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 UNIVERSITY of CALIFORNIA 
 
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 LIBiiARY
 
 THE FUNDAMENTAL 
 PRINCIPLES OF TAXATION 
 
 IN THE LIGHT 
 OF MODERN DEVELOPMENTS
 
 MACMILLAN AND CO., Limited 
 
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 THE FUNDAMENTAL 
 PRINCIPLES OF TAXATION 
 
 IN THE LIGHT 
 OF MODERN DEVELOPMENTS 
 
 (THE NEWMARCH LECTURES FOR 1919) 
 
 BY 
 
 Sir JOSIAH STAMP 
 
 K.B.E., D.Sc. 
 
 MACMILLAN AND CO., LIMITED 
 
 ST. MARTIN'S STREET, LONDON 
 
 1921
 
 COPYRIGHT
 
 S7S4- 
 
 TO 
 
 MY WIFE
 
 4 
 
 ^ 
 
 X 
 
 PREFACE 
 
 These Lectures, delivered to public audiences at 
 the end of 1919, under the Newmarch foundation of 
 University College, London, are now published in 
 book form in response to numerous requests from 
 those who heard them and from others in different 
 parts of the world. 
 
 T have thought that, on the whole, it was best 
 to leave them practically in the form in which they 
 were given, and without correction, for modifications 
 in practice that have since taken place, beyond brief 
 footnotes. 
 
 For the convenience of students who wish to 
 pursue and study any particular points, a number of 
 references have been given. 
 
 I would remind readers that it was no part of 
 my design to make a complete appraisal of any 
 tax, and that critical references to particular 
 aspects of a particular tax for the purpose of 
 illustrating general principles should not be taken 
 to imply a balance of approval or disapproval of 
 that tax taken as a whole. Such views may be 
 gathered elsewhere. 
 
 J. C. S. 
 
 September 1920.
 
 CONTENTS 
 
 CHAPTER I 
 
 PAGE 
 
 The General Trend of Eecent Developments and the 
 
 Need for Restatement of Principles ... 1 
 
 CHAPTER II 
 
 The Individual Standpoint for the Taxation of 
 
 Incomes ........ 25 
 
 CHAPTER III 
 
 The Standpoint of the Individual in Relation to 
 Taxes on Expenditure, Special Receipts, and 
 Savings ......... 55 
 
 CHAPTER IV 
 
 The Standpoint of the State . . . . .92 
 
 CHAPTER T 
 
 The Standpoint of the Community: Economic Effects 130 
 
 CHAPTER VI 
 
 The Standpoint of the Community : Ulterior Objects 170 
 
 INDEX 199
 
 NOTE ON ABBREVIATIONS USED IN THE 
 FOOTNOTES 
 
 Select Committee on the Income Tax . . . .1851-52 
 
 Joint Committee on the Income Tax .... 1863 
 
 Departmental Committee on the Income Tax . . 1905 
 
 Select Committee on the Income Tax .... 1906 
 
 Royal Commission on the Income Tax . . . 1920 
 
 The Reports and Evidence of the above are referred to briefly 
 by the date, e.g. " 1906 Comm." 
 
 E.J. = Economic Journal. Writings by the author are distin- 
 guished thus : (S.). 
 
 Eeadjustments = Re&djut^tments, in Taxation, TJie Annuls of the 
 American Academy of Political and Social Science., March 1915, 
 No. 147. 
 
 Foreiijii Income Taxes, 1905 j Bluebook on Graduated Incouie 
 and = Taxes in Foreign States, 
 
 Foreign Income Taxes, 1913 ) 1905 and 1913. 
 
 Dou-e^Z = History of Taxation in England, by Stephen Dowel).
 
 CHAPTER I 
 
 THE GENERAL TREND OF RECENT DEVELOPMENTS 
 AND THE NEED FOR RESTATEMENT OF PRINCIPLES 
 
 1. William Newmarch, in whose name these 
 lectures are given, was first and foremost a great 
 statistician, but he was also a realistic economist, a 
 recognised authority on questions relating to taxa- 
 tion, and an exponent of the principles accepted in 
 his day. Many of the distinguished men who have 
 spoken from this platform have dealt with the 
 practical aspects of economics, and I am making no 
 bold departure in selecting as my subject for these 
 lectures " The Fundamental Principles of Taxation 
 in the Light of Modern Developments." 
 
