The Effect of Taxation in generalSeptember 30, 2015
Taxation is the transfer of a portion of the national products from the hands of individuals to those of the government, for the purpose of meeting the public consumption or expenditure. Whatever be the denomination it bears, whether tax, contribution, duty, excise, custom, aid, subsidy, 66 grant, or free gift, it is virtually a burthen imposed upon individuals, either in a separate or corporate character, by the ruling power for the time being, for the purpose of supplying the consumption it may think proper to make at their expense; in short, an impost, in the literal sense.
It would be foreign to the plan of this work, to inquire in whom the right of taxation is or ought to be vested. In the science of political economy, taxation must be considered as matter of fact, and not of right; and nothing further is to be regarded, than its nature, the source whence it derives the version of cause and effect. A man is not rich, because he pays largely; but he is able to pay largely, because he is rich.
It would be not a little ridiculous, if a man should think to enrich himself by spending largely, because he sees a rich neighbour doing so. It must be clear, that the rich man spends, because he is rich; but never can enrich himself by the act of spending.
values it absorbs, and its effect upon national and individual interests. The province of this science extends no further. The object of taxation is, not the actual commodity, but the value of the commodity, given by the tax-payer to the tax- gatherer. Its being paid in silver, in goods, or in personal service, is a mere accidental circumstance, which may be more or less advantageous to the subject or to the sovereign. The essential point is, the value of the silver, the goods, or the service. The moment that value is parted with by the taxpayer, it is positively lost to him; the moment it is consumed by the government or its agents, it is lost to all the world, and never reverts to, or re-exists in society, This.
I apprehend, has already been demonstrated, when the general effect of public consumption was under consideration. It was there shown, that however the money levied by taxation may be refunded to the nation, its value is never refunded; because it is never returned gratuitously, or refunded by the public functionar- ies, without receiving an equivalent in the way of barter or exchange.
Cause and effect are easily distinguished, when they occur in succession; but are often confounded, when the operation is continuous and simultaneous.
Hence, although taxation do good when the sums it absorbs are properly applied, yet, the act of levying is always attended with mischief in the outset. And this mischief good princes and governments have always endeavoured to render as incon- siderable to their subjects as possible, by the practice of economy, and by levying, not to the full extent of the people’s ability, but to such extent only as is absolutely unavoidable.
That rigid economy is the rarest of princely virtues, is owing to the circumstance of the throne being constantly beset with individuals, who are interested in the absence of it; and who are always endeavouring, by the most specious reasoning, to impress the conviction, that magnificence is conducive to public prosperity, and that profuse public expenditure is ben- eficial to the state. It is the object of this third book to expose the absurdities of such representations.
The same causes, that we have found to make unproductive consumption nowise favourable to reproduction, prevent taxa- tion from at all promoting it. Taxation deprives the producer of a product, which he would otherwise have the option of deriving a personal gratification from, if consumed unproductively, or of turning to profit, if he preferred to de- vote it to an useful employment. One product is a means of raising another; and, therefore, the subtraction of a product must needs diminish, instead of augmenting, productive power.
Others there are, who are not impudent enough to pretend, that public profusion is a public benefit; yet undertake to show by arithmetical deduction, that the people are scarcely burthened at all, and are equal to a much higher scale of taxa- tion. As Sully tells us in his Memoirs, “The ear of the prince is assailed by a set of flattering advisers, who think to make their court to him by perpetually suggesting new ways of raising money; discharged functionaries, for the most part, whose experience of the sweets of office has left no other impression, than the tincture of the baneful art of fiscal extortion; and who seek to recommend themselves to power and favour, by commending it to the lips of royalty.” 68
It may be urged, that the pressure of taxation impels the productive classes to redouble their exertions, and thus tends to enlarge the national production. I answer, that, in the first place, mere exertion can not alone produce, there must be capital for it to work upon, and capital is but an accumulation of the very products, that taxation takes from the subject= that, in the second place, it is evident, that the values, which industry creates expressly to satisfy the demands of taxation, are no increase of wealth; for they are seized on and devoured by taxation.
