Taxation

Taxation (from "tax," derived, through the French, from Lat. taxare, to appraise, which again is connected with the same root as tangere, to touch), that part of the revenue of a state which is obtained by compulsory dues and charges upon its subjects. The state may have revenue from property of its own. In past times one of the principal sources of the revenue of the sovereign was in fact property of some sort, of which the crown lands in Great Britain, still administered by the government, are a remnant. In other countries, even at the present time, there is a large public domain yielding revenue. Local authorities also largely own property from which a revenue is obtained. But as a rule, and in spite of what has often been the practice in the past, and of exceptions which may still exist in some countries, a government obtains the money required for its expenses by means of taxation. Some of the apparent exceptions, moreover, appear to be only exceptions in name. It is contended, for instance, that the revenue from land obtained by the government of India is in reality of the nature of a land rent - a species of property owned by the government. But the fact of a government levying so general a charge may be held ipso facto to convert the charge into a tax, having much the same economic effects and consequences as a tax. When, moreover, a state receives a revenue from property, some of the economic consequences may be the same as if it received the money by means of a tax. In both cases there is absorption and administration by the state of so much of the income of the community, and it may be a question whether the private ownership of the property would not be more expedient both for the state and its subjects than state ownership is, in spite of the apparent advantage to all concerned in the state getting so much of its income without the compulsion of a tax.

## The Different Kinds of Taxes

In the economic development of states taxes have come to be grouped in different ways, according to variations in the method of levying them or the means of enforcing compulsion or other differences. One of the most usual divisions is into direct and indirect taxes. Taxes are distinguished as direct, because they are charged directly upon the tax-payer from whose income they are supposed to be taken. Indirect taxes are those where it is recognized from the beginning that the individual who pays in the first instance usually passes on the charge to some one else, who may again pass it on until it finally reaches the subject who bears the burden. The income tax, a direct charge upon all incomes above a certain limit, is the principal type in the United Kingdom of a direct tax. In France there is a group of taxes known by that name - a land tax,, a personal and furniture tax, a door and window tax, and a trade licence tax. In the United States there are mainly assessments of the capital value of property, always for state and local purposes only, and not for the central government. Among the indirect taxes the most important are excise and customs duties upon articles of general consumption, the principal articles almost everywhere being spirits, beer and tobacco. Sugar, tea, coffee and cocoa are also among the articles commonly selected. In essential character there is no difference between excise and customs duties, except that excise duties are levied upon articles of home production, and customs upon articles imported from abroad, or brought into one part of a country or empire from another part; but excise duties on the whole are considered more likely to interfere with trade, in consequence of the necessity of supervising the production of the articles affected. Next in importance to excise and customs we have duties levied by means of stamps upon documents or by charges at the time of registering deeds to which registration is necessary for the purpose of being valid. The charge in one case upon the article at a certain stage of its production, and in the other upon a transaction, is supposed to be passed on by the first payer to others. With these have been usually classed in the United Kingdom certain licence taxes upon traders, although such licences in France are reckoned direct taxes.

This division into direct and indirect is, however, far from logical. To take first the direct taxes. The income tax itself is not, in all cases, really paid to the state directly by the person out of whose income it comes. It is paid, in the first instance, in the case of land or houses, by the occupier, and where the occupier is a tenant it is recovered by him from the owner. In the case of joint-stock companies the company pays the state, and deducts the amount from the individual owners of stocks and shares out of whose incomes the amount comes. The ultimate payer in these cases is no doubt reached without delay or many steps, but the process is not quite direct. It is the same with rates. A householder is assessed as occupier, but he may be "compounded for," and really know nothing of the payment, though it is supposed to come out of his income. In the case, again, of a long-established land tax or rate many questions may arise as to whether the person who is considered to bear the burden in the first instance really bears it in the end. It is contended by some that the tax becomes in the nature of a rent-charge upon the property affected, and that the state really acts as landowner in levying the charge just as it does in receiving the rent of crown lands, and with similar economic incidents and consequences. Thus the direct taxes so called may frequently be no more direct than any others.

As regards indirect taxes, again, there appear to be some cases at least where it is by rio means certain that the charge is passed on; stamp duties, for instance, especially where moderate in amount, may have the effect of diminishing pro Canto the profits in business of the person paying them, or the income which he enjoys. Where they are heavy, as, for instance, with the French registration duties on the transfer of property, there appears to be little doubt that they constitute a deduction from the price which a seller receives, and thus they are direct enough. Sometimes also, when a charge upon a commodity is not of such a figure as to be easily divisible among the ordinary units of retail consumption, so that it can be passed on to a consumer of the articles in the form of an increased price, it may remain fixed upon those who first pay it, at least for a time. This is supposed to have actually happened with the increase of the beer duty in the British budget of 1894 by 6d. per barrel - a sum which would not when divided by the pints in a barrel amount to the smallest coin of the realm. When the multure tax, a tax upon milling grain, was imposed in Italy many years ago, it was found that no corresponding increase took place in the price of flour and bread. The trade fell into the hands of the millers on a large scale, who paid the tax out of their increased profits from larger business, while the smaller millers were crushed out; so that this was manifestly the case of a tax, so called indirect, where the whole burden really fell on those who paid the charge in the first instance, and who in theory were supposed to pass it on to others. Even in the case of indirect taxes, therefore, there are important exceptions to the rule that they are indirect.