 Features hitherto Latent are revealed by the Present 
 Financial Strain 
 
 The defects in a photographic negative are 
 often negligible, or, at any rate, tolerable, until we 
 enlarge the picture, when they become clear to all. 
 Gulliver found the complexions of the beauties of 
 Brobdingnag not quite to his liking, and the differ- 
 ence between perfection and imperfection is rarely 
 absolute, but a question of degree. Taxation is 
 
 B
 
 2 PRINCIPLES OF TAXATION 
 
 now rapidly developing from a merely unpleasant 
 incident into a dominating feature of daily life, and 
 those features which hitherto have been of little 
 interest, because they have been too small to matter, 
 now become of great importance ; the blemishes 
 which were insignificant may now be intolerable 
 simply because in the magnitude of the burden they 
 have become sufficiently magnified or intensified to 
 be within the range of ordinary human feeling. 
 There would probably have never been any society 
 " for the abolition of double taxation within the 
 Empire " if income taxes had remained in the 
 region of 8d. in the £. First, new problems arise 
 merely through the increasing complexity of modern 
 economic life. Secondly, the growing field of State 
 activity and the enlarged communal consciousness 
 necessitate demands for increased individual con- 
 tributions towards common spending. These 
 causes alone would suffice to bring about a re- 
 examination of principles. But when there is added 
 the financial legacy of a gigantic war, the most 
 supine taxpayer begins to be interested and critical, 
 and the number of potential or self-constituted 
 Chancellors cannot well be less than the total mem- 
 bership of our West End Clubs, and is limited only 
 by the extent of the adult population ! It is not 
 merely that the existing structure of taxation 
 methods is stretched to its utmost limits and shows 
 every crack and every patch ; but the search for 
 new methods and untapped resources also leads 
 men to ask for statements of the principles upon 
 which taxation can properly be based.
 
 I TREND OF RECENT DEVELOPMENTS 3 
 
 2. Adam Smith's Canons : an Attempt at Synthesis 
 
 I suppose that when the principles of taxation 
 are referred to, the majority of people think 
 instantly of the famous four canons of Adam Smith, 
 summarised under the headings : Equality or Ability, 
 Certainty, Convenience, and Economy. These have 
 indeed performed noble service in economic thought 
 and teaching for over a hundred years. It has 
 often been said that the most elaborate modern 
 teaching is really found in essence in Adam Smith's 
 plain phrases — they were indeed progenitors of 
 thought. But it can hardly be affirmed that we 
 can find enshrined in those four sentences the whole 
 duty of man and the State amid our modern per- 
 plexities. To get to America, " turn to the west 
 and keep straight on," might have been excellent 
 advice from Columbus, but is hardly adequate as a 
 direction to the Mauretania seeking New York. 
 
 Attempts have been made from time to time to 
 get the highest common factor of the principles of 
 taxation, and one writer has proclaimed that the 
 grand principle of all is " Economy." ^ By giving 
 the latter a sufficiently wide and rich connotation 
 he has made it comprise all that is vital in the 
 other principles. For it is not difiicult to show 
 that violations of the various canons are either 
 " uneconomical " or are working against true 
 " economic " lines. It is, however, not so much 
 verbal synthesis that we need in these days as a 
 careful and extended analysis, and rather than 
 
 ^ R. Jones, The Nature and First Principle of Taxation.
 
 4 PRINCIPLES OF TAXATION 
 
 reduce the number of principles we have to 
 subdivide and elaborate them, and to increase 
 their number in application to the actual condi- 
 tions of to-day.^ 
 
 3. The Maxims repeated 
 
 Adam Smith's four maxims may well be re- 
 peated : 
 
 1. The subjects of every State ought to contribute 
 towards the support of the Government as nearly as possible 
 in proportion to their respective abilities, i.e. 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. The time of payment, the 
 manner of payment, the quantity to be paid, ought all to 
 be clear and plain to the contributor and to every other 
 person. 
 
 3. Every tax ought to be so levied at the time or in the 
 manner in which it is most likely to be convenient for the 
 contributor to pay it. 
 
 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. 
 
 Indisputable as these rules may be, they are now 
 inadequate to the practical task of bringing under 
 judgement the many difficult issues that confront us. 
 
 It is intended in these lectures to outline the 
 questions of principle which are raised by modern 
 developments in taxation or made obvious by the 
 
 1 Vide Edinburgh Review, Oct. 1919 (S.).
 
 I TREND OF RECENT DEVELOPMENTS 5 
 
 intensitv of the burden, and to view them under a 
 new arrangement. 
 
