A Treatise on Political Economy
BOOK III, CHAPTER VIII
Of the Effect of all kinds of Taxation in general.
Taxation is the transfer of a portion of the national products from the hands of individuals to those of the government, for the purpose of meeting the public consumption or expenditure. Whatever be the denomination it bears, whether tax, contribution, duty, excise, custom, aid, subsidy,*67 grant, or free gift, it is virtually a burthen imposed upon individuals, either in a separate or corporate character, by the ruling power for the time being, for the purpose of supplying the consumption it may think proper to make at their expense; in short, an impost, in the literal sense.
It would be foreign to the plan of this work, to inquire in whom the right of taxation is or ought to be vested. In the science of political economy, taxation must be considered as matter of fact, and not of right; and nothing further is to be regarded, than its nature, the source whence it derives the values it absorbs, and its effect upon national and individual interests. The province of this science extends no further.
The object of taxation is, not the actual commodity, but the value of the commodity, given by the tax-payer to the tax-gatherer. Its being paid in silver, in goods, or in personal service, is a mere accidental circumstance, which may be more or less advantageous to the subject or to the sovereign. The essential point is, the value of the silver, the goods, or the service. The moment that value is parted with by the tax-payer, it is positively lost to him; the moment it is consumed by the government or its agents, it is lost to all the world, and never reverts to, or re-exists in society, This, I apprehend, has already been demonstrated, when the general effect of public consumption was under consideration. It was there shown, that however the money levied by taxation may be refunded to the nation, its value is never refunded; because it is never returned gratuitously, or refunded by the public functionaries, without receiving an equivalent in the way of barter or exchange.
The same causes, that we have found to make unproductive consumption nowise favourable to reproduction, prevent taxation from at all promoting it. Taxation deprives the producer of a product, which he would otherwise have the option of deriving a personal gratification from, if consumed unproductively, or of turning to profit, if he preferred to devote it to an useful employment. One product is a means of raising another; and, therefore, the subtraction of a product must needs diminish, instead of augmenting, productive power.
It may be urged, that the pressure of taxation impels the productive classes to redouble their exertions, and thus tends to enlarge the national production. I answer, that, in the first place, mere exertion can not alone produce, there must be capital for it to work upon, and capital is but an accumulation of the very products, that taxation takes from the subject: that, in the second place, it is evident, that the values, which industry creates expressly to satisfy the demands of taxation, are no increase of wealth; for they are seized on and devoured by taxation. It is a glaring absurdity to pretend, that taxation contributes to national wealth, by engrossing part of the national produce, and enriches the nation by consuming part of its wealth. Indeed, it would be trifling with my reader's time, to notice such a fallacy, did not most governments act upon this principle, and had not well-intentioned and scientific writers endeavoured to support and establish it.*68
If, from the circumstance, that the nations most grievously taxed are those most abounding in wealth, as Great Britain, for example, we are desired to infer, that their superior wealth arises from their heavier taxation, it would be a manifest inversion of cause and effect. A man is not rich, because he pays largely; but he is able to pay largely, because he is rich. It would be not a little ridiculous, if a man should think to enrich himself by spending largely, because he sees a rich neighbour doing so. It must be clear, that the rich man spends, because he is rich; but never can enrich himself by the act of spending.
Cause and effect are easily distinguished, when they occur in succession; but are often confounded, when the operation is continuous and simultaneous.
Hence, it is manifest, that, although taxation may be, and often is, productive of good, when the sums it absorbs are properly applied, yet, the act of levying is always attended with mischief in the outset. And this mischief good princes and governments have always endeavoured to render as inconsiderable to their subjects as possible, by the practice of economy, and by levying, not to the full extent of the people's ability, but to such extent only as is absolutely unavoidable. That rigid economy is the rarest of princely virtues, is owing to the circumstance of the throne being constantly beset with individuals, who are interested in the absence of it; and who are always endeavouring, by the most specious reasoning, to impress the conviction, that magnificence is conducive to public prosperity, and that profuse public expenditune is beneficial to the state. It is the object of this third book to expose the absurdities of such representations.
Others there are, who are not impudent enough to pretend, that public profusion is a public benefit; yet undertake to show by arithmetical deduction, that the people are scarcely burthened at all, and are equal to a much higher scale of taxation. As Sully tells us in his Memoirs, "The ear of the prince is assailed by a set of flattering advisers, who think to make their court to him by perpetually suggesting new ways of raising money; discharged functionaries, for the most part, whose experience of the sweets of office has left no other impression, than the tincture of the baneful art of fiscal extortion; and who seek to recommend themselves to power and favour, by commending it to the lips of royalty."*69
Others suggest financial projects, and ways and means for filling the coffers of the prince, as they assert, without fleecing the subject. But no plan of finance can give to the government, without taking either from the people, or from the government itself in some other way; unless it be a downright adventure of industry. Something can not be produced out of nothing by a mere touch of the wand. However an operation may be cloaked in mystery, however often we may twist and turn and transform values, there are but two ways of obtaining them, namely, creating oneself, or taking from others. The best scheme of finance is, to spend as little as possible; and the best tax is always the lightest.
Admitting these premises, that taxation is the taking from individuals a part of their property*70 for public purposes; that the value levied by taxation never reverts to the members of the community, after it has once been taken from them; and that taxation is not itself a means of reproduction; it is impossible to deny the conclusion, that the best taxes, or, rather those that are least bad, are
1. Such as are the most moderate in their ratio.
These positions are almost self-evident; yet I shall proceed to illustrate them successively, with some few observations.
1. Of such as are most moderate in their ratio.
Since taxation does, in point of fact, deprive the tax-payer of a product, which is to him, either a means of personal gratification, or a means of reproduction, the lighter the tax is, the less must be the privation.
Taxation, pushed to the extreme, has the lamentable effect of impoverishing the individual, without enriching the state. We may readily conceive how this can happen, if we recall to our attention the former position; viz. that each tax-payer's consumption, whether productive or not, is always limited to the amount of his revenue. No part of his revenue, therefore, can be taken from him without necessarily curtailing his consumption in the same ratio. This must needs reduce the demand for all those objects he can no longer consume, and particularly those affected by taxation. The diminution of demand must be followed by diminution of the supply of production; and, consequently, of the articles liable to taxation. Thus, the tax-payer is abridged of his enjoyments, the producer of his profits, and the public exchequer of its receipts.*71
This is the reason why a tax is not productive to the public exchequer, in proportion to its ratio; and why it has become a sort of apophthegm, that two and two do not make four in the arithmetic of finance. Excessive taxation is a kind of suicide, whether laid upon objects of necessity, or upon those of luxury; but there is this distinction, that, in the latter case, it extinguishes only a portion of the products on which it falls, together with the gratification they are calculated to afford; while, in the former, it extinguishes both production and consumption, and the tax-payer into the bargain.
Were it not almost self-evident, this principle might be illustrated, by abundant examples of the profit the state derives from a moderate scale of taxation, where it is sufficiently awake to its real interests.
When Turgot, in 1775, reduced to ½ the market-dues and duties of entry upon fresh sea-fish sold in Paris, their product was nowise diminished. The consumption of that article must, therefore, have doubled, the fishermen and dealers must have doubled their concerns and their profits; and, since population always increases with increasing production, the number of consumers must have been enlarged; and that of producers must have been enlarged likewise; for an increase of profits, that is to say of individual revenue, multiplies savings, and thus generates the multiplication of capital and of families; and that very increase of production will, beyond all doubt, augment the product of taxation in other branches; to say nothing of the popularity accruing to the government from the alleviation of the national burthens.
The government agents, who farm or administer the collection of the taxes, very often abuse their interest and authority, to construe all doubtful points of fiscal law in their own favour, and sometimes to create obscurity for the purpose of profiting by it. The effect is precisely the same, as if the scale of taxation were raised pro tanto.*72 Turgot adopted a contrary course, and made it a rule to lean always to the side of the tax-payer. The public contractors made a great outcry at this innovation, declaring that it was impossible for them to fulfil their engagements, and offering to collect on the government account and risk. The event, however, falsified their predictions by an actual increase of the receipts. The greater lenity in the collection proved so advantageous to production, and the consumption, consequent upon it, that the profits, which had before not exceeded 10,550,000 liv., rose to 60,000,000 liv.; an advance which could hardly be credited, if it were not attested by unquestionable evidence.*73
We are told by Humboldt,*74 to whom we are indebted for a variety of valuable information, that in thirteen years from 1778, during which time Spain adopted a somewhat more liberal system of government in regard to her American dependencies, the increase of the revenue in Mexico alone amounted to no less a sum than 100 millions of dollars; and that she drew from that country, during the same period, an addition in the single article of silver, to the amount of 14,500,000 dollars. We may naturally suppose, that, in those years of prosperity, there was a corresponding, and rather greater increase of individual profits; for that is the source, whence all public revenue is derived.
A similar course of conduct has invariably been followed by a similar effect;*75 and it is a great satisfaction to a writer of liberal principles to be able to prove by experience, that moderation is the best policy.*76
Upon the same principles, it will be easy to demonstrate in the next place, that the taxes least mischievous are:
2. Such as are least attended with those vexatious circumstances, that harass the tax-payer, without bringing any thing into the public exchequer.