The division of taxes into direct and indirect is thus based on no real intrinsic difference. It is a classification for convenience' sake, adopted upon a rough observation of conspicuous, or apparently conspicuous, differences in the mode of levying taxes, and nothing more. The division, nevertheless, cannot be passed over without mention, as it is not only a common one in economic writing, but it figures largely in budget statements, financial accounts, and finance ministers' speeches - especially in the United Kingdom and France. In the United Kingdom the distinction has been made familiar by free-trade discussions. Direct taxation in the shape of income tax was substituted for indirect taxation previously levied, in order to relieve trade from the shackles of duties and charges which had become allembracing. In France the direct taxes above referred to are described officially as direct, having been originally, there is little doubt, the main sources of government income; and there is equally an official designation of certain heads of revenue as "contributions et taxes indirectes." Recently in budget debates in England there has been much comparison of the amounts yielded at different times by direct and indirect taxes respectively.

Other general classifications of taxes have also been attempted, as, for instance, taxes upon real property, and taxes upon personal property, and so on. Classification is indeed only too easy. Applying a characteristic common to some taxes, we can make a group of them, and set them against a group of all the other taxes lumped together. Such classifications are, however, uninstructive, and it has been found practically necessary in financial writing to take the principal taxes by name, or by such a general grouping as that of import or stamp duties, and then describe their nature, characteristics and incidence. In this way each country has a grouping of its own, though there is a common likeness, and the experience and practice of one country assist the financial study of another. As Adam Smith remarks, there is nothing in which governments have been so ready to learn of one another as in the matter of new taxes.

Descriptions of Taxes. - Following the practice of authors on finance, we may give a short account of the principal taxes in the United Kingdom, with references in passing to points of comparison or contrast with the taxes of other countries. See, however, also the article on English Finance.

The income tax (q.v.) for many years has been the most prominent, and latterly it has been the most productive, single tax. Its technical name is the property and income tax, but it is essentially a charge upon all incomes or profits, whether arising from property, or from the remuneration of personal services, or from annuities, income being applied with the widest possible meaning. As originally instituted in April 1798, during the great war with France, under the name of a "triplicate assessment," it was rather a consolidation of various assessed taxes levied upon the luxuries of the rich and upon property, than a wholly new tax. In December of the same year this impost was repealed, and a true income tax of io per cent. established on all incomes over X60, with abatements between £60 and £ 200\. It was intended as a temporary tax for war purposes only, and was repealed in 1802, but was reimposed when the war recommenced in 1803, with the limit of abatement reduced to £150\. So odious was it that parliament in 1815, when the war came to an end, ordered the destruction of the documents relating to it. Its efficiency as an instrument of producing revenue was, however, so great as to lead to its revival in 1842, when Sir Robert Peel inaugurated his great free-trade reform and swept away duties on exports, duties on imported raw material, and other imposts hampering the trade of the country. The intention again was that the tax should be temporary, but although the free-trade work was practically completed in the early 'sixties, and Mr Gladstone went so far as to dissolve parliament in 1874 with a promise that he would abolish the tax if his party were returned to power, it has become a permanent impost. The reasons are that with the tax at a low rate it has been found much less intolerable than during the Napoleonic War, when it was at the rate of 10 per cent., while the pressure of the tax has also been greatly mitigated by placing very high the minimum income subject to it, and giving abatements upon the lower taxable incomes. These expedients have since been carried much farther. The tax, if kept at a low rate, undoubtedly fulfils a useful function as a revenue reserve for emergencies, on account of the ease with which it can be put up and down without disturbing trade. But in recent years, by rising to the rate of is. 2d. per £, it has been felt more heavily, and at this height is decidedly less elastic. As regards this tax at least there is no question of its "directness" in a sense, .as it is so contrived that it can hardly be passed on by those who are struck at, though they are not always the same as those who pay in the first instance, as has already been pointed out. There have been great complaints also of injustice by the possessors of temporary and precarious incomes, who have to pay the same rate of tax as the owners of permanent incomes from property, although these complaints have been diminished to some small extent by the raising of the minimum limit of the income assessed and the increase of the principle of abatements.