 4. A Threefold Treatment suggested : the several 
 Standpoints 
 
 Taxation questions may be looked at from the 
 point of view of the taxpayer, and certain features 
 which it is desirable either to attain or to avoid 
 become clear from his standpoint, without com- 
 plicating the issue by other considerations. 
 
 They may be looked at from the point of view of 
 a Government, acting for the community in its 
 State organisation. 
 
 And, lastly, they may be looked at from the 
 point of view of the community as a producing or 
 Economic Society. It is true, of course, that the 
 points which are beneficial to the community, as a 
 revenue collector, or as an economic unit, will 
 generally also react to the benefit of the individual, 
 but the connection is more remote. A project for 
 taxation may satisfy all conditions of equity to the 
 individual, but it may fail to meet the requirements 
 of the Revenue, because it is impracticable, or 
 wasteful, or politically inexpedient. It may even 
 pass the first two barriers successfully, and break 
 down because it is hurtful to the economic life of 
 society. 
 
 Most taxes in practice represent the best practical 
 compromise between the three standpoints that can 
 be arranged in the particular circumstances of the 
 time.
 
 6 PEINCIPLES OF TAXATION 
 
 Such a grouping will, I believe, prove helpful in 
 a consideration of modern problems and enable us 
 to treat them with that isolation of effects and 
 freedom from distraction which are so necessary to 
 a clear conception of essentials. If the habit of 
 examining every project or proposal from each 
 point of view separately before passing a final 
 verdict could be developed, there would be far less 
 muddled counsel and confusion of judgement, and 
 the true character of such schemes would be more 
 easily determined. 
 
 5. The Individual — the Benefit Principle is 
 Natural but Impracticable 
 
 What principles should govern the amount of 
 taxation to be borne by any one individual as 
 compared with that borne by another ? 
 
 I think that what is known as the " benefit " 
 principle would be the natural one to consider if 
 it were practicable. The expenditure by the State 
 benefits the citizens of the State, and it benefits 
 the citizens outside the State in so far as they have 
 property within the State. If it were possible to 
 say what benefit each person derived, and to 
 evaluate that benefit, it would be fair to ask for 
 a contribution towards it in proportion to the 
 benefit. But even if it were correctly assessed it 
 would often be impossible for many men to pay 
 that contribution, and the principle as a practical 
 principle breaks down instantly in application. 
 First, must be decided the question whether or not
 
 I TREND OF RECENT DEVELOPMENTS 7 
 
 to tax a man on the benefit he might receive if he 
 liked, or only on the benefit he has actually availed 
 himself of ; for if the person who does not wish to 
 use the Free Library does not have to pay the penny 
 rate, it is not so much a tax-system as " co-opera- 
 tive reading," But the more important difficulty is 
 that social expenditure confers benefits on poorer 
 people which they would never pay for on the same 
 terms as those who are better of!, and which they 
 would have to forgo if they were required to pay 
 the price, or provides benefits which do not appeal 
 to them personally, but are clearly advantageous 
 socially. The expenditure for elementary educa- 
 tion is an obvious instance. The pure benefit 
 principle does, however, exist under " betterment " 
 schemes in this country, and also " special assess- 
 ments " in America, and we may have occasion to 
 observe that it is rarely absent altogether from most 
 forms of taxation. 
 
 6. The " Ability " Principle tested by Monetary 
 Resources 
 
 The rival principle of " ability to pay," or the 
 faculty principle, is now almost universally recog- 
 nised as the only satisfactory one for apportioning 
 the tax burden.^ This is generally interpreted to 
 mean " ability " by reference to monetary resources, 
 probably because the tax itself is payable in money. 
 But it is not the only conceivable test of ability. 
 If a community were independent of a monetary 
 
 ^ Readjustments, p. 4.
 
