Chapter IV. Comparison Between Direct And Indirect Taxation.
§ 1. Arguments for and against direct Taxation.
Are direct or indirect taxes the most eligible? A man dislikes not so much
the payment as the act of paying. He dislikes seeing the face of the
tax-collector, and being subjected to his peremptory demand. Perhaps, too,
the money which he is required to pay directly out of his pocket is the
only taxation which he is quite sure that he pays at all. That a tax of
two shillings per pound on tea, or of three shillings per bottle on wine,
raises the price of each pound of tea and bottle of wine which he
consumes, by that and more than that amount, can not, indeed, be denied;
it is the fact, and is intended to be so, and he himself, at times, is
perfectly aware of it; but it makes hardly any impression on his practical
feelings and associations, serving to illustrate the distinction between
what is merely known to be true and what is felt to be so. The
unpopularity of direct taxation, contrasted with the easy manner in which
the public consent to let themselves be fleeced in the prices of
commodities, has generated in many friends of improvement a directly
opposite mode of thinking to the foregoing. They contend that the very
reason which makes direct taxation disagreeable makes it preferable. Under
it every one knows how much he really pays; and, if he votes for a war, or
any other expensive national luxury, he does so with his eyes open to what
it costs him. If all taxes were direct, taxation would be much more
perceived than at present, and there would be a security, which now there
is not, for economy in the public expenditure.
Although this argument is not without force, its weight is likely to be
constantly diminishing. The real incidence of indirect taxation is every
day more generally understood and more familiarly recognized. The mere
distinction between paying money directly to the tax-collector and
contributing the same sum through the intervention of the tea-dealer or
the wine-merchant no longer makes the whole difference between dislike or
opposition and passive acquiescence.
If our present revenue [of $400,000,000 in 1883] were all raised by direct
taxes, an extreme dissatisfaction would certainly arise at having to pay
so much; but while men’s minds are so little guided by reason, as such a
change of feeling from so irrelevant a cause would imply, so great an
aversion to taxation might not be an unqualified good. Of the
[$400,000,000] in question, nearly [$60,000,000] are pledged, under the
most binding obligations, to those whose property has been borrowed and
spent by the state; and, while this debt remains unredeemed, a greatly
increased impatience of taxation would involve no little danger of a
breach of faith. That part, indeed, of the public expenditure which is
devoted to the maintenance of civil and military establishments
[$206,000,000] (that is, all except the interest of the national debt),
affords, in many of its details, ample scope for retrenchment. If so great
an addition were made to the public dislike of taxation as might be the
consequence of confining it to the direct form, the classes who profit by
the misapplication of public money might probably succeed in saving that
by which they profit, at the expense of that which would only be useful to
the public.
There is, however, a frequent plea in support of indirect taxation, which
must be altogether rejected as grounded on a fallacy. We are often told
that taxes on commodities are less burdensome than other taxes, because
the contributor can escape from them by ceasing to use the taxed
commodity. He certainly can, if that be his object, deprive the Government
of the money; but he does so by a sacrifice of his own indulgences, which
(if he chose to undergo it) would equally make up to him for the same
amount taken from him by direct taxation. Suppose a tax laid on wine,
sufficient to add [$25] to the price of the quantity of wine which he
consumes in a year. He has only (we are told) to diminish his consumption
of wine by [$25], and he escapes the burden. True, but if the [$25],
instead of being laid on wine, had been taken from him by an income-tax,
he could, by expending [$25] less in wine, equally save the amount of the
tax, so that the difference between the two cases is really illusory. If
the Government takes from the contributor [$25] a year, whether in one way
or another, exactly that amount must be retrenched from his consumption to
leave him as well off as before; and in either way the same amount of
sacrifice, neither more nor less, is imposed on him.
On the other hand, it is some advantage on the side of indirect taxes that
what they exact from the contributor is taken at a time and in a manner
likely to be convenient to him. It is paid at a time when he has at any
rate a payment to make; it causes, therefore, no additional trouble, nor
(unless the tax be on necessaries) any inconvenience but what is
inseparable from the payment of the amount. He can also, except in the
case of very perishable articles, select his own time for laying in a
stock of the commodity, and consequently for payment of the tax. The
producer or dealer who advances these taxes is, indeed, sometimes
subjected to inconvenience; but, in the case of imported goods, this
inconvenience is reduced to a minimum by what is called the Warehousing
System, under which, instead of paying the duty at the time of
importation, he is only required to do so when he takes out the goods for
consumption, which is seldom done until he has either actually found, or
has the prospect of immediately finding, a purchaser.