The varieties of income charged being very great, and special claims for consideration having been set up at different times, the result has been the formation of an income tax code, defining the methods and rules for assessing the different classes of profits and income, and prescribing the way in which abatements and exemptions are to be obtained. A leading peculiarity is the avoidance of special inquisition into the aggregate of individual incomes. Although it is called a direct tax, the method of levy, as far as property is concerned, is upon the profits at their source, and not as they are distributed among the receivers. The question of the amount of individual incomes only comes before the authorities when claims for exemption and abatement are made. The character of the tax is accordingly much less odious than it would be if an account of individual incomes were invariably demanded, as was the case in the United States during the Civil War, when an income tax existed for a short time. Other taxes grouped with the income tax by the authorities are house duty and land tax, but they are unimportant by comparison. The house duty replaced a window tax and other charges which were formerly not unimportant, especially in the interval between 1815 and 1843, when there was no income tax. It is a charge upon the occupiers of houses, mainly dwelling-houses, according to the amount of rent, the rate upon dwelling-houses ranging from 3d. to 9d. in the £, and the yield being about £1,750,000 per annum. The incidence is probably much the same as that of the income tax itself, though there are curious questions as to the ultimate incidence as between owners and occupiers of houses. The land tax is quite unimportant, being an ancient tax upon an old assessment which has long become obsolete, and it interests economists most of all by the illustration it furnishes of what may be called a rentcharge tax - a tax, that is, which has been so long in existence and so fixed in its basis that it becomes in reality a charge upon the property, and not a direct burden upon the person who pays it, as the income tax is upon the person who pays it or for whom it is paid. In 1897 the basis of the tax was varied, but not in any way to affect the principle just stated.

The next great group of taxes is that of the excise (q.v.) and customs duties upon commodities. Excise duties are charges upon commodities produced at home on their way to the consumer, and customs duties in the United Kingdom are charges upon commodities brought into the country from abroad; and they are of essentially the same nature. Not only so, but excise duties and customs duties are in some cases supplementary to each other, like articles being produced at home and imported from abroad, so that for the sake of the revenue they have both to be taxed alike. Of this in the British system spirits are the best instance.

Export duties, it may be observed, are not important in systems of taxation generally, as there are few articles where the charge will not really fall on the wages of labour and profits of capital within the country imposing them; but opium grown in India is a well-known exception, and in the West Indies export duties on principal articles of production, in spite of their incidence, have been found a convenient source of revenue.

The list of commodities selected for taxation in the English fiscal system, under Free Trade, is very small. Few countries have so short a list of import duties, but this is in consequence of their design to give protection, which raises totally different questions from those of revenue.

The next large group of taxes is that of the stamp duties (q.v.). The principal items are those derived from a stamp of rd. upon each cheque or receipt for money paid, and from a variety of charges on deeds and other instruments, and principally on the price paid for the transfer of real property and of stocks and shares, and on mortgages. Included are various charges on foreign bonds to bearer, to compensate for the advantage they have in escaping the transfer duty on deeds, through their passing on sale or mortgage from hand to hand. The essence of the compulsion in the case of stamp duties is the invalidity of the documents in courts of law unless the stamp is affixed, besides liability to penalties for not affixing the proper stamps. As things go in matters of taxation, English stamp duties are low. In France, besides the stamp duties, there are charges on the transfer of real property amounting to about 6 per cent. on the official registration of the transfer which is necessary to make it effective.

We come next, in dealing with taxation, to a group of charges about which the question has been raised as to whether they are, properly speaking, taxes or not. These are the post office charges, and the charges for telegraph service, including telephones. In the classification of the revenue in English budgets and in official returns these charges are deliberately separated from the above sources of the revenue described as taxes, and classed with "revenue derived from other sources." The correctness of this procedure is questionable. According to old usage, the post office was made a state monopoly for the express purpose of levying taxation by means of it. In France the postage on letters is still called the taxe des lettres. There is no doubt also, that when postage on letters is charged at the rate of rd. each, where the cost of collection and delivery, as in the metropolis, is perhaps not more than a tenth of a penny, it is difficult to distinguish the levy from that of any other tax. The excuse, as a rule, may hold good, that the postal charge is only a reasonable one for service rendered, so that the net income of the post office really resembles the profit of a business, but the element of taxation appears undoubtedly to enter. The same remark would apply to the charges for passenger conveyance and goods freight made by governments which carry on railway business, as in Prussia, India and the Australian states. In strict theory, where the government makes a charge, it levies a tax. The reasonableness of the charge in a given case is to its credit, but the features of monopoly and compulsion on the tax-pa y er make the charges difficult to distinguish logically from other taxes. The facts are not in dispute, however they may be described. If the government derived a large income from post office and telegraph service in excess of the amount expended, the whole income would be generally, and not improperly, described as taxation; but consideration, of course, must be given to the difference made by the working of the service generally for the public advantage rather than for purposes of revenue.