 8 PRINCIPLES OF TAXATION ghap. 
 
 economy, and taxation were, so to speak, " in 
 kind " for services to be performed for tke common 
 good, we should test ability otherwise. In the 
 tasks requiring strength, on Adam Smith's maxim 
 of " ability " more would be expected from the 
 powerful man than from the decrepit, whatever 
 their other possessions might be. In some tasks 
 more might be expected from the taller or the 
 swifter members of the community. In teaching 
 the young it would be idle to expect the ignorant to 
 render services equal to those given by the educated. 
 Swift in his great satire has a delightful account 
 of the ideas in Laputa, which sets out criteria of 
 taxable ability quite different from monetary ones. 
 " I heard a warm debate between two professors, 
 about the most commodious and effectual ways and 
 means of raising money without grieving the subject. 
 The first affirmed the justest method would be to 
 lay a certain tax upon vices and folly, and the sum 
 fixed upon every man to be rated after the fairest 
 manner by a jury of his neighbours. The second 
 was of an opinion directly contrary, to tax those 
 qualities of body and mind for which men chiefly 
 value themselves, the rate to be more or less accord- 
 ing to the degrees of excelling, the decision whereof 
 should be left entirely to tJieir own breast. The 
 highest tax was upon men who are the greatest 
 favourites of the other sex, and the assessments 
 according to the number and nature of the favours 
 they have received, for which they are allowed to 
 be their own vouchers. But valour and politeness 
 were likewise proposed to be largely taxed, and
 
 I TKEND OF EECENT DEVELOPMENTS 9 
 
 collected in the same manner by every person giving 
 his own word for the quantities of what he possessed. 
 But as to honour, justice, wisdom, or learning they 
 should not be taxed at all, because they are quali- 
 fications of so singular a kind that no man will 
 either allow them in his neighbours or value them 
 in himself. The women were proposed to be taxed 
 according to their beauty and skill in dressing, 
 wherein they had the same privilege with the men, 
 to be determined by their own judgement. But 
 constancy, chastity, good sense, and good nature 
 were not rated, because they would not bear the 
 charge of collecting." ^ 
 
 If our taxes were imposed by reference to 
 strength or brains, we should hesitate about courses 
 of Sandow or Pelmanism. But in an economic 
 community where the State wants a general 
 command over goods and services, it is natural to 
 determine ability according to wealth, and to 
 measure it by money, although both the war and 
 the railway strike give examples of a call by the 
 State based on other kinds of " ability." 
 
 Personal pride is not without influence upon 
 taxpaying ability apart from monetary tests. It 
 has been suggested that the special air of distinc- 
 tion which belongs to residence in " The Gables " or 
 " Palmerston House," instead of a plain 15 Smith 
 Street, is worthy of recognition by the imposition 
 of a special tax burden, which would not be " felt " 
 in the glow of pride. Again, in some instances 
 abroad, men have cheerfully borne a higher income 
 
 ^ GuUiver^s Travels, Part iii. chap. vi.
 
 10 PRINCIPLES OF TAXATION 
 
 tax than they would otherwise have regarded as 
 fair, where the assessments have been published in 
 the newspapers, and the distinction of appearing in 
 a defaulters' list has been a doubtful punishment. 
 Many a man has toiled and moiled to leave a large 
 sum at death, when its subjection to death duties 
 has been fully compensated for by the publication 
 of Estate Values and the strange anticipation that 
 folk will exclaim on seeing the figures, " Fancy, old 
 So-and-so left £23,000. I never thought he had so 
 much." Perhaps it can be said that personal pride 
 may be an anodyne to the so-called " hurt of 
 taxation." 
 
 Professor Marshall says : "A person who locks 
 up £3000 in diamonds obtains whatever social 
 prestige may attach to the power of holding, in a 
 sterile form, wealth that might yield, say, £120 in 
 income. Now if a tax of 2 per cent were imposed 
 on the capital value of diamonds the same social 
 prestige would be derived from diamonds worth 
 £2000 (for that would involve locking up £2000 of 
 capital at a sacrifice of £80 of income, together with 
 a payment of £40 in taxes), and the smaller stock of 
 diamonds would be nearly as beautiful as the larger. 
 A small amount of jewellery might be tax free. 
 But lists of all taxes on it collected in each locality 
 would be published in local newspapers, and some 
 persons might be tempted to overstate rather than 
 understate their holdings of it." ^ The learned 
 professor seems to have forgotten the burglars. 
 
 Many people have, through vanity, paid on 
 
 1 After- War Problems, p. 325.
 
 I TREND OF RECENT DEVELOPMENTS 11 
 
 Hglier assessments than tliey need liave done, but 
 tlie indulgence is in these days rather expensive. 
 