The strongest objection, however, to raising the whole or the greater part
of a large revenue by direct taxes, is the impossibility of assessing them
fairly without a conscientious co-operation on the part of the
contributors, not to be hoped for in the present low state of public
morality. In the case of an income-tax, we have already seen that, unless
it be found practicable to exempt savings altogether from the tax, the
burden can not be apportioned with any tolerable approach to fairness upon
those whose incomes are derived from business or professions; and this is
in fact admitted by most of the advocates of direct taxation who, I am
afraid, generally get over the difficulty by leaving those classes
untaxed, and confining their projected income-tax to “realized property,”
in which form it certainly has the merit of being a very easy form of
plunder. But enough has been said in condemnation of this expedient. We
have seen, however, that a house-tax is a form of direct taxation not
liable to the same objections as an income-tax, and indeed liable to as
few objections of any kind as perhaps any of our indirect taxes. But it
would be impossible to raise, by a house-tax alone, the greatest part of
the revenue, without producing a very objectionable overcrowding of the
population, through the strong motive which all persons would have to
avoid the tax by restricting their house accommodation.
A certain amount of revenue may, as we have seen, be obtained without
injustice by a peculiar tax on rent. Besides (1) the land-tax,(346) and
(2) an equivalent for the revenue derived from stamp duties on the
conveyance of land, some further taxation might, I have contended, at some
future period be imposed, (3) to enable the state to participate in the
progressive increase of the incomes of landlords from natural causes. (4)
Legacies and inheritances, we have also seen, ought to be subjected to
taxation sufficient to yield a considerable revenue. With these taxes, and
(5) a house-tax of suitable amount, we should, I think, have reached the
prudent limits of direct taxation. The remainder of the revenue would have
to be provided by taxes on consumption, and the question is, which of
these are the least objectionable.
§ 2. What forms of indirect taxation are most eligible?
There are some forms of indirect taxation which must be peremptorily
excluded. (1.) Taxes on commodities, for revenue purposes, must not
operate as protecting duties, but must be levied impartially on every mode
in which the articles can be obtained, whether produced in the country
itself, or imported. (2.) An exclusion must also be put upon all taxes on
the necessaries of life, or on the materials or instruments employed in
producing those necessaries. Such taxes are always liable to encroach on
what should be left untaxed, the incomes barely sufficient for healthful
existence; and on the most favorable supposition, namely, that wages rise
to compensate the laborers for the tax, it operates as a peculiar tax on
profits, which is at once unjust and detrimental to national wealth.(347)
What remain are taxes on luxuries. And these have some properties which
strongly recommend them. In the first place, they can never, by any
possibility, touch those whose whole income is expended on necessaries;
while they do reach those by whom what is required for necessaries is
expended on indulgences. In the next place, they operate in some cases as
a useful, and the only useful, kind of sumptuary law. A great portion of
the expense of the higher and middle classes in most countries is not
incurred for the sake of the pleasure afforded by the things on which the
money is spent, but from regard to opinion, and an idea that certain
expenses are expected from them, as an appendage of station; and I can not
but think that expenditure of this sort is a most desirable subject of
taxation. When a thing is bought, not for its use but for its costliness,
cheapness is no recommendation.
§ 3. Practical rules for indirect taxation.
