A similar experiment was tried by the Messrs. Brewster,
carriage-manufacturers, of New York. They offered to their workmen
ten per cent of their profits, before any allowance was made for
interest on the capital invested, or before any payment was made
for the services of the firm as managers. In one year as much as
$11,000 was divided among the laborers. Again, as in the case of
the Briggs colliery, the experiment was brought to an end by an
unreasoning submission to the pressure of outside workmen during a
strike.(331)
But, all in all, industrial partnership(332) offers a great field
for that kind of improvement which is worth more than a mere
increase of wages, and seems to make it possible to reach the
heavy weight of sluggishness among the lower and more hopeless
strata of society. And it is possible that it will stir in them
the powers which may afterward find employment in the harder
problems of productive co-operation.(333)
§ 7. People’s Banks.
In Germany the struggle between the two theories—self-help and
state-help—was fought out by Schultze-Delitsch—that is, Schultze
of Delitsch, a town in Saxony—and Lasalle, and the victory given
to the former. Schultze-Delitsch, as a consequence, was successful
in directing the co-operative principle in Germany to giving
workmen credit in purchasing tools, etc., when he had no security
but his character. This form of co-operation works to give the
energetic and industrious workmen a lever by which, through the
possession of credit, they can raise themselves to the position of
small capitalists, and thus widen the field of possible
improvement. While the former schemes of co-operation described
above have given the wages-receivers a share of the unearned
increment from land, and tend to give them a share of the
manager’s wages, the plan of Schultze was to assist them to gain a
share in the advantages belonging to the possession of capital.
The capital was to be accumulated by their own exertions, and, in
his scheme depended on the principle of self-help. The following
is the plan of banks adopted:
“Every member is obliged to make a certain weekly payment into the
common stock. As soon as it reaches a certain sum he is allowed to
raise a loan exceeding his share in the inverse ratio of the
amount of his deposit. For instance, after he has deposited one
dollar, he is allowed to borrow five or six; but, if he had
deposited twenty dollars, he is allowed only to borrow thirty. The
security he is compelled to offer is his own and that of two other
members of the association, who become jointly and severally
liable. He may have no assets whatever beyond the amount of his
deposits, nor may his guarantors; the bank relies simply on the
character of the three, and the two securities rely on the
character of their principal; and the remarkable fact is, that the
security has been found sufficient, that the interest of the men
in the institutions and the fear of the opinion of their fellows
has produced a display of honesty and punctuality such as perhaps
is not to be found in the history of any other banking
institutions. Such is the confidence inspired by these
institutions that they hold on deposit, or as loans from third
parties, an amount exceeding by more than three fourths the total
amount of their own capital. The monthly contributions of the
members may be as low as ten cents, but the amount which each
member is allowed to have in some banks is not more than seven or
eight dollars, in none more than three hundred dollars. He has a
right to borrow to the full amount of his deposit without giving
security; if he desires to borrow a larger sum, he must furnish
security in the manner we have described. The liability of the
members is unlimited. The plan of limiting the liability to the
amount of the capital deposited was tried at first, but it
inspired no confidence, and the enterprise did not succeed till
every member was made generally liable. Each member, on entering,
is obliged to pay a small fee, which goes toward forming or
maintaining a reserve fund, apart from the active capital. The
profits are derived from the interest paid by borrowers, which
amounts to from eight to ten per cent, which may not sound very
large in our ears, but in Germany is very high. Not over five per
cent is paid on capital borrowed from outsiders. All profits are
distributed in dividends among the members of the association, in
the proportion of the amount of their deposits—after the payment
of the expenses of management, of course—and the apportionment of
a certain percentage to the reserve-fund. Every member, as we have
said, has a right to borrow to the extent of his deposit without
security; but then, if he seeks to borrow more, whether he shall
obtain any loan, and, if so, how large a one, is decided by the
board of management, who are guided in making their decision just
as all bank officers are—by a consideration of the circumstances
of the bank as well as those of the borrower. All the affairs of
the association are discussed and decided in the last resort by a
general assembly composed of all the members.”(334) The main part
of the capital loaned by the banks is obtained from outside
sources on the credit of the associations. In 1865 there were 961
of these institutions in Germany; in 1877 there were 1,827, with
over 1,000,000 members, owning $40,000,000 of capital, with
$100,000,000 more on loan, and doing a business of
$550,000,000.(335)
BOOK V. ON THE INFLUENCE OF GOVERNMENT.
Chapter I. On The General Principles Of Taxation.
§ 1. Four fundamental rules of Taxation.
One of the most disputed questions, both in political science and in
practical statesmanship at this particular period, relates to the proper
limits of the functions and agency of governments.