It has been held by many, that the costs of collection are no very great evil, inasmuch as they are refunded to the community in some other shape. On this head, I must refer my readers to what has been already observed.*77 These costs are no more refunded, than the net proceeds of the taxes themselves; because both the one and the other consists in reality, not of the money, wherein the taxes are paid, but of the value, wherewith the tax-payer produces that money, and the value which the government again procures with it; which latter is destroyed and consumed outright.
The necessities of princes have operated far more effectually than their regard to the public good, to introduce the practice of better order and economy in the financial departments of most European states during the two last centuries, than in former times. The people are generally made to bear as much as they can well stand under; so that every saving in the charge of collection has gone to swell the receipts of the exchequer.
Sully tells us in his Memoirs,*78 that, for about 6 millions of dollars brought into the royal treasury, in 1598, by means of taxation, individuals were out of pocket about 30 millions of dollars, and assures us, that he had with great pains ascertained the fact, however incredible it might appear. Under the administration of Necker, upon a revenue of about 110 millions of dollars, the charges of collection amounted to no more than 10 millions of dollars; yet, under his management, there were 250,000 persons employed in the collection: most of them, however, had other collateral occupations. The charge was, therefore, about 10 4/5 per cent.; yet this is much higher than the rate at which the business is done in England.*79
Besides the charge of collection, there are other circumstances, that are burthensome to the people without being productive of gain to the public revenue. Law-suits, imprisonment and other preventive measures, entail additional expense, without procuring the smallest increase of revenue. And this addition is sure to fall on the most necessitous class of tax-payers; for the other classes pay without litigation or constraint. Such odious means of enforcing the payment of taxes are precisely the same as demanding of a man 12 dollars because he has not wherewithal to pay 10 dollars. Rigour is never necessary to enforce taxation where it presses lightly on the resources of individuals; but when a state is so unfortunate, as to be obliged to impose heavy burthens, of two evils, the process of levy by distress is preferable to that of personal constraint. For at any rate, by seizing and selling the tax-payer's goods, and thereby raising the arrears of his taxes, he is compelled to pay no more than is due; and the whole of what he does pay goes into the public purse.
On this account it is, that works executed by the public requisition of labour, as the roads were in France under the old régime, are always a mischievous kind of taxation. The time lost by the labourers put in requisition in coming three or four leagues, perhaps, to their work, and that which is always wasted by people who get no pay, and work against their inclination, is all a dead loss to the public, with no return of revenue. Even supposing the work to be well executed, there is often more loss incurred by the interruption of the regular agricultural pursuits, than gain made from the compulsory employment that has been substituted. Turgot called upon the surveyors and engineers of the respective provinces for an estimate of the average expense, one year with another, of keeping up old roads, and constructing the usual number of new ones, directing them to make their calculations on the most liberal scale. The estimate of the annual expense, made in compliance with his orders, amounted to 2 millions of dollars for the whole kingdom: whereas, according to the calculations of Turgot, the old corvée system involved a sacrifice to the nation of 8 millions of dollars.*80
Days of rest, enjoined either by law, or by custom and usage too powerful to be infringed upon, are another kind of taxation, productive of nothing to the public purse.
3. Such as press impartially on all classes.
Taxation being a burthen, must needs weigh lightest on each individual, when it bears upon all alike. When it presses inequitably upon one individual or branch of industry, it is an indirect, as well as a direct, incumbrance; for it prevents the particular branch or the individual from competing on even terms with the rest. An exemption, granted to one manufacture, has often been the ruin of several others. Favour to one is most commonly injustice to all others.
The partial assessment of taxation is no less prejudicial to the public revenue, than unjust to individual interests. Those who are too lightly taxed, are not likely to cry out for an increase; and those who are too heavily taxed, are seldom regular in their payments. The public revenue suffers in both ways.
It has been questioned whether it be just to tax that portion of revenues, which is spent on luxuries, more heavily than that spent on objects of necessity. It seems but reasonable to do so; for taxation is a sacrifice to the preservation of society and of social organization, which ought not to be purchased by the destruction of individuals. Yet, the privation of absolute necessaries implies the extinction of existence. It would be somewhat bold to maintain, that a parent is bound in justice to stint the food or clothing of his child, to furnish his contingent to the ostentatious splendour of a court, or the needless magnificence of public edifices. Where is the benefit of social institutions to an individual, whom they rob of an object of positive enjoyment or necessity in actual possession, and offer nothing in return, but the participation in a remote and contingent good, which any man in his senses would reject with disdain?
But how is the line to be drawn between necessaries and superfluities? In this discrimination, there is the greatest difficulty, for the terms, necessaries and superfluities, convey no determinate or absolute notion, but always have reference to the time, the place, the age, and the condition of the party; so that, were it laid down as a general rule, to tax none but superfluities, there would be no knowing where to begin and where to stop. All that we certainly know is, that the income of a person or a family may be so confined, as barely to suffice for existence; and may be augmented from that minimum upwards by imperceptible gradation, till it embrace every gratification of sense, of luxury, or of vanity; each successive gratification being one step further removed from the limits of strict necessity, till at last the extreme of frivolity and caprice is arrived at; so that, if it be desired to tax individual income, in such manner as to press lighter, in proportion as that income approaches to the confines of bare necessity, taxation must not only be equitably apportioned, but must press on revenue with progressive gravity.
In fact, supposing taxation to be exactly proportionate to individual income, a tax of ten per cent. for instance, a family possessed of 60,000 dollars per annum would pay 6000 dollars in taxes, leaving a clear residue of 54,000 dollars for the family expenditure. With such an expenditure, the family could not only live in abundance, but could still enjoy a vast number of gratifications by no means essential to happiness. Whereas another family, with an income of 60 dollars, reduced by taxation to 54 dollars per annum, would, with our present habits of life, and ways of thinking, be stinted in the bare necessaries of subsistence. Thus, a tax merely proportionate to individual income would be far from equitable; and this is probably what Smith meant, by declaring it reasonable, that the rich man should contribute to the public expenses, not merely in proportion to the amount of his revenue, but even somewhat more. For my part, I have no hesitation in going further, and saying, that taxation can not be equitable, unless its ratio is progressive.*81
4. Such as are least injurious to reproduction.
Of the values, whereof taxation deprives individuals, a great part would, undoubtedly, if left at the disposal of the individuals themselves, have gone to the satisfaction of their wants and appetites; but some part would have been laid by, and have gone to the further accumulation of productive capital. Thus, all taxation may be said to injure reproduction, inasmuch as it prevents the accumulation of productive capital.
This effect is more direct and serious, whenever the tax-payer is obliged to withdraw a part of the capital already embarked, for the purpose of enabling him to pay the tax; which case, as Sismondi has shrewdly observed, resembles the exaction of a tithe upon grain at seed-time, instead of harvest-time. Of this kind is the tax on legacies and successions. An heir, succeeding to a property of 20,000 dollars, and called upon for a tax of 5 per cent. upon it, will pay it, not out of his ordinary income, burthened as it is already with the ordinary taxes, but out of the inheritance, which is thereby reduced to 19,000 dollars. Wherefore, if it happen to be a vested capital of 20,000 dollars and be reduced by the tax to 19,000 dollars, the national capital will be diminished to the amount of the 1000 dollars thus diverted into the public exchequer.
It is the same with all taxes upon the transfer of property. The owner of land worth 20,000 dollars, will get but 19,000 dollars for it, if the purchaser be saddled with a tax of 5 per cent. The seller will have a disposable capital of 19,000 dollars only, in lieu of land worth 20,000 dollars; and the national capital will sustain a loss of the difference. Should the purchaser be so bad an arithmetician, as to pay the full value of the land, without allowing for the tax, he will sacrifice a capital of 21,000 dollars in the purchase of value to the amount of but 20,000 dollars. In either case, the loss to the national capital will be the same; although in the latter, it will fall upon the purchaser instead of the seller.
Taxes, upon transfer, besides the mischief of pressing upon capital, are a clog to the circulation of property. But, has the public any interest in its free circulation? So long as the object is in existence, is it not as well placed in one hand as in another? Certainly not. The public has a perpetual interest in the utmost possible freedom of its circulation; because by that means it is most likely to get into the hands of those, who can make the most of it. Why does one man sell his land? but because he thinks he can lay out the value to more advantage in some channel of productive industry. And why does another buy it? but because he wishes to invest a capital, that is lying idle, or less productively vested; or because he thinks it capable of improvement. The transfer tends to augment the national income, because it tends to augment the income of the two contracting parties. If they be deterred by the expenses of the transfer, those expenses will have prevented this probable increase of the national income.
Such taxes, however, as encroach upon the productive capital of the community, and consequently abridge the demand for labour and the profits of industry within the community, possess, in a very high degree, one quality, which that distinguished political economist, Arthur Young, has pronounced to be an essential requisite in taxation, namely, the facility and cheapness of collection.*82 Since taxation presents at best but a choice of evils, a nation, heavily burthened, will probably do well, in submitting to a moderate impost upon capital.
Taxes upon law-proceedings, and, generally, all that is paid to law-officers and agents, are taxes upon capital.*83 For litigation is not proportionate to the income of the suitors, but to accident, to the complexity of family interests, and to the imperfections of the law itself.
Forfeitures are equally a tax on capital.