In order to reduce as much as possible the inconveniences, and increase
the advantages, incident to taxes on commodities, the following are the
practical rules which suggest themselves: 1. To raise as large a revenue
as conveniently may be, from those classes of luxuries which have most
connection with vanity, and least with positive enjoyment; such as the
more costly qualities of all kinds of personal equipment and ornament. But
with regard to horses and carriages, as there are many persons to whom,
from health or constitution, these are not so much luxuries as
necessaries, the tax paid by those who have but one riding-horse, or but
one carriage, especially of the cheaper descriptions, should be low; while
taxation should rise very rapidly with the number of horses and carriages,
and with their costliness. 2. Whenever possible, to demand the tax, not
from the producer, but directly from the consumer, since, when levied on
the producer, it raises the price always by more, and often by much more,
than the mere amount of the tax. 3. But as the only indirect taxes which
yield a large revenue are those which fall on articles of universal or
very general consumption, and as it is therefore necessary to have some
taxes on real luxuries, that is, on things which afford pleasure in
themselves, and are valued on that account rather than for their cost,
these taxes should, if possible, be so adjusted as to fall with the same
proportional weight on small, on moderate, and on large incomes. This is
not an easy matter; since the things which are the subjects of the more
productive taxes are in proportion more largely consumed by the poorer
members of the community than by the rich. Tea, coffee, sugar, tobacco,
fermented drinks, can hardly be so taxed that the poor shall not bear more
than their due share of the burden. Something might be done by making the
duty on the superior qualities, which are used by the richer consumers,
much higher in proportion to the value; but in some cases the difficulty
of at all adjusting the duty to the value, so as to prevent evasion, is
said, with what truth I know not, to be insuperable; so that it is thought
necessary to levy the same fixed duty on all the qualities alike. 4. As
far as is consistent with the preceding rules, taxation should rather be
concentrated on a few articles than diffused over many, in order that the
expenses of collection may be smaller, and that as few employments as
possible may be burdensomely and vexatiously interfered with. 5. Among
luxuries of general consumption, taxation should by preference attach
itself to stimulants, because these, though in themselves as legitimate
indulgences as any others, are more liable than most others to be used in
excess, so that the check to consumption, naturally arising from taxation,
is on the whole better applied to them than to other things. 6. As far as
other considerations permit, taxation should be confined to imported
articles, since these can be taxed with a less degree of vexatious
interference, and with fewer incidental bad effects, than when a tax is
levied on the field or on the workshop. Custom duties are, _cæteris
paribus_, much less objectionable than excise: but they must be laid only
on things which either can not, or at least will not, be produced in the
country itself; or else their production there must be prohibited (as in
England is the case with tobacco), or subjected to an excise duty of
equivalent amount. 7. No tax ought to be kept so high as to furnish a
motive to its evasion, too strong to be counteracted by ordinary means of
prevention; and especially no commodity should be taxed so highly as to
raise up a class of lawless characters—smugglers, illicit distillers, and
the like.
The experience of the United States is pregnant with lessons in
this direction. During the war we imposed an internal-revenue tax
on distilled spirits of so large an amount that it not only
produced less revenue than a smaller tax would have done, but it
created gigantic frauds, public corruption, and infinite devices
to escape the payment. The following table will show how the
production, as indicated by the tax, fell off when the tax was
excessive. It forced evasions by distillers. It has been found by
various experiences that with a less rate the revenue is largely
increased.
Year. Revenue. Production Amount of tax.
indicated
by the tax
(gallons).
1862-1863 $3,200,000 16,000,000 July, 1862, 20 c.
per gallon.
1867-1868 14,200,000 7,000,000 Jan., 1865, $2 per
gallon.
1868-1869 34,200,000 16,000,000 July, 1868, 50 c.
per gallon.
1869-1870 39,200,000 18,000,000
The actual amount reached by taxation is very much less than that
known to be actually used by from ten to fifteen millions of
gallons, or nearly one half the product. The openness of the
frauds can be judged by the fact that proof spirits were “openly
sold in the market, and even quoted in price-currents, at from
five to fifteen cents less per gallon than the rate of tax and the
average cost of manufacture.”(348)
In what manner the finer articles of manufacture, consumed by the rich,
might most advantageously be taxed, I must leave to be decided by those
who have the requisite practical knowledge. The difficulty would be, to
effect it without an inadmissible degree of interference with production.
In countries which, like the United States, import the principal part of
the finer manufactures which they consume, there is little difficulty in
the matter; and, even where nothing is imported but the raw material, that
may be taxed, especially the qualities of it which are exclusively
employed for the fabrics used by the richer class of consumers. Thus, in
England a high custom duty on raw silk would be consistent with principle;
and it might perhaps be practicable to tax the finer qualities of cotton
or linen yarn, whether spun in the country itself or imported.