We shall first consider the economical effects arising from the manner in
which governments perform their necessary and acknowledged functions.
We shall then pass to certain governmental interferences of what I have
termed the optional kind (i.e., overstepping the boundaries of the
universally acknowledged functions) which have heretofore taken place, and
in some cases still take place, under the influence of false general
theories.
The first of these divisions is of an extremely miscellaneous character:
since the necessary functions of government, and those which are so
manifestly expedient that they have never or very rarely been objected to,
are too various to be brought under any very simple classification. We
commence, [under] the first head, with the theory of Taxation.
The qualities desirable, economically speaking, in a system of taxation,
have been embodied by Adam Smith in four maxims or principles, which,
having been generally concurred in by subsequent writers, may be said to
have become classical, and this chapter can not be better commenced than
by quoting them:(336)
“1. The subjects of every state ought to contribute to the support of the
government, as nearly as possible in proportion to their respective
abilities: that is, in proportion to the revenue which they respectively
enjoy under the protection of the state. In the observation or neglect of
this maxim consists what is called the equality or inequality of taxation.
“2. The tax which each individual is bound to pay ought to be certain, and
not arbitrary. The time of payment, the manner of payment, the quantity to
be paid, ought all to be clear and plain to the contributor, and to every
other person. The certainty of what each individual ought to pay is, in
taxation, a matter of so great importance, that a very considerable degree
of inequality, it appears, I believe, from the experience of all nations,
is not near so great an evil as a very small degree of uncertainty.
“3. Every tax ought to be levied at the time, or in the manner, in which
it is most likely to be convenient for the contributor to pay it. Taxes
upon such consumable goods as are articles of luxury are all finally paid
by the consumer, and generally in a manner that is very convenient to him.
He pays them little by little, as he has occasion to buy the goods. As he
is at liberty, too, either to buy or not to buy, as he pleases, it must be
his own fault if he ever suffers any considerable inconvenience from such
taxes.
“4. Every tax ought to be so contrived as both to take out and to keep out
of the pockets of the people as little as possible over and above what it
brings into the public treasury of the state. A tax may either take out or
keep out of the pockets of the people a great deal more than it brings
into the public treasury in the four following ways: First, the levying of
it may require a great number of officers, whose salaries may eat up the
greater part of the produce of the tax, and whose perquisites may impose
another additional tax upon the people.” Secondly, it may divert a portion
of the labor and capital of the community from a more to a less productive
employment. “Thirdly, by the forfeitures and other penalties which those
unfortunate individuals incur who attempt unsuccessfully to evade the tax
it may frequently ruin them, and thereby put an end to the benefit which
the community might have derived from the employment of their capitals. An
injudicious tax offers a great temptation to smuggling. Fourthly, by
subjecting the people to the frequent visits and the odious examination of
the tax-gatherers it may expose them to much unnecessary trouble,
vexation, and oppression”: to which may be added that the restrictive
regulations to which trades and manufactures are often subjected, to
prevent evasion of a tax, are not only in themselves troublesome and
expensive, but often oppose insuperable obstacles to making improvements
in the processes.
§ 2. Grounds of the principle of Equality of Taxation.
The first of the four points, equality of taxation, requires to be more
fully examined, being a thing often imperfectly understood, and on which
many false notions have become to a certain degree accredited, through the
absence of any definite principles of judgment in the popular mind.
For what reason ought equality to be the rule in matters of taxation? For
the reason that it ought to be so in all affairs of government. A
government ought to make no distinction of persons or classes in the
strength of their claims on it. If any one bears less than his fair share
of the burden, some other person must suffer more than his share. Equality
of taxation, therefore, as a maxim of politics, means equality of
sacrifice. It means apportioning the contribution of each person toward
the expenses of government, so that he shall feel neither more nor less
inconvenience from his share of the payment than every other person
experiences from his. There are persons, however, who regard the taxes
paid by each member of the community as an equivalent for value received,
in the shape of service to himself; and they prefer to rest the justice of
making each contribute in proportion to his means upon the ground that he
who has twice as much property to be protected receives, on an accurate
calculation, twice as much protection, and ought, on the principles of
bargain and sale, to pay twice as much for it. Since, however, the
assumption that government exists solely for the protection of property is
not one to be deliberately adhered to, some consistent adherents of the
_quid pro quo_ principle go on to observe that protection being required
for persons as well as property, and everybody’s person receiving the same
amount of protection, a poll-tax of a fixed sum per head is a proper
equivalent for this part of the benefits of government, while the
remaining part, protection to property, should be paid for in proportion
to property. But, in the first place, it is not admissible that the
protection of persons and that of property are the sole purposes of
government. In the second place, the practice of setting definite values
on things essentially indefinite, and making them a ground of practical
conclusions, is peculiarly fertile in the false views of social questions.
