very complicated conditions that govern the course of unimpeded trade, must be taken into account before a full interpretation can be given; it is, besides, hard to obtain confirmation or correction of the results of deductive reasoning by appeal to statistics, as they do not throw much light on the really obscure parts of the subject.
To begin with the most primitive form. Who pays the cost of a transit duty? According to Adam Smith ‘duties of this kind are paid altogether by foreigners, and, perhaps, are the only duties that one State can impose on the subjects of another, without obstructing in any respect the industry or commerce of its own.’1 The loss must, he supposes, fall on the sending or the receiving country. This view, however, needs qualification. A transit duty will force trade to take another direction, or if this is impossible will reduce its volume, and thereby injuriously affect the transport industry and the entrepôt business.2 For example, a transit duty in Belgium would be disastrous to the railways of that country and to the position of Antwerp as an international warehouse. If we recognise that a transit duty is an import tax without a drawback on export, we see at once that it is unadvisable for the same reasons that have led to the universal adoption of drawbacks.
The export duty is, generally speaking, open to similar objections. As employed in mediæval times, it was designed partly to tax those foreigners who used the staple product of the country, and partly as an impost on the producers, or owners of natural agents. It is evident that the incidence of the tax will vary according to the position of the article taxed. That the home traders will try to raise the price is certain, but their success in this endeavour will depend on (1) the extent to which outside competition is possible, and (2) the need that foreigners have for the article. Where several sources of supply exist, the effect of taxing one of them will be to turn demand to the others, and where increased price checks demand, it tends to bring about a fall. Thus it may be said that, in most cases, an export duty is chiefly paid by the country that imposes it. Unless the country has a complete monopoly of the product, and the foreign demand remains unaffected by a rise of price, the whole burden cannot be transferred to the consumers. This case is, it need not be said, rarely found,1 but any approximation to it will partly pass the tax to the foreign consumers. Still as a practical result, the bulk of the duty falls immediately on the producers of the taxed product, though it may be shifted by them to the owners of land, skilled labour, or fixed capital concerned in the business. A large number of export duties might even by diminishing foreign trade lower the rates of wages and interest generally.
The effects of an import duty have to be judged on the same principles. The usual incidence will be on the consumers of the commodity, but where no other market is open to the foreign producer, and where any increase of price arrests demand, the burden of the tax will be transferred to the producing country, with of course the same ulterior effects as those found in respect to export duties. It is also true that such a case is hardly in existence. The foreign producer has other markets, and demand is not often so sensitive; besides there is always the possibility of transferring labour and capital to other employments, should the pressure be sufficiently severe.2
The preceding considerations suggest that it is possible, in some instances, to place the weight of taxation on foreigners, and thus to levy what is substantially a tribute from them; but they also show that the probability of success in any design of the kind is very slight. It is further to be noticed that it is through revenue duties only that any advantage of the kind can be gained; a protective duty, if effective, brings in little or no revenue. That such duties are injurious to foreign countries is, we believe, unquestionable, but they are as certainly not advantageous to the revenue of the nation that imposes them. The corn duties of France and Germany may perhaps somewhat reduce the demand for Russian and American corn, and thus lower the price obtained by those countries, just as the English tea duty may have in part been paid by the Chinese; but in the former instance a corresponding excise duty on corn, if practicable, would add far more to the revenue with, on the whole, less sacrifice.1
A study of the question of incidence in relation to customs duties, therefore, leads to the conclusion, that while their real operation is often complicated and difficult to follow, the main burden falls on the country that imposes them, and that it can hardly ever hope, even if it should so desire, to shift any substantial part of its taxation to another nation or nations. On the whole the duties on imports must be regarded in common with the excise, and, where it exists, state monopoly, as one part of the system for taxing the consumption of wealth.
taxes on communications and acts
§ 1. When considering the system of taxation, we recognised that, in addition to the primary taxes levied on the income of the contributors and those secondary imposts affecting the consumption of commodities, there remained a large group of charges not to be placed under either category. Communications, transfers of property, inheritances and legal transactions have all been made to supply a part of the State's revenue.1 The principles on which this part of the tax-system should be based, and the justification for its employment, have also been briefly noticed; but there can be no doubt that very different elements have assisted in its establishment. There is, first, the close resemblance of some of the objects taxed to commodities. A charge on transport is very like a duty on goods transported, and the same close connexion exists in such cases as the advertisement and newspaper taxes: they might be called ‘taxes on quasi-commodities.’ Another contributing agency is the ‘fee’ system. Some of the taxes on acts are but extensions of fees paid for services rendered. Land transfers and other judicial acts require the intervention of state officials, for whose services a charge may fairly be made, and these payments are easily developed into taxes. In like manner, the economic receipts from public industry or possessions may, through the use of monopoly, be carried to a point at which they become in part taxation. Older perhaps than any of the foregoing is the effect of the sovereign's prerogative rights. The general power over the subject's property, whether expressed in the feudal forms, or in the older idea of dominium eminens, issued in duties on the transmission of possessions from the dead to the living, as well as in the case of transfers inter vivos. The fact that all these elements have contributed towards the creation of the taxes under consideration, and supply the historical interpretation of their existence, does not in the least affect the positions that at present the true legal ground of such charges is to be found in the legislative power of the State, and that their financial justification depends on the place they hold in the tax-system. A valid defence can be only based on their being conducive to the ends of economy, equity, and productiveness, and it was in that light that we admitted their legitimacy under present conditions.
§ 2. The first of the sub-classes in this part of the tax system is that levied on communications and transport. The most conspicuous part of the revenue derived by the State from this source has been already considered in connexion with the industrial domain. Post offices and railways are apparently contributors to the economic rather than to the tax revenue. Nevertheless, it is possible to find in some cases a tax element in such receipts. The net earnings of the English Post Office are declared to be for 1901–2 £3,999,000, and of this amount, the far greater part, perhaps the whole, is obtained from correspondence. The rates for circulars and newspapers are not fixed on a profitable scale. It therefore follows that the excess of postal revenue over expenditure is a tax on ordinary and commercial letter-writers, but one of a very moderate nature, though it is not easy to estimate the check that a penny, as against a halfpenny, rate gives to trade.1 Regarded as a tax diffused over the community, it is on the whole defensible, though the tendency to insist that the postal profits shall be devoted to improving the service is already becoming more pronounced. That England, with its dense population and high industrial development, is very favourably situated for cheap postal working is undoubtedly true. Other countries have very little postal surplus to deal with; their difficulty rather consists in keeping up sufficient receipts to balance expenditure.
The Prussian state railways have been in an analogous position to the English Post Office. Such high net receipts as they have obtained could hardly be due to superior management: they rather suggest unduly high rates or inefficient railway service, and in the latter respect there appears to be reason for complaint.1 A slight reduction in train service or delay in delivery of goods may reduce the cost of working, but proves very expensive and inconvenient for traders. For reasons stated before,2 it is not likely that taxation of this kind will continue. The railway service, when under public management, will usually tend to be worked at such rates as will simply cover its cost.
In countries where the railway system is left to private enterprise the question of taxation takes a different form. The companies appear as the possessors of land, buildings, and rolling stock, as well as the recipients of income, and they (i.e. their shareholders) will naturally be taxed for both general and local purposes. Thus the English local rates and the income tax apply to them. Many American States employ a special corporation tax on railroads. But these charges can hardly be regarded as falling on transport, though the last mentioned has in some degree that effect. Nearer to our present subject are the English passenger duty and the French taxes on the transport of goods and passengers. The former, which is a kind of descendant of the duty on stage coaches, used to consist of five per cent. of the gross receipts from passengers, but by a series of abatements and exemptions its yield has been lowered from £810,000 to £330,000, or more than half. The French taxes imposed after the war of 1871 have been removed from goods of slow carriage, but are still levied on express goods at five per cent., and on passengers at a very high rate (over twenty-three per cent.). For 1901 the receipts came to £2,486,000, or about seven times the English ones.1 Several of the American state taxes on railways are based either on the net or gross earnings of the lines; the latter is plainly the English passenger tax in a more comprehensive form.
The questions connected with the incidence of this kind of taxation are somewhat complex. At first it might appear that the tax would simply be added to the passenger fares or goods rates, and would therefore fall on the travellers, or in the case of goods on the dealers, and finally through them on the consumers. On the other hand, it has been pointed out that railway rates and fares are not fixed by cost of service, but, on the principle of all monopolies, so as to get the maximum net return. Consequently, the rates being already at their highest profitable point will not bear any further increase, and a tax on transport will be really a tax on railway dividends.2 The latter view, however, assumes too easily the absolute monopoly of railway business, and also that rates are in all cases placed at the point of maximum profit. The legal, and still more the moral, limits on the power of railway managers cannot be ignored, and they would compel at least the sharing with the users of the service of any gain obtained by the railways, as they would permit an increase in cases of new taxation. In countries where railway construction is still active, a tax as heavy as that in France would tend to check the opening of fresh lines, and therefore, in the shape of diminished railway accommodation, fall on the community. Everywhere the hindrance to fresh outlay would have the same effect, but in a less degree. Thus there is no reason to doubt that, with the high guaranteed dividends of the French railway companies, the tax on transport is shifted from them to the passengers and senders of goods, and in all cases an indeterminate portion falls on them. Such a form of taxation is very undesirable: like a charge on correspondence, it acts in restraint of trade, both with respect to goods and to business passengers. Even in the case of travellers for pleasure it is an impost on one of the most effective means of improvement. If railway earnings are to be taxed, it is better that they should be dealt with directly, either by requiring a price for the concession or a portion of the dividends. To trust to the uncertain action of shifting is not advisable where commercial interests may be seriously affected.1
The same conclusion may be extended to the treatment of telegrams and parcels. Unless on the ground of financial necessity, the effort to raise revenue from these factors of trade cannot be justified. The defence of letter-post taxation is to be found in its general diffusion, and in the fact that it is hardly perceived.
The treatment of the press and advertising agencies in respect of taxation may be next considered. Arising partly out of the system of control adopted by governments with respect to news, the taxation of newspapers by means of stamps was employed in England, France, and Prussia. Both the issues of newspapers and the advertisements in them were taxed. This impost was first established in England in 1712, at a moderate rate, but raised by degrees till, in 1815, it came to 4d. per sheet, while the duty for each advertisement was 3s. 6d. The latter was abolished in 1853, and the newspaper duty in 1855.1 The Prussian tax was repealed in 1874, and the French one three years earlier. Austria, however, has retained the duty on newspapers.
The objections to such taxation are plain enough. To tax the press is to limit the diffusion of information and one of the means of popular education. It has the further defect of being very unequal in its pressure, and at the same time being very likely to become uneconomical, as a tax on journals reduces their sale and lowers their quality.2 The advertisement duty was a direct check to trade, and prevented the growth of businesses relying on the custom of a large and scattered body of persons. These considerations, together with the small revenue from the duties—£500,000 at the highest (1815)—has made their repeal imperative, unless in countries where political reasons make the control of the press desired.
§ 3. We have more than once had occasion to refer to the employment of stamps as a part of the mechanism of taxation. A great many fees, the postal revenue, the Russian and American tobacco taxes, and the newspaper duty in England are or were collected in this manner. It is, however, in connexion with the taxes on acts that the stamp form becomes particularly prominent. So much is this the case that ‘stamps’ in England and the ‘timbre’ in France are actually treated as distinct heads of revenue.3 It is therefore important to state plainly that there is no separate stamp tax as such. The term merely denotes that the mode of collecting the taxes is by the use of stamps. This particular fiscal contrivance—first introduced in Holland in 1624—is peculiarly suited for levying taxes on acts or commercial dealings, and is on that account regarded as being their special feature. Modern European taxation uses it extensively, and sometimes combines it with the older method of registration at a public office. The great convenience of the stamp system results from the facilities that it gives for proportioning taxation to value. By grading the prices of the necessary stamps, the tax on any act or transfer can be adjusted to the amount dealt in, and the formalities are made easier and less cumbersome.