It is a glaring absurdity to pretend, that taxation contributes to national wealth, by engrossing part of the na- tional produce, and enriches the nation by consuming part of its wealth. Indeed, it would be trifling with my reader’s time, to notice such a fallacy, did not most governments act upon this principle, and had not well-intentioned and scientific writers endeavoured to support and establish it. 67
Others suggest financial projects, and ways and means for filling the coffers of the prince, as they assert, without fleec- ing the subject. But no plan of finance can give to the govern- ment, without taking either from the people, or from the gov- ernment itself in some other way; unless it be a downright adventure of industry. Something can not be produced out of nothing by a mere touch of the wand. However an operation may be cloaked in mystery, however often we may twist and turn and transform values, there are but two ways of obtain- ing them, namely, creating oneself, or taking from others The If, from the circumstance, that the nations most grievously taxed are those most abounding in wealth, as Great Britain, for example, we are desired to infer, that their superior wealth arises from their heavier taxation, it would be a manifest in-
arithmetic of finance. Excessive taxation is a kind of suicide, whether laid upon objects of necessity, or upon those of luxury; but there is this distinction, that, in the latter case, it extin- guishes only a portion of the products on which it falls, to- gether with the gratification they are calculated to afford; while, in the former, it extinguishes both production and con- sumption, and the tax-payer into the bargain. best scheme of finance is, to spend as little as possible; and the best tax is always the lightest.
Admitting these premises, that taxation is the taking from in- dividuals a part of their property 69 for public purposes; that the value levied by taxation never reverts to the members of the community, after it has once been taken from them; and that taxation is not itself a means of reproduction; it is impos- sible to deny the conclusion, that the best taxes, or, rather those that are least bad, are Were it not almost self-evident, this principle might be illus- trated, by abundant examples of the profit the state derives from a moderate scale of taxation, where it is sufficiently awake to its real interests.
1 Such as are the most moderate in their ratio. When Turgot, in 1775, reduced to ½ the market-dues and duties of entry upon fresh sea-fish sold in Paris, their product was nowise diminished. The consumption of that article must, therefore, have doubled, the fishermen and dealers must have doubled their concerns and their profits; and, since popula- tion always increases with increasing production, the number of consumers must have been enlarged; and that of producers must have been enlarged likewise; for an increase of profits, that is to say of individual revenue, multiplies savings, and thus generates the multiplication of capital and of families; and that very increase of production will, beyond all doubt, augment the product of taxation in other branches; to say nothing of the popularity accruing to the government from the alleviation of the national burthens.
Such as are least attended with those vexatious circumstances, that harass the tax-payer without bringing any thing into the public exchequer.
Such as press impartially on all classes.
Such as are least injurious to reproduction.
Such as are rather favourable than otherwise to the national morality; that is to say, to the prevalence of habits, use- ful and beneficial to society.
These positions are almost self-evident; yet I shall proceed to illustrate them successively, with some few observations. The government agents, who farm or administer the collection of the taxes, very often abuse their interest and authority, to construe all doubtful points of fiscal law in their own favour, and sometimes to create obscurity for the purpose of profiting by it. The effect is precisely the same, as if the scale of taxation were raised pro tanto. 71
Turgot adopted a contrary course, and made it a rule to lean always to the side of the tax-payer. The public contractors made a great outcry at this innovation, declaring that it was impossible for them to fulfil their engagements, and offering to collect on the government account and risk. The event, however, falsified their predic- tions by an actual increase of the receipts. The greater lenity in the collection proved so advantageous to production, and the consumption, consequent upon it, that the profits, which had before not exceeded 10,550,000 liv., rose to 60,000,000 liv.; an advance which could hardly be credited, if it were not attested by unquestionable evidence. 72
- Of such as are most moderate in their ratio. Since taxation does, in point of fact, deprive the tax-payer of a product, which is to him, either a means of personal gratifi- cation, or a means of reproduction, the lighter the tax is, the less must be the privation.
Taxation, pushed to the extreme, has the lamentable effect of impoverishing the individual, without enriching the state. We may readily conceive how this can happen, if we recall to our attention the former position; viz., that each tax-payer’s consumption, whether productive or not, is always limited to the amount of his revenue. No part of his revenue, therefore, can be taken from him without necessarily curtailing his consump- tion in the same ratio. This must needs reduce the demand for all those objects he can no longer consume, and particularly those affected by taxation. The diminution of demand must be followed by diminution of the supply of production; and, consequently, of the articles liable to taxation. Thus, the tax- payer is abridged of his enjoyments, the producer of his prof- its, and the public exchequer of its receipts. 70 We are told by Humboldt, 73 to whom we are indebted for a variety of valuable information, that in thirteen years from 1778, during which time Spain adopted a somewhat more liberal system of government in regard to her American dependencies, the increase of the revenue in Mexico alone amounted to no less a sum than 100 millions of dollars; anti that she drew from that country, during the same period, an This is the reason why a tax is not productive to the public exchequer, in proportion to its ratio; and why it has become a sort of apophthegm, that two and two do not make four in the
other preventive measures, entail additional expense, without procuring the smallest increase of revenue. And this ad- dition is sure to fall on the most necessitous class of tax-payers; for the other classes pay without litigation or constraint.