It can not be admitted that to be protected in the ownership of ten times
as much property is to be ten times as much protected. If we wanted to
estimate the degrees of benefit which different persons derive from the
protection of government, we should have to consider who would suffer most
if that protection were withdrawn: to which question, if any answer could
be made, it must be, that those would suffer most who were weakest in mind
or body, either by nature or by position.
§ 3. Should the same percentage be levied on all amounts of Income?
Setting out, then, from the maxim that equal sacrifices ought to be
demanded from all, we have next to inquire whether this is in fact done,
by making each contribute the same percentage on his pecuniary means. Many
persons maintain the negative, saying that a tenth part taken from a small
income is a heavier burden than the same fraction deducted from one much
larger; and on this is grounded the very popular scheme of what is called
a graduated property-tax, viz., an income-tax in which the percentage
rises with the amount of the income.
On the best consideration I am able to give to this question, it appears
to me that the portion of truth which the doctrine contains arises
principally from the difference between a tax which can be saved from
luxuries and one which trenches, in ever so small a degree, upon the
necessaries of life. To take a thousand a year from the possessor of ten
thousand would not deprive him of anything really conducive either to the
support or to the comfort of existence; and, if such _would_ be the effect
of taking five pounds from one whose income is fifty, the sacrifice
required from the last is not only greater than, but entirely
incommensurable with, that imposed upon the first. The mode of adjusting
these inequalities of pressure which seems to be the most equitable is
that recommended by Bentham, of leaving a certain minimum of income,
sufficient to provide the necessaries of life, untaxed. Suppose [$250] a
year to be sufficient to provide the number of persons ordinarily
supported from a single income with the requisites of life and health, and
with protection against habitual bodily suffering, but not with any
indulgence. This then should be made the minimum, and incomes exceeding it
should pay taxes not upon their whole amount, but upon the surplus. If the
tax be ten per cent, an income of [$300] should be considered as a net
income of [$50], and charged with [$5] a year, while an income of [$5,000]
should be charged as one of [$4,750]. An income not exceeding [$250]
should not be taxed at all, either directly or by taxes on necessaries;
for, as by supposition this is the smallest income which labor ought to be
able to command, the government ought not to be a party to making it
smaller.
Both in England and on the Continent a graduated property-tax (_l’impot
progressif_) has been advocated, on the avowed ground that the state
should use the instrument of taxation as a means of mitigating the
inequalities of wealth. I am as desirous as any one that means should be
taken to diminish those inequalities, but not so as to relieve the
prodigal at the expense of the prudent. To tax the larger incomes at a
higher percentage than the smaller is to lay a tax on industry and
economy; to impose a penalty on people for having worked harder and saved
more than their neighbors. It is not the fortunes which are earned, but
those which are unearned, that it is for the public good to place under
limitation. With respect to the large fortunes acquired by gift or
inheritance, the power of bequeathing is one of those privileges of
property which are fit subjects for regulation on grounds of general
expediency; and I have already suggested,(337) as the most eligible mode
of restraining the accumulation of large fortunes in the hands of those
who have not earned them by exertion, a limitation of the amount which any
one person should be permitted to acquire by gift, bequest, or
inheritance. I conceive that inheritances and legacies, exceeding a
certain amount, are highly proper subjects for taxation; and that the
revenue from them should be as great as it can be made without giving rise
to evasions, by donation _inter vivos_ or concealment of property, such as
it would be impossible adequately to check. The principle of graduation
(as it is called), that is, of levying a larger percentage on a larger
sum, though its application to general taxation would be in my opinion
objectionable, seems to me both just and expedient as applied to legacy
and inheritance duties.
The objection to a graduated property-tax applies in an aggravated degree
to the proposition of an exclusive tax on what is called “realized
property,” that is, property not forming a part of any capital engaged in
business, or rather in business under the superintendence of the owner; as
land, the public funds, money lent on mortgage, and shares in stock
companies. Except the proposal of applying a sponge to the national debt,
no such palpable violation of common honesty has found sufficient support
in this country, during the present generation, to be regarded as within
the domain of discussion. It has not the palliation of a graduated
property-tax, that of laying the burden on those best able to bear it; for
“realized property” includes the far larger portion of the provision made
for those who are unable to work, and consists, in great part, of
extremely small fractions. I can hardly conceive a more shameless
pretension than that the major part of the property of the country, that
of merchants, manufacturers, farmers, and shopkeepers, should be exempted
from its share of taxation; that these classes should only begin to pay
their proportion after retiring from business, and if they never retire
should be excused from it altogether. But even this does not give an
adequate idea of the injustice of the proposition. The burden thus
exclusively thrown on the owners of the smaller portion of the wealth of
the community would not even be a burden on that _class_ of persons in
perpetual succession, but would fall exclusively on those who happened to
compose it when the tax was laid on. As land and those particular
securities would thenceforth yield a smaller net income, relatively to the
general interest of capital and to the profits of trade, the balance would
rectify itself by a permanent depreciation of those kinds of property.