This system of stamp duties—as following English usage we may call it—covers a very wide field and is growing in favour. Extensions to fresh business forms, particularly in connexion with Stock Exchange transactions, have been carried out both in England and Germany, and higher rates are probable in the future. The chief groups into which the system may be divided are:—(1) Taxes on law proceedings and juridical acts; (2) those on the ordinary commercial instruments, on stocks, shares, etc.; (3) taxes on the sale of property, especially immovables; and (4) taxes on gratuitous transfers, including the large and important body of duties on successions after death. This arrangement is in some respects open to criticism, for commercial transactions involve transfers of property, and succession duties have certain points of difference from gifts, but it is convenient as supplying an outline of the classes of objects taxed, and need not be regarded as logically exact.
§ 4. The taxation of law proceedings is a development of the fees charged for judicial services. So far as the charge is merely a recompense for the actual expense that the proceedings cause, it may best be looked on as a fee, but if it is raised to a higher point in order to cover some of the general expenses of justice, it is rather special taxation levied on the class of litigants for the extra advantages it enjoys. Certain classes of the community make greater use of the tribunals, and such taxation compels them to contribute a part of the expense incurred for their use. More careful consideration shows the error of applying the rule of particular interest in this way. The administration of justice is a general interest that affects rich and poor, litigants and non-litigants alike. A tax on legal process is a hindrance to the use of the tribunals, i.e. an obstacle to obtaining legal remedies. The arguments of Bentham on this point have never been refuted,1 and it seems that the true course is to reduce the necessary fees to the lowest point, unless in the exceptional case of commercial courts, where a small contribution towards the permanent expense may perhaps be allowable. Nevertheless, most legal systems do, in effect, tax litigants. The English charges, so far as direct receipts are concerned, hardly exceed the level of fees, but there is a good deal of unnecessary cost in the methods of procedure that is burdensome to the parties and not productive of revenue to the State. France is in somewhat the same position; its strictly tax receipts are probably somewhat less than those obtained in England.2 The German fees from the courts of justice also contain a tax element. The Prussian net receipts from this source were about £1,750,000 in 1868; £2,300,000 in 1894–5, and over £2,500,000 in 1897–8, though the part inclusion of non-contentious fees makes precise statement difficult. The intrusion of taxation into this part of administration should be carefully watched, which is most effectively done by revising the scale of fees at short intervals.
Taxation of juridical acts is open to objection, as in most cases they are necessary for the assertion of claims or rights, and graduation in proportion to value is hardly possible. It is, besides, unwise to put pressure on the poorer classes in connexion with what is so conspicuous a part of state action. The fee principle is the one really applicable to such cases, unless a measure of value can be found, when a proportional scale at a moderate rate may be used, if financial necessities require it. The method of stamps enables this policy to be carried out at the lowest cost, and with on the whole the least evasion.
The duties on juridical acts are not quite clearly separated from those on what we have called commercial transactions. The simplest relation between parties has its legal side; the giving of a receipt or the transfer of a share may be said to be an act of law, but in the great majority of cases this aspect of the transaction passes without notice, and the economic process attracts chief attention. Dealings in bills of exchange, bills of lading, shares, or stock, in the various forms that the modern money market presents, may be regarded as equally suitable objects for taxation with ordinary income, or the use of commodities. They have also the advantage, as it is thought, of falling on the circulation of wealth, and therefore corresponding to and supplementing the duties on the other departments of the economic process. Some recent advocates have discovered another useful function in that they are mainly levied on the gains from speculation (Conjuncturgewinn), which, as being ‘unearned,’ are evidently a fit subject for taxation; while, finally, they present to the practical financier the pleasing prospect of a tolerable revenue without the social and technical difficulties that the taxation of income and commodities gives rise to.
The objections are, however, not to be lightly treated. All such duties are, it must be said, to some extent obstructive of trade. A tax on the formation of companies is so far a check to their establishment. Duties on the transfer of shares tend to keep capital from that particular form of investment, and to make these evidences of ownership less mobile. Even a small tax on cheques is a limit to the extension of banking, and a receipt duty is a charge on the evidence of an important class of transactions in which everybody is sure to be concerned. High rates are in fact an inducement to evasion, or to entire neglect of the requisite formalities, and therefore often cause injustice where claims are disputed. The problem raised by this part of the tax-system is, on the one hand, to avoid undue pressure on the circulation and transference of wealth, and, on the other, to derive sufficient revenue to make the maintenance of the duties justifiable. From this point of view the English method seems the best—viz. that which raises a large revenue from low duties, and escapes unnecessary discrimination and complication by uniform rates, or at most a small number of scales. Great elaboration and minute distinctions between different classes of acts are productive of far more inconvenience to the taxpayers than of revenue to the State. Where, however, ad valorem rates can be easily applied, it is possible to combine simplicity and proportionality to value.1
One particular class of duties, that on the transfer of property, and especially on land and fixed capital, or, in legal language, ‘immovables,’ gives rise to still greater doubt and question. Heavy taxation on transfer has the effect of lowering the value of the articles subject to it, and prevents their ready passage from one owner to another. In the case of such important commodities as land and buildings, any result of the kind is detrimental to economic progress. One of the agents of production is hindered from reaching the possession of those who could best use it, and the total production of the country is less than it would otherwise be. High duties on land transfer are therefore forbidden by the strongest financial and economic reasons, viz. the injury they inflict on the national wealth, and by consequence on the public revenue. Fees sufficient to cover the cost of the legal machinery needed for transfer are legitimate, and where revenue is urgently required, a moderate transfer duty may be employed, just as, under like conditions, raw materials may be subject to excise or customs duties.
On the whole, then, it seems that the place of taxation on acts, whether by stamps or other machinery, is a subordinate one. It cannot wisely be used to collect as large a revenue as either the primary taxes on income and property or the duties on consumption. A very wealthy community with large commercial transactions may be able to bear the levying of a toll on them, provided that it is kept within due bounds. The yield of the penny duties in England may be taken as an illustration, but it must at the same time be remembered that any injudiciousness in the imposition will cause a loss to the trading community, not easily perceived, but none the less present and real.1
§ 5. The regular history of the English stamp duties commences after the Revolution. By the Stamp Act (1694), duties varying from 1d. to 40s. were imposed on legal instruments, which were grouped in six classes, and each sheet of a document was separately taxed. Twenty years later some of the rates were graded in proportion to the value affected, and the duties were increased. Several other increases were made as financial necessities demanded, and the yield of the duties was larger.2 Bills of exchange and promissory notes were brought under taxation in 1782, and receipts in the next year. Fresh increases followed in the time of the great war, and a great many complicated rates were established, until in 1815 the total yield was £2,800,000, of which £1,100,000 came from bills, notes, and receipts. Some reductions and improvements were made in 1850, and the penny receipt duty was introduced by Mr. Gladstone in 1853. The further progress consisted in a wider use of the system of low duties, a closer approximation to ad valorem charges in the variable duties, and an extension to the new forms of documents and transactions that modern commerce had developed. The last-mentioned movement is hardly concluded, though recent legislation has left little to be done in the future, except in the task of removing anomalies. The yield from these different forms is now £7,500,000 annually, of which about £700,000 is received from bills and promissory notes, nearly £1,500,000 from the penny duties,1 and about £3,600,000 from the taxes on deeds, sales, and securities.
The French system is older than the corresponding English one. The duties at present known as enregistrement and timbre can be traced back to a series of dues existing under the monarchy.2 This was one of the forms of taxation that were in substance preserved by the Constituent Assembly, for though it abolished the old names, it retained the regulations under the new title ‘enregistrement,’ and dealt with the two comprehensive classes of ‘acts’ and ‘transfers of property,’ including under these heads gifts and successions after death. Parallel with it were the stamp duties—first used in France in 1665—which were reformed in 1791. The field covered by this system is even more comprehensive than the English one. Transactions of all kinds are brought within the net of taxation by elaborate and complicated regulations. The legislation of the revolutionary period, which at first was ineffective, owing to bad administration, became more productive as settled conditions were restored. The duties of registration were separated into ‘fixed’ and ‘proportional,’ to which, since 1872, an intermediate class known as ‘graduated’ duties has been added. These groups, as their several designations show, consist respectively of uniform, of ad valorem, and of classified rates. In the corresponding stamp system, the charges depend, either on the size of the document (timbre de dimension), or on the value dealt with, and for the former a scale is prescribed. Cheques, receipts, insurance policies, and other negotiable instruments of very varied kinds are brought under this charge.
As a result, the yield of the duties has been a growing one. In 1800 the total receipts were less than £2,800,000. By 1816 they came to £5,200,000, and in 1830 to £7,280,000. In 1860 they reached £14,500,000, and had in 1890 risen to over £28,000,000.1 Their yield in 1901 exceeded £29,000,000. Out of this amount successions (which belong to the subject of the next chapter) and donations contributed £9,000,000, and the duties on land-transfer over £5,250,000.2
So great an increase—tenfold in ninety years, and nearly twofold between 1830 and 1860, and again between the latter year and 1890—is due to three distinct causes, viz. (1) the normal growth of wealth and transactions respecting it; (2) the extension of the duties to new cases; and (3) the establishment of higher rates; and, so far as the stamp duties are concerned, the effect of each has been about equal. There seems to be little doubt that in many cases the rates are far too high and the regulations too complicated. Especially in the case of land-transfer is the first defect noticeable. The duties directly imposed on sale are nearly 7 per cent., and with the stamps and fees the total charge is over 10 per cent.—i.e. where land sells for thirty years' purchase it amounts to at least three years' income. Such a rate is open to the severest condemnation as tending to immobilise the most important form of property and thereby to reduce the productive power of the community.
The influence of French financial legislation on neighbouring countries has been considerable, and nowhere more than in Italy. The duties on transactions in that country have been formed on the same general lines as the enregistrement and timbre, and at first increased even more rapidly in their returns. From £1,400,000 in 1862 they rose to £3,600,000 in 1875, and advanced steadily until in 1887–8 they amounted to £5,500,000, at which point they have since remained, while the succession duties, which were only £280,000 in 1862, had become £1,000,000 in 1876 and £1,470,000 in 1887–8. Enlarged territory, higher rates of duty, and greater stringency in collection were the chief reasons for this growth of revenue.
Neither registration nor stamp duties have acquired as much financial importance in the German States. The transfer of land is not heavily burdened, and the methods of registration are devised for the convenience of the parties concerned. The succession duties are as yet confined to the separate States, but an imperial system of taxes on commercial affairs has been established. Bills of exchange, shares, credit instruments, and commercial transactions have thus been by degrees brought under moderate taxation, and developed by a series of measures in 1881, 1885, 1894, and lastly 1900. The stamp duty on ‘exchange’ yielded £500,000 in 1900. The more important ‘Bourse tax’ increased from £750,000 in 1885 to £1,300,000 in 1890 and to £2,700,000 in 1895. The yield in 1900 was a little less than in 1895.
The revenue obtained is very much below the English, French, or Italian receipts.
§ 6. The actual operation of the duties on transactions is not always capable of being precisely estimated, and in regard to some of the classes the question of incidence has given rise to much dispute. Very often a transaction has reference to some material commodity, and then a duty on it may plausibly be assimilated with an ordinary tax on commodities, and the same principles applied to its investigation. To levy a charge on transactions connected with production is, so far, an increase in the expenses of production that the producer and dealer will endeavour to shift to the consumer. In most of the taxes on receipts and bills the burden, falling as it does on trade as a whole, may be regarded as a tax on business gains. Whether any of it will be represented in higher prices to the consumers will depend on the extent to which the burden is unequally imposed, but under actual conditions this effect is not very likely to be experienced. The duties are too small a proportion of the total cost to have any influence on prices.