 One Michael Kelly, in 180G, made a return of 
 £500 for his emoluments, and was questioned by the 
 Commissioners, who doubted its sufficiency. He 
 gives an account of his interview : 
 
 " Sir," said I, " I am free to confess I have erred in my 
 return ; but vanity was the cause, and vanity is the badge 
 of all my tribe. I have returned myself as having £500 per 
 annum, when, in fact, I have not 500 pence of certain 
 income." " Pray, sir," said the Commissioner, " are you 
 not stage-manager of the Opera House ? " " Yes, sir," 
 said I, " but there is not even a nominal salary attached to 
 that office. I perform its duties to gratify my love of music." 
 " Well, but, Mr. Kelly," continued my examiner, " you 
 teach ! " "I do, sir," answered I, " but I have no pupils." 
 " I think," observed another gentleman, who had not 
 spoken before, " that you are an oratorio and concert 
 singer ? " " You are quite right," said I to my new an- 
 tagonist, " but I have no engagement." " Well, but at all 
 events," observed my first inquisitor, " you have a very 
 good salary at Drury Lane ? " "A very good one, indeed, 
 sir," answered I, " but then it is never paid." " But you 
 have always a fine benefit, sir ? " said the other, who seemed 
 to know something of theatricals. " Always, sir," was my 
 reply, " but the expenses attending it are very great ; and 
 whatever profit remains after defraying them is mortgaged 
 to liquidate debts incurred by building my saloon. The 
 fact is, I am at present very like St. George's Hospital — 
 supported by voluntary contributions — and have even less 
 certain income than I felt sufficiently vain to return."
 
 12 PRINCIPLES OF TAXATION 
 
 7. " Ability " tested by Income 
 
 When Adam Smith said that " the expense of 
 Government to the individuals of a great nation is 
 Hke the expense of management to the joint-tenants 
 of a great estate who are all obliged to contribute 
 in proportion to their respective interests in the 
 Estate," he might be held to have blessed the 
 benefit principle ; but his better known pronounce- 
 ment, " 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," ^ is a clear enunciation of the ability 
 principle. Moreover, we learn that he would test 
 " ability " by reference to " revenues," i.e. incomes. 
 
 8. " Ability " tested by other Monetary Measures 
 
 People are so used to the idea of ability being 
 measured by incgin£_that they are in danger of 
 forgetting that there are other tests having rival 
 claims to notice, which have indeed served as sole 
 tests or partial tests of ability, and which have even 
 been regarded in their place as superior tests. 
 There is, for example, the test of "..^consumptioiiy" 
 i.e. expenditure, whether out of capital or income 
 and capital wealth. We are now so wedded to the 
 income conception that even those c apita l taxes we 
 possess, such as death duties, and the expenditure 
 
 1 Adam Smith, Wealth of Nations, v. chap. ii. (2).
 
 I TREND OF RECENT DEVELOPMENTS 13 
 
 taxes, such as the taxes on tea, sugar, etc., we 
 endeavour to express in terms of a tax upon income, 
 in order to make comparisons of the total taxation 
 borne by one class of individual with that paid by 
 another, in relation to the amount of their re- 
 spective incomes. This was recently done by Sir 
 Herbert Samuel in his address upon the " Taxation 
 of the various Classes of the People." ^ When we 
 have summed up the taxation of all kinds borne by 
 an " average " person with £300 a year and found 
 it to be so much in the £, and have performed a 
 similar operation upon the average income of £3000, 
 we feel we are in a position to make a valid compari- 
 son, but not before. We do not find it so easy to 
 think of the taxation borne by a fortime of £6000 
 compared with one of £60,000, probably because the 
 great majority of people have little capital wealth 
 beyond their home and their insurances, and 
 our comparison would therefore be too limited. 
 Neither does it come easy to us to consider taxation 
 according to the relative amounts spent. Neverthe- 
 less there is an important school of thought which 
 would alter the tax on incomes to a tax on sums 
 spent, on purely economic grounds, if that were 
 practicable. So if Brown is comparing his taxation 
 burdens with Jones's he will make little allegation 
 of hardship except by reference to relative incomes. 
 " I pay £30 a year out of £400 income, whereas 
 Jones pays only £80 out of £800." But such a 
 mode of thought has not until recent times been 
 common in America, nor has it been very prevalent 
 
 ^ Journal of the Royal Statistical Society, Mar. 1919.
 