The influence of taxation upon production is not confined to the circumstance of diminishing one of its sources, that is to say, capital; it operates besides in the nature of a penalty, inflicted upon certain branches of production and consumption. Patents, licenses to follow any specified calling, and, generally, all taxes, that bear directly upon industry, are liable to this objection; but, when moderate in their ratio, industry will contrive to surmount such obstacles without much difficulty.
Nor is industry affected only by taxes bearing directly upon it; it is indirectly affected by such also, as bear upon the consumption of the articles it has to work upon.
The products consumed in reproduction are, for the most part, those of primary necessity; and taxes, that discourage such products, must be injurious to reproduction. This is more especially the case in respect to those raw materials of manufacture, which can only be consumed reproductively. An excessive duty upon cotton, checks the production of all articles, wherein that substance is worked up.*84
Brazil is a country abounding in animal productions, that might be cured and exported, if they were allowed to be salted. Its fisheries are very productive, and cattle so abundant, that they are killed merely for the sake of the hide. Indeed, it is thence that our tanneries in Europe are in a great measure supplied. But the salt duties prevent the export of either fish or meat; and thus, for the sake of a revenue of about 200,000 dollars perhaps, incalculable mischief is done to the productive powers of the country, as well as to the public revenue, which they might be made to yield.
In like manner, as taxation operates in the nature of a penalty, to discourage reproductive consumption, it may be employed to check consumption of an unproductive kind; in which case it has the two-fold advantage, of subtracting no value from reproductive investment, and of rescuing values from unproductive consumption, to be employed in a manner more beneficial to the community. This is the advantage of all taxes upon luxuries.*85
When sums, levied by taxation upon capital, instead of being simply expended by the government, are laid out upon productive objects; or, when individuals contrive to make good the deficiency out of their private savings, the positive mischief of taxation is then balanced by a counteracting benefit. The proceeds of taxation are reproductively vested, when laid out in improving the internal communications, constructing harbours, or other such works of utility. Governments sometimes employ a part of the revenue thus realised in adventures of industry. Colbert did so, when he made advances to the manufacturers of Lyons. The governments of Hamburgh, and of some other places in Germany, were in the habit of embarking their revenues in productive undertakings; and it is said, that the authorities of Berne were in the habit of so employing a part of its revenues every year: but such instances are of very rare occurrence.
5. Such as are rather favourable than otherwise to the national morality; that is to say, to the prevalence of habits, useful and beneficial to society.
Taxation influences the habits of a nation, in the same way as it operates upon its production and consumption, that is, by imposing a pecuniary penalty upon specified acts; and it is, moreover, possessed of the grand requisites to render punishment effectual; namely, moderation and difficulty of evasion.*86 Without reference, therefore, to the purposes of finance and revenue, it is a powerful engine in the hands of government, for either corrupting or reforming the national morals, and may be directed to the promotion of idleness or industry, extravagance or economy.
The tax of five per cent. upon all lands devoted to productive husbandry, and the exemption of pleasure-grounds, which existed in France before the revolution, operated, of course, as a premium upon luxury, and a penalty upon agricultural enterprise.
The tax of one per cent. upon the redemption of ground-rents and rent-charges was virtually a penalty upon an act, equally advantageous to the parties and to the community at large; a fine upon the meritorious exertions of prudent land-owners to pay off their incumbrances.
The law of Napoleon, exacting from each scholar, educated in a private academy, a specified payment into the chests of the public universities, operated as a penalty upon that mode of education, which alone can soften national manners and fully develope the faculties of the human mind.*87
When a government derives a profit from the licensing of lotteries and gambling-houses, what does it else but offer a premium to a vice most fatal to domestic happiness, and destructive of national prosperity? How disgraceful is it, to see a government thus acting as the pander of irregular desires, and imitating the fraudulent conduct it punishes in others, by holding out to want and avarice the bait of hollow and deceitful chance!*88
On the contrary, taxes, that check and confine the excesses of vanity and vice, besides yielding a revenue to the state, operate as a means of prevention. Humboldt mentions a tax upon cock-fighting, which yields to the Mexican government 45,000 dollars per annum, and has the further advantage of checking that cruel and barbarous diversion.
Exorbitant or inequitable taxation promotes fraud, falsehood, and perjury. Well-meaning persons are presented with the distressing alternative, of violating truth, or sacrificing their interests in favour of less scrupulous fellow-citizens. They can not but feel involuntary disgust, at seeing acts, in themselves innocent, and sometimes even useful and meritorious, branded with the name, and subjected to all the consequences, of criminality.
These are the principal rules, by which present or future taxation must be weighed, with a view to the public prosperity. After these general remarks, which are applicable to taxation in all its branches, it may be useful to examine the various modes of assessment; in other words, the methods adopted for procuring money from the subject; as well as to inquire, upon what classes of the community the burthen principally falls.
Of the different Modes of Assessment, and the Classes they press upon respectively.
Taxation, as we have seen above, is a requisition by the government upon its subjects for a portion of their products, or of their value. It is the business of the political economist to explain the effects resulting from the nature of the products put in requisition, and from the mode of apportioning the burthen, as well as upon whom the burthen of the charge really falls, since it must inevitably fall upon some one or other. The application of the above principles in a few specific instances will show, how they may be applied in all others.
The public authority levies the values taken in the way of taxation, sometimes in the shape of money, sometimes in kind, according to its own wants, or the ability of the tax-payer. In whatever shape it is paid, the actual contribution of the tax-payer is always of the value of the article he gives. If the government, wanting or pretending to want corn, or leather, or woollens, makes a requisition of those articles upon the tax-payer, and obliges him to furnish them in kind, the tax paid amounts exactly to what the payer has expended in procuring those articles, or what he could have sold them for, if the government had not taken them from him. This is the only way of ascertaining the amount of the tax, whatever price or rate the government may set upon it in the plenitude of its power.
So, likewise, the charges of collection, in whatever shape they may appear, are always an aggravation of the assessment, whether they accrue to the profit of the state or not. If the tax-payer be obliged to lose his time, or transport his goods, for the purpose of paying the tax, the whole of the time lost, or expense of transport, is an aggravation of the tax.
Among the contributions, that a government exacts from its subjects, should likewise be comprised, all the expenses which its political conduct may bring upon the nation. Thus, in estimating the expenses of war, we must include the value of equipment and pocket-money, with which the military are supplied by themselves or their families; the value of the time lost by the militia; the sums paid for exemption and substitutes; the full charge of quarters for the troops; the pillage and destruction they may be guilty of; the presents and attentions lavished on them by friends or countrymen on their return; to all which must be added, the alms extorted from pity and compassion by the misery consequent upon such misrule. For, in fact, none of these values need have been taken from the members of the community under a better system of government. And, although none of them have gone into the treasury of the monarch, yet have they been paid by the people, and their amount is as completely lost, as if they had contributed to the happiness of the human species.
Hence, we may form some notion of the extent of the national sacrifices. But, from what source are they drawn?—Doubtless, either from the annual product of the national industry, land, and capital; that is to say, from the national revenue; or from the values previously saved and accumulated; that is to say, from the national capital.
When taxation is moderate, the subject can not only pay his taxes wholly out of his revenue, but will not be altogether disabled from besides saving some part of that revenue: and although some of the tax-payers may be obliged to trench upon their capital for the payment of their taxes, the loss to the general stock is amply reimbursed by the savings, which this happy state of affairs allows others to effect.
But it is far otherwise, when military despotism or usurped authority extorts excessive contributions. Great part of the taxes is then taken from the vested and accumulated capital; and, if the country be long subjected to its domination, the revenues of each successive year are progressively reduced, and the ruin and depopulation of the country, will recoil upon its rulers, unless their downfall be accelerated by their own folly and excesses.
Under the protecting influence of just and regular government, on the contrary, there is a progressive annual enlargement of the profits and revenues, on which taxation is to be levied; and that taxation, without any alteration of its ratio, gradually becomes more productive by the mere multiplication of taxable products.
Nor is the government more deeply interested in moderating the ratio of taxation, than its impartial assessment upon every class of individual revenue, and its equal pressure upon all. In fact, when revenue is partially affected, taxation sooner reaches the extreme limits of the ability of some classes, while others are scarcely touched at all: it becomes vexatious and destructive, before it arrives at the highest practical ratio. The burthen is galling, not because of its weight, but because it does not rest upon all shoulders alike.
The different methods employed to reach individual revenues, may be classed under two grand divisions—direct, and indirect, taxation; the former is the absolute demand of a specific portion of an individual's real or supposed revenue; the latter, a demand of a specific sum on each act of consumption of certain specified objects, to which that income may be applied.
In neither case, is the real subject of taxation that commodity, on which the estimate is made, and which forms the ground-work of the demand for the tax; or of necessity that value, whereof a part is taken by the state; individual revenue is the only real subject of taxation; and the specific commodity is selected only as a more or less effective means of discovering and attacking that revenue. If individual honesty could in every case be relied on, the matter would be simple enough; all that would be requisite would be, to ask each person the amount of his annual profits, that is to say, his annual revenue. The contingent of each would be readily settled, and one tax only necessary, which would be at the same time the most equitable, and the cheapest in the collection. This was the method adopted at Hamburgh, before that city fell into misfortune; but it can never be practised, except in a republic of small extent, and very moderately taxed.