Where transfers of property are taxed the problem becomes more difficult, and there is room for doubt as to the real incidence of the charge. From one point of view it may be held that the purchaser, like the consumer of commodities, will in the long run bear the burden, and that therefore the price of land or shares would rise in proportion to the tax. Another view, represented by Adam Smith and J. S. Mill, assumes that in transactions with respect to land the seller is the more necessitous, and has, therefore, to reduce his price by the amount of the tax.1 For a somewhat different reason this way of regarding the matter may be extended. Forms of property are purchased for the income that they yield, but the effect of a tax, so far as it is paid by the buyer, is to lower the return obtained, and besides to make the principal less saleable in the future. It might accordingly be supposed that purchasers would take all these elements into account, and place the whole weight of the present and future charges on the actual holders. The tax on transfer would in fact resemble a fixed tax on the object sold, such as the permanent land tax. There is, on the whole, good reason for believing that the incidence is divided between buyer and seller; the former gets less than he would receive if there were no tax, the latter pays more than he would on the same supposition,1 and some persons keep out of dealing on account of the tax.
Where bills of exchange and commercial instruments, as stocks and shares, are affected, another result may be found. Taxation will tend to drive away floating capital from the countries in which it is imposed. A heavy tax on transactions in the London money market would be so far an inducement to shift them to another country. On this ground it is very undesirable to tax international stocks at higher rates than exist elsewhere. The utmost care is needed in limiting this form of taxation so as to avoid injurious action on capital.
taxes on successions1
§ 1. One large and productive form of taxation which actual legislation often combines with the transfer and stamp duties, but which is of such increasing importance as to require separate treatment, must now be considered. This is no other than the duties imposed on succession to property after death—in well-known English phraseology the ‘death duties,’ but also often described as inheritance taxes. Though such charges are undoubtedly levied on the transfer of property, and are usually—in part at least—collected by means of stamps, they yet possess peculiar features that mark them off from the imposts discussed in the preceding chapter. In the first place, they are not the result of ordinary commercial operations, and differ even from gifts in the circumstance that they are, in a sense, forced or compulsory. Again, the incidence of the duty is distinct from that in the case of ordinary exchanges, while, most significant of all, they amount to, and indeed are by some deemed to be, the best mode of carrying out a general tax on property. All these characteristics fully justify us in devoting some space to an examination of the growth and operation of the various taxes on successions.
The origin of these duties may be traced to the claim of the ruler to take possession of goods that had no owner, or with even greater probability to the feudal dues that were payable to the lord at each change of tenancy.1 But in any case the full establishment of the State made the employment of any form of taxation possible. Recent discoveries have revealed the existence of an inheritance tax in Egypt under the Ptolemies and it may be of even older date.2 Almost at the establishment of the Empire in Rome, we find the policy of death duties adopted by Augustus, who imposed a five per cent. tax on the inheritances of all Roman citizens except those passing to very near relatives,3 a charge which extended with the widening of citizenship until it came in the third century to include all freemen. Modern States, more particularly in recent years, have largely developed the system with very varied scales and grades of duty, so that it has come to be almost universally regarded as an essential constituent in any well-arranged scheme of finance, and seems to be equally approved by popular sentiment and by the larger part of scientific opinion.4 In spite of this weight of authority, both theoretical and practical, the difficulties to be encountered are by no means trivial and are such as to deserve attentive consideration.
§ 2. Succession duties first of all possess the grave economic fault of tending to fall on capital or accumulated wealth rather than on income; they therefore may retard progress. The force of this objection no doubt varies greatly with the economic position of the society and the habits of the people, but it is, nevertheless, always more or less in operation. The distinction between capital and revenue is not indeed so rigid as Ricardo seems to have supposed, and there is some transference of taxation between these two categories of wealth.1 But this in no wise invalidates the proposition that the levy of duties directly on capital tends to reduce the amount of that aid to production. To take a part from a given mass of wealth at the moment of acquisition leads the new possessor to look on the remainder as all that ever existed.2 How far evil will actually result depends on the extent to which the accumulation of wealth has become automatic, and also largely on the amount of the duties levied. By placing succession duties at a sufficiently high point the process of saving would be stopped even in the most thrifty of modern countries. There is, therefore, a pressing need for observing due limits in the rates of charge in order to avoid such a danger.3
A second and more strictly financial difficulty arises from the risk of evasion that high duties are likely to cause. Unless gifts and sales are taxed at the same rates as inheritances there is a strong inducement to resort to transfers inter vivos, or special legal devices by which the liability to duty would be escaped. Here, again, the social and economic conditions are important. The disposition to avoid taxation even by legal means varies in different countries, and so do the forms of property to be dealt with. Thus the great increase of immaterial wealth, much of it of an international character, that has taken place in the last fifty years, supplies readier means of evasion should the possessors desire to use them. The attempt to guard the succession duties by a comprehensive taxation of all transfers is too obstructive to trade and commerce to be lightly adopted, but in case of difficulty it seems the only effectual mode.
So far as the smaller successions are affected, heavy taxation is objectionable in another way, inasmuch as it often presses very hardly on the payers at a time of need. This applies more particularly to inheritances by wives and children, but even in the case of collaterals it is sometimes a grievance. The dissolution of a household is a time of special demands, and the claim of the State may violate that canon of convenience which should govern the application of every form of taxation.
All these circumstances tend to support the proposition that duties on inheritances should not be carried beyond a moderate limit. There is hardly any form of taxation that would be more injurious in its ultimate effects, while at the same time the evils produced by it may not for a long time be attributed to their real cause.
§ 3. The true place of the succession duties in a developed tax system has given rise to much debate, and been the occasion for the promulgation of many ingenious theories.1 We might choose between the application of the protection or quid pro quo theory, by which taxes on inheritances are merely the compensation of the State for the trouble of securing the due devolution of property, the essentially opposite one which regards the public power as a bandit levying the highest charges possible on those estates which have fallen into its hands, and the connected theory of the State as the rightful successor to all property, a portion of which it graciously surrenders to those who claim by will or the ordinary rules of distribution in the case of intestacy. But to those who have followed the exposition of principles contained in earlier chapters, none of these one-sided doctrines will appear even plausible. Taxation on transfers after death is but one part of a general system designed to provide the funds needed for the maintenance of the State. It must conform to the general canons that govern the tax system, and it should be adjusted to the other component parts with which it has to make an harmonious whole. Assuming that we have a rule of distribution, the burden of succession duties should be so adjusted as, together with other taxes, to secure its observance.1 From this point of view the chief difficulty with the succession duties is their necessarily irregular levy. Human life is uncertain in its duration, and, as Gladstone once asserted with his wonted impressiveness, ‘no man can die more than once.’2 Taking the average, however, we find that a fairly constant proportion of property passes annually by death, and we are thus led to regard the death duties as a capitalised income-tax levied only on accumulated wealth, and sparing those comparatively temporary parts of income that result from personal exertion.3 So regarded, they may be progressive as to their rate on the larger inheritances without losing the features that we have just described, and they may even be looked on as a partial realisation of the taxation of one form of accidental or unmerited advantage. Whether they should be employed in this way, or for the furtherance of any wider social ends, such as the better distribution of wealth, is a question, not of public finance, but of economic policy, though it may be said that the result of mixing up social and financial aims is not beneficial.1
§ 4. As applied in practice, the many taxes on succession present at first sight a bewildering variety that makes it almost impossible to regard them as being the outcome of scientific or administrative foresight, or indeed anything else than the result of temporary convenience or fiscal necessity. Closer investigation reveals the fact that they have been usually graduated on two different principles, viz. (1) that near relations should pay less than remote ones or total strangers, and (2) the later idea that large successions should pay a higher rate of duty than small ones, or progression in the usual sense. The former, which is found in nearly every system, rests on very old and long established sentiments. The feeling that the wife and children are, in a sense, joint-owners of the deceased's property, or at least have the best moral claim to succeed to it, is still powerful.2 There is, besides, the already noticed fact that the death of the owner is a time when special outlay is required, so that heavy taxation would involve sacrifice and cause much irritation, and it would, moreover, form the strongest stimulus to efforts at evasion. Hence the complete agreement as to the principle of lower rates in the case of successions by near kin, with at the same time very great differences in the allowances actually made in different financial systems.
Of much greater interest at present is the principle of progression as applied to succession duties. We have already considered the general question,1 but, as in the case of the income tax, some special points are best noticed here. The hope of promoting a better division of wealth has led some opponents of progression to approve of its use in this case.2 Some of the technical difficulties that make progression unsuitable in the case of the income tax are not found here. A return of the total wealth of the deceased must in any case be made, so that the assessment of the duties is comparatively easy. The executor or administrator through whose hand the property passes is, besides, often not interested at all, or very slightly, in evading the duty. Other difficulties no doubt remain. Consideration has to be given to the effect of high duties on the minds and habits of those who are the accumulators of great stores of wealth. They may be influenced to reduce their savings to the injury of the society, or they may employ the various means of evasion that their legal advisers or their own ingenuity may suggest. But behind any actual scale of progression lies the unavoidable danger of arbitrary extension in the future. There is as yet no limiting principle discovered which will determine up to what point progressive death duties shall be carried, and at which their advance should cease. Appeals to the supposed natural rights of owners, or to the equally imaginary rights of the State, can supply no solution of this problem.3
§ 5. The history of the English death duties begins with the Stamp Act (1694), which placed 5s. on probates over £20. This uniform charge—doubled four years later—continued till 1779, when three scales of duty were introduced. The usual process of increase was carried on, and the ad valorem principle was reached by gradual approximation in 1889. After that date the duty stood at three per cent., imposed on all probates and letters of administration. The old arrangement by which a maximum duty was fixed at a certain point1 disappeared, and very small estates—those under £100 and £300—received special allowances. This direct charge on the estate was protected by the account duty—devised by Gladstone in 1881—which was introduced to check evasions, and applied to gifts made within a year of death. Those duties did not include real or settled property, and they therefore failed in comprehensiveness.
The legacy duty, first imposed in 1780, developed in the same way. Though a charge on the receiver of the bequest, it is, like the income tax, in many cases to be paid from the source, that is the estate, and deducted in the payment. Unlike the old probate duty with its practically uniform scale, or the new progressive estate duty, it varies according to degree of relationship, and does not, since 1889, apply to descendants. Its highest point, ten per cent., is reserved for strangers and very distant relatives.
The parallel tax on realty and settled personalty, the succession duty, only dates from 1853. Pitt had failed to establish a tax of the kind in 1796, and it was with great difficulty that the budget plan of 1853 was carried. It amounted to an extension of the legacy duty to successions hitherto exempt.1 This undoubtedly just proceeding failed at first to accomplish what was expected; instead of the estimated £2,000,000, its average yield has been about £700,000, or, roughly speaking, one-third of what was anticipated. The great number of lineal successions and the exemption of debts from the duty explain this failure.
Another and, as it proved, very temporary addition to this group of taxes was the estate duty of 1889, which was a supplement of one per cent. to the probate and succession duties when the property exceeded £10,000.2
The system of death duties as it thus stood in 1889 was extremely complex, and presented some striking anomalies.3 The separation of real and personal property, and the favourable treatment given to the former,4 appeared at first sight a gross injustice. Plausible reasons, and especially the alleged heavy local taxation of land, might be put forward in mitigation, but the striking fact of inequality remained untouched. Settled personalty also, and with less justification, escaped its proper share of the death duties, with the natural result of encouraging the tying-up of property, and thereby producing economic and financial loss. There was, too, an unnecessary amount of complication in the number of duties and in the minute distinctions drawn as to the different interests in property. These defects led to a very general recognition of the need for simplification and amendment, a task which was attempted, and in part achieved, by the Finance Act of 1894.
