Public Finance

§ 1. From an examination of the general and what may almost be called the necessary features of the tax system, conditions that are beyond the direct influence of human agency, we have now to pass to a problem of a very different character, viz., the determination of the proper distribution of the burden inevitable in the levy of taxation among the persons or ‘subjects’ liable to it. Instead of studying ‘what is,’ we ask ‘what ought to be.’ The distribution of taxation may be said with far more justice than the distribution of wealth in general to be ‘a matter of human institution solely.’
*58 Like all questions into which the conception of ‘ought’ or rightness enters, it is an ethical one; but its correct solution is so bound up with economic and financial considerations that it must remain within the field of financial inquiry. Without a knowledge of the surrounding conditions and the effects of any given tax system, the attempt to form a judgment respecting its justice is hopeless. Moreover, to obtain an approximately correct answer to the question is of great importance to the practical financier. Any error, wilful or otherwise, on the subject is apt to show itself in political difficulties that may in some cases reach an acute point. Nor is it sufficient that a tax system shall be substantially just: it ought to be generally recognised as such. The prevalence of even an unfounded belief that the public burdens are not fairly divided among the different classes and individual members of a society is a seriously disturbing force. Finance touches on the domain of general politics, and no method of fiscal administration, however successful in other respects, can be worthy of approval unless it seeks, so far as existing conditions allow, to realise the idea of an equitable division of the public charges. The establishment of general principles on this point for the guidance of financial policy and their recognition by the people in general are so eminently desirable, that the investigation of the grounds on which taxation should be distributed is a work of utility in the narrowest practical sense.

The difficulties of the inquiry are increased by several distinct circumstances. First, they are due to the changing nature of the public economy. The city state of Greece or Italy, the mediæval kingdom on a feudal basis, and the nation of modern times have so many points of contrast, their several functions are in outward appearance so different, that it seems impossible to assign a single law of distribution that can include them all and yet be more than a truism. Will it not be necessary to take each stage of political evolution and deal with it separately? Next, even confining our attention to a single type of State, it is not easy to bring the numerous public charges, and the equally numerous functions whose cost they defray, to the test of a common calculation. It is not clear on the surface that all citizens should bear all charges in an equal degree, or that all expenditure should fall on a common and indivisible fund. The text-book writers have, it must be said, created a third difficulty, as they, in too many cases, have supplied us with formulas that allow of a convenient laxity of interpretation, and give an appearance of information without the reality.

Under such circumstances it will be expedient to examine the various rules of distribution, and to note their historical application. While thus engaged we shall see how misunderstanding has often arisen from neglecting the necessary changes in public economy, and the gradual development of the State, as well as from attempts to stretch a particular rule beyond its legitimate limits.

§ 2. The first and, in one sense, the simplest principle for the distribution of taxation is that which would treat it as a payment for public services. We have already seen reason for rejecting this mode of explaining the nature of taxation,
*59 and thereby implicitly its value as a measure of its amount. There was, however, much in the mediæval economic system that tended to foster the belief. Private economies admittedly sold their services, but the royal economy was nothing but the largest of private economies. The King lived by his domain and by the fees that he obtained for the performance of duties. The whole feudal system was based on the idea of contract. Defence against enemies was the payment for the vassal’s homage and dues. Justice was bought, and so were the few economic services rendered by the sovereign. Under such conditions the doctrine that taxation should be measured by service supplied was but the formal expression of an existing fact. The growth of the state economy made this no longer true and the doctrine thus became a survival from earlier times. It is still more important to note that the method of specific payment for public services was never a realisation of justice in the distribution of burdens. Neither in respect of national defence nor of legal administration, nor finally of general economic activity, is it possible to distribute the advantages among individuals, and to charge in proportion. The introduction of general taxation was in part a result of the defects of the older mode, and it was undoubtedly a step in advance, particularly in the direction of securing a fairer allocation of the expenses of the public powers. The theory that taxation is the price of the State’s services, and finds its measure for each citizen in the amount of benefit received, is, as regards the latter part, quite unsupported by history. The system of direct purchase applied to the State’s tasks was so far from being equitable that justice was only made possible by its abandonment.

Much of the plausibility of this view of the measure of taxation arises from the apparent support that it gives to the individualistic theory of the State. If the services of government are the standard by which to regulate taxation, there appears to be no essential difference between the payment of taxes and the purchase of commodities. The assimilation of the two forms is in reality a forced one. In the case of taxation the advantage given is indefinite, and the payment for it is compulsory; the modern upholders of the doctrine are consequently forced to have recourse to some other standard, which they declare brings about a substantial equality between the benefits received and the taxes paid.
*60 That usually suggested is the rule of taxation in proportion to revenue. It is, however, quite impossible to establish any such connexion. Limiting state functions to the minimum, viz. the protection of person and of property, there can be no doubt that the former would in general require equal payment from all. It costs quite as much (if not more) to protect a poor man’s person as it does to perform the same service for a rich man. Again, as regards property, there is little ground for the belief that the cost of guarding it varies directly as its value. If security is to be sold like an ordinary commodity, there ought, on the strictest commercial principles, to be some allowance made to the purchaser of a large quantity! The natural conclusion, therefore, appears to be that the rate of taxation should, on the theory of purchase and sale, be lower on large than on small incomes; but even this result does not rest on very solid grounds, since any change in the quantity or quality of state services would alter the relations of the parties concerned.

§ 3. The evident weakness of the theory just discussed makes the adoption of some other and more precise criterion necessary. Retaining the idea that taxation should be equal, but giving up as hopeless the attempt to measure the respective services performed for each person by the State, we might conceivably abandon all efforts at differentiation between individuals, and hold that equality was realised by taxing all persons (or all families) at the same rate. Such a method might be admissible in a primitive community. All are dependent on the State for certain essential conditions of social life. Why should not all pay equally for these advantages? Military service is rendered by all alike, and the same principle might seem as applicable to the contribution of commodities as to that of services. Civilised societies have, however, almost forgotten the existence of a state of things in which such an arrangement would be feasible. The annual tax revenue of the United Kingdom may be put roughly at £120,000,000, and the population at 40,000,000. Under a system of equal contribution the rate per head would be £3, or £15 for a family of five. The labourer’s family, with a weekly income of £1, would be taxed about 30 per cent.; a middle class family, with £500 per annum, would be taxed 3 per cent.; where the family income was £50,000 per annum the charge would be an insignificant fraction. The method of equal contributions per head would be impossible politically, besides being extremely unjust.