As a means of assessing direct taxation proportionately to the respective revenues of the tax-payers, governments sometimes compel the production of leases by landlords, or, where there is no lease, set a value on the land, and demand a certain proportion of that value from the proprietor; this is called a land-tax.*89 Sometimes they estimate the revenue by the rent of the habitation, and the number of servants, horses, and carriages kept, and make the assessment accordingly. This is called in France, the tax on moveables.*90 Sometimes they calculate the profits of each person's profession or calling, by the extent of the population and district where it is followed. This is called in France, the license-tax.*91 All these different modes of assessment are expedients of direct taxation.
In the assessment of indirect taxation, and such as is intended to bear upon specific classes of consumption, the object itself is alone attended to, without regard to the party who may incur the charge. Sometimes a portion of the value of the specific product is demanded at the time of production; as in France, in the article of salt. Sometimes the demand is made on entry, either into the state, as in the duties of import;*92 or into the towns only, as in the duties of entry.*93 Sometimes a tax is demanded of the consumer at the moment of transfer to him from the last producer; as in the case of the stamp duty in England, and the duty on theatrical tickets in France. Sometimes the government requires a commodity to bear a particular mark, for which it makes a charge, as in the case of the assay-mark of silver, and stamp on newspapers. Sometimes it monopolizes the manufacture of a particular article, or the performance of a particular kind of business; as in the monopoly of tobacco, and the postage of letters. Sometimes, instead of charging the commodity itself, it charges the payment of its price; as in the case of stamps on receipts and mercantile paper. All these are different ways of raising a revenue by indirect taxation; for the demand is not made on any person in particular, but attaches upon the product or article taxed.*94
It may easily be conceived, that a class of revenue, which may escape one of these taxes, will be affected by another; and that the multiplicity of the forms of taxation gives a great approximation to its equal distribution; provided always, that all are kept within the bounds of moderation.
Every one of these modes of assessment has peculiar advantages and peculiar disadvantages, besides the general evil of all taxation, to wit, that of appropriating a part of the products of the community to purposes little conducive to its happiness and reproductive powers. Direct taxation, for instance, is cheap in the collection; but, on the other hand, it is paid with reluctance, and must be enforced with considerable harshness and rigour. Besides, it bears very inequitably upon the individual. A rich merchant, charged only 120 dollars for his license, makes an annual profit, perhaps, of 20,000 dollars; while the retailer, who can scarcely be supposed to make more than 300 dollars, is charged for his license 20 dollars, which is the lowest rate. The revenue of the landholder is already affected by the land-tax, before it is further reduced by the tax on moveables; while the capitalist is subjected to the latter burthen only.
Indirect taxation has the recommendation of being levyable with more ease, and with less apparent vexation or hardship. All taxes are paid with reluctance, because the equivalent to be expected for them, that is, the security afforded by good order and government, is a negative benefit, which does not immediately interest individuals; for the benefit afforded consists rather in prevention of ill, than in the diffusion of good. But the buyer of the taxed commodity does not suspect himself to be paying for the protection of government, which probably he cares very little about; but merely for the commodity itself, which is an object of his urgent desire, although, in fact, that price is aggravated by the tax. The inducement to consume is strong enough to include the demand of the government; and he readily parts with a value, that procures an immediate gratification.
It is this circumstance, that makes such taxes appear to be voluntary. And, indeed, so much so were they considered by the United States before their emancipation, that, although the right of the British Parliament to tax America without her consent was stoutly denied, yet she was ready to acknowledge the right of imposing taxes upon consumption, which every body could evade if he pleased, by abstaining from the articles taxed.*95 Personal taxes are viewed in a different light, and have more of the character of ostensible spoliation.
Indirect taxation is levied piecemeal, and paid by individuals according to their respective ability at the moment. It involves none of the perplexity of separate assessments on each province, department, or individual; or of the inquisitorial inspection into private circumstances; nor does it make one person suffer for the default of another. The inconvenience of appeals and private animosities, as well as of levy by distress or imprisonment, is avoided altogether.
Another advantage of indirect taxation is, that it enables the government to bias the different classes of consumption; favouring such as promote the public prosperity, as does reproductive consumption of all kinds; and checking such as tend to public impoverishment, as do all kinds of unproductive consumption; discouraging the costly and insipid indulgences of the wealthy, and promoting the simpler and cheaper enjoyments of the poor and industrious.
It has been objected to indirect taxation, that it entails a heavy expense of collection and management, and a large establishment of clerks, officers, directors, and subordinate agents; but it is observable, that these charges may be vastly reduced by good administration. The excise and stamp-duties in England cost but 3¼ per cent. in the collection, in the year 1799.*96 There are few classes of direct taxation, that are managed so economically in France.
It has been further objected, that its product is uncertain and fluctuating; whereas, the public exigencies require a regular and certain supply: but there has never been any lack of bidders, whenever such taxes have been let out to farm; and experience has shown, that the product of every class of taxation may always be nearly estimated and safely reckoned upon, except in very rare and extraordinary emergencies. Besides, taxes on consumption are necessarily various; so that, the deficit of one is covered by the surplus of another.
Indirect taxation is, however, an incentive to fraud, and obliges governments to brand with the character of guilt, actions that are innocent in their nature; and, consequently, to resort to a distressing severity of punishment. But this mischief is never considerable, until taxation has grown excessive, so as to make the temptation to fraud counterbalance the danger incurred. All excess of taxation is attended with this evil; that, without enlarging the receipts of the public purse, it multiplies the sufferings of the population.
It may be observed, that consumption, and, consequently, individual revenue, are unequally affected by indirect, as well as by direct, taxation: for the private consumption of many articles is not proportionate to the revenue of the consumer. The possessor of an annual revenue of 20,000 dollars does not consume in the year an hundred times as much salt, as the possessor of a revenue of 200 dollars only. But this inequality may be obviated by the variety of taxes on consumption. Moreover, it is to be recollected, that such taxes fall upon incomes already charged with the taxes on land and on moveables. A person, whose whole income is derived from land, in respect to which he is taxed in the first instance, pays on the same income a second tax under the head of moveables; and a third on every taxed article, that he buys and consumes.
Although all these kinds of taxes be paid in the outset, by the persons of whom they are demanded by the public authority, it would be wrong to suppose, that they always ultimately fall on the original payers, who, in many instances, are not the parties really charged, but merely advance the tax in the first instance, and contrive to get indemnified wholly or partially by the consumers of their own peculiar products. But the rate of indemnity is infinitely diversified by the respective circumstances of the individuals.
Of this diversity, we may form some notion, by the consideration of the following general facts:
When the taxation of the producers of a specific commodity operates to raise its price, part of the tax is paid by the consumers of the commodity. If its price be nowise raised, it falls wholly upon the producers. If the commodity, instead of being thereby advanced in price, is deteriorated in quality, a portion of the tax at least must fall upon the consumer; for a purchase of inferior quality at equal price is equivalent to a purchase of equal quality and superior price.
Every addition to price must needs reduce the number of those possessed of the ability to purchase; or, at any rate, must diminish the extent of that ability.*97 There is much less salt consumed, when it sells for three cents, than when it sells for one cent per lb. Now, the ratio of the demand to the means of production being lowered, productive agency in this department is worse paid; that is to say, the master-manufacturer of salt, and all the subordinate agents and labourers, together with the capitalist that supplies the funds, and the landlord of the premises where the concern is carried on, must be content with smaller profits, because their product is less in demand.*98 The productive classes, indeed, naturally strive to indemnify themselves to the amount of the tax; but, they can never succeed to the full extent, because the intrinsic value of the commodity, that, I mean, which goes to pay the charges of production, is really diminished. So that, in fact, the tax upon an article never raises its total price by the full amount of the tax; because, to do so, the total demand must remain the same; which it never can do. Wherefore, in such cases, the tax falls, partly upon those, who still continue to consume, notwithstanding the increase of price, and partly upon the producers, who raise a less product, and find that, in consequence of the reduced demand, they really obtain less on the sale, when the tax comes to be deducted. The public revenue gains the whole excess of price to the consumer, and the whole of the profit, which the produce is thus compelled to resign. The effect is analogous to that of gunpowder, which at the same time propels the bullet, and makes the piece recoil.
By laying a tax upon the consumption of woollens, their consumption is reduced, and the revenue of the wool-grower suffers in consequence. It is true, he may take to a different kind of cultivation, but we may fairly suppose, that, under all the circumstances of soil and situation, the rearing of sheep was the most profitable kind of culture; otherwise, he would not have chosen it. A change in the mode of cultivation must, therefore, involve a loss of revenue. But the clothier and the capitalist will each be subjected to a portion of the loss resulting from the tax.
Each concurrent producer is affected by a tax on an article of consumption, in proportion only to the share he may have in raising the product taxed.
When the owner of the soil furnishes the greatest part of the value of a product, as he does in respect to products consumed nearly in the primary state, he it is that bears the greatest part of that portion of the tax, which falls on the producers. A duty of entry upon the wine imported into the towns, falls heavily upon the wine-grower; but an exorbitant excise upon lace will affect the flax-grower in a degree hardly perceptible; whereas, all the other producers, the dealers, the operative and speculative manufacturers, who create the far greater proportion of the value of the lace, will suffer very severely.