Future buyers would acquire land and securities at a reduction of price,
equivalent to the peculiar tax, which tax they would, therefore, escape
from paying; while the original possessors would remain burdened with it
even after parting with the property, since they would have sold their
land or securities at a loss of value equivalent to the fee-simple of the
tax. Its imposition would thus be tantamount to the confiscation for
public uses of a percentage of their property equal to the percentage laid
on their income by the tax.
The above proposition has been extended, by those in the United
States who appeal to class prejudice, to a proposal to tax the
incomes of those who hold government bonds. It so happened that,
for example, the six dollars income on a one-hundred-dollar bond
of the United States was not, in the war period, deemed a
sufficient equivalent for the risk of loaning one hundred dollars
to the state; and Congress, therefore, agreed to relieve them of
taxation. It is the same thing to a lender if he receive six per
cent directly from the Government, or if he receive seven per
cent, and is obliged to pay back one per cent to the treasury in
the form of taxation; but to the Government it is another thing,
because if it sell a taxed bond at seven per cent interest, it
does not receive back the whole of the one per cent tax, but the
one per cent tax less the expense of levying it. In other words
the Government, in the latter case, pays six per cent interest
plus the cost of levying the tax; and consequently borrowed more
cheaply in the form of an untaxed bond, as was the hope when the
provision was made. If, then, a tax were now to be put upon the
bonds, it would fall exclusively on the present holders of them;
for, since it diminishes the net income from the bond, it lowers
the selling price of the bond itself, as before explained.(338)
§ 4. Should the same percentage be levied on Perpetual and on Terminable
Incomes?
Whether the profits of trade may not rightfully be taxed at a lower rate
than incomes derived from interest or rent is part of the more
comprehensive question whether life-incomes should be subjected to the
same rate of taxation as perpetual incomes; whether salaries, for example,
or annuities, or the gains of professions, should pay the same percentage
as the income from inheritable property.
The existing tax [in England] treats all kinds of incomes exactly
alike,(339) taking its [fivepence] in the pound as well from the person
whose income dies with him as from the landholder, stockholder, or
mortgagee, who can transmit his fortune undiminished to his descendants.
This is a visible injustice; yet it does not arithmetically violate the
rule that taxation ought to be in proportion to means. When it is said
that a temporary income ought to be taxed less than a permanent one, the
reply is irresistible that it is taxed less: for the income which lasts
only ten years pays the tax only ten years, while that which lasts forever
pays forever. The claim in favor of terminable incomes does not rest on
grounds of arithmetic, but of human wants and feelings. It is not because
the temporary annuitant has smaller means, but because he has greater
necessities, that he ought to be assessed at a lower rate.
In spite of the nominal equality of income, A, an annuitant of ￡1,000 a
year, can not so well afford to pay ￡100 out of it as B, who derives the
same annual sum from heritable property; A having usually a demand on his
income which B has not, namely, to provide by saving for children or
others; to which, in the case of salaries or professional gains, must
generally be added a provision for his own later years; while B may expend
his whole income without injury to his old age, and still have it all to
bestow on others after his death. If A, in order to meet these exigencies,
must lay by ￡300 of his income, to take ￡100 from him as income-tax is to
take ￡100 from ￡700, since it must be retrenched from that part only of
his means which he can afford to spend on his own consumption. Were he to
throw it ratably on what he spends and on what he saves, abating ￡70 from
his consumption and ￡30 from his annual saving, then indeed his immediate
sacrifice would be proportionally the same as B’s; but then his children
or his old age would be worse provided for in consequence of the tax. The
capital sum which would be accumulated for them would be one tenth less,
and on the reduced income afforded by this reduced capital they would be a
second time charged with income-tax; while B’s heirs would only be charged
once.
The principle, therefore, of equality of taxation, interpreted in its only
just sense, equality of sacrifice, requires that a person who has no means
of providing for old age, or for those in whom he is interested, except by
saving from income, should have the tax remitted on all that part of his
income which is really and _bona fide_ applied to that purpose.