Dismissing then the idea of equal taxation of persons as utterly impracticable, we come to what is the best known and most widely accepted doctrine, viz. that which takes ‘faculty’ or ‘ability’ as the measure for taxation. This view, which is found as early as Bodin,
*61 has been embodied by Adam Smith in the first of his classical maxims: ‘The subjects of every State ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities.’
*62 For the last thirty years it has been the doctrine accepted by the majority of German writers on finance. One reason for the readiness with which ‘ability’ has been adopted as the measure of taxation is perhaps its convenient vagueness. The mere statement that taxation should be proportioned to ‘ability’ does not afford much practical guidance. A measure of ‘ability’ is further wanted, and in fact different criteria have been put forward with equal sincerity and equal confidence. Property, revenue, net revenue have each been selected as the test of the taxpayer’s ability.

§ 4. All the foregoing tests are more or less measurable, and present, so to speak, objective standards, but the measure of ‘ability’ has sometimes been transformed into that of ‘sacrifice,’ and this criterion has been widely accepted. ‘Equality of taxation,’ says Mill, ‘as a maxim of politics means equality of sacrifice.’
*63 It is apparent that the rule of equality of sacrifice is but another mode of stating the rule of equality as to ability. Equal ability implies equal capacity for bearing sacrifice. An equal charge will impose equal sacrifice on persons of equal ‘faculty,’ and where abilities are unequal a corresponding inequality in the amount of taxation will realise the aim of equality of sacrifice. There is, however, a shade of difference in the use of the two terms. Ability suggests the positive element of power to contribute, sacrifice the negative one of loss by contribution; the former is most naturally measured by some objective standard, the latter refers primarily to the sentiments of the people concerned, and is, therefore, rather subjective. The use of sacrifice undergone by the payer as the measure of taxation is probably due to a disposition to place weight on the element of privation felt by those who are taxed, instead of on the external marks that indicate ability to pay.

But when the conception of ‘sacrifice’ is substituted for that of ‘ability’ the road is opened for a further and more radical alteration. Assuming the utilitarian standard as the true one, it is forcibly argued that the proper distribution of taxation is not that which imposes
equal sacrifice. The ‘greatest happiness’ of the society will be best attained by so distributing the burden as to inflict the
least sacrifice on the whole, and therefore placing the heaviest pressure on those who are far above the average in resources, while exempting altogether those who are much below it.
*64 The same train of thought leads to more careful discrimination in the treatment of ‘equal sacrifice, since under this term equal sacrifice in the strict sense and ‘proportional sacrifice’ are frequently included. Last of all in this process of refinement is the recognition of ‘
equi-marginal sacrifice’ which will lead to the realisation of ‘minimum’ or ‘least sacrifice.’

These complications in the employment of the sacrifice principle seem to justify adherence to the objective standard of ability, especially as the practical application of the criterion of ‘least sacrifice’ is impossible.
*65 It is clearly inadmissible to use a principle of a highly abstract character, and one limited by other important considerations, as the guide in such an essentially practical study as finance.

§ 5. But whether ‘ability’ or ‘sacrifice’ be taken as the standard, it is possible to reach very different practical results according to the amount of weight assigned to the different elements. We accordingly meet with three different forms of distribution, all avowedly based on the criterion of ability, and all claiming to realise true equality. These are: (1) pure proportional taxation, in which income is taken as the standard, and the amount of public burdens regulated by it; (2) qualified proportional taxation, where income is still the test, but is subjected to certain modifications, either by deduction of necessary expenses or by analysis of its component parts; (3) progressive or graduated taxation, which places a heavier rate of charge on large than on small incomes, since the ability of the ‘subject’ is supposed to increase in a more rapid ratio than the increase of his income.

The rule of proportional taxation has been undoubtedly the doctrine of the classical political economy. Connected on its political side with the liberalising movements of the eighteenth century, its representatives protested against all exemptions and privileges, and against none more than those granted in respect of taxation. The assertion of the justice of taxing in proportion to revenue carried with it a condemnation of the very common freedom from all personal taxation enjoyed by the privileged classes of the Continent. ‘There is,’ says Vauban, ‘a natural obligation on the subjects of all conditions to contribute in proportion to their revenue or their industry … Every privilege that tends to exemption from that contribution is unjust and abusive.’
*66 If taxation should be proportional it follows necessarily that it must also be general. The French Revolution, and the changes that it led to elsewhere, so completely abolished the objectionable privileges that this side of the doctrine is often ignored, and its reference to the income possessed alone considered. Adam Smith completes his statement that taxation should be adjusted to the abilities of the subjects by adding ‘that is in proportion to the revenue which they respectively enjoy under the protection of the State.’
*67 And since his time the rule has been quoted and adopted by most of his English and French successors.
*68 At first put forward as a protest against the injustice of the old system of privilege, the maxim of proportional taxation is now employed as a weapon against the newer Radical socialism.
*69

One great advantage of the rule is its simplicity. As M. Say puts it, ‘Proportional taxation does not need definition, it is the rule of three … When it is said of a tax that it will be levied proportionally every one understands it.’
*70 The problem of taxation is reduced to its least complex form. Given the amount that must be raised by taxation, and given the sum of individual incomes, the rate per cent. can be assigned and applied to each case. It is true that there are certain practical difficulties in the way. The ascertainment of individual incomes is not a perfectly easy work, and where, as is almost universally the case, it is necessary to specialise the tax system and have a number of duly correlated charges, it is difficult to measure the exact amount paid by each citizen to the public treasury. But any other principle must either meet or evade these embarrassments, besides the additional difficulties that are peculiar to itself. Simplicity and easy application, though desirable in finance, are not the sole objects to be attained, and therefore the rule of proportional taxation has been vehemently opposed as failing to give a just distribution of the public charges. The question has, in fact, been mainly debated on the issue whether proportional or progressive taxation should be the system adopted.

§ 6. What is known to Continental writers as progressive
*71—but more familiar in England as graduated—taxation includes, as we have said, any system in which the rate of taxation becomes higher, or progresses, as income increases. In this consists the essence of the principle; the grades into which incomes are divided, the initial rate of charge, and the increases at the several stages of advance, though very important, are yet matters of application.

The reasons that have led to the popularity of progressive taxation are obvious enough. The loss of a portion of wealth by a rich man is generally regarded as a very slight evil or as none at all, while to a poor one it causes curtailment of real enjoyment. The deduction of £10 from an income of £100 will in most cases prove a serious pressure, sweeping away perhaps the savings of the period, or compelling the sacrifice of all relaxation; that of £100 from £1,000, though still heavy, would not trench upon the conditions of a comfortable life; £1,000 taken from £10,000 would leave a balance sufficient to support a luxurious existence; and £10,000 from £100,000 would hardly, so popular sentiment imagines, be perceptible by the owner. Yet it is precisely these deductions that proportional taxation carries out, without recognition of the real gradations of ability and capacity for bearing sacrifices. So regarded, the levying of equal rates on all incomes has an appearance of unfairness that has given much support to the plan of graduating charges according to different scales.