Another source of revenue in British imperial finance is that from fees in courts of justice, patent stamps and the like, which is usually classified, like the income of the post office, as revenue derived from other sources than taxes. The amount is not large, though unfortunately it is not exactly known, owing to the fees being treated in many cases as extra receipts, and deducted from the expenditure of the departments by which they are received, so that this part of the national expenditure is not shown in the accounts at all. The proceeding appears to be quite incorrect, whatever excuse there may be for treating revenue like that of the post office as non-tax revenue. Fees levied on proceedings in courts of justice are not only taxes, but taxes of the worst sort. They received the special condemnation of Jeremy Bentham. It is a blot on British finance, therefore, that this part of the taxation is treated as if it were not taxation at all, and largely concealed from view in the way described.

Last of all, we have to notice among the imperial taxes the estate (q.v.) or death duties, as they are called - the charges made by government on the transfer of property from the dead to the living. These have been considerably increased in amount. Various interesting questions arise regarding them. Logically they are apparently taxes upon the dead, as they limit the area of bequest, but they are felt by the living who receive the estate as if the burden of taxation fell on them. Practically, when a stranger receives the estate of a deceased man, the proper way of viewing the tax would appear to be that it is a share of property claimed by the state against a stranger who has no right in the matter except that which the state gives him, so that it is hardly a tax at all, as the word is usually understood; but when the estate is received by the near relatives of the deceased who were subsisting upon it even before his death, it is undoubtedly felt as a tax by them, and operates as a tax. It is even at times a very burdensome tax, falling upon a family when its sources of income are otherwise diminished, while it has the demerit of striking a small number annually instead of being diffused equally. Death duties also raise the question as to their being taxes upon capital. They are of large amount, even at the lowest rates of I to 4 per cent. upon the capital charged, and they have to be paid at such times as to cause their being paid out of capital and not out of income, so that their tendency is to diminish the capital available for productive enterprises.

## Local Taxation

Besides the above revenue from taxation for imperial purposes, large amounts are raised for local purposes. The local authorities derive a large income from private property, and from monopolies such as water, gas, electric light, telephones and tramway service, which they carry on, and on which the same observations may be made as on the post office and telegraph services; but in addition there is a large amount of taxation. The principal portion of this taxation consists of rates, that is, a direct charge upon the income or rental of real property, such as lands, houses, railways and mines, but mainly lands and houses. Rates are even a more important factor in direct taxation than the income tax, and they have given rise to even greater complaints and discussion. In 1896 a special royal commission was appointed, under the chairmanship of Lord Balfour of Burleigh, to consider the problems of the rates; it made several elaborate reports, the final one appearing in 1901. The most important questions raised in a scientific view appear to be the misconception of the whole problem of local taxation by governments. Rates were originally imposed, there is little question, when the intention was to tax all local incomes equally, and this is still the intention in the local taxation of the United States as well as the United Kingdom. Rates were imposed, therefore, on all kinds of property and the income arising from them, just as they are imposed in the United States on the capital of the property itself. But it has been found in practice that for various reasons only real property, which is visibly local and cannot be moved away, can be assessed and made to pay. The owners of real property, however, continually urge that they are unfairly treated, and that other property should be rated. Next there has been misconception, arising from the same cause, in the constant attempt to charge the occupier of lands and houses with rates, although the real effect of the rates must be, as a rule, to diminish the value of the property affected like an old-established land tax, so that rates, properly speaking, do not fall upon either owner or occupier. It would be hard, however, to persuade the mass of occupiers in England that they do not pay the rates, so that the expedient of dividing the rates between owner and occupier, though it cannot affect their real incidence to a substantial extent, constantly finds favour. The confusion has been further increased of late years by attempts, as far as towns are concerned, to find a new subject of taxation in what are called site values, as if rates themselves were not in reality an appropriation by the state of a portion of the whole value of the property, subject to which all the other interests exist. It would be impossible here even to state all the questions that have arisen about rates; but the essential confusion caused by the neglect of practical men to study the natural history of taxation, as it may be called, must be obvious to every student. The frank recognition that local income taxes are impossible, and that taxation on property for local purposes can only be applied to real property, where it becomes, usually or frequently, in the nature of a rent-charge, would have saved the legislature and the public an infinity of laborious discussion.

Other taxes for local purposes comprise dues and tolls, such as harbour dues, where the money is required for such a definite purpose as a harbour, maintained at the expense of the traffic accommodated. Here again the question arises as to whether the tax is a mere compulsory charge or payment for a service rendered. Among these tolls may perhaps be included some charges in the nature of octroi dues, imposed on commodities entering a town, but not to a great extent. Such dues, in the nature of customs, are very common in continental cities, and yield large revenue to the local authorities, although they have been very generally, if not quite universally, abolished in the United Kingdom. They have been regarded with' much dislike by most economists, and some dues of the kind which existed in London, viz., dues on coal and wine imported, and metage dues on grain, were much imposed until their final abolition in recent years. When of moderate account, however, dues of this sort appear no more objectionable than harbour dues already mentioned, or any other moderate charges on transactions. If of large amount and very numerous, they hamper trade, as all taxation tends to do, but that is no reason for condemning them specially when the choice lies between them and other forms of taxation.