§ 4. Taxation systems of the United States and other Countries.
It will now well repay study to examine Chart No. XXI, which shows
in what manner the United States have raised their revenues, and
to consider how far the right rules of taxation have been
followed.
I. For means of comparison, I shall give the last annual budget of
the United States in order to make clear from what sources the
country derives its revenues:
Chart XXI.
United States Budget, Year Ending June 30, 1883.
[In millions and tenths of millions.]
_Receipts:_
Customs $214.7
Internal revenue 144.7
Direct tax .1
Sale of public lands 7.9
Miscellaneous 30.8
Net ordinary receipts $398.2
_Expenditures:_
War Department $48.9
Navy Department 15.3
Indians 7.3
Pensions 66.0
Miscellaneous 68.7
Net ordinary expenditures $206.2
Interest on public debt 59.2
Total $265.4
This leaves a surplus of $132,839,444 above all expenditures, and
our problem is now where to reduce taxation. The annual interest
charge is lessening with the payment of the public debt, having
fallen from its highest figure of $143,781,591 in 1867, to
$59,160,131 in 1883.(349) Our national taxation is practically all
indirect, that of internal taxation being chiefly levied on
tobacco and distilled spirits, and our customs falling on almost
all articles which can be imported, materials as well as
manufactures.
In the United States direct taxation on real and personal property
is very generally levied for State, county, and municipal
purposes. In fact, nearly all the perceptible taxation is the
property tax, and, inasmuch as the State and county tax is very
light, the burden is almost always owing to municipal and town
expenditures. People do not seem to be aware of the enormous
national burden, because the taxes are indirect, and only increase
the prices of commodities. Other countries, it will be seen, make
a greater use of direct taxation than the United States. In fact,
the comparison of the ways by which different countries collect
their revenues may naturally show us where we may gain by their
experience.
II. The English system is especially interesting, because, after
having had an extended scheme of customs duties, they abandoned
it, and raised their revenue, some on imported articles, it is
true (generally on those which could not be produced in England),
but by the income-tax, and other forms.(350)
In 1842 Sir Robert Peel found 1,200 articles subject to
customs-duties. He began (1) by removing all prohibitions; (2) by
reducing duties on raw materials to 5 per cent or less; (3) by
limiting the rates on partially manufactured goods to 12 per cent;
and (4) those on wholly manufactured goods to 20 per cent. Now
customs-duties are levied only on beer, cards, chiccory,
chocolate, cocoa, coffee, dried fruit, plate, spirits, tea,
tobacco, and wine. The following budget gives the sources of
revenue for Great Britain:(351)
Budget Of Great Britain, 1883.
[In millions and tenths of millions.]
_Receipts:_
Customs $98.4
Excise (such as on tobacco and 134.9
spirits)
Stamps 58.5
Land tax 5.2
House duty 8.9
Income tax 60.9
Post-Office 36.5
Telegraph 8.6
Crown lands 2.0
Interest (on loans, Suez 6.1
Canal, etc.)
Miscellaneous 26.4
Total $446.4
_Expenditures:_
Interest on national debt $148.4
Army, navy, etc. 157.1
Cost of revenue departments 45.1
Public works 9.1
Public departments, salaries, 12.5
etc.
Law and justice 35.7
Education, science, and art 22.9
Colonial and consular 3.4
Civil list 2.0
Pensions 2.0
Miscellaneous 6.8
Total expenditures $445.0
From this it will be seen that in the land, income, and house
taxes, Great Britain raises by direct taxation about $75,000,000,
and in customs and excise, by indirect taxation, about
$233,000,000.
III. The following is the system adopted by Germany (Prussia):
German Budget, 1881-1882.
[In millions and tenths of millions.]
_Receipts:_
(1.) Property income from $11.7
domains and forests
From mines and salt-works 2.5
From railways 22.5
Miscellaneous 5.0
$41.7
(2.) Royal Lottery 1.0
(3.) Bureau of Justice $12.7
Harbors and bridges .5
13.2
(4.) Direct taxes $35.5
(5.) Indirect taxes (for 12.3
Prussia)
Total receipts $103.6
_Expenditures:_
(1.) Civil list 3.0
(2.) Debt 25.0
(3.) Various ministries, 49.5
schools, etc.