When the value of a product is partly of foreign, and partly of domestic creation, the domestic producers bear nearly the whole burthen of the tax. A tax upon cottons in France will reduce the earnings of her cotton manufacturers, by lowering the demand for their product; thus, part of the tax will fall on them. But the wages of the productive agency of the cotton-growers in America will be very little affected indeed, unless there be a concurrence of other circumstances. In fact, the tax would reduce the consumption in France 10 per cent. perhaps, and demand in America 1 per cent. only, if the demand from France were but one-tenth of the general demand upon America.
The taxation of an object of consumption, if it be one of primary necessity, operates upon the price of almost all other products, and consequently falls upon the revenues of all the other consumers. An octroi upon meat, corn, and fuel, at their entry into a town, enhances the price of every thing manufactured in it; while a tax upon the tobacco there consumed makes no other commodity dearer; the producers and consumers of tobacco alone are affected; and for a very plain reason; the producer who indulges in superfluities has to maintain a competition with another, who abstains from them; but, if he pays a tax upon necessaries, he need fear no competition; for his neighbours will be all in the same predicament.
The direct taxation of the productive classes must, à fortìori, affect the consumers of their products, but can never raise the prices of those products so much, as completely to indemnify the producer; because, as I have repeatedly explained, the increased price abridges the demand, and the contraction of the demand reduces the profits of all the productive agency, that has been exerted in the supply.
Of the concurrent producers of a specific product, some can more easily evade the effect of the tax than others. The capitalist, whose capital is not absolutely vested and sunk in a particular business, may withdraw it and transfer it elsewhere, from a concern that yields him a reduced interest, or has become more hazardous. The adventurer or master-manufacturer may, in many cases, liquidate his account, and transfer his labour and intelligence to some other quarter. Not so the land-owner and proprietor of fixed capital.*99 An acre of vineyard or corn-land will only produce a given quantity of corn or wine, whatever be the ratio of taxation; which may take the ½ or even ¾ of the net produce, or rent as it is called, and yet the land be tilled for the sake of the remaining ½ or ¼.*100 The rent, that is to say, the portion assigned to the proprietor, will be reduced, and that is all. The reason will be manifest to any one, who considers, that in the case supposed, the land continues to raise and supply the market with the same amount of produce as before; while on the other hand, the motives in which the demand originates remain just as they were.*101 If, then, the intensity of supply and demand must both remain the same, in spite of any increase or diminution of the ratio of the direct taxation upon the land, the price of the product supplied will likewise remain unchanged, and nothing but a change of price can saddle the consumer with any portion whatever of that taxation.*102
Nor can the proprietor evade the tax even by the sale of the estate; for the price or purchase-money will be calculated according to the revenue which may be left him by taxation. The purchaser makes his estimate according to the net revenue, charges and taxes deducted. If the ordinary interest on such investments of capital be five per cent., an estate that before would have sold for 20,000 dollars, will fetch but 16,000 dollars when it comes to be charged with an annual tax of 200 dollars; for its actual product to the proprietor will not exceed 800 dollars. The effect is precisely the same, as if government were to appropriate to itself 1-5 of the land in the country; which would make no difference at all to the consumers of its produce.*103
But property in dwelling-houses is otherwise circumstanced; a tax upon the ownership raises the rents; for a house, or rather the satisfaction it yields to the occupier, is a product of manufacture and not of land; and the high rate of house-rent reduces the production and consumption of houses, in the like manner as of cloth or any other manufactured commodity. Builders, finding their profits reduced, will build less; and consumers, finding the accommodation dearer, will content themselves with inferior lodging.
From all those circumstances, we may judge of the temerity of asserting as a general maxim, that taxation falls exclusively upon any specific class or classes of the community. It always falls upon those who can find no means of evasion; for every one naturally tries to shift the burthen off his own shoulders if possible; but the ability to evade it is infinitely varied, according to the various forms of assessment, and the position of each individual in the social system. Nay, more; it varies at different times even in the same channel of production. When a commodity is in great request, the holder will not part with the possession, unless indemnified for all his advances, of which the tax he has paid is a part: he will take nothing short of a full and complete indemnity. But, if any unlooked-for occurrence should happen to lower the demand for his product, he will be glad enough to take the tax upon himself, for the sake of quickening the sale. There are few things so unsteady and variable, as the ratio of the pressure of taxation upon each respective class of the community. Those writers, who have maintained, that it bears upon any one or more classes in particular, or in any fixed or certain proportion, have found their theory contradicted by experience at every turn.
Furthermore, the effects I have been describing, and which are equally consonant to experience and to reason, are uniform in their operation and of equal duration with the causes in which they originate. The owner of land will never be able to saddle the consumers of its produce with any part of his land-tax; not so the manufacturer. A manufactured commodity will invariably feel a diminution in its consumption, in consequence of the price being raised by taxation, supposing other circumstances to be stationary; and its production will be a less profitable occupation. A person, who is neither producer nor consumer of an object of luxury, will never bear any portion whatever of the tax that may be laid upon it.—What, then, must we think of a proposition, unfortunately sanctioned by the approbation of an illustrious body,*104 that has too much neglected this branch of science, namely, that it is of little importance whether a tax press upon one branch of revenue or another, provided it be of long standing; because every tax in the end affects every class of revenue, in like manner, as bleeding in the arm reduces the circulating blood of the whole human frame. The object of comparison has no analogy whatever with taxation. Social wealth is not a fluid, tending constantly to find a level. It rather resembles the vegetable creation, which admits of the loss of a limb without the destruction of the trunk, and in which the loss is more to be lamented, if the branch be productive, than if it be barren.—But the tree will bear cutting and hacking in every part, before it becomes barren all over, or necessarily falls into decay. This is a far more apposite case; but neither will do to reason upon. Comparisons are not proofs, but mere illustrations, tending to make that intelligible, which can be made out in proof without their assistance.
When speaking of taxes upon products, which I have sometimes called taxes upon consumption, although not paid entirely in all cases by the consumer, I have hitherto made no mention of the particular stage of production, at which the tax may be demanded, or of the consequence of this particular circumstance, which deserves a little of our attention.
Products increase in value progressively, as they pass through the hands of the different concurrent producers: and even the most simple undergo a variety of modifications, before they arrive at a fit state for consumption. Wherefore, a tax does not take the proportion of the value of a product which it professes, unless it be levied at the precise moment, when it has arrived at the full value, and has undergone all the productive modifications. If a tax be imposed on the raw material in the outset, proportioned, not to its then value, but to the value it is about to receive, the producer, in whose hands it happens to be, is obliged to advance a tax out of proportion to the value in hand; which advance, besides being highly inconvenient to himself, is refunded with equal inconvenience by every successive producer, till it reach the hands of the last, who is in turn but partially indemnified by the consumer. And there is this further mischief in such an advance of tax; that it prevents the class of industry, which is called upon to make it, from being originally set in motion, without a larger capital than the nature of the business requires; and that the additional interest of the capital, which must be paid, part by the consumers, and part by the producers, is so much additional taxation, without any addition of public revenue.*105
Thus, both theory and experience lead to the conclusion precisely opposite to that drawn by the sect of economists; and show that portion of the tax, which presses upon the consumer's revenue, to be always the more burthensome, the earlier it is levied in the process of production.
Direct and personal taxes, which operate to raise the price of necessaries, or such as fall immediately upon necessaries, are liable to this inconvenience in the highest degree: for they oblige each producer to advance the personal tax on all the producers that have preceded him: so that the same amount of capital will set in motion a smaller amount of industry; and the tax-payers pay the tax, plus a compound interest upon it, yielding no benefit to the exchequer.
Nor is this mere theory: the neglect of these principles has occasioned may serious practical errors; like that of the Constituent Assembly of France, which carried to excess the system of direct taxation, especially upon land; being misled by the prevailing and fashionable doctrine of the economists;—that land is the source of all wealth, the agriculturist the only productive labourer, and France naturally and essentially an agricultural country.
It seems to me that, in the present stage of political economy, the principles of taxation will be more correctly laid down as follows:
Taxation is the taking a portion of the general product of the community, which never returns to the community in the channel of consumption.
It takes from the community over and above the values actually brought into the exchequer, the charges of collection, and the personal trouble it entails; together with all those values, of which it obstructs the creation.
The privation resulting from taxation, whether voluntary or compulsory, affects the tax-payer in his quality of producer, whenever it operates to curtail his profits; that is to say, his income or revenue; and affects him in his character of consumer, whenever it increases his expenditure, by raising the prices of products.
And, since an increase of expenditure is precisely the same thing as a diminution of revenue, whatever is taken by taxation may be said to be so much deducted from the revenues of the community.
In a great majority of cases, the tax-payer is affected by taxation in both his characters, of producer and consumer; and, when he can not manage to pay the public burthens out of his revenue, along with his personal consumption, he must encroach upon his capital. When this encroachment of one person is not counterbalanced by the savings of another, the wealth of the community must gradually decline.
The individual actually paying the tax to the tax-gatherer is not always the party really charged with it, at least, not the party charged with the whole that is paid. He frequently does no more than advance the tax, either wholly or partially; being afterwards reimbursed by the other classes of the community, in a very complicated way, and perhaps after a vast variety of intermediate operations; so that a great many persons are paying portions of the tax, at a time when probably they least suspect it, either in the shape of the advanced price of commodities, or of personal loss, which they feel but can not account for.