If, indeed, reliance could be placed on the conscience of the
contributors, or sufficient security taken for the correctness of their
statements by collateral precautions, the proper mode of assessing an
income-tax would be to tax only the part of income devoted to expenditure,
exempting that which is saved. For when saved and invested (and all
savings, speaking generally, are invested) it thenceforth pays income-tax
on the interest or profit which it brings, notwithstanding that it has
already been taxed on the principal. Unless, therefore, savings are
exempted from income-tax, the contributors are twice taxed on what they
save, and only once on what they spend. To tax the sum invested, and
afterward tax also the proceeds of the investment, is to tax the same
portion of the contributor’s means twice over.
No income-tax is really just from which savings are not exempted; and no
income-tax ought to be voted without that provision, if the form of the
returns and the nature of the evidence required could be so arranged as to
prevent the exemption from being taken fraudulent advantage of, by saving
with one hand and getting into debt with the other, or by spending in the
following year what had been passed tax-free as saving in the year
preceding. But, if no plan can be devised for the exemption of actual
savings, sufficiently free from liability to fraud, it is necessary, as
the next thing in point of justice, to take into account, in assessing the
tax, what the different classes of contributors _ought_ to save. In fixing
the proportion between the two rates, there must inevitably be something
arbitrary; perhaps a deduction of one fourth in favor of life-incomes
would be as little objectionable as any which could be made.
Of the net profits of persons in business, a part, as before observed, may
be considered as interest on capital, and of a perpetual character, and
the remaining part as remuneration for the skill and labor of
superintendence. The surplus beyond interest depends on the life of the
individual, and even on his continuance in business, and is entitled to
the full amount of exemption allowed to terminable incomes.
§ 5. The increase of the rent of land from natural causes a fit subject of
peculiar Taxation.
Suppose that there is a kind of income which constantly tends to increase,
without any exertion or sacrifice on the part of the owners: those owners
constituting a class in the community, whom the natural course of things
progressively enriches, consistently with complete passiveness on their
own part. In such a case it would be no violation of the principles on
which private property is grounded, if the state should appropriate this
increase of wealth, or part of it, as it arises. This would not properly
be taking anything from anybody; it would merely be applying an accession
of wealth, created by circumstances, to the benefit of society, instead of
allowing it to become an unearned appendage to the riches of a particular
class.
Now, this is actually the case with rent. The ordinary progress of a
society which increases in wealth is at all times tending to augment the
incomes of landlords; to give them both a greater amount and a greater
proportion of the wealth of the community, independently of any trouble or
outlay incurred by themselves. They grow richer, as it were, in their
sleep, without working, risking, or economizing. What claim have they, on
the general principle of social justice, to this accession of riches? In
what would they have been wronged if society had, from the beginning,
reserved the right of taxing the spontaneous increase of rent, to the
highest amount required by financial exigencies? The only admissible mode
of proceeding would be by a general measure. The first step should be a
valuation of all the land in the country. The present value of all land
should be exempt from the tax; but after an interval had elapsed, during
which society had increased in population and capital, a rough estimate
might be made of the spontaneous increase which had accrued to rent since
the valuation was made. Of this the average price of produce would be some
criterion: if that had risen, it would be certain that rent had increased,
and (as already shown) even in a greater ratio than the rise of price. On
this and other data, an approximate estimate might be made how much value
had been added to the land of the country by natural causes; and in laying
on a general land-tax, which for fear of miscalculation should be
considerably within the amount thus indicated, there would be an assurance
of not touching any increase of income which might be the result of
capital expended or industry exerted by the proprietor.
With reference to such a tax, perhaps a safer criterion than either a rise
of rents or a rise of the price of corn, would be a general rise in the
price of land. It would be easy to keep the tax within the amount which
would reduce the market value of land below the original valuation; and up
to that point, whatever the amount of the tax might be, no injustice would
be done to the proprietors.
In 1870 Mr. Mill became President of the Land Tenure Association,
one of whose objects was: “To claim for the benefit of the State
the Interception by Taxation of the Future Unearned Increase of
the Rent of Land (so far as the same can be ascertained), or a
great part of that increase, which is continually taking place,
without any effort or outlay by the proprietors, merely through
the growth of population and wealth; reserving to owners the
option of relinquishing their property to the state at the market
value which it may have acquired at the time when this principle
may be adopted by the Legislature.” It is urged against this plan
that, if the Government take for itself the increase from rent, it
should also make compensation for loss arising from declining
rents, whenever there happens to be any readjustment of values in
land.(340)
§ 6. Taxes falling on Capital not necessarily objectionable.