 14 PRINCIPLES OF TAXATION 
 
 in France.^ The task of reducing a miscellaneous 
 set of taxes into terms of a tax on incomes is an 
 intricate one, rarely attempted by the ordinary 
 individual, and unless his thought is naturally and 
 readily led along that line by the existence of a tax 
 on incomes, he does not easily think of comparative 
 hardships in that way. Mr. Hull, in introducing the 
 United States Income Tax in 1913 to Congress, 
 remarked, " By this method alone could every citizen 
 see and know that taxes are being imposed equit- 
 ably and according to ability to pay." ..." The 
 masses of people are now paying most of our tariff 
 taxes, and most of our State and local taxes . . . 
 those who have been the victims ivithout being able 
 to hiow the extent thereof, will welcome the proposed 
 tax." 2 
 
 It will probably be easiest to consider first the 
 problems raised in the mind of the individual by 
 the attempt to tax according to ability to pay, 
 when it is to be achieved by a tax on incomes. This 
 will lead the way to a consideration of the bearing 
 of other kinds of taxation upon the problem of 
 ability to pay. 
 
 9. " Ability " may be subject to Five Tests 
 
 The problem of ability to pay might appear at 
 first sight to be adequately dealt with by putting 
 the question, " How much have you got coming 
 
 1 Vide article on " Graduated Taxation," by Prof. Seligman, in 
 Dictionary of Political Economy ; also " The Income Tax," by the same 
 writer. 
 
 ^ Congressional Record, M.ay 1, 1913, p. 837.
 
 I TREND OF RECENT DEVELOPMENTS 15 
 
 in ? " This I refer to as the Qtiantit ative a spect. 
 But under the stress of modern high rates of taxa- 
 tion this can only be regarded as a beginning to a 
 series of questions, and we must ask, " Over w hat 
 p^iiod ? " A commercial traveller, for example, 
 having had a fine week on the road, might be think- 
 ing only of his recent experience and answer, " I'm 
 doing at the rate of a £1000 a year." This point 
 must be dealt with mider the heading the " Time 
 Element." Then follows the question, " Are you 
 sure it was pure income, without any wastage or 
 return of capital ? " which is a matter to be referred 
 to hereafter as the " Econormc ^^ or '^ Pure Income " 
 aspect. Even at this stage the true verdict as to 
 comparative ability cannot be pronounced. We 
 must ask, " How do you get it ? " because we want 
 to know whether it has any reserve behind it, or 
 whether its continuance depends entirely upon the 
 continuance of the worker himself. This may be 
 termed the " Precarious " or ''Earned^' income 
 discrimination. Then follows the highly personal 
 question, " Are you free to sjjend it all how you 
 like, or have you unescapable family claims upon 
 you ? " and to this aspect may be given the title 
 " D omesti c Cirmimslances." ^ 
 
 Finally, there would be some who would ask, 
 " Did you get anything in excess of the sum 
 required to induce you to give your service or 
 lend your capital ? " This may be called the 
 Economic Survlus Distinction. 
 
 Edinburgh Review, Oct. 1919 (S.).
 
 16 PRINCIPLES OF TAXATION 
 
 10. These Elements have only recently been 
 recognised 
 
 A detailed consideration of these various ques- 
 tions' will be deferred, but it is quite clear that 
 in these days we do not feel that we have dealt 
 adequately with the question of " ability " until 
 these several distinct aspects have been reviewed. 
 It is not merely in the pure taxation of income that 
 we now expect to find them properly recognised, 
 but also when the whole system of taxation is 
 reduced to its net aggregate effect upon the indi- 
 vidual we consider the claims of justice have not 
 been met if the differences of ability here indicated 
 are ignored or inadequately recognised. 
 
 Now it is difficult for the rising generation of 
 students to realise how extraordinarily complex the 
 connotation of the term "ability" has become in 
 the last few years. Twenty years ago any ordinary 
 text-book, on coming to the question of taxation, 
 informed us that our income tax was based on the 
 principle of " ability to pay," merely because 
 Jones with an income of £10,000 paid ten times as 
 much taxation as Brown ^\^th an income of £1000. 
 Apart from a little degression, and the exemption 
 limit at the bottom of the scale, we had a flat rate 
 of 8d. in the £, without any allowances for differences 
 of income or personal circumstances of any kind. 
 Beyond the scarcely heeded teaching of a few 
 advanced writers, the great mass of the people had 
 ne instinctive feeling for anything else. All these 
 questions slumbered peacefully imder the gentle
 
 I TREND OF RECENT DEVELOPMENTS 17 
 
 weight of such a burden, but as the pressure set up 
 by the Boer War and the gromng consciousness of 
 the necessity for wider State functions steadily in- 
 creased, one by one they woke up and became vocal, 
 until they reached the shrieking chorus that we hear 
 to-day. 
 