(4.) Pensions 4.0
(5.) Miscellaneous 19.5
Total expenditures(352) $101.0
The Prussian _direct_ taxes include (1) a land-tax, (2) a
house-tax, (3) an income-tax, (4) a class-tax, (5) a trade-tax,
and (6) miscellaneous taxes.
IV. How the French supply themselves may be seen by the following
statement:(353)
French Budget, 1881.
[In millions and tenths of millions.]
_Receipts:_
Direct taxes $75.9
Similar taxes 4.7
Registry, stamps, etc 135.1
Forests 7.6
Customs (and salt duty $3.5) 65.4
Indirect taxes (including 209.7
tobacco)
Post-Office and telegraph 27.2
Miscellaneous 29.8
Total receipts $555.4
_Expenditures:_
Public debt, etc. $249.0
General functions of the 243.7
ministries
Administrative expenses, cost 58.5
of revenue collections, etc.
Miscellaneous 3.5
Total expenditures $554.7
The direct taxes are (1) on property; (2) one nearly like our
poll-tax together with a species of income-tax; (3) a tax on doors
and windows; and (4) one on licenses.
§ 5. A _Resume_ of the general principles of taxation.
After the manner of our classification and _resume_ of the subject of
value and money, it may be convenient to here insert a recapitulation of
the various principles under the treatment of taxation.(354)
Comparison Between Direct And Indirect Taxation.
Adam Smith’s “Canons of Taxation.”—A tax should be: I. _Equal_ (in amount
of _sacrifice_ entailed). II. _Certain._ III. _Timely._ IV. _All for the
state._
A Tax is either:
Direct.
Indirect (on commodities.)
Direct taxes are:
On Income.
On Expenditure.
Taxes on Income are:
General.
Special.
General income taxes. The best of taxes, if people were all honest. As it
is, it falls most heavily on the conscientious. Should be reserved for
emergency. All _savings_ and a fixed amount in _all_ incomes should be
exempt.
Special taxes are on:
Rent.
Wages.
Profits.
Taxes on Rent. Agricultural rent is meant. It falls entirely on the
landlord, and, if not balanced by taxes on other classes, is unjust. May
be blended with a tax on profits, if on rent due to landlord’s
improvements.
Taxes on Wages are:
On Skilled.
On Unskilled.
Skilled wages are at a monopoly price, and taxes on them are paid by the
laborers, so long as wages are not reduced below their just proportion.
Unskilled wages. (1) _Population diminished by it._ Paid by profits. (2)
_Population left stationary._ Shared between profits and wages. (3)
_Population increasing in spite of it._ Falls entirely on wages.
Taxes on Profits. May possible stimulate production, and is then a good
all round, contributing to the state, and leaving no one any poorer. If
not, if profits are really diminished by the tax, capital may be
diminished also. This (a) may, or (b) may not diminish population. If (a),
then the margin of cultivation ceases to be extended, and part of the tax,
_pro tanto_, falls on the landlords. If (b), then wages fall, and part of
the tax falls on the laborer. Total result is a nearer approach to the
stationary state.
Taxes on Expenditure are open to the same objections as the general
income-tax. They may be:
Assessed taxes.
House-tax.
Assessed taxes, such as on servants, dogs, etc. These are rigidly
_direct_.
House-taxes are:
On building-rent.
On ground-rent.
House-taxes on building-rent are paid by occupier. This tax is _indirect_.
House-taxes on ground-rent are (1.) with, or (2.) without an equivalent
tax on agricultural rent. (1.) Are paid by ground landlord wholly, and
therefore _direct_. (2.) Are part by occupier, and therefore _indirect_.
Indirect taxes are: Excise,
Customs, or
Tolls.
Indirect taxes may be on (1.) Long or (2.) Short investments of capital.
Indirect taxes on Long investments are always unadvisable, in view of
Canon IV.
Indirect taxes on Short investments are subject to the laws of indirect
taxation. 1. Tax vanities rather than positive enjoyments (e.g., liveries
rather than servants). 2. The consumer and not the producer should pay the
tax collector (Canon IV). That is, collect the tax as near the actual
consumer as possible. 3. Taxes on real enjoyments to be kept as equal as
possible for large and small means. 4. Tax as few articles as possible.