§ 6. This important and carefully conceived measure dealt with most of the points that we have indicated above. For the probate or account duty, applicable to unsettled personal property only, it substituted a new and all-embracing charge (which also included the estate duty of one per cent. established five years before), to be imposed on ‘all property, real or personal, settled or unsettled,’ and thus at a stroke removed the exemptions complained of, while reducing the number of duties. A second sweeping change was the valuation of real on the same basis as personal property, a provision which extends to the assessment of succession duty, if the successor is ‘competent to dispose of’ the property. Interests in real property will therefore be charged at their full commercial value, and the privileges as to time of payment are curtailed. Settled property passing at death also comes under charge, and contributes to swell the aggregate amount of the estate. Settlements are in addition subjected to a penalty charge of one per cent. over and above the estate duty on their transfer.
So far the changes have been in accordance with the principles admitted by all students of the subject, but the next alteration is of a more questionable character. The imposition of duty on the several forms of property making up an estate is accompanied by their ‘aggregation,’ a process essential for the ascertainment of the rate of estate duty, since it varies with the aggregate amount, beginning at one per cent. and ranging up to eight per cent. in the case of millionaires.1 This is a direct introduction of progression into one part of the tax system, and the advocates of the measure have approved of it chiefly on that ground. We need not reconsider the vexed question of progression, but it may be noticed that the effort to apply it is the cause of most of the technical difficulties surrounding the measure. The elaborate forms of account to be furnished by the executor are necessitated by the principle of aggregation. The sum of property ‘passing on the death’ is a vital element in the assessment of the duty. The comparatively small amount of £1,000 added to an estate of £1,000,000 would increase the duty £5,000. Hence the care and scrutiny required as to the exact total. For the same reason the inclusion of property situated abroad becomes very desirable, but it cannot fail to raise difficult questions of ‘double taxation, which may even lead to international difficulties.’1 More serious practically than either of the foregoing is the uncertainty that must attend a good deal of the taxation under this system. The rate of duty payable by A may depend on B's being brought to account for his portion of the estate, a proceeding which may not take place for years. The older duties were sufficiently irksome, and often pressed hardly on innocent persons. Future experience will probably show a great increase of troubles in this respect. Another effect of the system of aggregation combined with progression, in the case of the larger estates, is to place a heavier burden on the receiver of the residue, even though this be of moderate amount. It is quite possible that the whole surplus might disappear under the action of the law, but to avoid this grievance it would be necessary to make the legacy and succession duties vary with the scale of the inheritance.2
The treatment of landed property, though on the whole in accordance with sound principles, is open to some question. Local rates and taxes are no inconsiderable items in the burdens on land, and some allowance should be made for their existence. Assessment on capital value, though theoretically fair, tends to fall heavily on an object which can only yield a small annual return. To ask at once the equivalent of three years' income is distinctly contrary to the canon of convenience. It might indeed be suggested that an annual tax on land equal in amount to the average death duties should be substituted for them, or arrangements might be made for their commutation into such a charge at the owner's option. At all events, it seems evident that the measure of 1894 has not succeeded in dealing with all the problems that death duties inevitably create.1
§ 7. But whatever be the difficulties surrounding the future of the British death duties, there can be no question as to their value as a steadily growing branch of revenue. The increase during the present century has been very large. Before the changes of 1894 the total return—including the amount allotted to local taxation—reached in the year 1891–2 the amount of £11,000,000. After a slight falling off in the three following years, the new maximum point of £14,088,000 was reached in 1895–6. A loss of £125,000 in 1896–7 was followed by an advance in the next three years to £18,473,000 in 1899–1900. The year 1900–1 only gave £17,090,000, but 1901–2 almost touched the highest point obtained with a yield of £18,398,000.2 In spite of occasional irregularities, the yield is at once fairly reliable and progressive; so that this class of duties may take place with the income tax as an important contributory to the direct taxation that is needed to counterbalance the excise and customs. This very function makes it all the more necessary to avoid rash experiments that might impair the efficiency of this part of the tax system.
§ 8. By means of the elaborate system of registration the French succession duties have been treated as a subdivision of the taxation on tranfers of property. This arrangement brings gifts inter vivos and successions after death under a common system, which is convenient, owing to the characteristics of the Code Civil, but it presents the economic disadvantage of hampering the movement of property. Starting from 1790, the duties on succession were somewhat increased by the measures of 1798, 1816, 1832, and 1850, the latter establishing the same rate of duty for ‘movable’ as for ‘immovable’ property (the former, contrary to the English rule, having been previously favoured). The Franco-German war made a general increase of 25 per cent. necessary; but with this addition, the scheme of succession duties continued unchanged to the end of the nineteenth century. The charge on descendants was more moderate than in England, that between husband and wife somewhat higher. Brothers, sisters, uncles, and aunts paid over 8 per cent.; complete strangers 11¼ per cent. In the actual working of the system several grievances were created, for (1) inheritances were taxed on their gross, not their net, value, (2) no allowance was made for debts, (3) when property was divided into a usufruct, or ‘life interest,’ and a ‘reversion,’ the life tenant paid one-half of the duty, the reversioner paying the full charge, while (4) land was estimated at twenty-five times its annual return for the purpose of the duty.
These defects, together with the strong desire of advanced politicians to introduce a progressive scale of charges, led to a series of attempts to radically reconstruct the French succession duties. After a number of failures the budget law of 1901 provided for the recognition of net value as the basis of assessment (with certain exceptions), and also for the deduction of debts. It further divided the duty between the usufructuary and the ‘bare proprietor,’ according to definite rules. But the most important change—or at all events that which attracted most attention—was the revision of the scale of duties on a progressive basis. Under the new system, somewhat extended in 1902, the duty varies with (1) the relationship, and (2) the total net value of the property received by the successor, and in some cases goes as high as 20½ per cent.1 The financial results of this change will be interesting as an illustration of the working of progressive taxation, especially if taken in comparison with those of the English Finance Act of 1894, which was in part the model on which the French legislation is framed.
But with all their defects the former French duties have proved a productive part of the revenue system. Their yield in 1891 exceeded £7,700,000, they rose to £8,400,000 in 1892, with some fluctuations in intermediate years they advanced to £9,000,000 in 1900, and stood at £8,000,000 in 1901.
§ 9. The Italian succession duties resemble the French (as they existed previous to the recent change), but are rather higher on lineal successions, and a little lighter in other cases. Deduction of debts, if proved on good evidence, is allowed. The receipts from this source increased from £1,000,000 in 1876 to £1,470,000 in 1890–1. The yield in 1900–1 was £1,590,000.
Though the German States nearly all levy succession duties they are of a very moderate character. Descendants are generally exempt,1 and in Prussia ascendants as well as the husband or wife are also free. The highest point in most States is eight per cent. Alsace-Lorraine imposes nine per cent. on strangers. Baden, Hamburg, Hesse, Lubeck, and Oldenburg go as far as ten per cent.2 The example of England and France will probably lead to an extension of these taxes, but proposals in this direction have as yet been decisively rejected by the legislatures.
Switzerland was long remarkable as being the only continental country possessing progressive succession duties. This feature, which is quite in accordance with the system of income and property taxes already described,3 only appears in cantonal taxation, and varies much from canton to canton. In some the duties are proportional and light, in others high and progressive. Thus in Uri a stranger receiving £40,000 has to pay £30,000 in duties. But, as Schanz significantly remarks, ‘so high a property is not found there.’1
The Australasian colonies have signalised themselves by a very active employment of progressive death duties, reaching in some instances to 20 per cent.2 It should, however, be remembered that direct taxation generally has been very little developed in Australia, owing to the great preponderance of customs duties and to the large proportion of gross economic revenue.3
§ 10. In the United States the inheritance tax has been chiefly developed in ‘State’ legislation. Beginning with taxes on collateral successions some legislatures have advanced to duties on direct successions, combined with progressive rates. Thus New York imposed a ‘direct’ tax of one per cent. on personal property over $10,000, Ohio followed with a progressive tax on direct successions (which was declared to be unconstitutional), and a uniform tax on collaterals. The example so set has been followed by a number of States, Minnesota, Nebraska, Washington, and Utah being the latest cases of imitation. It is highly probable that nearly all the American States will adopt this tax in some form or other.1 There are, however, difficulties to be encountered. The constitutions of some of the States, which declare that taxation must be ‘uniform,’ prevent the employment of progressive or graduated rates.2 Then, the economic conditions are not favourable. The interstate mobility of capital is so complete that the strict enforcement of a heavy progressive tax on successions, especially in the case of immaterial wealth, seems almost impossible. Hence, at first sight, the conclusion appears justified that inheritance taxes are, on the analogy of the income tax, better suited for ‘Federal’ than for State administration. Competent opinion in America is, however, agreed in approving of the attribution of the inheritance like the corporation tax to the States,3 and this judgment must be regarded as conclusive.
The Federal Government has confined the use of the inheritance to times of war. In 1898 a duty was laid on successions exceeding $10,000. Descendants, brothers and sisters, were taxed ¾ per cent., for more distant degrees the rates increased up to 5 per cent. In regard to amount, successions over $25,000 paid one-half more; those between $100,000 and $500,000 paid double; the next class—those up to $1,000,000—paid two and one-half times; finally in the case of successions over $1,000,000, the original tax was tripled. The validity of this law was questioned on the ground that as a ‘direct’ tax it was outside the competance of Congress; but it was upheld by the Supreme Court, to the surprise of those who had followed the arguments on the income tax cases.4
On the whole it may perhaps be said that, bearing in mind the peculiarities of the American Constitution and the actual economic conditions of the country, the States are the best organs for levying the duties on successions, but this makes it all the more important that the dangers of the progressive system should be avoided, and that there should be inter-state agreements establishing similarity of rates, and providing for equal and reciprocal treatment where property in different States is concerned.1
§ 11. The problem of incidence might first be supposed not to arise at all in this connexion. ‘Taxes upon the transference of property from the dead to the living,’ said Adam Smith, ‘fall finally, as well as immediately, upon the persons to whom the property is transferred.’2 But this view altogether neglects the ulterior effects on the distribution of wealth that the duties may bring about. If, as Ricardo argued, they fall mainly on capital, it is evident that the whole society suffers by less efficient production, and it is also probable that the higher value of the remaining capital will lead to a rise in interest and a consequent fall in wages. Hard as it may be to trace these results in any actual case, yet, given the conditions, they must be in existence. The pressure of existing death duties on capital is not, however, so clear. The English receipts of over £18,000,000, or the French of £8,000,000, are but a small part of the annual savings (not more than 6 or 7 per cent.). Even if we suppose that the whole amount would be added to savings the effect would not be important. This, however, could not happen, as an equal amount of taxation would have to be imposed in other directions, and it would in some degree trench on capital.1
On the whole, we may best regard the succession duties as presenting a parallel to the income-tax. The latter withdraws annually for the service of the State a portion of the new wealth created in the period; the former operate in the same way, but at uncertain intervals, on the collective wealth of the society.
Dowell, i. 8, for the ‘hide.’ For the Jugerum, Mommsen, Hist. Rom. i. 95. St. Vincent and British Guiana have the uniform tax. Parl. Papers (1891), 181, Taxation of Land.
Clamageran, i. 16.
‘Land (in Ohio) was divided into three classes, according to quality, and there were three rates of taxation per 100 acres; one for land of the first quality, another for land of the second quality, and still another for land of the third quality,’ Ely, Taxation, 134.
Restraints must be placed on the sale of crops until they are inspected by the tax-collector and his share settled.