In addition, we have to notice certain taxes which up to 1910 - II were levied by the British government and distributed to the local authorities, just as in France the government levies certain direct taxes, or centimes additionnelles, added to its own direct taxes for the benefit of the local authorities. These taxes were additional beer and spirit dues (customs and excise), excise licences, and share of probate and estate duty. The remarks already made on the corresponding taxes levied for imperial purposes of course apply to these. Exceptionally, it may be added, as regards the licence taxes, which occupy quite an inferior place in the British system of taxation for imperial purposes, that the question whether some of them are not really direct in their incidence on the first person charged may also be raised, although they are classed with indirect taxes. Many of the licences are those of brewers, distillers and publicans, and others in trade,and are paid out of the general profits of the business, so that they can hardly be passed on to the consumers, while other licences are for shooting, for employing carriages and men-servants, and for similar objects, where the charge on the payer is direct. This may be the place to mention that in other countries, as in France, the licence duties on traders are more general than in the United Kingdom, and are levied on an elaborate scale, according to the size of population of the town where the business is carried on, and the rent paid for the premises. They take the place, to some extent, of the income tax, and are usually classed with the direct taxes. The peculiarity of taxes which are levied by the imperial authority and distributed among the local authorities for disbursement deserves notice. There must be a general cause for such an arrangement when we find it to have been in existence in France and other countries, and to have been introduced into the United Kingdom. And this cause no doubt is the need of the local authorities, and the difficulty of letting them have taxes of their own to levy which do not interfere with the imperial monopoly. The arrangement is obviously objectionable on the score of its conducing to local extravagance, as local authorities are not likely to be so economical with money that comes to them from the outside, as it were, as they would be with money directly taken from their own pockets. Local authorities receive other subventions and aids from the central government besides the proceeds of these taxes, so that their appropriation for local needs is related to a large question which belongs, however, to the general subject of local government, and not so much to the special subject of taxation.

## Incidence of Taxation

In describing the principal taxes which are employed in 'the United Kingdom to provide for the national expenditure, observations have necessarily been made upon the incidence, probable or assumed, upon the taxpayer, and on the question how far they may fall equally on the whole community without any special incidence being traceable. The incidence of taxation is, however, a special subject for discussion, and is connected with various large issues, such as that of Free Trade, which are of deep interest to economic students.

The starting-point of discussions as to incidence of taxation is a classical passage in Adam Smith's Wealth of Nations (book v. chap. ii.), where he lays down the following maxims with regard to taxes in general: i. The subjects of every state ought to contribute towards 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. 2. The tax which each individual is bound to pay ought to be certain and not arbitrary. 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. [Adam Smith specially praises indirect taxes on commodities under this head, because the consumer "pays them by little and little as he buys the goods," and "it must be his own fault if he ever suffers any considerable inconveniency from such taxes."] 4. Every tax ought to be so contrived as both to take out and 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. [This last passage is specially directed against taxes which are expensive to collect, or discourage trade, or offer temptation to smuggling, or subject people to frequent visits of the tax-gatherer.] These maxims have commanded universal assent, as they are obviously the common sense of the subject.

It may be observed, however, that while general maxims are easy, the application presents difficulties, and since Adam Smith wrote, and especially in modern times, new questions of some interest have been raised. Adam Smith does not go minutely into the incidence of taxation. Taxes in his view must come out of rent, or profit, or the wages of labour; and he observes that every tax which falls finally upon one only of the three sorts of revenue "is necessarily unequal in so far as it does not affect the other two," and in examining different taxes he disregards as a rule this sort of inequality, and confines his observations "to that inequality which is occasioned by a particular tax falling unequally upon that particular sort of private revenue which is affected byl it." Recent discussion, however, has gone rather to the point which Adam Smith neglected, that of inequality generally, not merely as between different sorts of income, but as between individuals and classes. The whole burden of taxation, it is maintained, should fall equally upon classes and individuals as far as possible, and, if necessary, taxes falling equally upon special sources of private revenue should be balanced against each other in order to obtain the desired result. Along with this view has arisen the question whether the burden of taxation should not be progressive - the proportion of the sum taken by the state from the tax-payers increasing with the wealth of the individual; because ability to pay taxes is assumed to be not in proportion to, but to increase with the size of, the income.