In addition to the preceding rules, another general rule of taxation is
sometimes laid down—namely, that it should fall on income and not on
capital.
To provide that taxation shall fall entirely on income, and not at all on
capital, is beyond the power of any system of fiscal arrangements. There
is no tax which is not partly paid from what would otherwise have been
saved; no tax, the amount of which, if remitted, would be wholly employed
in increased expenditure, and no part whatever laid by as an addition to
capital. All taxes, therefore, are in some sense partly paid out of
capital; and in a poor country it is impossible to impose any tax which
will not impede the increase of the national wealth. But, in a country
where capital abounds and the spirit of accumulation is strong, this
effect of taxation is scarcely felt. To take from capital by taxation what
emigration would remove, or a commercial crisis destroy, is only to do
what either of those causes would have done—namely, to make a clear space
for further saving.
I can not, therefore, attach any importance, in a wealthy country, to the
objection made against taxes on legacies and inheritances, that they are
taxes on capital. It is perfectly true that they are so. As Ricardo
observes, if ￡100 are taken from any one in a tax on houses or on wine, he
will probably save it, or a part of it, by living in a cheaper house,
consuming less wine, or retrenching from some other of his expenses; but,
if the same sum be taken from him because he has received a legacy of
￡1,000, he considers the legacy as only ￡900, and feels no more inducement
than at any other time (probably feels rather less inducement) to
economize in his expenditure. The tax, therefore, is wholly paid out of
capital; and there are countries in which this would be a serious
objection. But, in the first place, the argument can not apply to any
country which has a national debt and devotes any portion of revenue to
paying it off, since the produce of the tax, thus applied, still remains
capital, and is merely transferred from the tax-payer to the fund-holder.
But the objection is never applicable in a country which increases rapidly
in wealth.
Chapter II. Of Direct Taxes.
§ 1. Direct taxes either on income or expenditure.
Taxes are either direct or indirect. A direct tax is one which is demanded
from the very persons who, it is intended or desired, should pay it.
Indirect taxes are those which are demanded from one person in the
expectation and intention that he shall indemnify himself at the expense
of another: such as the excise or customs. The producer or importer of a
commodity is called upon to pay tax on it, not with the intention to levy
a peculiar contribution upon him, but to tax through him the consumers of
the commodity, from whom it is supposed that he will recover the amount by
means of an advance in price.
Direct taxes are either on income or on expenditure. Most taxes on
expenditure are indirect, but some are direct, being imposed, not on the
producer or seller of an article, but immediately on the consumer. A
house-tax, for example, is a direct tax on expenditure, if levied, as it
usually is, on the occupier of the house. If levied on the builder or
owner, it would be an indirect tax. A window-tax is a direct tax on
expenditure; so are the taxes on horses and carriages.
The sources of income are rent, profits, and wages. This includes every
sort of income, except gift or plunder. Taxes may be laid on any one of
the three kinds of income, or a uniform tax on all of them. We will
consider these in their order.
§ 2. Taxes on rent.
A tax on rent falls wholly on the landlord. There are no means by which he
can shift the burden upon any one else. It does not affect the value or
price of agricultural produce, for this is determined by the cost of
production in the most unfavorable circumstances, and in those
circumstances, as we have so often demonstrated, no rent is paid.
This, however, is, in strict exactness, only true of the rent which is the
result either of natural causes, or of improvements made by tenants. When
the landlord makes improvements which increase the productive power of his
land, he is remunerated for them by an extra payment from the tenant; and
this payment, which to the landlord is properly a profit on capital, is
blended and confounded with rent. A tax on rent, if extending to this
portion of it, would discourage landlords from making improvements; but
whatever hinders improvements from being made in the manner in which
people prefer to make them, will often prevent them from being made at
all; and on this account a tax on rent would be inexpedient unless some
means could be devised of excluding from its operation that portion of the
nominal rent which may be regarded as landlord’s profit.
§ 3. —on profits.
A tax on profits, like a tax on rent, must, at least in its immediate
operation, fall wholly on the payer. All profits being alike affected, no
relief can be obtained by a change of employment. If a tax were laid on
the profits of any one branch of productive employment, the tax would be
virtually an increase of the cost of production, and the value and price
of the article would rise accordingly; by which the tax would be thrown
upon the consumers of the commodity, and would not affect profits. But a
general and equal tax on all profits would not affect general prices, and
would fall, at least in the first instance, on capitalists alone.