Wagner, iii. 26; Clamageran, i. 19. Seebohm, English Village Community, 290 sq. For England, Seebohm, 40; Dowell, iii. 67.
Dowell, i. 5.
Vignes, i. 11; Dowell, i 88, 154.
Wealth of Nations, 349–50.
Wagner, iii. 25–6.
Said to be derived from ‘capistratum.’
‘The survey and valuation of Bohemia is said to have been the work of more than a hundred years.’ Wealth of Nations, 351. The French cadastre, begun in 1807, was not completed till 1850. In Madras we hear that ‘in 1855 the work of survey and re-settlement was begun. This work will be accomplished in or about 1895, but certain districts of the Presidency will then have seen this very re-settlement expire.’ Goodrich, Economic Journal, i. 451. In like manner the Irish valuation usually known as ‘Griffiths's’ has become by lapse of time very misleading.
Three valuations of Lancashire made in 1790, 1840, and 1890 respectively, would have few common, or even proportional results.
Leroy-Beaulieu, i. 343. For Italy, Alessio, i. 224–5; Fournier de Flaix, Traité, 498. According to the former, land was taxed in Lombardy, at 25 per cent., in Liguria at 7 per cent.; the latter gives 79 per cent. for Modena and 17 per cent. for Sicily. A new cadastre for Italy is proposed.
Bk. ii. ch. 4, § 5.
Local Rates for 1898–99—
In the last country the returns from gas and waterworks are included in the rates, but are unimportant.
Local Taxation Report (No. 168, 1893) xxxvii-xl. Cp. Blunden, Local Taxation and Finance, 62.
Owing to the great fall in the value of land the assessments are now probably up to, or in some cases beyond, the true amount.
Local Taxation, 17, 50. Cp. Mr. Fowler's Local Taxation Report, xxxv.
More precise figures are—
For the French land tax, Stourm, i. 124–220: Vignes, i. 25–39. Dict des Finances, s. v. ‘Foncière.’
En 1876, 6,614 propriétés étaient expropriées par le Fisc pour le recouvrement de 936,774 francs d'impôt, et en 1877, 6,644 propriétés pour 662,722 francs. Le Fisc dévore la petite propriété trop obérée. De 1873 à 1878, 35,074 petits propriétaires ont perdu leur avoir par l'expropriation forcée. Laveleye, Lettres d Italie (1880), 161–2. For the Italian land tax, De Parieu, i. 205–218; Alessio, Sistema Tributario, i. 88–232.
More accurate figures for 1900 are—
For the German land taxes, Cohn, §§ 303–6; Wagner, vol. iv.; Fournier de Flaix, 393 sq.
Bk. iv. ch. 4, § 3.
Probably lowest in Saxony.
It does not follow, as has been asserted, that Ireland suffers from this system. It would on the whole tell in her favour.
Professor Seligman—Political Science Quarterly, vii. 719—seems to question this proposition, which nevertheless is a necessary deduction from the nature of the land tax.
Bk. iii. ch. 6, § 4. The recent Prussian legislation noticed in § 7 is in accordance with the doctrine here laid down.
The proposal was made by Léon Say in the debates on the Impôt foncier in 1890 (Finances de la France, iii. 437), and by Professor Ely, Taxation, 251–3, who would exempt land from even ‘State’ taxation.
See Ricardo, Principles, ch. 9. McCulloch, Senior, and J. S. Mill all desert him in this case. See Bk. iii. ch. 5, § 6; also J. S. Mill, Principles, Bk. v. ch. 4, § 4.
‘As a matter of fact it appears that a great portion of the farms in England are not rack-rented. If so, it is clear that any increase in local burdens must fall on the margin between the actual rent and the rack-rent, and so far diminish the advantage derived by the farmer from his actual rent being below a rack-rent, and till that margin were exhausted it would naturally be useless for him to apply to his landlord to readjust his rent.’ Goschen, Local Taxation, 165. But as Mr. Blunden (Local Taxation and Finance, 42) points out, in times of depression this may tell in a different way. Rents continue above the economic level, and the rates paid by the occupier are an aggravation of his position.
See Leslie, Essays, 395–7, for an illustration.
See Bk. iii. ch. 5, § 6.
Bk. ii. ch. 4, § 5.
On the English house and window taxes, Wealth of Nations, 355–357; Dowell, iii. 165–192.
Bk. iv. ch. 1, § 4. Sir H. Fowler's estimate for England and Wales in 1891 was £23,560,000, but it should be remembered that other property is included under this heading. Local Taxation Report, xl.
The yield of the Personnelle mobilière has been as follows—
Some of which, however, are reserved for the central government. In 1890 the centimes additionnels raised for state purposes came to 18,262,000 francs.
The figures for the ‘door and window’ tax are—
The Impôt foncier on propriétés bâties, now separated from the land tax proper, gives the following results—
Taking this with the preceding notes we reach the result in the text. Mr. Egerton in the year 1890, estimated that ‘the total tax on land and houses in France will be found to amount this year to about £15,000,000 independently of the personal and ‘mobilière’ tax of £5,500,000 and of the door and window tax of over £3,000,000.’ Reports as to the Taxation of Land and Buildings, (C. 6209), 16.
For the Italian house tax, Alessio, i. 233–266.
Cohn, § 306; Reports on Taxation (C. 6209), 31.
I.e. taking the florin at 2s. The figures are—Austria, 30,713,000 florins; Hungary, 10,000,000 florins.
The plan adopted in the recent valuation of buildings in France, Finanz Archiv, viii. 193–4.
Cp. with the discussion in the text the fuller treatment by Professor Seligman, Incidence, Part ii. ch. 3. His careful discrimination of the different effects of the tax according to its point of first imposition—on the landowner, builder, or occupier—is most valuable as a lesson in the effect of economic friction, but he seems to give too little weight to the forces that shift taxation on the ground owner. In his second edition, Professor Seligman remarks that this criticism ‘seems to overlook’ the statement in his text that ‘as between the landowner and the tenant, the tenant is the weaker party’ (Incidence, 241). The assertion so broadly made is a disputable one. It does not follow that because rent rises with increasing demand, it will rise still further in consequence of a tax. The difference of view as to the elasticity of demand for houses accounts for the difference on this point. Moreover, in the theory of incidence it happens that the holder of a differential gain is the weaker party (infra, Bk. vi. ch. 5, § 6). To avoid misapprehension, it must be added that it is not ‘the tax’ but a portion of it (as suggested by the word ‘taxation’) that has a tendency to pass on to the ground owner. Professor Edgeworth's complete agreement powerfully supports the position here taken (Economic Journal, vii. 66). See for further reference to the latest discussions Bk. iii. ch. 6, § 5.
If the house tax were levied directly from the building owner, the influence of economic friction would keep part of the burden on him.
Professor Seligman (Incidence, 242 n.) asks, ‘But why should the landowner take less? The building owner is in the weaker position, for his building is on the land and under the law goes with the land.’ This implies a misconception of the supposed case. It is the intending builder who is considered, and therefore, the question may be answered thus—because, otherwise, his site will remain vacant. The building owner is not in the weaker position, for his building is not yet on the land. In respect to existing leases there is no room for shifting between the building owner and ground owner, and when a lease has expired, the ground owner absorbs the building owner's interest, or, as Professor Seligman puts it, ‘the building under the law goes with the land.’ Cp. the statement ‘this freeholder is generally spoken of as the “ground landlord,” but ... is in no sense more the owner of the ground than of the house ... At the expiration of the lease both land and house revert to him together.’ Report of Town Holdings Committee, vi. vii. This position is fully accepted by Lord Balfour and his co-signatories in the separate Report on urban rating and site values. Commission on Local Taxation, Final Report, 154. A slight alteration in the text meets Professor Seligman's other objection, viz. ‘that there is no such thing as a strict monopoly value of a lot.
Fawcett, Political Economy (5th ed.), 626. His argument as to the incidence of rates on the consumer is based on too rigid an interpretation of the doctrine of equality of profits.
The latest scheme in this direction is that of a section of the Local Taxation Commission for a special charge on site values. This charge is to be divided between owner and occupier, the latter deducting one-half the tax from his payment. See Final Report, 153–176. More extreme plans are vigorously criticised in this Report.
Some small licenses on manufactures have been retained by the central government, viz. brewers, distillers, tobacco manufacturers, and medicines.
One-third of the rent is now taken as the profit of the farmer, who, however, if he prefers, may be assessed under Schedule D. Previous to 1894 one-half the rent was the standard in England and Wales.
Under the Ancien Régime industry was taxed through the personal Taille and the Vingtièmes.
Most important is the law of 1844, amended in 1853, 1872, 1880, and 1893.
For the Patente see Vignes, i. 52–53, ii. 333–380; Leroy-Beaulieu, i. 393–414; Wagner, iii. 468–489.
More accurate figures are—
The additional centimes include those for State purposes, which amounted to 20,200,000 francs in 1885 and to 39,000,000 francs in 1900.
For the Prussian Gewerbesteuer, Cohn, § 307; Wagner in Schönberg, 273; also Finanzwissenschaft, iv. 18, 20, 31, 32, 41; Taxation of Personal Property (Misc. No. 2, 1886, C. 4909), 8–10. For the recent changes see Wagner's article in Finanz Archiv, xi. 1–76, and J. A. Hill, ‘The Prussian Business Tax,’ Quarterly Journal of Economics, viii. 77–92.
See on these Stts Wagner, iv. 830–46, where the latest changes are noticed. For Bavaria see Schanz, ‘Das Bayrische Ertragssteuersystem,’ FInanz Archiv, xvii. 551–772.
See Seligman, Essays, 136–264 (chs. 6, 7, 8), for a history and discussion of this tax
For a full enumeration of the bases of the corporation tax see Seligman, Essays, 176–9. The most important are those given in the text; see also Adams, Finance, 449–466.
Cohn, §§ 461–3; Reitzenstein in Schönberg, 623; Fournier de Flaix, 401 seq. For the future in Prussia the industry tax will be altogether local.
It is significant that Adam Smith discusses the income tax under the title ‘capitation taxes,’ Wealth of Nations, 367.
Dowell, iii. 3–7.
Vignes, i. 40–1.
De Parieu, i. 139–151.
Seligman, Finance Statistics of American Commonwealths, 53; cp. Ely, Taxation, 209 11. This was the case in Massachusetts until the amendment of the Constitution in 1891, Massachusetts Tax Commission Report (1897), 5.
Lord Avebury (Statistical Journal, lxiv. 567) regards this passage as ‘an admission which amounts almost to a surrender’ of the position taken with respect to the theory of equal diffusion in an earlier part of this work (see Book iii. ch. 5, § 4). It is, however, merely a criticism of the exaggerated form of the doctrine held by the Physiocrats and Ricardo. To hold that labourers do not always, or even generally, shift capitation taxes is quite consistent with believing that taxes are not equally diffused.
In Mr. Dowell's words ‘personal property slipped out of assessment,’ iii. 85; see also Cannan, History of Local Rates, for the limitation of rates to immovable property.
Bk. iii. ch. 3, § 13.
But see § 4, infra, for the partial revival of this tax; also cp. Bk. iv. ch. 9, for inheritance taxes, which are closely akin to sudden charges imposed on property.
The total mass of legislation and legislative proposals is quite overwhelming. It has been collected with characteristic thoroughness in the elaborate work of Schanz, Die Steuern der Schweiz (over 2,000 pages in 5 volumes).
The following table will show the rates of charge—
The following are the areas and populations of the cantons referred to—
The above account of the Ohio property tax is condensed from Ely, Taxation, Pt. ii. ch. 4, which gives full details.
Essays, 61. The recent Ohio Tax Commission is equally emphatic. ‘The system as it is actually administered results in debauching the moral sense. It is a school of perjury. It sends large amounts of property into hiding. It drives capital in large quantities from the State,’ Report, 24.