What opinion should be held regarding this modern view as to equality in taxation, which differs so widely from anything countenanced by Adam Smith, though his language is echoed in it? The answer must be that, however sound, the view is for the most part far too ambitious. One difficulty is caused by the large proportion of the taxes in almost every system of taxation, and at any rate in the British system, where the exact incidence is in no way traceable, or where there is no sort of general agreement as to the incidence. The whole of the British revenue from post office and telegraph service, and the whole of the stamp revenue, are derived from charges whose exact incidence cannot be traced. We have seen, indeed, that doubt is even felt as. to whether post office and telegraph charges can be treated as taxes at all. Again, the death duties are in a distinct category, these duties falling each year not on a particular class of the community, or a particular kind of property, but on a few individuals only, who are in some cases treated severely, while others may have no cause of complaint. In the course of fifty years, it may be said, the balance will be rectified, and the whole class to which the individuals belong, and the property they own, will be visited in turn, so that this taxation should be credited to them in an account of the incidence of taxes generally; but fifty years is altogether too long a period for such adjustments to be made. Thus a very large proportion of the total revenue cannot be made available for an account showing the incidence of taxation. There remain principally the income tax and one or two minor "direct" taxes, and the customs and excise duties. These, it is said, can be distributed among different classes of tax-payers, because the income tax falls on the owners of incomes of all kinds of property subject to the duty, if their incomes are above a certain limit, while the incidence of customs and excise duties can be ascertained by inquiries as to the consumption of dutiable articles by different classes. Even here, however, formidable difficulties are presented. The payers of income tax, unfortunately, are not one class but many, and although the rate of duty is the same, the definition of income seems imperfect, so that many pay on a much larger assessment of income than seems fair in comparison with other incomes of nominally the same amount, but really of much greater value when all deductions from the gross sum are fairly reckoned. If all who pay income tax are lumped together and contrasted with those who do not pay, then there is a false division to begin with, and there is so far no means of establishing equality or inequality. As regards indirect taxes, again, there appears no small difficulty in ascertaining the relative consumption of different classes, for the simple reason that in the same class so called the habits of consumption differ widely. It is only by a wide extension of the term "working man," for instance, that a class which includes a steady mechanic earning 30s. to £2 a week, who is frequently a total abstainer, and a labourer of inferior capacity and character earning 15s. to 20s. a week, and who is not a total abstainer, can be spoken of as one, and credit given to the one class for so much taxation on spirits, beer, tobacco, wine, tea and sugar. There are also geographical differences of a serious kind. On the other hand, the consumption by the income tax paying classes of customs and excise articles must vary indefinitely amongst themselves, according to personal habits, size of families, and even their geographical distribution. A further difficulty is furnished by a question as to whether the employer of domestic servants who gives them their board does or does not bear the burden of the duties on the articles which they consume, and which he buys for their use. Theoretically the burden falls on them as consumers. They would have more real wages, it is said, if the price of the articles they consume was not raised by taxation. But practically most employers are convinced that they pay the taxes for their servants. To establish, therefore, any fair account of the incidence of indirect taxes on different classes of the community, real classes being distinguished, and not a mere rough grouping into so-called classes of units who are altogether heterogeneous, is probably beyond the skill of man.

All this is evident on a view of imperial taxation alone. In studying equality, moreover, local taxation must be brought into view, with even more impracticable differences of opinion as to the real incidence of the taxation. The moment rates are brought into question it is seen at once how impossible it would be to establish equality among tax-payers, when. owners on one side and occupiers on the other claim that they each bear the burden of the same taxes, and economists favour the opinion that much of the burden is in the nature of a rentcharge on the property, and in any case is equally diffused over the whole community.

Adam Smith was thus not altogether badly advised in not carrying his investigations into the equality of taxation farther than he did. There was another reason for his so doing in the heaviness of the burden of taxation at the time he wrote, governments exacting as much as they could, and being only desirous of finding the easiest means of doing so. It is the very lightness of taxation in recent years which has suggested the possibility of comparing the relative burdens of different classes, which would have seemed quite hopeless with a high taxation and an immense variety of high taxes. The conclusion that with good taxes long established the burden of taxation tends to become equal over the whole community was certainly not ill founded in the circumstances of former times, and may be accepted as true even in the present day.

As to progressive taxation based on the assumption that equality requires a larger proportionate charge upon a big income than on one of a smaller amount, the practical application of the principle, if true, would be impossible. A great deal more would need to be known than is now known as to the effect of taxes on different classes, and the aggregate amount of different incomes, before such a task could be undertaken. If there is a greater proportionate charge already on the larger incomes, nothing more need be done, and we cannot know that there is not. As to the justice of such a progressive tax, there is a common opinion in its favour among economists, at least to .the extent of exempting a certain minimum of subsistence from taxation; but the present writer, after accepting this view in early life on the authority of Mill, must now express the greatest doubt. The ideal is equality, and no measure of a minimum of subsistence can really be devised.

Of course there may be single taxes which are progressive in form, such as the licence tax in France, or the income tax in Great Britain, where progression is established by abatements, or the death duties, where progression by scale is very common. But such progression may arise in a different way and on different principles from those proposed in defence of a general system of progressive taxation. It may be expedient for balancing taxation and roughly redressing palpable inequalities, and may be adopted for that purpose and no other.

