Chapter 2

Consumption Taxes

by Adam Smith Icon

Taxes on possessions are naturally equal. But taxes on consumptions are naturally unequal. Sometimes they are paid by:

  • the merchant
  • the consumer, or
  • the importer, who must be repaid it by the consumer.

In Holland, all goods are deposited in a public warehouse, one key of which is kept by the commissioner of the customs, and another by the owner of the goods. If the goods are exported, no tax is advanced. But if they go into the country the consumer pays down the price to the merchant and the custom to the commissioner.

This method is much the same with the famous excise scheme of Sir Robert Walpole, which was at last his ruin.

It was to this effect, that a general excise should be established, and all goods imported deposited in a public warehouse, and the tax should only be paid upon the inland sale of them. This scheme was liable to inconveniences such as subjecting the owner to anxiety from not having his goods entirely in his own power.

But it is plainly this which gives the Dutch so great an advantage over all the other European nations. The Dutch are the carriers of the other Europeans. They bring corn from the Baltic and those places where it is cheap, and wines from those places where there has been a good vintage.

The Dutch keep them by them until they hear of a dearth. They then export them to the places where it is. But in England, the moment you bring the commodities to the country, you must pay the tax and sell them where you please. Thus, the merchant may lie out of his interest for a long time. Therefore, he must sell his commodities dearer. The Dutch have no tax to pay but on inland sale. They can sell cheaper than the English or any other nation. However, taxes on consumption have some advantage over taxes on possessions.

They are not felt, being paid imperceptibly; but a person possessed of 1,000 pounds of land-rent feels very sensibly a 100 pounds going from him. The taxes on consumption are not so much murmured against, because they are laid on the merchant. He lays them on the price of goods. They are thus insensibly paid by the people. When we buy a pound of tea, we do not reflect that the most part of the price is a duty paid to the government.

We therefore pay it contentedly, as though it were only the natural price of the commodity.

In the same way when an additional tax is laid upon beer, its price must be raised. But the mob do not directly vent their malice against the government, who are the proper objects of it, but on the brewers, as they confound the tax price with the natural one.

Taxes on consumption paid by the merchant therefore, seem most to favour liberty. Such taxes will always be favoured by this government. In Holland, they buy a hogshead of wine and first pay the price to the merchant, and then so much to the officers of excise, as it were to get leave to drink it. We do the very same thing. But as we do not feel it immediately, we imagine it all one price. We never reflect that we might drink port wine below sixpence a bottle, were it not for the duty. Taxes on consumptions have still another advantage over those on possessions.

If a person be possessed of a land-rent of an hundred pounds per annum, and this estate be valued at a high rate, he perhaps pays £20 to the government. The collector must be paid at a certain time of the year, and few people have so much self-command as to lay up money to be ready. He has therefore £20 to borrow to answer his present demands. When next payment comes, he has not only the tax to pay, but also the interest of the money borrowed the former year. He begins to encumber his estate; and thus upon examination it will be found that many landholders have been ruined.

The best method of preventing this is to make the tenant pay the land tax in part payment of his rent. The taxes on consumptions are not liable to this inconvenience. When a person finds that he is spending too much on the elegancies of life, he can immediately diminish his consumption.

Taxes upon consumptions are therefore more eligible than taxes upon possessions, as they have not so great a tendency to ruin the circumstances of individuals. It is to be observed that taxes both on consumptions and possessions are more or less advantageous to industry according to the manner in which they are levied. The land tax in England is permanent and uniform, and does not rise with the rent, which is regulated by the improvement of the land; notwithstanding modern improvements it is the same that it was formerly.

In France the tax rises proportionably to the rent, which is a great discouragement to the landholder.

It has much the same effect with the tithes in England. When we know that the produce is to be divided with those who lay out nothing, it hinders us from laying out what we would otherwise do upon the improvement of our lands. We are better financiers than the French, as we have also the advantage of them in the following particulars. In the method of levying our customs we have an advantage over the French.

Our customs are all paid at once by the merchants, and goods, after their entry in the custom house books, may be carried by a permit through any part of the country without molestation and expense, except some trifles upon tolls, &c. In France a duty is paid at the end of almost every town they go into, equal, if not greater, to what is paid by us at first; inland industry is embarrassed by theirs, and only foreign trade by ours. We have another advantage in levying our taxes by commission, while theirs are levied by farm, by which means not one half of what they raise goes into the hands of the government.

In England the whole expense of levying above seven millions does not come to £300,000. In France 24 millions are levied every year, and not above 12 goes to the expense of the government, the rest goes for defraying the expense of levying it, and for the profit of the farmer. In England no excise officers are requisite but at the seaports, except a few up and down the country.

The profits of the farmers in France would pay the expense of them all.

In the collecting of our excise there is a regular subordination of officers who have their fixed salaries and nothing more, but in France the highest bidder has the place, and, as the man who undertakes it must advance the sum at a certain time, and runs a risk of not getting it up, he deserves a very high profit= besides, in an auction of this kind there are few bidders, as none are capable of undertaking the office but those who are brought up to business, and are possessed both of a great stock and credit, and can produce good security.

When there are few bidders they can easily enter into an association among themselves, and have the whole at a very easy rate. Upon the whole we may observe that the English are the best financiers in Europe, and their taxes are levied with more propriety than those of any country whatever. Upon this subject it is in general to be observed that taxes upon exportation are much more hurtful than those upon importation.

When the inhabitants of a country are in a manner prohibited by high taxes from exporting the produce of their industry, they are confined to home consumption, and their motives to industry are diminished. Taxes upon importation, on the contrary, encourage the manufacturing of these particular commodities. The tax upon Hamburgh linen, for example, hinders the importation of great quantities of it, and causes more linen to be manufactured at home.

In general, however, all taxes upon importation are hurtful in this respect, that they divert the industry of the country to an unnatural channel. The more stock there is employed in one way, there is the less to be employed in another; but the effects of taxes upon exportation are still more pernicious.

This is one great cause of the poverty of Spain; they have imposed a high tax on the exportation of every commodity, and think that by this means the taxes are paid by foreigners, whereas, if they were to impose a tax on importation, it would be paid by their own subjects, not reflecting that by bringing a burden on the exportation of commodities, they so far confine the consumption of them, and diminish industry.

To conclude all that is to be said of taxes, we may observe that the common prejudice that wealth consists in money has not been in this respect so hurtful as might have been imagined, and has even given occasion to regulations not very inconvenient.

Those nations to whom we give more goods than we receive, generally send us manufactured goods; those on the contrary, from whom we receive more goods than we give, or with respect to whom the balance is in our favour, generally send us unmanufactured goods.

To Russia, for example, we send fine linen and other manufactured goods, and for a small quantity of these receive, in return, great quantities of unmanufactured goods. This kind of trade is very advantageous, because goods in an unmanufactured and rude state afford employment and maintenance to a great number of persons.

It is merely from the absurd notion that wealth consists in money, that the British encourage most of those branches of foreign trade, where the balance is paid in money. There are still some other species of taxes.

But their nature are much the same, so it is unnecessary to mention them. Taxes are connected to stocks.

We will next discuss:

  • the nature of stocks and
  • the causes of their rising and falling.


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