Report on Local Taxation, 17–18.
Quite as striking is the case of Cincinnati. The following figures give the amounts assessed to realty and personalty respectively at three different periods—
We thus see that while real property has more than doubled in value, the personal property returned is roughly about two-thirds of what it was twenty-five years previously. For further details as to evasion see the excellent Report of the Tax Commission of Ohio (1893), especially 24–31.
The Massachusetts Tax Commission, while recognising certain of the advantages of an income tax, declines to recommend its adoption. See Report, 85–7.
Bk. iii. ch. 6, § 3.
The best American authorities approve of the corporation tax as a peculiarly suitable form of revenue for the States. Thus Prof. Adams concludes that ‘in view of the peculiar duties imposed upon a State, and because of the nature of corporation and natural monopolies, that all special and corporation taxes should be assigned to the State as an exclusive source of revenue.’ Finance, 502.
On the whole subject of the property tax see the Local Taxation Report of Mr. Wells and his colleagues, made in 1871; Professor Seligman's chapter, ‘The General Property Tax,’ Essays, 23–61; his Finance Statistics of the American Commonwealths, 53–66; and Professor Ely's Taxation, 146–201, in which a mass of evidence is collected showing the grievances that arise from the property tax. Professor Ely, however, fails to notice that the same arguments may be urged against the state income taxes advocated by him in a later part of his valuable work (287–311).
See § 8, infra.
See Finanz Archiv, x. 370, where the reasons for the measure are given at length.
The precise rates are:—Property under 6,000 marks is free; between 6,000 and 24,000 marks the tax rises from 3 marks to 12 marks, at the rate of 1 mark for each complete increment of 2,000 marks. Between 24,000 and 60,000 marks the increments are 4,000 marks and the increased duty 2 marks. Between 60,000 and 200,000 marks the increments and increased duty are 10,000 marks and 5 marks respectively. From that point up to 2,000,000 marks increments and extra tax are doubled. A property of 2,000,000 marks (£100,000) therefore pays 1,000 marks (£50). Every further addition of 100,000 marks involves an increased charge of 50 marks.
For the new Dutch system see Boissevain's elaborate study, Finanz Archiv, xi. 419–682 (reprinted separately); also Seligman, Essays, 322–30. The measures are due to the eminent economist Pierson, and were defended by him on financial, not on social grounds.
‘It was in this crisis of the revolutionary war that, when Mr. Pitt found the resources of taxation were failing under him, his mind fell back upon the conception of the income tax.’ Gladstone, Financial Statements, 14.
It has twice within this period acted as a war tax, viz. in 1854–56, during the Crimean War, and in 1900–1903 for the South African war.
See B. Sayer, On the Income Tax, 1833; Parnell, Financial Reform, 1830.
The last time that its existence was endangered was by Mr. Gladstone's proposal of abolition in 1874.
Financial Statements, 20.
This method of stoppage at the source has been generally recognised as a characteristic and valuable feature of the English income tax. This is the judgment of Prof. Dunbar (Quarterly Journal of Economics, ix. 38–40), Prof. Seligman (Pol. Science Quarterly, ix. 644–5) and quite recently of Mr. Hill. The same view is forcibly supported by Mr. Blunden. The only dissentient of note is Prof. Adams, who objects that the principle is carried too far. ‘It [the government] taxes the salaries of public officials by not paying them as much as it promised.... The result is the citizen is never sure of getting into his pocket all that he or his property earns’ (Finance, 479). Further ‘it may be questioned if the use made of it by the English income tax is quite honest in its purpose or fair in its results’ (ib. 484). Two points are raised by this criticism, viz., (1) the honesty of the system, (2) its fairness as between different sections. The former seems to anyone actually conversant with the English system almost ludicrous. What is the advantage to the citizen of getting into his pocket what he must immediately pay out again? There would be the necessity for a double transfer of the amount of the tax. So far as public officials are concerned the contention, to give it any substance, should be for exemption from taxation of their salaries. The second point really attacks, not the method of ‘stoppage at the source,’ but the income tax itself, on the ground that all incomes are not equally discoverable. This is the great difficulty that any income tax must encounter; but it can hardly be held that a contrivance which makes some parts of income more easily ascertainable adds to this weakness. Were all income capable of being taken at the source the income tax would be perfect. An abandonment of the method would increase, not diminish, the inequality inherent in this as in all taxes.
The following figures of income assessed are instructive—
On the Income Tax see Dowell, iii. 90–120; Hill, The English Income Tax. Chailley, Impôt sur le Revenu, 89–218, gives a full and lucid account of the English system. The series of studies in the Economic Journal by the late G. H. Blunden (whose loss Englsh students of finance must deplore) are most instructive: see vol. ii. 637–52; v. 527–31; vii. 607–18; xi. 156–68.
I.e. on a small part of permanent income; the other groups pay at the lower figures mentioned in the text.
This view has received the support of Newmarch and J. S. Mill, as, too, of Leroy-Beaulieu and Chailley.
For the Italian income tax see Chailley, 220–344; Alessio, i. 318–370.
See the careful discussion by Piernas Hurtado, Hacienaa Publica, ii. 457–68.
See Bk. iv. ch. 3, § 2.
For the Prussian income tax see Cohn, §§ 315–20, and for the recent reform, Wagner, Finanz Archiv. 551 sq.; also J. A. Hill, ‘The Prussian Income Tax’ in Quarterly Journal of Economics, vi. 207–26.
More exact figures are—
Supra, Bk. v. Ch. 2, § 10.
See Sieghart, ‘The Reform of Direct Taxation in Austria,’ Economic Journal, viii, 173–82, and the same writer's fuller account, Finanz Archiv. xiv. 1–110
The following are the precise grades—
The amount was $69,800,000 (£14,000,000). See infra, Bk. v. ch. 4 § 6.
See for this abortive income tax the admirable articles of Profs. Dunbar (Quarterly Journal of Economics, ix. 26–46) and Seligman, Economic Journal, iv. 639–67.
Among opponents of the income tax are M. Guyot and Léon Say, chiefly on the ground of its progressive and ‘personal’ character. Guyot, Impôt sur le Revenu; L. Say, Les Finances de la France, ii. 163–78; iii. 255–87; iv. 576–99, 645–67. M. Chailley, in his elaborate Impôt sur le Revenu, is a strong supporter. Leroy-Beaulieu (i. 491) is neutral. Mr. Bodley explains that the income tax is always regarded as a device of radical politicians, and adds, ‘My own observation’ leads me to believe that an income tax is unsuited to the French temperament, and that its imposition would be a mischievous error. France, 622.
Bk. iii. ch. 3, § 9.
This is the really decisive argument against direct progression, as contrasted with the English method, which is ‘degressive,’ and which throws the task of claiming exemption or abatement on the person interested.
‘The real tendency of all these exemptions,’ said Mr. Gladstone, ‘is the breaking up and destruction of the tax.’ Financial Statements, 45.
A new period of assault on the alleged inequalities of the income tax seems to be approaching. Mr. Blunden's proposal of a property tax (really a higher charge on permanent incomes) has much to commend it in the case of a high rate to meet exceptional outlay.
Limited to one-sixth for land and one-eighth for houses.
Bk. v. ch 2, § 4.
Fawcett, Political Economy, 538 sq.
Bk. iii. ch. 1, § 12.
Wagner, ii. 233, 515; Cohn, § 332.
This is probably the best plan in a purely descriptive or historical treatment. It has been adopted by Mr. Dowell (who gives tobacco a class to itself), and in great measure by De Parieu.
Tobacco, e.g., is free in India, subject to excise in the United States and Germany, monopolised in France and Italy, and taxed by the customs in England.
Cp. Cato's over-valuation of articles of luxury after the repeal of the Les Oppia, and his taxation of them.
Bk. iii. ch. 4, §§ 8, 9.
Leslie, Financial Reform, 241–2. This is one of the many instances in which economic forces act and react on each other.
See Bk. iv. ch. 2, §§ 1–5 inclusive.
To be distinguished from the trade licenses noticed in Bk. iv. ch. 2, § 8.
The Irish rate of 2s. (with 6d. additional for stamp) is for this reason better than the English one of 7s. 6d.
The respective contributions are—
The licenses on carriages should be added; they are placed with the ‘drink’ licenses in the financial returns.
Thus in England the receipt from the Excise on commodities has been for many years, speaking broadly, 30 per cent. of the total tax receipts—£26,050,000 out of £78,665,000 in the year 1894–5—but now hardly exceeds 25 per cent.—£31,600,000 out of £121,893,000 in 1901–2. The contributions indirectes and the fiscal monopolies in France show for 1901 a gross yield of £41,800,000. Allowing for the expenses of working the tobacco monopoly, the balance remaining is over 25 per cent. of the total tax revenue. The German Imperial excise is of less importance, but still gives a substantial contribution, estimated at £15,800,000 for 1900–1. In the United States the internal revenue for 1899–1900 was $233,000,000, that for 1900–1 $238,000,000 or over 40 per cent. of the receipts from every source.
Bolles, Financial History (1861–1885), Bk. i. chs. 9. 10; Wells in Cobden Club Essays (2nd series), 479.
The first excise was created by the Long Parliament in 1643, Dowell, ii. 8 sq.; Sinclair, History of the Revenue, i. 46, 278.
Subject of course to the complicated reactions discussed in Bk. iii. ch. 5, § 5.
Bk. ii. ch. 3, §§ 6, 9.
Bk. iii. ch. 4, § 5.
The hostility of the Physiocrats to indirect taxation was shared, so far as internal taxation went, by the other sections of the liberal party. It is note-worthy that this disposition is also found in the labour parties of the present day, who resent taxation on commodities consumed by the working classes as taxation of labour. Cp. Lassalle, Die indirecte Steuer und die Lage der Arbeitenden Classen.
Bk. iii. ch. 4, § 6.
In preceding editions it was stated as an illustration that, ‘With an increased expenditure of £20,000,000 per annum in Great Britain, the exemption of sugar from taxation could hardly be continued.’ This has been confirmed by fact.
Cp. Bk. i. ch. 6, § 3; and for a notice of the fiscal aspect of protection, ch. 7, § 2 of the present book.
The principle stated in the text is important, but is often overlooked. Thus in the controversy on the financial relations of Ireland to Great Britain it has been argued that the imposition of the same taxes must produce equality, the different character of consumption in the two countries being neglected. On the other hand, Sir R. Giffen (Financial Relations Report, ii. 161) has suggested that the possible existence of inequality is a ground for separate financial treatment, overlooking the fact that a system of taxation may be unequal as between individuals and classes within a single country in exactly the same way. From which it follows that the true remedy for injustice in either case is reform of taxation. Provided the tax objects are properly selected there is no injustice in placing two countries under a common system.
Bk. iii. ch. 3, §7.
Wealth of Nations, 375.
For Economics this distinction has been worked out by Menger, who grades commodities in ‘orders’ according to their nearness to the consumer. Cp. Marshall, Principles (3rd ed.), 133–4.
Some license duties and that on the railways’ receipts from passengers are placed under the excise, but they really belong to another category of taxes (see ch. 8 of the present Book).
See for the customs infra, Book iv. ch. 7, § 3.
The case of the sugar duty illustrates admirably the principle of relativity in taxation. Recognition of the fact that sugar is relatively a good object for taxation is quite consistent with the belief that the removal of the sugar duty in 1874 was highly beneficial.
The hereditary excise had the former, the temporary excise granted for the life of the King the latter object, but the distinction was purely formal.
The severity of the revenue laws was greatly increased. Hallam declared that ‘our fiscal code ... is to be counted as a set-off against the advantages of the Revolution.’ Constitutional History, iii. 290.
Wealth of Nations, 369.