Though the general current of economic opinion has till recently been decidedly against the idea of progression, the system has secured the adhesion of some eminent authorities. A passage of Montesquieu’s has been often quoted in its favour, in which, speaking of the Athenian property tax, he says, ‘it was just though not proportional; if it did not follow the proportion of goods, it followed the proportion of wants. It was thought that each had equal physical necessities, which ought not to be taxed; that what was useful came next, and should be taxed, but not so highly as superfluities.’
*72 Rousseau and the elder Mirabeau took the same view. In the nineteenth century J. B. Say and Joseph Garnier approved of a system of moderate progression. The former ‘did not fear to declare that progressive taxation was the only equitable form’; the latter held that ‘taxation ought to be progressive without spoliation.’
*73 Still the weight of authority was on the other side. ‘Progressive taxation,’ like ‘protection’ or ‘a double standard,’ was an heretical tenet opposed to the true economic faith. Alike in England, France, and Germany it was rejected by such representatives of competent opinion as J. S. Mill and McCulloch, Levasseur and De Parieu, Gneist and Hermann.
*74

The recent change in opinion on this subject has been due partly to increased popular influence over government. The shifting in the centre of political gravity that the growth of democracy has brought about has, as one of its consequences, a tendency to alter the distribution of taxation in favour of the most powerful class,
i.e. the numerical majority. This can only be accomplished by putting a heavier burden on the wealthy. The diffusion of socialistic ideas assists in this movement. Progressive taxation is one of those agencies that seem likely to facilitate the transition from the capitalist to the socialist
régime, and it consequently has the support of the various sections of that party. Among the counts of the indictment that the French economists bring against the system, one of the weightiest, in their opinion, is its socialistic character.

Modern developments of economic theory have also had their share in the work. The members of the ‘historical’ school have not been bound by any undue respect to the opinions of their predecessors, and their greater sympathy with semi-socialist ideas made them inclined to favour what seemed to be a mode of relieving the poorer classes from the pressure of excessive taxation. Accordingly some moderate form of progression has generally received their approval.

Another and apparently opposed school has tended in the same direction. The more accurate study of the variations of utility, which forms the common starting-point of the researches of Jevons, Menger, and Walras, has among its other important effects given a new mode of measuring the pressure of taxation. Final or marginal utility becomes the measure of sacrifice, and if, as is plain, the utility of a shilling is more to the possessor of an income of £100 than it is to one of £1,000, it does not follow that it is exactly ten times as great. The assumption that equal percentages of income are of equal utility is a rough ‘first approximation,’ admissible, perhaps, in the earlier stages of inquiry, but certain to give place to the more accurate results of later investigation. It is noticeable that Sax and Wieser, who represent the financial studies of the Austrian school, have both declared for progressive taxation.
*75

The substitution of ‘
least sacrifice’ for ‘
equal sacrifice’ as the criterion for distributing the burden of taxation would lead of necessity to a more extreme form of progression, approximating to, if not actually attaining, a state of socialistic equality. This substitution is, however, too speculative, and, as previously explained, too much limited by the need of maintaining production, to be seriously considered. Still, even its qualified recognition may be regarded as one of the influences giving support to the movement towards the development of progressive taxes.

§ 7. A system of progression may be realised in different ways, as by heavy taxes on luxuries consumed by the rich,
*76 or by higher duties on the finer kinds of all commodities. Duties on the transfer of property, and on commercial transactions generally, could be so adjusted as to reach the same end, while taxes on inheritance appear to supply a specially effective form of progression.
*77 The mode usually employed is, however, that of progressive income and property taxes. This is obviously the most direct way, since it places the increased charges at once on the larger incomes, and has not to trust to the less certain and calculable operation of taxes on ‘consumption’ or on ‘acts.’ In form the tax may be on property, or on income, or on both; but as in any case it must normally be paid out of income, the assessment of property is simply a particular mode of fixing the rate of charge.

But whatever be the form adopted, the policy of progressive taxation is open to serious objections, of which the following may be noticed as the most important.

In the first place, it is entirely arbitrary. The possible scales are infinite in number, and no simple and intelligible reason can be assigned for the selection of one in preference to its competitors. The schemes proposed vary widely. Some are of a very drastic character, aiming in fact at confiscation of all income above a certain appointed level.
*78 Others are more moderate, and seek only to realise a supposed equality of sacrifice, or simply to somewhat favour the poor as against the rich. But the fact that such divergent plans can be plausibly propounded is highly significant.

Actual examples of progression, as we shall see, are not of an extreme type. The highest rate of charge is fixed at a comparatively low percentage. It still remains true that there is no self-acting principle by which to determine the scale of progression. We must perforce agree with Léon Say’s declaration that ‘progression is naturally arbitrary.
*79 Opponents of the system will hold that the mildest form is the least objectionable, and try to attain that result (unless they prefer to have an extreme measure in the hope that its hardships may cause a reaction). Reasonable supporters will recognise that a rapidly increasing rate is both unjust and economically injurious. But beyond such vague propositions nothing can be stated. All depends on the will of the legislature,
i.e. in most modern societies on the votes of persons who will not directly feel the charges placed on the higher incomes, and will probably believe that they will be gainers by them.
*80

Another serious obstacle to a progressive system is the danger of evasion. No empirical law is better established in finance than that which states that high taxation leads to efforts to avoid it. Duties on luxuries are in part escaped by the smuggler’s aid; special duties on the better kinds of goods lead to false declarations; graduated inheritance taxes are met by concealment and gifts
inter vivos; progressive income and property taxes cause false returns on the part of the contributors. For this latter fact there are several reasons. The increased charge on higher incomes offers a special inducement to understatement on the part of those liable, as thereby they obtain the advantage of a lower rate, a proceeding the more readily excused to their consciences by the plea that the exaction escaped is itself unjust. Another reason is the impossibility of employing effective measures for collection. With a uniform income tax a great deal of income can be taken at its source, where evasion is impossible; with progression, as the rate varies according to the sum of income, the ascertainment of that fact is required for fixing the charge, though it is undoubtedly very difficult to get a proper answer to inquiries respecting it. Thus the motives for evasion are stronger and the means of prevention less effective in the case of a progressive than of a proportional tax.
*81 It is the intrusion of the personal and arbitrary element that raises this difficulty, which is accordingly unavoidable.

A third powerful argument against progressive taxation is derived from its probable effect on the accumulation of wealth. One of the motives to providence is the desire of gaining a large fortune, but a system that in its extreme forms prevents, and in any case hinders, the attainment of this desire must, it is argued, check the growth of capital. The imposition of special taxation on the larger incomes or properties is, in fact, a fine on saving, and consequently an impediment to the supply of one of the auxiliaries of production. If the legislator is to interfere at all, he ought rather to encourage the formation of new stores of wealth that will, in the vast majority of cases, be used to assist industry.