England taxes only a very small number of imports. The United States taxes
nearly everything imported. 5. Tax stimulants freely. The United States
collect $91,000,000 from spirits and liquors, and $42,000,000 from tobacco
(1883). 6. Tax imports of commodities not made at home, or whose home
production is under an excise (internal revenue) duty equal to the customs
tax. 7. Keep the rate of tax low, in order to get most revenue.
Chapter V. Of A National Debt.
§ 1. Is it desirable to defray extraordinary public expenses by loans?
The question must now be considered, how far it is right or expedient to
raise money for the purposes of government, not by laying on taxes to the
amount required, but by taking a portion of the capital of the country in
the form of a loan, and charging the public revenue with only the
interest.
This question has already been touched upon in the First Book.(355) We
remarked, that if the capital taken in loans is abstracted from funds
either engaged in production, or destined to be employed in it, their
diversion from that purpose is equivalent to taking the amount from the
wages of the laboring-classes. Borrowing, in this case, is not a
substitute for raising the supplies within the year. A government which
borrows does actually take the amount within the year, and that too by a
tax exclusively on the laboring-classes, than which it could have done
nothing worse, if it had supplied its wants by avowed taxation; and in
that case the transaction, and its evils, would have ended with the
emergency; while, by the circuitous mode adopted, the value exacted from
the laborers is gained, not by the state, but by the employers of labor,
the state remaining charged with the debt besides, and with its interest
in perpetuity. The system of public loans, in such circumstances, may be
pronounced the very worst which, in the present state of civilization, is
still included in the catalogue of financial expedients.
We, however, remarked that there are other circumstances in which loans
are not chargeable with these pernicious consequences: namely, first, when
what is borrowed is foreign capital, the overflowings of the general
accumulation of the world; or, secondly, when it is capital which either
would not have been saved at all, unless this mode of investment had been
open to it, or, after being saved, would have been wasted in unproductive
enterprises, or sent to seek employment in foreign countries. When the
progress of accumulation has reduced profits either to the ultimate or to
the practical minimum—to the rate less than which would either put a stop
to the increase of capital, or send the whole of the new accumulations
abroad—government may annually intercept these new accumulations, without
trenching on the employment or wages of the laboring-classes in the
country itself, or perhaps in any other country. To this extent,
therefore, the loan system may be carried, without being liable to the
utter and peremptory condemnation which is due to it when it overpasses
this limit. What is wanted is an index to determine whether, in any given
series of years, as during the last great war, for example, the limit has
been exceeded or not.
Such an index exists, at once a certain and an obvious one. Did the
Government, by its loan operations, augment the rate of interest? If it
only opened a channel for capital which would not otherwise have been
accumulated, or which, if accumulated, would not have been employed within
the country, this implies that the capital, which the Government took and
expended, could not have found employment at the existing rate of
interest. So long as the loans do no more than absorb this surplus, they
prevent any tendency to a fall of the rate of interest, but they can not
occasion any rise. [But] To the full extent to which the loans of
government, during the war, caused the rate of interest to exceed what it
was before, and what it has been since, those loans are chargeable with
all the evils which have been described. If it be objected that interest
only rose because profits rose, I reply that this does not weaken, but
strengthens, the argument. If the Government loans produced the rise of
profits by the great amount of capital which they absorbed, by what means
can they have had this effect, unless by lowering the wages of labor? It
will, perhaps, be said that what kept profits high during the war was not
the drafts made on the national capital by the loans, but the rapid
progress of industrial improvements. This, in a great measure, was the
fact; and it, no doubt, alleviated the hardship to the laboring-classes,
and made the financial system which was pursued less actively mischievous,
but not less contrary to principle. These very improvements in industry
made room for a larger amount of capital; and the Government, by draining
away a great part of the annual accumulations, did not indeed prevent that
capital from existing ultimately (for it started into existence with great
rapidity after the peace), but prevented it from existing at the time, and
subtracted just so much, while the war lasted, from distribution among
productive laborers. If the Government had abstained from taking this
capital by loan, and had allowed it to reach the laborers, but had raised