There is, however, an ulterior effect, which, in a rich and prosperous
country, requires to be taken into account. It may operate in two
different ways: (1.) The curtailment of profit, and the consequent
increased difficulty in making a fortune or obtaining a subsistence by the
employment of capital, may act as a stimulus to inventions, and to the use
of them when made. If improvements in production are much accelerated, and
if these improvements cheapen, directly or indirectly, any of the things
habitually consumed by the laborer, profits may rise, and rise
sufficiently to make up for all that is taken from them by the tax. In
that case the tax will have been realized without loss to any one, the
produce of the country being increased by an equal, or what would in that
case be a far greater, amount. The tax, however, must even in this case be
considered as paid from profits, because the receivers of profits are
those who would be benefited if it were taken off.
But (2.) though the artificial abstraction of a portion of profits would
have a real tendency to accelerate improvements in production, no
considerable improvements might actually result, or only of such a kind as
not to raise general profits at all, or not to raise them so much as the
tax had diminished them. If so, the rate of profit would be brought closer
to that practical minimum to which it is constantly approaching. At its
first imposition the tax falls wholly on profits; but the amount of
increase of capital, which the tax prevents, would, if it had been allowed
to continue, have tended to reduce profits to the same level; and at every
period of ten or twenty years there will be found less difference between
profits as they are and profits as they would in that case have been,
until at last there is no difference, and the tax is thrown either upon
the laborer or upon the landlord. The real effect of a tax on profits is
to make the country possess at any given period a smaller capital and a
smaller aggregate production, and to make the stationary state be attained
earlier, and with a smaller sum of national wealth.
Even in countries which do not accumulate so fast as to be always within a
short interval of the stationary state, it seems impossible that, if
capital is accumulating at all, its accumulation should not be in some
degree retarded by the abstraction of a portion of its profit; and, unless
the effect in stimulating improvements be a full counterbalance, it is
inevitable that a part of the burden will be thrown off the capitalist,
upon the laborer or the landlord. One or other of these is always the
loser by a diminished rate of accumulation. If population continues to
increase as before, the laborer suffers; if not, cultivation is checked in
its advance, and the landlords lose the accession of rent which would have
accrued to them. The only countries in which a tax on profits seems likely
to be permanently a burden on capitalists exclusively are those in which
capital is stationary, because there is no new accumulation. In such
countries the tax might not prevent the old capital from being kept up
through habit, or from unwillingness to submit to impoverishment, and so
the capitalists might continue to bear the whole of the tax.
§ 4. —on Wages.
We now turn to Taxes on Wages. The incidence of these is very different,
according as the wages taxed as those of ordinary unskilled labor, or are
the remuneration of such skilled or privileged employments, whether manual
or intellectual, as are taken out of the sphere of competition by a
natural or conferred monopoly.
I have already remarked that, in the present low state of popular
education, all the higher grades of mental or educated labor are at a
monopoly price, exceeding the wages of common workmen in a degree very far
beyond that which is due to the expense, trouble, and loss of time
required in qualifying for the employment. Any tax levied on these gains,
which still leaves them above (or not below) their just proportion, falls
on those who pay it; they have no means of relieving themselves at the
expense of any other class. The same thing is true of ordinary wages, in
cases like that of the United States, or of a new colony, where, capital
increasing as rapidly as population can increase, wages are kept up by the
increase of capital, and not by the adherence of the laborers to a fixed
standard of comforts. In such a case, some deterioration of their
condition, whether by a tax or otherwise, might possibly take place
without checking the increase of population. The tax would in that case
fall on the laborers themselves, and would reduce them prematurely to that
lower state to which, on the same supposition with regard to their habits,
they would in any case have been reduced ultimately, by the inevitable
diminution in the rate of increase of capital, through the occupation of
all the fertile land.
Some will object that, even in this case, a tax on wages can not be
detrimental to the laborers, since the money raised by it, being expended
in the country, comes back to the laborers again through the demand for
labor. Without, however, reverting to general principles, we may rely on
an obvious _reductio ad absurdum_. If to take money from the laborers and
spend it in commodities is giving it back to the laborers, then, to take
money from other classes, and spend it in the same manner, must be giving
it to the laborers; consequently, the more a government takes in taxes,
the greater will be the demand for labor, and the more opulent the
condition of the laborers—a proposition the absurdity of which no one can
fail to see.
In the condition of most communities, wages are regulated by the habitual
standard of living to which the laborers adhere, and on less than which
they will not multiply. Where there exists such a standard, a tax on wages
will indeed for a time be borne by the laborers themselves; but, unless
this temporary depression has the effect of lowering the standard itself,
the increase of population will receive a check, which will raise wages,
and restore the laborers to their previous condition. On whom, in this
case, will the tax fall? A rise of wages occasioned by a tax must, like
any other increase of the cost of labor, be defrayed from profits. To
attempt to tax day-laborers, in an old country, is merely to impose an
extra tax upon all employers of common labor; unless the tax has the much
worse effect of permanently lowering the standard of comfortable
subsistence in the minds of the poorest class.