The discouragement to the growth of capital may operate in two different ways. There will naturally be a movement of wealthy persons from a district in which they are subjected to special penalties. Any existing outflow of wealth will be increased, and the influx of other wealth so far checked. Such is a very probable and serious danger in a small district from which movement is easy, and with the modern tendency to international movements of capital it may occur even in large areas. But for countries with a highly developed system of industries, another effect is more to be dreaded, viz. the stoppage of saving at an earlier period. Capital may not emigrate readily from such a country as England or France, but the annual increment may become smaller and finally cease. Considering the dependence of industry on the facilities for obtaining new capital, it would seem that any artificial check to its growth would be a grave evil and likely to react on the finances of the State.

In mitigation it may be urged that progressive taxation is not in fact likely to weaken the disposition to save. It will only affect those who possess a good deal already, and such persons save as much from habit as from conscious motive. There is, too, the further fact that the heavier taxation on the rich will leave the poor a larger disposable sum, part of which they may save, and to that extent increase the store of wealth. But though in both those ways the loss to capital under a moderate progression may be reduced, it seems clear that some loss there will inevitably be, and it is incumbent on the supporters of any measure tending in this direction to show what compensation will be gained through fairer distribution.
*82

In discussing this matter it is well to remember that the productiveness of a progressive tax on incomes is not as great as is popularly supposed. This failure to reach expectation is due partly to the evasions that have been noticed as incident to the tax, and also to the various devices, not absolutely illegal, that are used to escape the extra pressure. If rigorously collected the tax causes much capital to emigrate; discretion is therefore very often employed in enforcing claims, and in either case the revenue suffers. Another reason is found in the fact that in most countries large incomes do not form a large proportion of national revenue. Taxation to be productive must draw on the resources of the middle and working classes. The unproductiveness of progressive direct taxes is paralleled by the small yield of taxes on the luxuries of the rich as compared with duties on articles of general consumption.
*83 To obtain the funds needed by the State pressure must be placed on all classes of society, not merely on the prosperous.
*84

§ 8. The foregoing objections, which may be distinguished in their order as political, moral, and economical, are so weighty that a very clear proof of injustice inflicted by any other system than progression must be made out in order to sanction its use. The injustice of proportional or regressive taxation, if established, would tend to show that for the realisation of equity progression in some form must be adopted. But in support of this contention we have nothing except the appeal to equality of sacrifice as the standard, and the alleged failure to conform to it by taking equal proportions from different incomes. The deduction of £10 from A’s income of £100 and of £10,000 from B’s of £100,000 will, it is maintained, inflict greater suffering on A than on B. Such is the assumption of the upholders of progression, and their view accords with popular sentiment. There is, nevertheless, room for doubt. Is it really certain that A, whose income is reduced from £100 to £90, is worse treated than B, whose £100,000 is brought down to £90,000? There can be no dispute as to the wants which the latter will have to leave unsatisfied being very much slighter than those of A, when looked at from the same point of view. But the point of view is not the same. B’s system of life on its material side is so differently constituted from A’s that any comparison of the kind is absurd.
*85 £10 from A’s income may mean the loss of a certain amount of alcoholic drink; B, by having to give up £10,000 may lose the chance of purchasing an estate, or may have to abandon some social scheme that he could otherwise have carried out. The economic calculus is not at present competent to deal with such comparisons. The complexity of the problem is admittedly great, and not to be solved by simple methods.
*86 The weightiest difficulty that the theoretical advocates of progression have to meet is the essentially subjective nature of their standard. Its translation into an objective rule of taxation can be accomplished only by the aid of assumptions as to the relations of enjoyment in different classes that must contain a large element of conjecture. The modern elements of the theory of utility fail to supply any definite practical basis on which to frame a scale of progression.

Progressive taxation has been supported by a very different line of reasoning in Cohn’s brilliant
Finanzwissenschaft.*87 Proportional taxation is asserted by him to be the logical result of the ‘contract’ or assurance theory of the State. In accordance with that belief, it was fitting that all should pay the same proportion of income in exchange for the stipulated services. The modern or ‘higher’ conception of the State abandons altogether this theory of the social compact, and therefore its corollaries, in which is included the rule of proportional taxation. Writers who like Rau, De Parieu, and Leroy-Beaulieu reject the older view of the State’s relation to its subjects, and yet maintain the justice of proportional taxation, are guilty of inconsistency, explicable only by their dread of the often-described evils of progressive taxation.

To this ingenious contention the answer is that, granting the derivation of the rule of proportional taxation from the ‘assurance theory,’ the refutation of the latter does not upset the former, since a true conclusion may result from false premises. But even this concession need not be made. It has been argued in the present chapter that the exploded doctrine of ‘assurance’ would logically lead not to proportional, but to what has been called ‘regressive’ taxation,
i.e. to a lower percentage on large than on small incomes.
*88

§ 9. Experience of the actual working of progressive systems might be expected to throw light on the reality of the evils attributed to them and their real operation. A large amount of evidence has been collected with this object by very competent inquirers,
*89 but, unfortunately, the results are not decisive. Most of the cases discussed are those of Swiss cantons or the smaller German States. (The short-lived income-tax of the United States and the progressive income-tax of Prussia are the chief exceptions.) Now, the financial arrangements of small political bodies are undoubtedly full of instruction and deserve attentive study, but they belong to the domain of local rather than general finance. The conditions of working are therefore different, and there is to some extent room for the use of a different principle of distribution,
*90 since the public services rendered by local bodies do often allow of an estimation of their value to individuals, and, besides, have to be considered in connexion with the taxation of the State.

The peculiar economic conditions under which progressive taxes have been applied are clearly shown in the discussions respecting their operation, which are chiefly concerned with the danger of forcing capital to emigrate and that of undue discrimination against particular persons. Both are real and serious in a small area; within the wider boundaries of a nation their probability would be smaller. It is hardly conceivable that the English Chancellor of the Exchequer should arrange his scheme of taxation with reference to any small number even of the wealthiest taxpayers; nor would the emigration of capital be caused by even a fairly heavy tax. On the other hand, the facilities for assessment are much increased by having to deal with a limited district in which the income and property of each resident can be ascertained with a close approach to the truth, and as incomes are in no case very large, there is not the same room for injustice. Progressive taxation could not be easily applied in national finance. The forms of wealth are very numerous, and can be so placed as to escape the tax-collector’s notice when he has to deal directly with income as a whole. We have, therefore, no evidence sufficient to modify the unfavourable conclusion reached on general grounds respecting progressive taxation.
*91

§ 10. The idea of securing equality of sacrifice while escaping the dangers of unregulated progression has led to the adoption of what is known as ‘degressive’ taxation, a system in which a uniform rate of tax is levied beyond a prescribed limit; but incomes under that limit are either altogether exempt, or rated only for a part of their amount. Some of the so-called progressive taxes in Switzerland are really of this kind. Thus in Zürich 500 francs are free, the excess up to 1,500 francs is rated at only one-fifth, the next 1,500 francs at two-fifths, the next 3,000 at three-fifths, and the next 4,000 at four-fifths, anything beyond being rated at its full amount,
e.g. an income of 12,500 francs (£500) would only pay on 8,300 francs.
*92 By this method the confiscation of the higher portions of income can never happen, but there is still an arbitrary power of fixing the several scales which is inconvenient, while this form of progression is particularly open to the charge of unproductiveness, and is somewhat hard to work owing to the minute subdivisions that are usually made.