The individuals, on whose revenues the tax ultimately falls, are the real tax-payers, and contribute value greatly exceeding the sum that is brought into the exchequer, even with the addition of the charges of collection. The misconduct of the government in the matter of taxation, is proportioned to this excess of the payment above the receipt.
A country heavily taxed may be considered in the same light as one labouring under natural impediments to production. With a heavy charge of production, it raises a very small product. Personal exertion, capital, and the productive agency of land are all but poorly recompensed: and more is expended in earning a less profit.
It is worth while on this head to recur to the principles explained in the preceding book,*106 when describing the difference between positive and relative dearness. High price resulting from taxation is positive dearness: it indicates a smaller product raised by the efforts of a larger amount of productive agency. Besides which, taxation generally occasions a contemporary advance of commodities in comparison with silver; that is to say, raises their money price: and for this reason; because specie is not an annual, regenerative product, like those that are swallowed up by taxation. Government is not a consumer of specie, except when it happens to export it for the payment of its armies, or foreign subsidies: it refunds in the purchases it makes all the specie it obtains by taxation: but the value levied is never refunded.*107 Wherefore, since taxation paralyzes one part of the sources of production, and effects the rapid destruction of the product of the other, when its ratio is excessive, it must gradually render products more scarce in proportion to the specie, which is not varied in quantity by the operation. Now, whenever the commodities to be circulated become fewer in proportion to the specie that is to circulate them, their relative value to the specie must rise; the same money will purchase a smaller quantity of products.
It might be supposed, that such a superabundance of gold and silver specie ought to operate in exoneration of the public: yet it can not have that effect; for, however plentiful it may be in proportion to other commodities, still individuals can only obtain it by giving their own products in exchange, and the raising of those products has become more difficult and more costly.
Besides, when money-prices grow high, and specie is consequently reduced in relative value, it gradually takes its departure, and becomes scarcer, like all other commodities: and thus a country, burthened with a taxation too heavy for its productive powers, is first drained of its commodities, and next of its specie; till it gradually reaches the extreme of penury and depopulation.
The careful study of these principles will give some insight into the mode, in which the annual and really monstrous expenditure of national governments, in modern times, has habituated the subject to severer toil and exertion, without which it would be impossible that, after providing for the subsistence, comfort, and pleasures of himself and family, according to the habits of the time and place, he should be able to meet the consumption of the state, and the collateral waste and destruction it occasions, the amount of which it is impossible to ascertain, though in the larger states it is confessedly enormous.
This very profusion, though it proves the vices and defects of the political system and organization, has been attended with one advantage at any rate; it has operated to stimulate the approximation to perfection in the art of production, by obliging mankind to turn the natural agents to better account. In this point of view, taxation has certainly helped to develope and enlarge the human faculties; so that, when the progress of political science shall limit taxation to the supply of real public wants only, the improvements in the art of production will prove a vast accession to human happiness. But, should the abuses and complexity of the political system lead to the prevalence, extension, increase, and consolidation of oppressive and disproportionate taxation, it is much to be feared, that it may plunge again into barbarism those nations, whose productive powers are now the most astonishing; and the condition of the labouring classes, who are always the bulk of the community, may in such nations present a picture of drudgery so incessant and toilsome, as to make them cast a wistful eye upon the liberty of savage existence; which, though it offer no prospect of domestic comfort, at least promises emancipation from perpetual exertion to supply the prodigality of a public expenditure, yielding to them no satisfaction, and, perhaps even operating to their prejudice.*108
Of Taxation in Kind.
Taxation in kind is the specific and immediate appropriation of a portion of the gross product to the public service.
It has this advantage, of calling on the producer only for what he has actually in hand, in the identical shape which it happens to be under. Belgium, after its conquest by France, found itself at times unable to pay its taxes, in spite of abundant crops; the war, and the prohibition of exportation, obstructed the sale of its produce, which the government enforced by demanding payment in money; whereas, the taxes might have been collected without difficulty, had the government been content to take payment in kind.
It has the further advantage of making it equally the interest of government and of the farmer to obtain plentiful crops, and improve the national agriculture. The levying of taxes in kind in China, was probably the origin of the peculiar encouragement, bestowed by its government upon the agricultural branch of production. But, why favour one branch, when all are equally entitled to protection, because all contribute to bear the public burthens? And, why has not government an equal interest in supporting the other branches, which it takes the trouble of extinguishing?
It has likewise the advantage of excluding all exaction and injustice in the collection; the individual, when he gathers in his harvest, knows exactly what he has to pay; and the state knows what it has to receive.
This tax, which might appear at first sight to be of all others the most equitable, is nevertheless of all others the most inequitable; for it makes no allowance for the advances made in the course of production, but is taken upon the gross, instead of the net, product. Take two farmers in different branches of cultivation; the one farming tillage-land of moderate quality; his expenses of cultivation, amounting, one year with another, say to 1600 dollars, and the gross product of his farm, say to 2400 dollars, so as to yield him a net product of 800 dollars only; the other farming pasturage or wood-land, yielding a gross product of precisely the same amount of 2400 dollars: with an expense of cultivation, amounting, perhaps, to but 400 dollars, leaving him a net product, one year with another, of 2000 dollars. Suppose a tax in kind to be imposed in the ratio of 1-12 of the annual product of land of all descriptions indiscriminately. The former will have to pay in sheaves of corn to the amount of 200 dollars; the latter will pay, in cattle or in wood, an equal value of 200 dollars. What is the result? The one will have paid the fourth part of a net revenue of 800 dollars; the other but a tenth part of a net revenue of 2000 dollars.
The revenue, that each person has for his own share, is the net residue only after replacing the capital he has embarked, whatever may be its amount. Is the gross amount of the sales he effects in the year the annual income of the merchant? Certainly not; all the income he gets is the surplus of his receipts above his advances; on this surplus alone can he pay taxes, without ruin to his concerns.
The ecclesiastical tithe levied in France under the old system was liable to this inconvenience in part only. It attached neither upon meadow, nor wood-land, nor kitchen-ground, nor many other kinds of cultivation; and in some places was 1-18, in others 1-15 or 1-10 of the gross product; so that the real, was corrected by the apparent inequality.
The marechal de Vauban, in his work entitled, Dixime Royale, a book replete with just views, and well worth the study of those who manage national finances, proposes a tax of 1-20 of the product of the land, which, in times of great emergency, might be raised to 1-10. But this proposition was made as a substitute for a still more inequitable system: namely, the saddling of the lands of the commonalty with the whole tax, and altogether exempting the lands of the nobles and clergy. The public-spirited writer, who had occasion, in his character of engineer, to become personally acquainted with every part of France, speaks most feelingly of the hardships resulting from the land-tax*109 of those days. And there is no doubt, that the adoption of his plan at that time would have been a vast relief to the country. But it was disregarded. Why? Because every courtier had an interest to resist it: and this fine country was left to flounder through its distresses. The consequence was, a heavier loss of population from famine, than from the sword, in the war of the Spanish succession.
The difficulty and expense of collection, together with the abuses to which it is liable, are another objection to taxation in kind. The immense number of agents must open a fine field for peculation. The government may be imposed upon, in respect to the amount collected, upon the subsequent sale and disposal, in respect to the quantity damaged, as well as in the charges of storing, preservation and carriage. If the tax be farmed to contractors, the profits and expenses of numberless farmers and contractors must all fall upon the public. The prosecution of the farmers and contractors would require the active vigilance of administration. 'A gentleman of great fortune,' says Smith, 'who lived in the capital, would be in danger of suffering much by the neglect, and more by the fraud, of his factors and agents, if the rents of an estate in a distant province were to be paid to him in this manner. The loss of the sovereign, from the abuse and depredation of his tax-gatherers, would necessarily be much greater.'*110
Various other objections have been urged against taxation in kind, which it would be useless and tedious to enumerate. I shall only take the liberty of remarking the violent operation upon relative price, which must follow from so vast a quantity of produce being thrown upon the market by the agents of the public revenue, who are notoriously equally improvident as buyers and as sellers. The necessity of clearing the storehouses to make room for the fresh crop, and the ever urgent demands upon the public purse, would oblige them to sell below the level, to which the price would naturally be brought by the rent of the land, the wages of labour, and the interest of the capital, engaged in agriculture; and private dealers would be unable to maintain the competition. Such taxation not only takes from the cultivator a portion of his product, but prevents his turning the residue to good account.
Of the Territorial or Land-Tax of England.
In the year 1692, which was four years after the happy revolution, that placed the prince of Orange upon the British throne, a general valuation was made of the income of all the land in the country; and, upon that valuation, the land-tax continues to be levied to this day; so that the tax of four shillings in the pound, upon the rents of land, is a fifth of its rent in 1692, and not of the actual rent at the present day.
It may easily be conceived how much this tax must operate to encourage improvements of the land. An estate that has been improved so as to double the rent, does not pay double the original tax; neither does it pay a less tax if it be suffered to fall into neglect and impoverishment; thus, it operates as a penalty upon negligence.