Such odious means of enforcing the payment of taxes are precisely the same as demanding of a man 12 dollars because he has not wherewithal to pay 10 dollars. Rigour is never necessary to enforce taxation where it presses lightly on the resources of individuals; but when a state is so unfortunate, as to be obliged to impose heavy burthens, of two evils, the process of levy by distress is preferable to that of personal constraint. For at any rate, by seizing and selling the taxpayer’s goods, and thereby raising the arrears of his taxes, he is compelled to pay no more than is due; and the whole of what he does pay goes into the public purse. On this account it is, that works executed by the public requisition of labour, as the roads were in France under the old regime, are always a mischievous kind of taxation. The time lost by the labourers put in requisition in coming three or four leagues, perhaps, to their work, and that which is always wasted by people who get no pay, and work against their inclination, is all a dead loss to the public, with no return of revenue.
Even supposing the work to be well executed, there is often more loss incurred, by the interruption of the regular agricultural pursuits, than gain made from the compulsory employment that has been substituted.
Turgot called upon the surveyors and engineers of the respective provinces for an estimate of the average expense, one year with another, of keeping up old roads, and constructing the usual number of new ones, directing them to make their calculations on the most liberal scale. The estimate of the annual expense, made in compliance with his orders, amounted to 2 millions of dollars for the whole kingdom= whereas, according to the calculations of Turgot, the old corvee system involved a sacrifice to the nation of 8 millions of dollars. 79
addition in the single article of silver, to the amount of 14,500,000 dollars. We may naturally suppose, that, in those years of prosperity, there was a corresponding, and rather greater increase of individual profits; for that is the source, whence all public revenue is derived. A similar course of conduct has invariably been followed by a similar effect; 74 and it is a great satisfaction to a writer of liberal principles to be able to prove by experience, that mod- eration is the best policy. 75 Upon the same principles, it will be easy to demonstrate in the next place, that the taxes least mischievous are:
- Such as are least attended with those vexatious circumstances, that harass the tax-payer, without bringing any thing into the public exchequer.
It has been held by many, that the costs of collection are no very great evil, inasmuch as they are refunded to the commu- nity in some other shape. On this head, I must refer my readers to what has been already observed. 76 These costs are no more refunded, than the net proceeds of the taxes themselves;
because both the one and the other consists in reality, not of the money, wherein the taxes are paid, but of the value, where- with the tax-payer produces that money, and the value which the government again procures with it; which latter is destroyed and consumed outright.
The necessities of princes have operated far more effectually than their regard to the public good, to introduce the practice of better order and economy in the financial departments of most European states during the two last centuries, than in former times. The people are generally made to bear as much as they can well stand under; so that every saving in the charge of collection has gone to swell the receipts of the exchequer.
Days of rest, enjoined either by law, or by custom and usage too powerful to be infringed upon, are another kind of taxa- tion, productive of nothing to the public purse.
Sully tells us in his Memoirs, 77 that, for about 6 millions of dollars brought into the royal treasury, in 1598, by means of taxation, individuals were out of pocket about 30 millions of dollars, and assures us, that he had with great pains ascer- tained the fact, however incredible it might appear. Under the administration of Necker, upon a revenue of about 110 millions of dollars, the charges of collection amounted to no more than 10 millions of dollars; yet, under his management, there were 250,000 persons employed in the collection= most of them, however, had other collateral occupations. The charge was, therefore, about 10½ per cent; yet this is much higher than the rate at which the business is done in England. 78 3. Such as press impartially on all classes.
Taxation being a burthen, must needs weigh lightest on each individual, when it bears upon all alike. When it presses in- equitably upon one individual or branch of industry, it is an indirect, as well as a direct, incumbrance; for it prevents the particular branch or the individual from competing on even terms with the rest. An exemption, granted to one manufac- ture, has often been the ruin of several others. Favour to one is most commonly injustice to all others.