Degressive taxation may, however, like the more moderate forms of progression, be employed rather to secure than to destroy proportionality of taxation, as it affects only one part of the tax-system, and may correct inequalities in other directions. When the articles consumed by the poorer classes are heavily taxed, they would contribute more than their share to the maintenance of the State were they not relieved through the income and property taxes. This is one of the reasons for the exemption of incomes of §160 and under from income tax in the United Kingdom and the abatements on those up to §700. The duties on tea, sugar, tobacco, spirits, and corn, which chiefly affect the smaller incomes, are thus balanced, and a substantial equality (or what is believed to be such) attained. The rule of proportionality is applicable only to the whole tax-system, and it may be necessary to have several partial inequalities in order to establish that final equality which is one of the principal merits of a financial system.

§ 11. Another ground for modifying the rule of proportional taxation exists in the doctrine that net income is the sole available fund for social objects. If certain kinds of expense be necessary and unavoidable, it seems that any income which only suffices for meeting them should be exempt from taxation. On the supposition that the labourer’s wages are just enough to keep him alive, the slightest extra charge will lead to his death, unless he is relieved from some other quarter. Taxation on the minimum of subsistence must, by the nature of the case, be paid by somebody else. The Physiocrats, as we saw,
*93 extended this argument to the interest on capital, but their successors have not accepted this extreme view. However, the doctrine known as ‘the exemption of the minimum of subsistence’ is widely spread. Among its supporters in one form or other may be reckoned Justi, Sonnenfels, Bentham, Sismondi, Hermann, and J. S. Mill, and it long received recognition in the English system of taxation, in the avoidance of duties on the necessaries of life, while, as just mentioned, incomes up to £160 per annum are free from direct taxation.
*94 The different interpretations put on the doctrine need to be distinguished. The primitive and most natural meaning is that which limits it to the absolute necessaries of existence, though here there is room for doubt as to the correctness of including the expense of maintaining a family under this head. The wider use of the term to cover ‘the sum of the means of support which, according to the standard of a given period, is required for the conduct of an existence worthy of man,’
*95 would extend the exemption far beyond the limit of physical necessaries, and would almost reach to the exclusion of whatever expenditure is necessary for the earning of the person’s income from the amount to be taxed.
*96 By regarding the outlay requisite for the support of each grade of income and its expenses of production, we might bring the fund available for taxation down to a very small amount.

Such a construction of the doctrine may be dismissed as impracticable. The subject’s outlay is determined by himself and is directed for his own advantage. The only ground for doubt would be the possibility of expenditure on these ‘necessary’ items being curtailed in consequence of the tax. This effect would be very improbable unless the rate of taxation were so heavy as to show bad administration, but even in the limited case of physical necessaries the argument for remission is not so clear as might be thought. The danger of relieving the lowest class of labourers from nearly all the burdens of the State while it holds preponderating political power is apparent. Again, there is much force in the view that public expenses are a part of necessary expenditure. ‘The State,’ argues Cohn, ‘belongs as much to the life of every civilised man as his daily food or the air; without the State a civilised existence is not thinkable. The minimum of every moral existence includes the blessings of the State. It follows that the minimum of outlay for existence must also include the necessary expense of the State.’
*97 Why should not the poorest citizen pay something towards security as well as purchase the bread that supports him? The practical side of the question seems rather to favour the English policy of the later years of the nineteenth century. So far as the argument from ability is concerned, it is plain that those who barely possess the means of subsistence have little or no ability to contribute. In any country where legal provision is made for poor relief it would seem that to tax those at the point of minimum subsistence would be simply to drive them into the ranks of pauperism, and to take with one hand in order to give back with the other. The cost and trouble of raising money by direct taxation from the poorer classes, added to the foregoing considerations, strongly supports the method of exemption from direct taxation of the smaller incomes with the employment of moderate taxes on the luxuries of the poor.
*98 When exemption is claimed for the minimum it can only be on the ground that it will be employed in buying necessaries; any other application of this amount fairly brings it under the weight of taxation.
*99

§ 12. The question of justice may also be raised in respect of incomes that differ not in amount but in origin. As usually debated, the point is confined to the case of an income tax, but it is really wider, and applies to all forms of taxation. To put the issue in the simplest way, let us suppose that of two persons one, A, obtains by his exertions £500 per annum; the other, B, obtains the same sum from the rent of land or from interest on capital. Is it just or expedient that A should pay the same sum in taxes that B does? The most natural answer is a negative one, and many persons have proposed that the capital values of the two incomes should be taken as the basis of taxation.
*100 A little reflection will, however, show that under certain conditions there is nothing unjust in the arrangement. A’s income, it is true, is less durable, but so is its chance of taxation. The permanence of B’s receipts involves likewise permanence of taxation. So long then as the public charges are uniform, there is no reason for complaint. Special occasions will sometimes occur in which extraordinary expenditure actually is, or is deemed to be, necessary, and then it seems that as there is an extraordinary call it ought to come from the capital rather than from the income of the community. A convenient mode of realising this end would be the imposition of an additional property tax, which, being met out of the income of the holders, would accomplish the end of taxing permanent incomes at a higher rate.
*101 Another mode would be to meet the increased outlay by loans to be repaid in a series of years.

In practice the difficulty is not so great; the distribution of burdens can never be accomplished with mathematical precision. The avoidance of real and serious grievances is all that can be expected, and the actual working of the financial system meets these in a tolerably satisfactory manner. Necessity compels recourse to loans whenever there is any large extraordinary outlay, and thus the particular holders of incomes from labour are in fact relieved. Again, the two categories are not so sharply divided as is supposed; they shade into each other at many points; and, moreover, the return on property (as distinct from ‘unearned increment’) is itself the result of saving, and entitled to as liberal treatment as any other form of revenue. The technical difficulties that surround any attempts to differentiate incomes belong to a later part of our inquiry.
*102

The foregoing considerations are helpful in considering a very different proposal, also aiming at a departure from the rule of taxation in proportion to income, viz. that which asserts that expenditure alone should be taxed, savings being entirely exempt. The reasons given in support of this privilege are (1) that saving is not enjoyment, but a useful social process that deserves encouragement; and (2) that savings, unless exempted, would pay twice over, viz. first at their origin, and again when they yield a further return after investment. It may be freely allowed that to encourage providence is desirable, but it does not follow that exemption from taxation is the proper mode for so doing. If income be the normal fund from which taxation comes, and if it is on its amount that the measurement of the burden is to be taken, an arbitrary separation of a certain part is obviously objectionable. The line between saving and expenditure is besides a thin one; the true distinction should rather be between productive and unproductive expenditure,
i.e. the result of outlay ought to be the test, a plainly impossible course in practice. Further, it may be said that many forms of productive outlay are just as enjoyable as any non-productive one, and some forms of the latter are socially preferable to others. There is, in reality, no reason for a sharp division into two classes, whether we take enjoyment or social advantage as the basis. Practical finance could not deal with such shades of difference as would be the apparently fair course. The same consideration may be applied to the case of temporary and durable incomes, the former of which are very variable in character.