the supplies which it required by a direct tax on the laboring-classes, it
would have produced (in every respect but the expense and inconvenience of
collecting the tax) the very same economical effects which it did produce,
except that we should not now have had the debt. The course it actually
took was therefore worse than the very worst mode which it could possibly
have adopted of raising the supplies within the year; and the only excuse,
or justification, which it admits of (so far as that excuse could be truly
pleaded) was hard necessity; the impossibility of raising so enormous an
annual sum by taxation, without resorting to taxes which from their
odiousness, or from the facility of evasion, it would have been found
impracticable to enforce.(356)
When government loans are limited to the overflowings of the national
capital, or to those accumulations which would not take place at all
unless suffered to overflow, they are at least not liable to this grave
condemnation. In this case, therefore, the question really is, what it is
commonly supposed to be in all cases—namely, a choice between a great
sacrifice at once, and a small one indefinitely prolonged. On this matter
it seems rational to think that the prudence of a nation will dictate the
same conduct as the prudence of an individual; to submit to as much of the
privation immediately as can easily be borne, and, only when any further
burden would distress or cripple them too much, to provide for the
remainder by mortgaging their future income. It is an excellent maxim to
make present resources suffice for present wants; the future will have its
own wants to provide for. On the other hand, it may reasonably be taken
into consideration that, in a country increasing in wealth, the necessary
expenses of government do not increase in the same ratio as capital or
population; any burden, therefore, is always less and less felt; and,
since those extraordinary expenses of government which are fit to be
incurred at all are mostly beneficial beyond the existing generation,
there is no injustice in making posterity pay a part of the price, if the
inconvenience would be extreme of defraying the whole of it by the
exertions and sacrifices of the generation which first incurred it.
§ 2. Not desirable to redeem a national Debt by a general Contribution.
When a country, wisely or unwisely, has burdened itself with a debt, is it
expedient to take steps for redeeming that debt? In principle it is
impossible not to maintain the affirmative.
Two modes have been contemplated of paying off a national debt: either at
once by a general contribution, or gradually by a surplus revenue. The
first would be incomparably the best, if it were practicable; and it would
be practicable if it could justly be done by assessment on property alone.
If property bore the whole interest of the debt, property might, with
great advantage to itself, pay it off; since this would be merely
surrendering to a creditor the principal sum, the whole annual proceeds of
which were already his by law, and would be equivalent to what a
land-owner does when he sells part of his estate, to free the remainder
from a mortgage. But property, it need hardly be said, does not pay, and
can not justly be required to pay, the whole interest of the debt.
Whatever is the fitting contribution from property to the general expenses
of the state, in the same, and in no greater proportion, should it
contribute toward either the interest or the repayment of the national
debt. This, however, if admitted, is fatal to any scheme for the
extinction of the debt by a general assessment on the community. Persons
of property could pay their share of the amount by a sacrifice of
property, and have the same net income as before.
[Illustration.]
If a person owns a property, A B, which returns him $1,000 income,
and if he pays $10 a year in taxes as his share of interest on the
public debt, suppose that part of his estate represented by X,
which returns him annually $10 (and which return he has annually
handed over to the state), to be carved out of it, and that he is
to be hereafter relieved of his share of taxes. He would then,
after having paid the capitalized value (X) of that which was his
share of the annual tax to the state on account of the public
debt, have the same net income as before; for he was never able to
enjoy the income of X.
If those who have no accumulations, but only incomes, were required to
make up by a single payment the equivalent of the annual charge laid on
them by the taxes maintained to pay the interest of the debt, they could
only do so by incurring a private debt equal to their share of the public
debt; while, from the insufficiency, in most cases, of the security which
they could give, the interest would amount to a much larger annual sum
than their share of that now paid by the state. Besides, a collective debt
defrayed by taxes has, over the same debt parceled out among individuals,
the immense advantage that it is virtually a mutual insurance among the
contributors. If the fortune of a contributor diminishes, his taxes
diminish; if he is ruined, they cease altogether, and his portion of the
debt is wholly transferred to the solvent members of the community. If it
were laid on him as a private obligation, he would still be liable to it,
even when penniless.