To this fixation of the tax, many writers attribute the high state of the cultivation of the land in England: and doubtless it may have done much to promote improvement. But, what would be thought of a government that should say to a tradesman in a small way of business, "You are trading in a small way upon a small capital, and consequently pay very little in direct taxes. Borrow, and enlarge your capital, extend your dealings, and increase your profits as much as you can, and we will not charge you with any increase of taxes. Nay, further, when your heirs succeed to the business, and have still further extended it, they shall be assessed at precisely the same rate, and shall continue subject to the same taxes only." All this might be a vast encouragement to trade and manufacture; but would there be any equity in such a proceeding? and might they not advance without such assistance? Has not England herself presented the example of a still more rapid improvement in commercial and manufacturing industry, without any such unjust partiality? A land-owner, by attention, economy, and intelligence, improves his annual income to the amount, say of 1000 dollars: if the state claim a fifth of this advance, there will still be a bonus of 800 dollars to stimulate and reward his exertions.
It would be easy to put cases, in which the tax, becoming by its fixation disproportionate to the means of the tax-payers and the condition of the soil, might be productive of as much mischief, as it has done good in other instances: where it would operate to throw out of cultivation a class of land, that, by one cause or other, had become incompetent to pay the same ratio of taxation. We have seen an example of this in Tuscany. There, a census or terrier was made in 1496, wherein the plains and valleys were rated very low, on account of the frequent floods and inundations, which prevented any regular and profitable cultivation; while the uplands, that were then the only cultivated spots, were rated very high. Since then, the torrents and inundations have been confined by drainage and embankment, and the plains reduced to fertility; their produce, being comparatively exempt from tax, came to market cheaper than that of the uplands, which, consequently, were unable to maintain the competition, under the pressure of disproportionate taxation, and have gradually been abandoned and deserted.*111 Whereas, had the tax been adjusted to the change of circumstances, both might have been cultivated together.
In speaking of a tax, peculiar to a particular nation, I have used it merely in illustration of general and universal principles.
Notes for this chapter
What avails it, for instance, that taxation is imposed by consent of the people or their representatives, if there exists in the state a power, that by its acts can leave the people no alternative but consent? De Lolme, in his Essay on the English Constitution, says that the right of the Crown to make war is nugatory, while the people have the right of refusing the supplies for carrying it on. May it not be said, with much more truth, that the right of the people to deny the supplies is nugatory, when the crown has involved them in a predicament that makes consent a matter of necessity? The liberties of Great Britain have no real security, except in the freedom of the press, which rests itself, rather upon the habits and opinions of the nation, than upon legal enactments or judicial decisions. A nation is free, when it is bent on freedom; and the most formidable obstacle to the establishment of civil liberty is the absence of the desire for it.
By the same reasoning it has been attempted to prove, that luxury and barren consumption operate as a stimulus to production. Yet they are less mischievous than taxation; inasmuch as they redound to the personal gratification of the party himself: whereas, to use the expedient of taxation as a stimulative to increased production, is to redouble the exertions of the community, for the sole purpose of multiplying its privations, rather than its enjoyments. For, if increased taxation be applied to the support of a complex, overgrown, and ostentatious internal administration, or of a superfluous and disproportionate military establishment, that may act as a drain of individual wealth, and of the flower of the national youth, and an aggressor upon the peace and happiness of domestic life, will not this be paying as dearly for a grievous public nuisance, as if it were a benefit of the first magnitude?
Memoires, liv. xx.
It is hardly necessary to controvert an opinion, entertained by sovereigns in times past, respecting the property of their subjects. We find Louis XIV. writing in these terms, professedly for the instruction of his son in matters of government: "Kings are absolute lords naturally possessing the entire and uncontrolled disposal of all property, whether belonging to the church or to the laity, to be exercised at all times with due regard to economy, and to the general interests of the state." Œuvres de Louis XIV., Mémoires Hist. A. D. 1666.
In France, before 1789, the average annual consumption of salt was estimated at 9 lbs. per head in the districts subject to the gabelle, and at 18 lbs. per head in those exempt from that impost. De Monthieu, Influence des divers Impots, p. 141. Thus, taxation in this form obstructed the production of ½ of this article in the districts subjected to it, and reduced to ½ the enjoyment it was capable of affording; to say nothing of the other mischiefs resulting from it; the injury to tillage, to the feeding of cattle, and to the preparation of salted goods; the popular animosity against the collectors of tax, the consequent increase of crime and conviction, and the consignment to the galleys of numerous individuals, whose industry and courage might have been made available to the increase of national opulence.
In 1804, the English government raised the duties on sugar 20 per cent. It might have been expected, that their average product to the public exchequer would have been advanced in the same ratio; i. e. from 2,778,000l. the former amount, to 3,330,000l.: instead of which the increased duties produced but 2,537,000l.; exhibiting an absolute deficit. Speech of Henry Brougham, Esq., M. P., March 13, 1817.
The people of Great Britain might consume French wines at a very little advance upon the prices of France, and have the enjoyment of an unadulterated, wholesome, and exhilarating beverage, costing perhaps a shilling a bottle. But the exorbitant duty upon this article has reduced its import and the product of the duty to a very trifle; and thus, the sole benefit resulting from the tax to the British nation is, the total privation of a cheap and wholesome object of consumption.
The two last examples are a sufficient answer to the objection taken by Ricardo to this passage of my text; on the ground that taxation is not injurious to production in the aggregate, inasmuch as the consumption of the state itself replaces that of individuals, which is annihilated by the tax. A tax, that robs the individual, without benefit to the exchequer, substitutes no public consumption whatever, in place of the private consumption it extinguishes.
Of this, a striking instance is given in a work entitled, Diverses Idées sur la Legislation et l'Administration, par M. C. St. Paul. One of the principal bankers of Paris having died in 1817, the duty on legacies and inheritance was levied upon the aggregate of his credit-account, and not upon the balance, after deducting the debits; and this by virtue of a proviso in the revenue laws, which charges the duty upon the gross estate of a defunct, and not upon the residue after the discharge of the outstanding claims. The danger of fraud upon the revenue in stating the account, is not sufficient to justify the exaction of more than is fairly due.
The same department is in the habit of giving no notice to the executors or other parties, of the payments falling due, until after the legal time has expired, in the hope of incurring the penalty of default. The revolution had abolished this official and fiscal severity; but it was revived by the imperial government, and has been acted upon ever since. A clerk or officer has no chance of promotion, unless he shows a disposition on all occasions to postpone the interests of the public to those of the exchequer.
Œuvres de Turgot, tom. i. p. 170. The accounts of the farmers-general were minutely stated, and rigidly investigated, because the crown participated in their profits.
Essai Pol. sur la Nouvelle Espagne, liv. v. c. 12.
This position is further confirmed by an instance mentioned in a letter, addressed in 1785, by the then Marquis of Lansdowne to the Abbé Morellet, stating, 'that in respect to the article of tea, the good effect of the reduction of duty had surpassed all expectation. The amount of sale had advanced from 5,000,000 lbs. to 12,000,000 lbs., in spite of many unfavourable circumstances, besides which, smuggling had been so much crippled, that the public revenue had been increased to a degree that astonished every body.'
This doctrine has been combated by Ricardo, in his Principles of Political Economy and Taxation. That writer maintains, that since the amount and the product of industry are always proportionate to the quantum of the capital engaged in it, the extinction of one branch by taxation must needs be compensated by the product of some other, towards which the industry and capital, thrown out of employ, will naturally be diverted. I answer, that whenever taxation diverts capital from one mode of employment to another, it annihilates the profits of all who are thrown out of employ by the change, and diminishes those of the rest of the community; for industry may be presumed to have chosen the most profitable channel. I will go further, and say, that a forcible diversion of the current of production annihilates many additional sources of profit to industry. Besides, it makes a vast difference to the public prosperity, whether the individual or the state be the consumer. A thriving and lucrative branch of industry promotes the creation and accumulation of new capital; whereas, under the pressure of taxation, and accumulation of new capital, it ceases to be lucrative; capital diminishes gradually instead of increasing; wealth and production decline in consequence, and prosperity vanishes, leaving behind the pressure of unremitting taxation. Ricardo has endeavoured to introduce the unbending maxims of geometrical demonstration; in the science of political economy, there is no method less worthy of reliance.
Chap. V. sect. I.
Under the system of Napoleon, which made civilization retrograde to this, as well as in most other particulars, the charges of collection in which must be included the charge of privation and the irrecoverable arrears, were much more considerable; but the full extent of the mischief he caused is not yet ascertained.
Necker reckons the corvée at four millions of dollars only; but probably he takes account of nothing, but the value the day-labour exacted; and does not notice the injury resulting from this method of supplying the public necessities.
Wealth of Nations, book v. c. 2. It has been objected, that a progressive scale of taxation presents the disadvantage of operating as a penalty to deter activity and frugality from the accumulation of capital. But it must be obvious, that taxation of all kinds subtracts a portion only, and generally a very moderate portion, of the addition made to the fortune of an individual; so that every one has a much stronger inducement to invite, than penalty to deter, accumulation. If a person had to pay 40 dollars more in taxes, upon every addition of 200 dollars to his revenue, still he would multiply his enjoyments in a larger ratio than his sacrifices. Vide what is said in Sect. 4. of the same Chapter, on the subject of the land-tax of England. Ibid.
This is the reason, why it has been found practicable to raise the duty on registration to its present high scale. Were it reduced, the product to the exchequer would probably be equally great; and the nation would enjoy the benefit of greater freedom of circulation, besides experiencing less encroachment upon its capital.