To the plea of double taxation it may be replied that taxation is imposed on income as such, that the wealth which is taxed as income is not identical with the extra produce that is the result of its application, and the charge on each is distinct. The income out of which savings are made cannot be the same as the subsequent income produced by those savings.
*103

There is, it should also be noticed, a direct opposition between the proposal to relieve temporary incomes and that to exempt savings from taxation. What is the balance of advantage in getting a premium to save, only to discover that the earnings which result from that saving will be subject to heavier payments? The broad and simple principle of taxing all incomes alike, and of taxing all that is income (allowance being made for the action of taxes on consumption in the case of the smaller incomes), appears to attain the result of just distribution quite as well as the more refined discriminations so often suggested. Should any further adjustment seem necessary in a particular system, it may be reached by a nominal property tax,
*104 or by duties on inheritance.

§ 13. The principal theories and contentions on the subject of the just division of taxation have now been considered, and it remains to state the general results which seem to be warranted. The attempt to measure taxation by the amount of service rendered has been recognised as hopeless and due to an erroneous theory of the State’s nature, but it contains a small element of truth. Where specific and measurable advantages are rendered to individuals or groups, direct payment for those services ought to be obtained, either in the course of exchange or by the payment of fees, or, if neither method can be employed, by a special tax. Cases of the latter are very rare in general, but they hold a more prominent place in local finance. Indeed, as we shall see, the division between local and general taxation is itself a case of making those interested pay for special services, and in the detailed division of local charges the same principle can often be applied.

The use of ‘ability’ or ‘faculty’ as a measure of taxation is encumbered by the necessity of defining its true meaning. We have seen reason, chiefly on practical grounds, for rejecting the interpretation which issues in the system of ‘progressive’ taxation. Its fiscal productiveness is slight, while its economical effects are likely to be injurious. Between the system of payment as recompense for state services, which would naturally lead to regressive taxation, and the system of progression, resting on the idea that sacrifice should be equalised, the intermediate method of taxation in proportion to income is on the whole the best standard for regulation. Its true foundation needs to be carefully appreciated. It cannot claim to be a realisation of exact distributive justice; it is rather to be accepted as a convenient and fairly definite working rule of finance, or at the utmost as supplying a measure of what may be called the objective side of ability. Income, when the lower grades are passed, is, we may hold, a fairly good mark of power to contribute, provided we make abstraction of individual circumstances.

In the same spirit we can solve the problem raised by the existence of incomes at the minimum. Financial convenience combines with economic conditions to make it desirable to exempt the smaller revenues from direct taxation where the duties on articles of common consumption are productive. Where it is possible to relieve necessaries from taxation, the minimum of existence is in fact free; where the needs of the Exchequer prevent this being done, the pressure placed on the lowest class is of a kind not much felt by them unless the rate of taxation is excessive. To tax the very poorest is a sad necessity, but where the want of revenue is urgent, not inconsistent with justice; there is a real advance when national wealth has reached so high a point that the lowest class are called on to contribute only through their luxuries, but the highest stage is that in which the improvement of society is such that all classes are in a position to pay their share as citizens for the common services of the State.

Thus it appears that the distinction between temporary and permanent incomes, as also that between expenditure and savings, may, speaking generally, be disregarded in practice as involving subtleties unsuitable for fruitful application and to a great extent cancelling each other, and the result is that on the whole, and speaking broadly, taxation should be proportioned to revenue, by which a fair approximation to justice and a convenient basis of working are supplied.

§ 14. One class of revenue is so peculiarly situated that its position deserves special notice, viz. that which arises from ‘unearned increment’ in the widest sense of the term, including the growth of rent from land, monopoly profits, and the gains of speculation.
*105 The characteristics of this class seem to have marked it out as peculiarly suited for taxation. The physiocratic tax on land was not, indeed, due to this idea of it as yielding a monopoly gain, but the practical result was just what it would have been in that case. Adam Smith distinctly notes the fitness of unearned gains for special taxation. ‘Ground rents and the ordinary rent of land are,’ he holds, ‘perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them…. Nothing can be more reasonable than that a fund which owes its existence to the good government of the State should be taxed peculiarly,’
*106 while later on he widens his view by declaring that ‘the gains of monopolists, whenever they can be come at,’ are ‘certainly of all subjects the most proper’ for taxation, a doctrine the truth of which as a general statement can hardly be denied. Regarded by itself, unearned wealth seems, as it were, designated to supply the public wants of the community,
*107 and there is no reason for surprise at the popularity of any proposals in that direction. But the imposition of taxation must be studied not simply with regard to a single general fact, but to the whole economic and financial constitution of the society. The obstacles in the way of this form of special taxation are serious enough. To begin with, it is not always easy to say what gains are ‘unearned.’ The rent of land and the receipts from pure speculation are the first examples, but the line that separates pure rent from profit rent is not so readily determined. As Adam Smith remarks in this connexion, ‘The ordinary rent of land is, in many cases, owing partly at least to the attention and good management of the landlord.’
*108 In a new country the gain from land is profit rather than rent,
*109 and as society advances the investment of capital in land improvements complicates the problem. In the case of commercial speculation it is not pure accident that determines gain. Speculation is rather, as Cohn well describes it, the struggle of intelligence against chance.
*110 To tax the profits of speculation would check the operation of the economising force of competition. Monopoly gains are better fitted for extra burdens, and where excessive profit is obtained, through natural or legal monopoly, there is good reason for obtaining at least some of the advantage for the public. But these cases are so few as to form but a trivial financial resource. Railways, banks, and some other companies are the principal examples of possible monopoly, and among them the amount of excessive profit is not considerable. Two further circumstances diminish still more the importance of this extra source of tax revenue, viz. (1) the existence of losses that counterbalance unearned gains. If individuals engage in a venture, be it cultivation of land or industrial enterprise, they can hardly be called on to give up their surplus gains unless they are guaranteed against possible loss. A landholder will not care to develop his property with the certainty before him that his accruing ‘producer’s surplus’ will be appropriated by the State, while he has no security for ordinary interest on his outlay. The same feeling will be even stronger in industry and commerce than in agriculture. Just as weighty is (2) the fact that with a system of private ownership and a developed economic organisation the titles to these ‘unearned gains’ are in a constant process of transfer, and future values are estimated in the prices given. The anticipated future movement of rent is registered in the price of land. Premiums on shares measure the gain from speculation or monopoly. Justice could therefore be attained only by taxing each increase immediately on its existence being noticed, an evidently hopeless endeavour. For these reasons it is desirable to narrowly limit special taxation of monopoly values to the clearest and best established cases, and for the rest to rely on the increased productiveness that this unearned wealth will give to the ordinary taxes. This conclusion, it may be added, does not apply to any existing land taxes, which may be plausibly regarded as reserved rents, nor does it cover the specially interesting case of ground rents in towns, where the effect of public expenditure introduces a new and difficult element, and one which strictly belongs to the domain of local finance.
*111