Statistical inquiries as to the incidence of taxation or of particular taxes, though ideal or even approximate equality of a palpable arithmetical kind is practically unattainable by governments, are not altogether to be put aside. The information thus obtainable may be useful as far as it goes, indicating the directions in which the burden of taxation may press, and forming a guide of some utility when changes of taxation are contemplated. Calculations, for instance, as to what people at the lower levels of the income tax must pay because they happen to be struck by every sort of tax as no other class is, and calculations as to the freedom from taxation of large numbers of other classes whose habits of consumption and living enable them to escape the tax-gatherer as the class to which they belong cannot generally do, may help a finance minister in the selection of taxes to be repealed or reduced or to be newly imposed. With every effort after equality he must fail to satisfy all, but friction may be diminished and the ` work of carrying on government quietly and steadily facilitated.

Taxes and Free Trade. - Taxation ought not to interfere with trade if possible, and the object of Adam Smith's maxims, as we have seen, was largely to erect sign-posts warning finance ministers against the kind of taxes likely to harass traders. There has been much discussion, however, on free trade since Adam Smith's time, and the far-reaching nature of his warnings is not even yet generally understood. There will probably be general agreement as to the wisdom of avoiding taxes which are uncertain and arbitrary, or which involve frequent visits of the tax-gatherer; but so far from there being a general assent in all countries to his maxims as to the expediency of avoiding taxation, which takes more from the tax-payer than what comes into the hands of the government, this is the very characteristic of duties deliberately imposed by most governments for the purpose of interfering with trade, and frequently called for even in the United Kingdom with a similar object. In a question of taxation. however, for the purpose of meeting the expenses of the government, all such duties must be ruled out. Taxes, as instruments for advancing the prosperity of a country, are things unknown to the study of "taxation" in the proper sense of the word. The only proper object of taxation is to meet the expenses of the state, and when taxes are used primarily or mainly for some other object they can only be justified by political and economic reasons of a different order from anything that has been under discussion.

On this ground, in an account of taxation proper, one might avoid discussing altogether the question of irregular or illegitimate taxation. But the subject is of too much popular interest, perhaps, to be passed over altogether. Generally, then, it may be affirmed that taxation in its essential nature cannot be thought of as a good instrument for promoting trade and the advancement of a country. So far as it operates at all, it operates by diverting trade from the channels in which it would naturally flow into other channels, and this diversion of industry, so far as it goes, must involve loss. People are induced to do things they would otherwise leave alone, Dr to leave alone what they would otherwise do, because money is given to them out of the pockets of the tax-payers to make it worth their while to do so; but there is palpably loss and not profit in the proceeding. It is urged that in time industries are set up that would not otherwise have existed, and population thereby attracted, this being especially the argument for protective duties in new countries; but even so, there is loss to set against the final gain, if any, and we have not yet had an account in which a balance of loss and gain is attempted.. The presumption is that on balance there is loss. In new countries especially the diversion of industry from its natural development cannot but be mischievous, wrong manufactures and industries being set up at the expense of the whole community, instead of those manufactures and industries which would be most profitable.

There is more to be said for the political argument which induced Adam Smith to favour navigation laws, giving a preference to national shipping in national waters, and for a similar political argument in favour of dude:, on agricultural produce imported into the country, on the ground, as regards navigation, that the prosperity of the shipping industry in particular was essential to the safety of the country, and on the ground, as regards duties on agricultural produce, that the maintenance of a larger rural population and of a larger agricultural production than would exist under natural conditions of perfect free trade was essential to the wel:Fare of the state and even to its very existence in the possible event of a temporary defeat at sea and a partial blockade of the coasts. This is not the place to discuss such political problems, but there is no question of free trade theory involved if the cost to the community of any such taxation is frankly acknowledged.

Sir John A. Macdonald, the great protectionist prime minister of Canada, in a conversation with the presen writer in 1882, avowed without hesitation that protectionist taxation in Canada was indefensible on economic grounds, and he defended it exclusively for political reasons. Politically one might differ from him, but economists as such must either be silent when political reasons are alleged for taxes that are against fundamental maxims, or must be content to point out the cost of the taxes in order that the communities concerned may decide whether the object in view is obtainable by means of the taxation, and is worth the price.

A great deal has been said as to taxes termed "countervailing duties," which are called for in order to defend free trade itself against the protectionist bounties of foreign governments. Such duties are obviously taxes cutside the limits to be considered in a question of taxation proper. They are to be imposed for other purposes than revenue. As to the claim for them that they will restore free trade conditions by nullifying the foreign bounties which have caused a disturbance of trade, this is really in the nature of a political reason. A country which is so devoted to free trade that it not only practises free trade itself but endeavours to convert others by nullifying their protectionist measures as far as it can, even with immediate loss to itself, departs from the guidance of selfinterest so far; hut its political action may be justifiable in the long run by other considerations. It seems right to point out, however, that countervailing duties, which are really differential duties of a special kind, are not the good expedient they are supposed to be for nullifying foreign bounties; that experience of differential duties in former times is altogether against them; and that they cannot be enforced without certificates of origin and other causes of harassment and confusion in the conduct of trade.