When the state possesses property, in land or otherwise, which there are
not strong reasons of public utility for its retaining at its disposal,
this should be employed, as far as it will go, in extinguishing debt. Any
casual gain, or god-send, is naturally devoted to the same purpose. Beyond
this, the only mode which is both just and feasible, of extinguishing or
reducing a national debt, is by means of a surplus revenue.
§ 3. In what cases desirable to maintain a surplus revenue for the
redemption of Debt.
The desirableness, _per se_, of maintaining a surplus for this purpose
does not, I think, admit of a doubt.
It is not, however, advisable in all cases to maintain a surplus revenue
for the extinction of debt. The advantage of paying off the national debt
is, that it would enable us to get rid of the worst half of our taxation.
But of this worst half some portions must be worse than others, and to get
rid of those would be a greater benefit proportionally than to get rid of
the rest. If renouncing a surplus revenue would enable us to dispense with
a tax, we ought to consider the very worst of all our taxes as precisely
the one which we are keeping up for the sake of ultimately abolishing
taxes not so bad as itself. In a country advancing in wealth, whose
increasing revenue gives it the power of ridding itself from time to time
of the most inconvenient portions of its taxation, I conceive that the
increase of revenue should rather be disposed of by taking off taxes, than
by liquidating debt, as long as any very objectionable imposts remain. In
the present state of England, therefore, I hold it to be good policy in
the Government, when it has a surplus of an apparently permanent
character, to take off taxes, provided these are rightly selected. Even
when no taxes remain but such as are not unfit to form part of a permanent
system, it is wise to continue the same policy by experimental reductions
of those taxes, until the point is discovered at which a given amount of
revenue can be raised with the smallest pressure on the contributors.
After this, such surplus revenue as might arise from any further increase
of the produce of the taxes should not, I conceive, be remitted, but
applied to the redemption of debt. Eventually, it might be expedient to
appropriate the entire produce of particular taxes to this purpose; since
there would be more assurance that the liquidation would be persisted in,
if the fund destined to it were kept apart, and not blended with the
general revenues of the state. The succession duties would be peculiarly
suited to such a purpose, since taxes paid as they are, out of capital,
would be better employed in reimbursing capital than in defraying current
expenditure. If this separate appropriation were made, any surplus
afterward arising from the increasing produce of the other taxes, and from
the saving of interest on the successive portions of debt paid off, might
form a ground for a remission of taxation.
The relative amount of the United States public debt may be seen,
by Chart No. XXII, from an early date down to 1880. Since the war,
the surplus revenue of the United States has been constantly
appropriated for the payment of the public debt incurred during
the late war, until, what with the reduction of debt and the fall
in the interest charge, our income is now so much greater than
expenditure that we are (1884) actually in difficulties owing to
the surplus. To the present time the Treasury has been able to use
its excess of receipts in redeeming matured debt; but the rapidity
of the payment has been such that in two years or more no matured
debt will exist to be redeemed: $250,000,000 of 4-½ per cent bonds
remain, but they do not fall due until 1891; and the 4 per cent
bonds to the amount of $737,620,700 do not mature until 1907.
Having once raised a large revenue under war pressure, it seems
very difficult for people to understand now why heavy duties were
originally levied, and the extraordinary suggestion is often made
that the surplus should remain, and new channels of expenditure
should be made (such as enormous pensions), simply in order to
keep up the heavy taxation. The difficulty is, however, that the
unnecessary surplus exists because of customs duties levied for
war purposes. But the heavy burden of war taxation ought not to be
continued, adding to the cost of production in all industries,
without doing a greater wrong than would be done by the
passing—and only possible—trouble of a redistribution of capital
in a few cases; especially since that distribution of capital will
be one from less productive to more productive industries;
otherwise, no change would be made.
The condition of foreign debts, and the progress made in their
reduction, may be studied in Chart No. XXIII. That of the United
States is exceptional. The interest-bearing debt, as given by the
last report of the Secretary of the Treasury, 1883, has been
reduced to $1,312,446,050, and the reduction is more striking than
is indicated in the chart for the year 1880.
[Illustration: Chart XXIII.]
Chart XXIII. Reduction of National Debts in Various Countries.
Chapter VI. Of An Interference Of Government Grounded On Erroneous Theories. |
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