§ 15. So far we have dealt with taxation as if it were applied to a single country or district in a state of complete isolation, and have sought to discover the just distribution of the burden between the inhabitants. This is, indeed, the most important part of the equities of taxation. But its examination does not exhaust the area of inquiry. Some interesting and difficult questions remain for discussion. One, which has lately attracted much notice, is the proper division of taxation between the several parts of a common realm. To put the issue interrogatively: Is there a rule of just distribution between districts or countries similar to that between individuals, and, if so, what is its nature? It is necessary in order to obtain a satisfactory basis for discussion to begin by distinguishing the different cases. Taking first the loosest form of connexion we find two, or more, countries under a common ruler, but with independent governments and distinct financial systems, and having to make provision for certain common expenses. Here it is hardly possible to lay down any general rule. The comparative benefit of a particular service to the countries appears the fairest standard, but this, owing to the great difficulty of estimating it, is generally replaced by some test of presumed service or comparative ability, no very clear separation being made between the two bases. Thus the diplomatic and consular services of Sweden and Norway have been met by joint contribution. The relation of the United Kingdom to India has led to more elaborate treatment of some joint services and a good deal of debate as to the justice of the particular arrangements.
*112 Political convenience and the spirit of compromise are the really controlling forces in such a situation.

The second class of cases is that in which a distinct financial system is formed to meet those expenses that are regarded as ‘common,’ the necessary revenue being obtained by contributions from the divisions in some settled proportion. The determination of the proportion necessarily raises the question of the proper rule to be applied, and the disputes as to the principle of benefit against that of capacity or ability are sure to make their appearance. In the most prominent actual examples a rough empirical rule has been employed. ‘The value of all land within each State … as such land and the buildings and improvements thereon shall be estimated,’ was the standard in the United States under the ‘Articles of Confederation.’
*113 The respective quotas of Austria and Hungary by the compact of 1867 were 70 per cent. and 30 per cent. That any crude arrangement of the kind can realise justice is almost impossible. There is no single criterion of ability and no definite measure of proportional advantage. As Alexander Hamilton declared, ‘The attempt to regulate the contributions of the members of a confederacy by any such rule cannot fail to be productive of glaring inequality and extreme oppression.
*114 The most feasible course in the face of this difficulty is to provide for an automatic re-adjustment, based on the chief elements of ‘advantage’ and ‘capacity’ to take place at definite periods. It may, indeed, be said that the relation is too unsatisfactory to be durable unless in a very exceptional situation.
*115

In a true federal union the conditions of the problem are altered. Instead of an arrangement between separate political units there is a system of taxation operating on persons, natural or juristic, and enforced by sovereign authority. The question of equity is then reduced to the problem which has occupied the preceding sections of this chapter, viz., the just division of the charge amongst the ‘subjects’ of the tax-system. Nevertheless there may be room for complaint on the special ground that the actual taxes press unfairly on some districts as compared with others. In a federal union indirect taxation is allotted to the national government, ‘State’ governments being confined to direct taxes. By this division, which has undoubted advantages,
*116 the central government has the opportunity if so disposed of burdening some States to the advantage of others.
*117 Constitutional provisions are some slight safeguard, but, as in other cases, they prove to be inconvenient and not always effective.
*118

The unitary state ought, it would at first sight appear, to be free from any complication of the kind, but when several countries have been united into a single State the question of just distribution between those countries may be raised. A remarkable example is that of the United Kingdom. By the Acts of Union, Scotland (1707) and Ireland (1801) were combined in a legislative unity. From the first the excise and customs were applied to the whole of Great Britain, the land tax alone being arranged on a proportion. In the earlier years of the Irish union, in consequence of the large amount of the debt of Great Britain, separate Exchequers were retained and the unsatisfactory plan of quotas was adopted, the Irish contribution being two to the British fifteen. Owing to the real Irish contribution falling short of this proportion—it only amounted to ‘one’ out of ‘thirteen’—the Irish debt was so much increased that consolidation of the Exchequers became possible, and was carried out in 1817. One limiting principle was enacted in the Act of Union—that no higher tax should be imposed on an article in Ireland than in Great Britain, and for many years higher duties were levied in the latter country. Substantial equality of rates was not, in fact, reached till 1858.
*119 Since then there has been equal taxation of persons similarly situated in any part of the United Kingdom.

This, however, it has been argued, does not secure true equality. Though the rates of taxation are the same, the practical result is to impose on Ireland a charge, excessive as compared with her ‘resources’ or ‘taxable capacity.’ Deducting subsistence, which should be untaxed, the available surplus is small and is kept down by oppressive taxation imposed in contravention of the pledges given at the passage of the Act of Union.
*120

To this case the usual reply has been that under a common system of taxation the question of justice is one between
persons, not between
countries. If the several individuals are fairly treated the aggregates composed of them can suffer no injustice.
*121 The general principle that all taxation must fall on persons
*122 gives force to this plea. There are, however, some considerations in qualification of this generally sound principle. Taxation may be equal as between persons of the same class, but very unequal as between those in different classes. A large use of indirect taxes will press severely on the poorer classes of society: the income and inheritance taxes will fall chiefly on the rich. It can hardly be denied that duties on tea, sugar, spirits, and corn would be more felt by the Irish population than an equivalent increase of the income tax. Again, the articles selected for taxation may be those principally consumed in one country, while their substitutes in other countries may be free or lightly taxed. Further the tax system may injuriously affect the production of one country while sparing that of another. It is true that a well organised financial system will avoid these evils, which result from non-observance of established principles, but the fact that they come out prominently in the case of a country may lead to their speedier detection. It must also be remembered that two countries may not be suited for a common financial system. Difference of habits and institutions may be so great as to render it impracticable. On the other hand there can be no doubt that where it is possible fiscal union is an enormous benefit, and substantial unity of taxation, when once attained, is too great an advantage to be lightly surrendered. Attempts to prove inequality of taxation on the ground of supposed inferior taxable capacity rest on too indefinite a basis to be safely applied in practice
*123 Should it appear that one territorial part of a State is overtaxed the true remedy is a reform of the tax system; this course will have the additional merit of relieving those who are suffering in like manner in the other divisions, while not affecting those in the particular area who are not really injured. It besides keeps closely to the rule of dealing with persons as the real tax subjects.