We find in the preceding considerations an additional argument for the
opinion, already expressed, that direct taxation should stop short of the
class of incomes which do not exceed what is necessary for healthful
existence. These very small incomes are mostly derived from manual labor;
and, as we now see, any tax imposed on these, either permanently degrades
the habits of the laboring-class, or falls on profits, and burdens
capitalists with an indirect tax, in addition to their share of the direct
taxes; which is doubly objectionable, both as a violation of the
fundamental rule of equality, and for the reasons which, as already shown,
render a peculiar tax on profits detrimental to the public wealth, and
consequently to the means which society possesses of paying any taxes
whatever.
§ 5. —on Income.
We now pass, from taxes on the separate kinds of income, to a tax
attempted to be assessed fairly upon all kinds; in other words, an
Income-Tax. The discussion of the conditions necessary for making this tax
consistent with justice has been anticipated in the last chapter. We shall
suppose, therefore, that these conditions are complied with. They are,
first, that incomes below a certain amount should be altogether untaxed.
This minimum should not be higher than the amount which suffices for the
necessaries of the existing population. The second condition is, that
incomes above the limit should be taxed only in proportion to the surplus
by which they exceed the limit. Thirdly, that all sums saved from income
and invested should be exempt from the tax; or, if this be found
impracticable, that life-incomes and incomes from business and professions
should be less heavily taxed than inheritable incomes.
An income-tax, fairly assessed on these principles, would be, in point of
justice, the least exceptionable of all taxes. The objection to it, in the
present state of public morality, is the impossibility of ascertaining the
real incomes of the contributors. Notwithstanding, too, what is called the
inquisitorial nature of the tax, no amount of inquisitorial power which
would be tolerated by a people the most disposed to submit to it could
enable the revenue officers to assess the tax from actual knowledge of the
circumstances of contributors. Rents, salaries, annuities, and all fixed
incomes, can be exactly ascertained. But the variable gains of
professions, and still more the profits of business, which the person
interested can not always himself exactly ascertain, can still less be
estimated with any approach to fairness by a tax-collector. The main
reliance must be placed, and always has been placed, on the returns made
by the person himself. The tax, therefore, on whatever principles of
equality it may be imposed, is in practice unequal in one of the worst
ways, falling heaviest on the most conscientious.
It is to be feared, therefore, that the fairness which belongs to the
principle of an income-tax can not be made to attach to it in practice.
This consideration would lead us to concur in the opinion which, until of
late, has usually prevailed—that direct taxes on income should be reserved
as an extraordinary resource for great national emergencies, in which the
necessity of a large additional revenue overrules all objections.
The difficulties of a fair income-tax have elicited a proposition for a
direct tax of so much per cent, not on income but on expenditure; the
aggregate amount of each person’s expenditure being ascertained as the
amount of income now is, from statements furnished by the contributors
themselves. The only security would still be the veracity of individuals,
and there is no reason for supposing that their statements would be more
trustworthy on the subject of their expenses than on that of their
revenues. The taxes on expenditure at present in force, either in this or
in other countries, fall only on particular kinds of expenditure, and
differ no otherwise from taxes on commodities than in being paid directly
by the person who consumes or uses the article, instead of being advanced
by the producer or seller, and reimbursed in the price. The taxes on
horses and carriages, on dogs, on servants, are of this nature. They
evidently fall on the persons from whom they are levied—those who use the
commodity taxed. A tax of a similar description, and more important, is a
house-tax, which must be considered at somewhat greater length.
§ 6. A House-Tax.
The rent of a house consists of two parts, the ground-rent, and what Adam
Smith calls the building-rent. The first is determined by the ordinary
principles of rent. It is the remuneration given for the use of the
portion of land occupied by the house and its appurtenances; and varies
from a mere equivalent for the rent which the ground would afford in
agriculture to the monopoly rents paid for advantageous situations in
populous thoroughfares. The rent of the house itself, as distinguished
from the ground, is the equivalent given for the labor and capital
expended on the building. The fact of its being received in quarterly or
half-yearly payments makes no difference in the principles by which it is
regulated. It comprises the ordinary profit on the builder’s capital, and
an annuity, sufficient at the current rate of interest, after paying for
all repairs chargeable on the proprietor, to replace the original capital
by the time the house is worn out, or by the expiration of the usual term of a building-lease. |
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