Besides the charge of collection, there are other circumstances, that are burthensome to the people without being productive of gain to the public revenue. Law-suits, imprisonment and The partial assessment of taxation is no less prejudicial to the public revenue, than unjust to individual interests. Those who are too lightly taxed, are not likely to cry out for an increase; and those who are too heavily taxed, are seldom regular in their payments. The public revenue suffers in both ways. this is probably what Smith meant, by declaring it reasonable, that the rich man should contribute to the public ex- penses, not merely in proportion to the amount of his revenue, but even somewhat more. For my part, I have no hesi- tation in going further, and saying, that taxation can not be equitable, unless its ratio is progressive. 80
Is it just to tax the revenues spent on luxuries, more heavily than that spent on necessity? It seems reasonable, for taxation is a sacrifice to the preservation of society and of social organization, which ought not to be purchased by the destruction of individuals.
Yet, the privation of absolute necessaries implies the extinction of existence. It would be somewhat bold to maintain, that a parent is bound in justice to stint the food or clothing of his child, to furnish his contingent to the ostentatious splendour of a court, or the needless magnificence of public edifices. Where is the ben- efit of social institutions to an individual, whom they rob of an object of positive enjoyment or necessity in actual possession, and offer nothing in return, but the participation in a remote and contingent good, which any man in his senses would reject with disdain?
- Such as are least injurious to reproduction.
Of the values, whereof taxation deprives individuals, a great part would, undoubtedly, if left at the disposal of the individuals themselves, have gone to the satisfaction of their wants and appetites; but some part would have been laid by, and have gone to the further accumulation of productive capital.
Thus, all taxation may be said to injure reproduction, inasmuch as it prevents the accumulation of productive capital. This effect is more direct and serious, whenever the tax-payer is obliged to withdraw a part of the capital already embarked, for the purpose of enabling him to pay the tax; which case, as Sismondi has shrewdly observed, resembles the exaction of a tithe upon grain at seed-time, instead of harvest-time. Of this kind is the tax on legacies and successions. An heir, succeeding to a property of 20,000 dollars, and called upon for a tax of 5 per cent upon it, will pay it, not out of his ordinary income, burthened as it is already with the ordinary taxes, but out of the inheritance, which is thereby reduced to $19,000.
Wherefore, if it happen to be a vested capital of $20,000 and be reduced by the tax to 19,000 dollars, the na- tional capital will be diminished to the amount of the $1000 thus diverted into the public exchequer. But how is the line to be drawn between necessaries and superfluities?
In this discrimination, there is the greatest difficulty, for the terms, necessaries and superfluities, convey no determinate or absolute notion, but always, have reference to the time, the place, the age, and the condition of the party; so that, were it laid down as a general rule, to tax none but superfluities, there would be no knowing where to begin and where to stop. All that we certainly know is, that the income of a person or a family may be so confined, as barely to sufffice for existence; and may be augmented from that minimum upwards by imperceptible gradation, till it embrace every gratification of sense, of luxury, or of vanity; each successive gratification being one step further removed from the limits of strict necessity, till at last the extreme of frivolity and caprice is arrived at; so that, if it be desired to tax individual income, in such manner as to press lighter, in proportion as that income approaches to the confines of bare neces- sity, taxation must not only be equitably apportioned, but must press on revenue with progressive gravity.
It is the same with all taxes upon the transfer of property. The owner of land worth 20,000 dollars, will get but 19,000 dol- lars for it, if the purchaser be saddled with a tax of 5%.
The seller will have a disposable capital of 19,000 dollars only, in lieu of land worth 20,000 dollars; and the national capital will sustain a loss of the difference. Should the purchaser be so bad an arithmetician, as to pay the full value of the land, without allowing for the tax, he will sacrifice a capital of 21,000 dollars in the purchase of value to the amount of but 20,000 dollars. In either case, the loss to the national capital will be the same; although in the latter, it will fall upon the purchaser instead of the seller.
In fact, supposing taxation to be exactly proportionate to individual income, a tax of ten per cent for instance, a family possessed of 60,000 dollars per annum would pay $6000 in taxes, leaving a clear residue of 54,000 dollars for the family expenditure.
With such an expenditure, the family could not only live in abundance, but could still enjoy a vast number of gratifications by no means essential to happiness.
Whereas another family, with an income of 60 dollars, reduced by taxation to 54 dollars per annum, would, with our present habits of life, and ways of thinking, be stinted in the bare necessaries of subsistence. Thus, a tax merely proportionate to individual income would be far from equitable; and Taxes, upon transfer, besides the mischief of pressing upon capital, are a clog to the circulation of property.