§ 16. Another important class of problems is that connected with international taxation. The conception of a country or even a group of countries as isolated or self-contained is far from according with the actual conditions that prevail in any modern society. Owing to the development of trade and of international relations generally, the residents in a country have varied economical ties with other lands. Many of them draw part of their revenue from abroad and are interested in foreign industrial and commercial undertakings. Increasing liberality in bestowing the privilege of naturalisation and the reduction of aliens’ disabilities encourage foreigners to hold property, and thus bring themselves within reach of the taxing power of the State. This steady growth of international dependence gives much greater importance than formerly to the difficult problem of double taxation, and makes it essential to consider the chief cases coming under that title. But in so doing we need not enter into the imposition by a State of different taxes on the same object, nor into the apparent double taxation of persons. Whatever be the proper rule of distribution, any kinds of taxation, however complicated, which conform to it are justifiable. Thus the corporation tax—now being developed in the American States—is seen on analysis to be in reality taxation of the shareholders in the corporation, and is therefore to be counted in estimating the total burden on them.
*124

Exclusion of the cases of apparent double taxation leaves a clear road for the examination of international as distinct from domestic taxation, or—to put the distinction more accurately—the conflict between different tax jurisdictions. One instance may be easily disposed of, viz. that in which a citizen removes himself and his property from one country to another. Here the country that he leaves has no right, and in fact no power, to exact contributions from him. He belongs altogether to the country of his adoption. More difficult in practice is the case in which the owner of property resides abroad and draws his revenue for use in the country in which he dwells. Here it may be asked, how shall the charges of the two States be distributed in an equitable manner, or what guiding principle should be employed? On the old protection or assurance theory, it would follow that the country of residence should be paid for protecting the person, and that where the property lies for guarding it; but as this doctrine is now exploded, we must look elsewhere for an answer. It would seem reasonable that special taxes on property or local rates should be assigned to the country of situation, while the general income tax and indirect taxes on commodities consumed by the person would accrue to the country of residence. But this course is not free from difficulties. In the first place, it is by no means easy to draw a clear line between the general income tax and the special produce taxes. Then, certain forms of income derived from abroad,
e.g. rent of land, may claim exemption. A still greater difficulty is found in the attempt to deal with those diverse forms of immaterial property which pass so often from hand to hand. The foreign stockholder and still more the foreign company give rise to almost insoluble puzzles.
*125 Finally the treatment of wealth passing at death when the deceased possesses property in two or more countries requires careful consideration.
*126 One broad principle—that of reciprocity—might seem to afford a satisfactory solution, but where the countries are very differently situated even this method fails. Taxation of colonial property when held by residents in the United Kingdom would not be counterbalanced by similar taxation of British property owned by residents in Australia. It becomes necessary to obtain fairness as well as nominal equality, and this can only be reached by international agreement.
*127 In a federal State such problems should, it seems, be decided by the central authority, or by constitutional provisions. In the analogous case of local taxation, another method—the separation and limitation of the forms of revenue used for local purposes—is advisable.
*128

§ 17. Our judgment as to the equity of any particular distribution of the pressure of taxation will depend on the view that we take of the results to be attained. Even when taxation is limited to the supply of the public wants the proper division of its weight may vary according to the amount and character of the services supplied by its employment. Where state functions are confined to the narrowest possible field, the poorer classes may claim to bear a smaller share than if—as in many modern societies—they were largely benefited by public expenditure. But from the difficulty of discrimination it seems better to adhere to the general rule of distributing taxation without direct reference to the results of expenditure on the different classes. Injustice of this kind ought to be corrected, not by redistribution of taxation, but by alteration of outlay.

There is a tendency in recent years to take a wider view of the functions of taxation than the purely financial one. Its agency is regarded as valuable, not solely for the resources that it brings into the State, but for the effect that it produces on the distribution of wealth. By the use of a properly adjusted tax-system the inequalities of wealth may, it is thought, be reduced, if not entirely removed, and one of the aims of Socialism approached without revolution. Such is Wagner’s position when he declares for the ‘politico-social’ conception of taxation in opposition to the ‘pure financial’ one. This change in standpoint must of necessity change the mode of estimating the justice of taxation. What is wise and prudent when we aim simply at supplying the requirements of the public powers in the fairest and cheapest way ceases to be such when it is sought to bring about a supposed better distribution of wealth. Proportional taxation, caution in taxing unearned wealth, and moderation in expenditure may be admitted to be the logical results of the ‘financial’ conception: progressive taxation with a high rate of increase, rigorous fiscal supervision of all gains except those from labour, and bold attempts at improving the condition of the poorer classes by state outlay in various directions will be the natural outcome of the ‘social’ attitude.
*129 The change of aim necessitates a corresponding change in the methods adopted.

The general arguments on the subject of socialistic interference do not concern us here, but the results of financial experience are of some value in respect to the use of taxation for other than fiscal purposes. The taxing power has been often employed to encourage industry, to improve taste, to benefit health, or to elevate morals, but in none of these applications has the desired success been obtained. There is, therefore, a strong presumption against its use as an agent for remedying the inequalities of wealth. Its definite and universally recognised function is the supply of adequate funds for the public services. To mix up with one very important object another different and perhaps incompatible one is to run the risk of failing in both. It is within the power of financial skill to so select the forms and rates of taxation as to secure the requisite amount without unfair pressure on any class, but if the ulterior effects on the distribution of wealth have to be considered, and adjustments made to attain particular ends in that respect, the difficulties of the task are enormously increased. If the socialistic
régime is the goal to be sought, there are more direct and more effective modes open than the manipulation of taxation.
*130

§ 18. At the opposite pole to the doctrine that finance should aim not solely at preserving justice, but at remedying injustices already existing in the social system, is that which refuses to see anything of justice in financial problems.
*131 For the upholders of this view the distribution of taxation is reduced to placing the burden where it will give the least trouble and friction in collection. McCulloch’s often-quoted statement that ‘the characteristic of the best tax is not that it is most nearly proportioned to the means of individuals, but that it is easily assessed and collected, and is at the same time most conducive to the public interests,’
*132 is a sufficiently clear expression of the view which is a very natural feeling among practical administrators. An escape from the difficult questions that the problem of justice must always present is a pleasing prospect, though unfortunately based on illusion, since injustice in distribution is certain sooner or later to show itself in the very difficulties that the practical financier wishes to avoid. All the conditions of a good system of taxation are interdependent and the breach of one reacts on the others.
*133 The observance of the mere technical rules at the expense of justice will not be successful, any more than the utmost straining after fairness without regard to the other conditions which we proceed to examine in the next chapter.