‘The revenue from inland duties had varied considerably in different years. In 1700 over a million, it was in 1702 nearly £1,400,000.’ Dowell, ii. 62.
For the details of these taxes, Dowell, ii. 208–245, and vol. iv. under the several heads.
The following were the amounts yielded by the excise taxes on the above-mentioned articles at the dates of abolition—
An increase of 6d. per gallon imposed in 1894 was removed in 1895, but re-imposed in 1900.
Bk. iv. ch. 2, § 8.
The prohibition at first applied to Ireland, but was removed in 1779 in consequence of the American war. It was re-imposed in 1832.
Lavoisier, the eminent chemist, was one of the sufferers. For the system of the Ancien Régime, see Stourm, chs. 11–14. For the mechanism of the Finances, cp. Bk. vi. ch. 2, also Bouchard, Système Financier de l'Ancienne Monarchie and the Dictionnaire de l'Economie Politique, s. v. ‘Finances de l'Ancien Régime.’ For the earlier history, Clamageran, Histoire de l'Impôt, and for the latter part of the 18th century the elaborate works of Gomel, Les Causes financières de la Révolution Française (2 vols.); Histoire Financière de l'Assemblée Constituante (2 vols.), and Histoire Financière de la Législative et de la Convention, as yet only vol. i.
Stourm, i. 295.
Introd. ch. 2, § 4.
For the re-establishment of the French finances see Stourm, Les Finances de l'Ancien Régime. For Bonaparte's place see the same writer's lately issued Les Finances du Consulat. Mollien, Mémoires d'un Ministre, 1780–1815, is full of instructive details.
Taxation and Funding, 231.
By the Law of December 1900 the duty on circulation is the only one retained for wine and cider.
See Economic Journal, i. 307–24, for a fuller account of monopoly for taxation.
That is, including the customs duty on imported salt, the excise proper yielded £385,000.
In the case of sugar also the customs and excise returns are combined, but the customs only brought in £820,000.
More accurate figures are—
See § 14, infra.
In 1897–8 the following were the receipts and expenses of the salt and tobacco monopolies—
The wealth of Italy has been estimated at £2,120,000,000, or one-fifth that of England. Pantaleoni, Giornale degli Economisti, Aug. 1890, 139 sq. Cp. Giffen, Growth of Capital, 153.
Cp. Bk. iv. ch. 3, § 2, for the ‘class tax.'
114,000,000 marks out of 141,000,000 marks in 1886–7. Cohn, § 413.
This table shows the effect of changes in the laws regulating the bounties, and the growth in recent years of the net receipts. The customs duty is so small that it may be neglected.
Bk. iv. ch. 2 § 7.
For the German taxation of commodities up to 1888, see Cohn, §§ 411–23; for the later, and indeed the complete, history, Wagner, iv. 666–724.
See Wickett, ‘Studien über das Österreichische Fabrikmonopol,’ Finanz Archiv, xiv. 198–284.
Wells in Cobden Club Essays (2nd Series), 479.
For the tobacco tax, Olmsted in Quarterly Journal of Economics, v. 193 sq.
The Swiss alcohol monopoly has given a small profit. The receipts from September 1887 to the end of 1900 amounted to £5,836,000, the expenses to £3,604,000, showing a surplus of £3,232,000 or about £244,000 per annum. The Russian experience since 1895 is also in favour of a monopoly.
See § 4, supra.
The recent sugar convention is an indication pointing in this direction.
Constitution of the United States, Art. i, § 10.
Supra, § 9
Supra, § 6.
Vignes, i, 205–16. A law of December 1887 allows the communes to remove, and compels them to lower their octrois on the boissons hygiéniques (wine, cider, beer, and mineral waters).
The distribution of the duties among the different articles is shown by the following figures for the year 1900:—
Of the total on drinks 67,000,000 francs were levied on wine, 57,500,000 francs on spirits, and 16,500,000 francs on beer. The cost of collection in 1900 came to about £1,250,000, which should be deducted from the gross receipts of £14,200,000.
Only six Tuscan communes had octrois out of 246, and only one in every ten of those in the kingdom of Sardinia. ‘Report on the Octroi Duties in Italy,’ Parliamentary Papers (C 6206), 1891.
Supra, § 8.
See, however, for a discussion of the modifications required, Conigliani, Tributi Locali, 232–62.
For the German octrois, see Cohn, §§ 457 sq. Cp. ‘In Deutschland sind die Octrois von geringer Bedeutung, der Bieraufschlag in Bayern und einige neuere Verbrauchsabgaben Württembergs ausgenommen; Belangreicher sind sie schon in Oesterreich; Wien zieht aus den städtischen Verzerungssteuern eine ansehnliche Summe.’ Schäffle, Steuerpolitik, 452.
Bk. iii. ch. 6, § 7.
Isolated octrois may be found in all these countries, e.g. that at Copenhagen.
Journal des Économistes, December 1891, 449–461.
Bk. iii. ch. 5, § 5.
This argument will reappear in connexion with the incidence of import duties.
This has been alleged of the Belgian reform and also of the partial remission of the Parisian octrois in 1848. The absence of any traceable effect on price by the abolition of the London coal dues is another instance.
Report on Octroi Duties (C. 6206), 14, 15.
The following table shows the position of the Customs revenue in the leading European States—
A large part of the United States’ revenue has generally been obtained from this source, often exceeding one-half of the total receipts. The lowest yield since 1884 was in 1893–4, when the Customs were only $131,818,000. The highest absolute amount was in 1900–1, when $238,585,000 were received, or 40 per cent. of the revenue from all sources.
For the great number of tolls and passage duties in mediæval times see Clamageran, i. 160–1; Pigeonneau, Histoire du Commerce de la France, i. 96–99, 182–3. The tolls on the Seine in 1315 are set forth in a document given in Fagniez, Documents de l'Industrie et du Commerce en France, ii. 30–37 for Germany, Zimmern, Hansa Towns, 102.
See Introd. ch. ii. § 5.
For this side of Mercantilism, see Wealth of Nations, Bk. iv. ch. 8.
India is, perhaps, the only country in which the revenue from exports exceeds that from imports.
Mommsen, Hist. of Rome, iii. 397–8; Merivale, Romans under the Empire, v. 45; Clamageran, i. 73.
Dowell, i, 75 sq.
For England, see Schanz, Englische Handelspolitik, and Cunningham, Growth of English Industry and Commerce, Bks. vi., vii; for France, Pigeonneau, ut supra.
‘Taxes proposed with a view to prevent, or even to diminish, importation are evidently as destructive of the revenue of the customs as of the freedom of trade.’ Wealth of Nations, 191.
Bk. iv. ch. 5, § 2.
Report of Import Committee (1840); Leroy-Beaulieu, i. 615; Cohn, § 407; Wagner, iv. 769.
The English revenue from this source kept very near £20,000,000 per annum for forty years. In the period 1815–1900 it has only varied between £24,000,000 and £19,000,000, notwithstanding the extensive remission of taxation. The export duty on coal and the import one on sugar account for the great rise in 1901–2. The estimate for 1902–3 exceeds £35,000.000.
J. S. Mill, Principles, Bk. v. ch. 6, § 2.
Bk. iv. ch. 6, § 2.
Cp. Mill's advocacy of a tax on raw silk. Principles, Bk. v. ch. 6, § 2.
Cp. Bk. iii. ch. 3, § 10, for this use of a progressive tax on income.
The treatment of the wine duties and the export duty on coal indicate a retrograde tendency in this respect, still further shown in the re-imposition of a duty on imported corn.
Dowell, i. 195; ii. 34. Some of the hottest contests between the king and the people turned on questions of taxation, e.g. the currant duty (Bates’ case). For the earlier history, see Hall, History of the Customs Revenue.
For Walpole's fiscal policy see Morley, Walpole, 166–82; for his ‘excise’ scheme, Leser, Ein Accise-Streit.
The following figures give the yield of the customs at selected periods:—
Sinclair, History of the Revenue, ii. Appendix No i. ; Dowell, ii. 62, 109; Wilson, National Budget, 55.
There were three stages in the movement, viz. (1) the reforms of Huskisson 1823–7, which opened the way; (2) Peel's tariffs of 1842 and 1845, by which a substantial instalment of free trade was given; and (3) the measures of Mr. Gladstone in 1853 and 1860, which completed the work. For the fiscal history of this period, see Dowell, ii. 249–361; Buxton, Finance and Politics, i. 1–217; Bastable, Commerce of Nations, ch. 6; also Northcote, Twenty Years of Financial Policy. For the general character of the legislation, Wagner, iii. 300–1.
It is important to maintain the distinction between ‘finance’ (Finanzwissenschaft) and ‘economic policy’ (Wirthschaftpolitik). To introduce a discussion of the merits of free trade or protection into a financial treatise would tend to confuse these separate subjects, and would thus be detrimental to both. Prof. Plehn's statement (Finance, 185 n) that in this work we ‘refuse to discuss protective duties because we believe them [sic] “vicious” and “uneconomic,”’ is, it need hardly be said, entirely destitute of foundation. Such a reason, as he rightly says, ‘is not scientific.’ Therefore to ascribe it without a shadow of evidence—the quotation marks inserted in his note are spurious—is a proceeding which may be left to the reader to characterise.
Thus in 1839 crystal beads yielded 1s. 7d., starch 1s. 9d., Bruges thread 1s. 3d., extract of vitriol 12s. 3d.!
Between 1815 and 1885 the amount of duties remitted was £35,861,000 against £8,063,000 imposed, or a balance of £27,800,000 remitted. Wagner, iii. 299. But there were no remissions in the last ten years of the period, and those in the preceding fifteen years (1861–75) amounting to £14,500,000, were on purely revenue duties—tea, sugar, &c. In the period 1885–1900 the tea, tobacco, and currant duties were reduced.
As predicted in the 1st edition of this work, pp. 488–9.
Import duties on timber and petroleum have been suggested by Sir R. Giffen as a substitute for part of the income tax (Times, January 10, 1902).
On the bonding system, cp. Cliffe Leslie, Financial Reform, 199, 214–6.
For Colbert, see Clamageran, ii. 599–697; also Sargent, Economic Policy of Colbert. For the internal customs, Stourm, i. 470 sq., and for the tariff of 1791, ib. ii. 61–75.
Leroy-Beaulieu, i. 614.
I.e. including the salt duty.
The following figures are more precise:—
On the French customs, see Leroy-Beaulieu, i. 612–31; Wagner, iii. 784–834, and Erganzungsheft, 124–34.
On the history of the Italian customs, see the elaborate study by Alessio, ii. 346–452.
For the founding of the Zollverein, see Roscher, § 102; also his Geschichte, ch. 34, and for the present German customs, Cohn, §§ 404–10; Wagner, iv. 655–66, 767–70.
For the American tariffs see Taussig, Tariff History of the United States, where, however, financial considerations are not made prominent.
The Indian transit duties—the most important of which was that on Cashmere wool (10 per cent.)—were abolished by Mr. James Wilson; see his Financial Statement (1860), 22. But part of the opium revenue is really a transit charge on the drug from the native States.
The Indian opium duty—partly monopoly, partly transit—yielded 84,500,000 rupees in 1880–1, but the estimate for 1899–1900 was only 66,000,000 rupees, the Brazilian coffee duty gave £1,800,000 in 1889.
The English customs system was extended to Scotland in 1707, but not to Ireland till 1825, when the Union duties were repealed. At present the Channel Islands are outside it, and the Isle of Man is under special regulations.
Wealth of Nations, 379.
The abolition of the Indian transit dues was for the object of stimulating through trade. Wilson, ut sup. 22.