But, has the public any interest in its free circulation? So long as the object is in existence, is it not as well placed in one hand as in another?
Certainly not. The public has a perpetual interest in the utmost possible freedom of its circulation; because by that means it is most likely to get into the hands of those, who can make the most of it. Why does one man sell his land? but because he thinks he can lay out the value to more advantage in some channel of productive industry. And why does another buy it? but because he wishes to invest a capital, that is lying idle, or less productively vested; or because he thinks it capable of improvement.
The transfer tends to augment the national income, because it tends to augment the income of the two contracting parties. If they be deterred by the expenses of the transfer, those expenses will have prevented this probable increase of the national income.
fisheries are very productive, and cattle so abundant, that they are killed merely for the sake of the hide. Indeed, it is thence that our tanneries in Europe are in a great measure supplied. But the salt duties prevent the export of either fish or meat; and thus, for the sake of a revenue of about $200,000 perhaps, incalculable mischief is done to the productive powers of the country, as well as to the public revenue, which they might be made to yield.
In like manner, as taxation operates in the nature of a penalty, to discourage reproductive consumption, it may be employed to check consumption of an unproductive kind; in which case it has the two-fold advantage, of subtracting no value from reproductive investment, and of rescuing values from unproductive consumption, to be employed in a manner more beneficial to the community. This is the advantage of all taxes upon luxuries. 84
Such taxes, however, as encroach upon the productive capital of the community, and consequently abridge the demand for labour and the profits of industry within the community, possess, in a very high degree, one quality, which that distinguished political economist, Arthur Young, has pronounced to be an essential requisite in taxation, namely, the facility and cheapness of collection. 81 Since taxation presents at best but a choice of evils, a nation, heavily burthened, will probably do well, in submitting to a moderate impost upon capital.
When sums, levied by taxation upon capital, instead of being simply expended by the government, are laid out upon productive objects; or, when individuals contrive to make good the deficiency out of their private savings, the positive mis- chief of taxation is then balanced by a counteracting benefit.
The proceeds of taxation are reproductively vested, when laid out in improving the internal communications, constructing harbours, or other such works of utility. Governments sometimes employ a part of the revenue thus realised in adven- tures of industry. Colbert did so, when he made advances to the manufacturers of Lyons. The governments of Hamburgh, and of some other places in Germany, were’ in the habit of embarking their revenues in productive undertakings; and it is said, that the authorities of Berne were in the habit of so employing a part of its revenues every year= but such instances are of very rare occurrence.
Taxes upon law-proceedings, and, generally, all that is paid to law-officers and agents, are taxes upon capital. 82 For liti- gation is not proportionate to the income of the suitors, but to accident, to the complexity of family interests, and, to the imperfections of the law itself.
Forfeitures are equally a tax on capital.
The influence of taxation upon production is not confined to the circumstance of diminishing one of its sources, that is to say, capital; it operates besides in the nature of a penalty, inflicted upon certain branches of production and consumption. Patents, licenses to follow any specified calling, and, generally, all taxes, that bear directly upon industry, are li- able to this objection; but, when moderate in their ratio, industry will contrive to surmount such obstacles without much difficulty.
- Such as are rather favourable than otherwise to the national morality; that is to say, to the prevalence of habits, use- ful and beneficial to society.
Taxation influences the habits of a nation, in the same way as it operates upon its production and consumption, that is, by imposing a pecuniary penalty upon specified acts; and it is, moreover, possessed of the grand requisites to render pun- ishment effectual; namely, moderation and difficulty of evasion. 85
Without reference, therefore, to the purposes of finance and revenue, it is a powerful engine in the hands of government, for either corrupting or reforming the national morals, and may be directed to the promotion of idleness or industry, extravagance or economy.
Nor is industry affected only by taxes bearing directly upon it; it is indirectly affected by such also, as bear upon the con- sumption of the articles it has to work upon.
The products consumed in reproduction are, for the most part, those of primary necessity; and taxes, that discourage such products, must be injurious to reproduction. This is more especially the case in respect to those raw materials of manu- facture, which can only be consumed reproductively. An excessive duty upon cotton, checks the production of all ar- ticles, wherein that substance is worked up. 83
A 5% tax on all lands devoted to productive husbandry, and the exemption of pleasure-grounds before the French revolution operated as a premium on luxury and a penalty on agricultural enterprise.
Brazil is a country abounding in animal productions, that might be cured and exported, if they were allowed to be salted. Its