The extent of the interference with trade, in regard to particular taxes, is also a matter of importance. A particular tax is not necessarily to be condemned because it takes a little more out of the pockets of the people than what the government receives. Such a defect is a ground for consideration in weighing a particular tax against others, but it is only one inconvenience among many incidental to all taxes.

Some English applications of free trade theory in recent times in the matter of import duties have been pedantic - the abolition of the shilling corn duty in 1869 by Robert Lowe (Lord Sherbrooke) being typical of this pedantry, though it is not the only instance. No doubt, in theory, this duty, being levied on the import only and not on the home production of corn, took from the tax-payer a shilling on every quarter of grain produced at home which did not go into the exchequer. Per contra the tax was wholly unfelt, a shilling a quarter only affecting an average family of four persons to the extent of three shillings per annum, or about three farthings a week, while it was paid little by little, as Adam Smith explains with regard to indirect taxes in general. The amount yielded, moreover, was considerable, being equal to a penny on the income tax, which it is desirable to maintain as a reserve of taxation. When we balance advantages and disadvantages, therefore, the repeal of the corn duty and similar measures would appear to have been sacrifices of revenue without adequate reason.

## Rates of Taxation

Apart from the merits or demerits of particular taxes or groups of taxes, and the questions as to inequality, injury to trade, and the like already discussed, the aggregate of taxation, or rather revenue, of a state may be considered in the most general way, having regard to the proportion appropriated by the state of the total income of the community, and the return made by the state therefor. Here there are the greatest variations. At one time, for instance, during the great wars at the beginning of the 19th century, it was 'calculated that the British government expenditure, and the corresponding revenue, mostly raised by taxation, were each equal to about one-third of the aggregate of individual incomes - that is, as £90,000,000 to about 270,000,000. Proportions even higher have not been unknown in history, and it is probable that in Russia, India, Egypt, and in other countries at this moment, in time of peace, the proportion may amount to one-fourth or one-fifth. On the other hand, some years ago in the United Kingdom, before the high expenditure on army and navy began, and before the South African war of 1899-1902, it is probable that with an outlay of less than roo,000,000 by the central government, the proportion of this outlay to the aggregate income of the people was not higher than onefourteenth. At the beginning of 1902, when the South African war was closing, the normal peace expenditure, even reckoned at 160,000,000, did not exceed one-tenth, while even peace and war expenditure together in 1901, taking them as close on 200,Ooo,000, did not exceed one-eighth. These varying proportions, however, mean different things economically, and it is of obvious interest that, besides questions as to particular taxes, the broad effect of the whole burden of taxation should also be discussed.

The important points in this connexion appear to be: (1) Very large appropriations can be made by the state from the revenue of its subjects without permanent injury. The community thereby suffers, but the land and fixed capital remain, and when the high government expenditure ceases individuals at once have the benefit, subject to possible disturbance at the moment of transition, when many persons employed by the state return to private employment. (2) A state which in ordinary times appropriates one-tenth or some less proportion of aggregate individual incomes is much stronger relatively than a state absorbing one-fourth, one-third, or even a higher proportion. It has much larger resources, which would be available if time were given to develop them. (3) When the proportion becomes one-tenth or less it is doubtful whether the state can do best for its subjects by making the proportion still lower, that is, by abandoning one tax after another, or whether equal or greater advantage would not be gained by using the revenue for wise purposes under the direction of the state, such as great works of sanitation, or water supply, or public defence. In other words, when taxes are very moderate and the revenue appropriated by the state is a small part only of the aggregate of individual incomes, it seems possible that individuals in a rich country may waste individually resources which the state could apply to very profitable purposes. The state, for instance, could perhaps more usefully engage in some great works, such as establishing reservoirs of water for the use of town populations on a systematic plan, or making a tunnel under one of the channels between Ireland and Great Britain, or a sea-canal across Scotland between the Clyde and the Forth, or purchasing land from Irish landlords and transferring it to tenants, than allow money to fructify or not fructify, as the case may be, in the pockets of individuals. Probably there are no works more beneficial to a community in the long run than those like a tunnel between Ireland and Great Britain, which open an entirely new means of communication of strategical as well as commercial value, but are not likely to pay the individual entrepreneur within a short period of time.

## AuTxoRITIEs

See also, for taxation and taxes in different countries, the separate articles on the finance under the heading of each country; and the articles on FREE TRADE, PROTECTION and TARIFFS. The following short list of authors may be useful to the student: - Adam Smith, Wealth of Nations; Ricardo-M'Culloch, Principles of Taxation; Mill, Principles of Political Economy;  Bastable, Public Finance; E. R. A. Seligman, Shifting and Incidence of Taxation (2nd ed., 1899); Garnier, Traite de Finances; Cohn, System der National-Okonomie; Wagner, Finanzwissenschaft;  Roscher, System der Finanzwissenschaft. (R. GN.)