Taxes upon law proceedings are the most grievous and oppressive that have ever been resorted to, and since the appearance of Mr. Bentham's work on Law taxes, no one, who has read it, can doubt their impolicy. It is said in the Edinburgh Review (vol. 27, page 358.), "that one day Mr. Rose, in Mr. Pitt's presence, took Mr. Bentham aside, and informed him that they had read the pamphlet—that its reasoning was unanswerable—and that it was resolved there should be no more such taxes." "Yet Budget after Budget," remarks the reviewer, "has since been formed, in which those duties have made a part; and Mr. Pitt himself was found to patronize them upon his return to office in 1804." All the arguments ever brought forward in support of this objectionable impost, have been triumphantly refuted by Mr. Bentham, in this work, which it is said in the same Review, "for closeness of reasoning, has not perhaps been equalled, and for excellence of style, has certainly never been surpassed." American Editor.
In both England and France, premiums are given upon the importation of specific raw materials, with a view to encourage manufacture. This is an error on the opposite side. Upon this principle, instead of a tax on the product of land, a bounty should be given to all who would take the trouble to cultivate, for domestic agriculture furnishes the raw material of most manufactures; as grain in particular, which is transformed, through the mediation of human exertion, into value of various kinds, exceeding that consumed in the process. Customs or duties of import upon any article whatever are equally equitable with direct taxes upon land; both are positive evils; but the lighter the tax, the smaller the injury.
When it is absolutely necessary to lay a tax upon a particular kind of consumption or industry, which it is desirable not to extinguish altogether, the burthen must be light in the commencement, and increased gradually and cautiously. But if it be desired to repress or annihilate a mischievous class of consumption or industry, the full weight of the tax should be thrown upon it at once.
The efficacy of the characteristics of punishment has been placed beyond all doubt by Beccaria, in his tract, Dei delitti e delle pene.
This species of tax is still more iniquitous, because it must fall either upon orphans, or upon parents, who are disposed to submit to personal privations, for the purpose of rearing valuable citizens; because it is heavier in proportion to the number of children, and the degree of privation of the parent; and because it is disproportionate to the means of the individual, poor and rich being taxed alike. A parent of moderate fortune, with one son only, pays as much to the university as all the rest of his taxes together: if he have more sons than one, he is still worse off. Thus was this institution converted by the usurper into an instrument of fiscal extortion, sufficient of itself to have insured the relapse into barbarism, even had it never been made the medium of instilling false ideas or habits of servility. The pretext, of making the profits of private establishments contribute to the expense of compulsory tuition, is by no means satisfactory. Supposing the tuition of the public Lycées to be, of all others, the best calculated to train up useful citizens; and, admitting the justice of compelling a father, or a teacher to his choice, to bring his pupil to the lectures of the authorized professors, still the parties, least in need of this instruction, are those already placed in private establishments of education, and entrusted to teachers of their own selection. It may be for the interest of the community at large, to dispense particular classes of learning gratuitously; but it is the greatest oppression to force learning upon individuals, and make them pay dear for it into the bargain. If any one class in particular ought to defray the charge of moderate gratuitous tuition, it is that, which has no children of its own, and is in the reception of all the benefits of social life, without being subject to all its burthens.
Lotteries and games of hazard, besides occupying capital unprofitably, involve the waste of a vast deal of time, that might be turned to useful account, and this item of expenditure can never redound to the profit of the exchequer. They have the further mischievous effect of accustoming mankind to look to chance alone for what their own talents or enterprise might attain; and to seek for personal gain, rather in the loss of others, than in the original sources of wealth. The reward of active energy appears paltry beside the bait of a capital prize. Moreover, lotteries are a sort of tax, that, however voluntarily incurred, falls almost wholly upon the necessitous; for nothing, but the pressure of want can drive mankind to adventure, with the chances manifestly against them. The sums thus embarked are, for the most part, the portion of misery; or, what is worse, the fruit of actual crime.
Not because they affect the tax-payer indirectly; for this circumstance is equally applicable to many items of direct taxation; as, for instance, to the license-tax (patentes,) part of which falls indirectly upon the consumer, who buys of the licensed dealer.
Vide Examination of B. Franklin, at the bar of the House of Commons, 1767. Memoirs, vol. i. Appendix 6.*
Garnier, Traduction de Smith, tom. iv. p. 438. According to Arthur Young, the stamp-duties in his time cost but 5,691l. in the collection, upon the receipt of 1,330,000l.; which is less than ½ per cent.
Suprà, Book II. chap. I.
The position, that the interest of the capitalist and the rent of the landlord are thereby lowered, however paradoxical it may appear, is nevertheless quite true. It may be asked, why should the capitalist, who makes the advance to the manufacturer, or the landlord, whose land he occupies, lower their demands, in consequence of a portion of the product being subtracted by taxation? But is no allowance to be made for consequent delay of payment, claims of allowances, failures, and legal expenses? All, or at least a portion, of which must fall upon the landlord and capitalist: and often without any suspicion on their part, that they are thus made to participate in the burthen. In a complex social organization the pressure of taxation is often imperceptible.
This shows the danger of adherence to invariable principle; and of abandoning the experimental method of Smith, and constructing a system of theoretical deduction, as some recent English writers have done, in imitation of the economists of the last century.
Vide Suprà, Book I. chap. 4. for the explanation of the mode, in which the land-holder concurs in production by the advance of his land; and must, therefore, be included amongst the productive classes.
The cultivation need never be abandoned altogether, until taxation takes more than the whole surplus product applicable to the payment of rent; it is then worth nobody's while to cultivate at all; for not only could the proprietor receive nothing, the whole being appropriated by the state; but the farmer would be compelled to pay to the state a higher rent, than he could afford.
There is this peculiarity attending the products of agricultural industry, viz. that their average price is not raised by growing scarcity, because population is sure to decline co-extensively with the declining supply of human aliment; so that the demand necessarily diminishes equally with the supply. Thus it is not found, that wheat is dearer in those countries where great part of the land is thrown out of tillage, than where it is all in a high state of cultivation. In Spain, wheat is not now dearer, than in the time of Ferdinand and Isabella, though it is there produced in much less abundance; for the number of mouths to be fed is also much less. On the contrary, the lands of both England and France were less cultivated in the middle ages than at the present day; and their product of grain less abundant; yet it does not appear, from a comparison of other values, that it was then much dearer than at present. The product and the population were both greatly inferior; and the slackness of demand counter-balanced the slackness of supply.
It is a mistake to suppose, that the tax must bear equally upon the proprietor and the farmer, who finds the requisite capital and industry; for taxation can have no effect, either in reducing the quantity of land capable of cultivation, or in multiplying the number of farmers, able and willing to undertake it; and, if neither supply nor demand in this branch be varied, the ratio of the rent must needs remain unaltered likewise.
The economists were quite correct in their position, that a land or territorial tax falls wholly upon the net product, and consequently, upon the proprietors; but they were wrong in extending the doctrine so far as to assert, that all other taxes were defrayed out of the same fund.
The French institute, which awarded the prize of merit to an Essay of M. Canard, in support of this doctrine.
The duty on the import of cotton into France was, in 1812, as high as 200 dollars per bale, one bale with another. There were several manufactories averaging a consumption of two bales per day; and as the amount of duty was a dead outlay, during the whole interval between the purchase of the raw material and the realization of the manufactured product, which may be taken at twelve months, they must each have required an additional capital of 120,000 dollars more than would have been requisite but for the tax; the interest of which they must have charged to the consumer, or have paid out of their own profits. The whole of it was so much addition of price to the French consumer, and aggravation of the pressure of taxation, unproductive of a single additional dollar to the public revenue. The heaviest of the national burthens of that period were those that made the least figure in the annual budget of the ministry: the people suffered, in very many instances, without knowing the nature of the grievance, as in the example, just cited.
Book II. chap. 3.
For the reason already stated, viz. that purchases, made with the proceeds of taxation, are acts of exchange, and not of restitution.
This ground of apprehension is certainly just. It has been doubted by many political theorists, whether the total remission of taxation would operate to improve the condition of the inferior productive classes: inasmuch, as all that is now paid into the public exchequer, would quickly be appropriated by the classes, who should happen to be in possession of those sources and means of production, which are capable of exclusive appropriation; and the owners of mere personal agency would nowise benefit. But it should be observed, that private persons have an immediate personal interest in making the most of their property; and will, on their own account, so conduct themselves, as to promote their own advantage, which is the advantage of the public also, where equality of personal right prevails. Wherefore, the strongest impulse of private cupidity can never operate to retard the advance of productive power and national wealth, or to make them retrograde; but just the contrary. Thus, although the present condition of the mere labourer might not be improved, his means of bettering his condition would be enlarged, by the growing increase of wealth, and by greater freedom of personal agency. The extortion of private cupidity, unaided by authority, must, for its own sake, regulate itself by the ability of the object of it: but that of public authority is inexorable, and is restrained by no consideration of immediate personal interest. Besides, personal suffering, occasioned by the hard-heartedness of primate task-masters, is not so strong an incentive of odium against public authority, as where that authority is itself the ostensible task-master. Translator.
Taille; for the explanation of this tax, vide Wealth of Nations, book v. c. 2. art. 2. Translator.
Wealth of Nations, book v. c. 2. art. I.
Forbonnois, Principes et Observ. &c. tom. ii. p. 247.
Book III, Chapter IX
End of Notes
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