Wool in mediæval England and opium in India at present have been suggested as examples, but the latter is undoubtedly open to some competition. The newly imposed coal duty has given rise to much discussion on this point. Mine owners, lessees, colliers, shippers, foreign consumers, and the home consumers of imported commodities have each and all been put forward as the real bearers of the tax. Cp. Jevons, Coal Question, 337.
For further discussion of this complicated question, see Nicholson. Principles, iii. 342–9; Seligman, Incidence, 300–304; Edgeworth, Economic Journal, iv. 39–48; Bastable, International Trade, 110–24, and Britt. Assoc. Report, 1889, 440–48, also cp. Bk. iii. ch. 5.
For the corn duties, Wagner, ii. 359, 367; Conrad, art. ‘Landwirthschaft’ in Schönberg, ii. 247–260; for tea, Senior, Pol. Ec. 184.
See Bk. iii. ch. 1, §§ 11, 12; ch. 4, § 10.
See the discussion in Memoranda on Incidence [C. 9528] as to the nature of the postal revenue, and cp. supra, Book ii. ch. 3, § 9.
See Foxwell and Farrer, Express Trains, 118 sq.
Bk. ii. ch. 3, §§ 14, 19.
The tax on bicycles recently imposed in France may be regarded as a tax on transport, but it is perhaps more correct to place it under the head of licences.
Sidgwick, Pol. Ec. 574; Fawcett, Pol. Ec. 628–9. See for discussion of some theoretical varieties Edgeworth, Economic Journal, vii. 230–2.
Professor Ely advocates taxation of gross receipts in order to escape evasion. Taxation, 324. But where this danger exists a more thorough reform is wanted. Taxation of railways by American States on this basis is particularly unsuitable owing to inter-state competition. See Adams, Finance, 458–62.
Dowell, iv. 338–47.
Cp. Mill's judgment, ‘A tax on newspapers is objectionable, not so much where it does fall as where it does not,’ Principles, Bk. v. ch. 5, § 2. But does not a tax ‘fall’ where it is privative?
See the heads of revenue in the annual Statistical Abstracts, where ‘stamps’ take a place beside ‘customs’ and ‘excise.’
Theory of Legislation, 140; cp. Bk. i. ch. 3, § 2.
Cp. Bk. ii. ch. 4, § 8.
Both in France and Germany popular feeling is strongly in favour of an extension of ‘Bourse taxation,’ as shown by the French law of 1892 and the German legislation of 1894 and 1900.
Some of the ‘penny’ duties devised by Mr. Gladstone erred in this respect; e.g. that on packages, justified by its author for statistical reasons. Financial Statements. 161, 295. The French statistical duties have the same defect. Leroy-Beaulieu, i. 617.
The following are the figures for selected years:—
Dowell, iii. 290–1.
In 1881 the postage and revenue penny stamps were combined, so that the exact receipt of the latter is now a matter of calculation.
These charges were known as contrôle, insinuation, and centième denier. The stamp duty was known as the formule.
Stourm, i. 442–3, 468–9; Leroy-Beaulieu, i. 528, 533.
The following figures give the result of the enregistrement and timbre for 1901.
From this total the succession duties have to he deducted, and allowance has to be made for the element of fees under the ‘other duties.’ Actes civils et administratifs amount to £3,000,000, Actes judiciaires to £960,000. Probably one-half of these sums should be regarded as ‘fees,’ the other half as taxation.
‘Taxes upon the sales of land fall altogether upon the seller.’ Wealth of Nations, 364; cp. Mill, Principles, Bk. v. ch. § 1.
Suppose, for example, that a property, which free of duty would sell for £10,000, is subject to 10 per cent. on transfer. If the whole tax fell on the seller he would only get £9,000, if it all fell on the buyer he would pay £11,000. Is it not plain that if an exchange is to take place the probability is that there will be a division of the tax? When there are many transactions the less eager buyers and sellers will withdraw, and there will be fewer dealings at a higher price, the tax included. See Böhm-Bawerk, Positive Theory of Capital (Eng. trans.), 203–13, for the theoretical basis of this position.
See on the whole question of succession duties the careful monograph by Dr. Max West entitled The Inheritance Tax; A. Garelli, L'Imposta Successoria; and Schanz, ‘Studien zur Geschichte und Theorie der Erbschaftssteuer,’ Finanz Archiv, xvii. 1–62, xviii. 553–678.
Cp. Bk. ii. ch. 4, § 6. The ‘relief’ or ‘heriot’ was the commonest of the feudal dues.
See the material collected in Wilcken Griechische Ostraka.
This was the vicesima hereditatum, which underwent several changes until it was abolished in the sixth century.
See the long list given by West, 112, n. 2. Some of the names might have been omitted as of little weight, and others, e.g. Leroy-Beaulieu, are those of very lukewarm supporters.
Cp. Bk. iii. ch. 2, § 5, and Bk. v. ch. 5, § 9, for recognition of this fact. Professor Marshall declares that ‘the old objection to taxes on inheritances that they are paid out of capital ... seems to me to have great force still,’ Memoranda, [C. 9528], 123.
It is therefore impossible to accept Dr. West's statement, that ‘Whether a tax is paid out of capital or income depends not on the form of the tax but upon its amount and the time allowed for payment’ (Inheritance Tax, 119), unless we reduce the antithesis between the terms so opposed almost to vanishing point. The mere ‘name’ of a tax has of course no effect.
The strongest body of sentiment in favour of high succession duties is that which regards them as an agency for reducing large fortunes, and thus bringing about a better distribution of wealth. In Bentham's language such persons desire to sacrifice ‘security’ to ‘equality.’
See West, 114–19, for a list of the different theories, also Seligman, Essays, 122–33, who holds that the tax is one on ‘accidental income.’ Schanz (Finanz Archiv, xviii. 172–6), after reviewing the earlier theories, bases this form of taxation on (a) the increase of ability in the payer, (b) the justice of beavier taxation on property, (c) the power of the State to limit inheritance.
It is ingeniously suggested by Sidgwick that inheritance taxes are ‘quite sui generis,’ and therefore outside the rules for distributing general taxation. See his Political Economy, 577–9, and Politics, 176–7. But this view overlooks the close connexion between property and income, and also that between the successors and those from whom they inherit.
Financial Statements, 62.
The system of insurance so extensively advertised by British insurance companies to meet the estate duty of 1894 indicates very plainly that this is the essential character of the tax. This view is adversely criticised by Seligman (Essays, 132), on the grounds that (a) if the existing system (i.e. without the inheritance tax) does reach the living taxpayer, there is the injustice of double taxation; (b) if it does not reach him, there is inequality between persons dying at different ages. To which it may be rejoined that (a) it is because the existing system only partially reaches the taxpayer that the inheritance tax is introduced; and (b) that there is inequality in the case of persons dying at different ages, but this, like other inequalities, is hardly avoidable without incurring greater evils. Westlake recognises ‘the fact that death duties may be regarded as capitalised income tax,’ (Economic Journal, ix. 372), and holds that this view is in accordance with the principle of the British system. Lord Milner also declares, ‘I regard the death duty as equivalent to an extra income tax on property.’ ‘Commission on Agricultural Depression,’ Evidence, iv. 478 a.
Cp. Bk. iii. ch. 3, § 17.
Cp. the Roman rule as to disherison of children, justified by the jurist Paulus on the ground that there was a sort of co-partnership between the father and the children. See Pliny's remarks as to the vicesima hereditatum, which was ‘tributum tolerabile et facile heredibus extraneis, domesticis grave, since it was levied on goods ‘quaeque nunquam ut aliena et speranda, sed ut sua semperque possessa cepissent.’ Paneg. 37.
Bk. iii. ch. 3, §§ 6, 7, 8.
E.g. J. S. Mill, who declares that ‘The principle of graduation ... seems to me both just and expedient as applied to legacy and inheritance duties.’ Principles, Bk. v. ch. 2, § 3.
The only scientific bases for progressive succession duties would be (a) the establishment of the regressiveness of other taxes, so that in this case a duly calculated progression would restore proportionality, and (b) the proof of the justice of progression on an assigned scale over the whole tax system. It was on the former ground that Lord Goschen defended his estate duty of one per cent. on estates over £10,000. He declared that ‘On the whole, I think it will be found that the men whose fortunes are considerable are those who pay the least in proportion to their aggregate income.’ Budget Speech, April 18, 1889.
This limit was raised from £5,000 to £10,000, then to £100,000, next to £500,000, and lastly, in 1815, to £1,000,000. It was abandoned in 1859.
‘We propose to alter the law and ... to extend the legacy duty to all successions whatever.’ Gladstone, Financial Statements, 62.
For the history of the English death duties, see Dowell, iii. 124–140.
See for a lucid but one-sided statement of these anomalies Lord Farrer's Mr. Goschen's Finance, 117 sq.; also A Handbook to the Death Duties, by Messrs. Buxton and Barnes.
Real property paid no probate duty; succession duty on it was not due for a year after death; it could be paid by eight instalments, and it was calculated on the successor's life interest only, not on the full value.
The scale of duties is given in the following table:—
As seems to have been the original design. Cp. the section of the Act, 57–58 Vict. ch. 30, § 14, with clause 12 of the Bill as introduced.
On this point cp. Bk. iii. ch. 3, § 14.
One very difficult question is the relation of the death duties to local finance. Lord Goschen's allocation of half the probate duty has been continued under the present system, with the substitution of 1½ per cent. of the new estate duty. This substitution, however, altered the character of the charge, which ceased to be on personal property (to which the ‘probate’ duty was confined), and instead fell on all the mass of wealth passing by succession. See ‘Local Taxation Commission,’ Final Report, 114.
The growth of the total death duties is best seen by the date at which each additional million was reached—
The following table gives the scale of duties under the laws of 1901 and 1902; the latter introduced the progression on inheritances exceeding £40,000. It is instructive as showing the arbitrary way in which progressive taxation can be applied. Cp. Bk. iv. ch. 3, § 7, for this point.
Hamburg, Lubeck, and Alsace-Lorraine are the only exceptions; the latter possesses a modified form of the French law of 1870.
See the valuable tables in Finanz Archiv, xviii. 679–695.
See Book iv. ch. 4, §§ 2, 8.
Finanz Archiv, xviii. 637. For a fuller account of the facts respecting continental inheritance taxes see, besides the articles of Schanz, West, Inheritance Tax, ch. 1. It is impossible to follow the many small changes in the various States.
The first to draw public attention to these remarkable experiments was Sir C. Dilke. Problems of Greater Britain, 513–4.
The following table gives the proportional contribution of the different heads of revenue in the Australasian colonies for 1890:—
It thus appears that the yield from succession duties, which are only one part of the non-customs taxation, is very small. See The Victorian Year-Book (1892), i. 231.
See Seligman, Essays, 133 n. for a list of States using the inheritance tax in 1895. On American state legislation, see West, ch. 3.
Minnesota amended its constitution to remove this obstruction.
This is the judgment of Professor Adams (Finance, 504, who, however, suggests a claim of the smaller local bodies), Professor Seligman (Political Science Quarterly, xiv. 139), and Professor Taussig (ib. xiv. 123).
Professor Adams, in discussing the allocation of taxation, remarks, ‘The Federal Government would be excluded, because under the rule imposed by the Constitution it cannot justly make use of direct taxation,’ Finance, 504. From the economic point of view this is correct, but it may be questioned whether there is any justice in this interpretation of the constitutional rule. See W. H. Dunbar (Quarterly Journal of Economics, xv. 292–8) on the legal question. It is interesting to notice that under either French or German law a succession duty is certainly ‘indirect.’
See the Massachusetts Tax Commission (1897) Report, in which a uniform inheritance tax is recommended. Report, 93–4.
Wealth of Nations, 364.
See on this question the discussions in Memoranda on Incidence [C. 9528], especially 88 (Courtney), 105 (Sidgwick), 133 (Edgeworth).