 1 1 . Taxation, formerly Objective, is becoming 
 Subjective 
 
 It is, of course, very true that all taxation is 
 ultimately borne by persons, although in the first 
 place it may be laid upon things, and the whole 
 movement of this age is away from what Professor 
 Seligman has referred to as real or specific taxes, to 
 personal taxes, or what the lawyers call " taxes ' ad 
 rem ' to taxes ' in persona.' " ^ Even our own in- 
 come tax up to fourteen years ago was rather a tax 
 in rem than a tax in persona. No one was required 
 to make a return of his total income as an integral 
 feature of the tax unless he liked, and he only did 
 so to claim a privilege. Such a personal statement 
 was incidental to the system rather than vital to it. 
 
 I believe that I was the first one in this country 
 to characterise the change then proceeding as a 
 transition from the " objective" to the "subjective," 
 and the following may be quoted : 
 
 " Attention to the individual, as an interference with the 
 main system, has grown slowly but surely until it has 
 assumed serious dimensions, threatening the tax with Con- 
 tinental complexity. At first, it was required only for 
 exemption and simple abatement. Then life insurance 
 
 ^ Readjustments, p. 1.
 
 18 PEINCIPLES OF TAXATION 
 
 allowances were made contingent upon total income showing 
 a certain minimum proportion. Following on, the range of 
 abatements was twice extended : exemption from, or abate- 
 ment of one-half, the Land Tax was made to depend upon 
 total income ; and allowances for married women's earned 
 incomes were restricted to a fixed maximum joint total 
 income. Then came differentiation, with its income limit, 
 and now the allowance for children has a similar restriction, 
 while, w^ith the super-tax, attention to the individual and 
 to the amount of total income becomes universal and 
 compulsory. The total income governs three rates and a 
 super-rate. Formerly, the assessment upon a medium-sized 
 business, conducted by a firm, involved the comparatively 
 simple task of ascertaining the gross liability. Now it is 
 little short of a mathematical puzzle to divide up that 
 liability with due regard to fixed drawings, varying partner's 
 interest, and proportional profits ; charging those for which 
 claims have been made at one rate, those for w^hich no 
 claims or late claims were made, or which go to sleeping 
 partners, at another rate or rates ; and providing that all 
 charges for interest, etc., not covered by income already 
 taxed and received by the firm shall be kept at the highest 
 rate. Thus gradually has the system lost the impersonal 
 and gained the personal — one might almost say subjective 
 — aspect." ^ 
 
 But I had not sufficient prescience to recognise 
 that the old machine might be patched and patched 
 and still roll groaning along its way with added 
 complications but without actually breaking down, 
 for the passage continued : 
 
 " It is not too much to say that disintegration, or rather 
 chaos, will set in if there is any tampering with the normal 
 uniform rate for the Schedule A assessment. There are 
 certain popular demands that small ' unearned ' incomes 
 
 1 Economic Revieiv, 1909, p. 410, " Economic Aspects of Income Tax 
 Change " (S.).
 
 I TREND OF RECENT DEVELOPMENTS 19 
 
 from personal accumulated savings should be allowed a 
 lower rate. This could be practicable only by individual 
 claims every year during the collection, or, for mortgage 
 interest and dividends, by repayment, involving great 
 additions to the clerical staff. It could not possibly be 
 automatic, a part of the general machinery of assessment. 
 With variable gears for cycles, it is a sound principle that 
 the gear likely to be most used, the normal, should run 
 ' solid,' and the complicated mechanism be brought into 
 use only with the gears used exceptionally. So all tax 
 deduction must ' run solid ' on a normal rate, but several 
 popular ideas entail abandonment of this principle." 
 
 12. Taxation, at first Persofial, becomes Specific, 
 and then Personal again 
 
 Professor Seligman has very well pointed out 
 tliat taxation is generally begun in its most specific 
 form, and develops into the more personal form. 
 " In New England, for instance, the earliest taxes 
 were on particular things, like sheep and cows and 
 houses and stock-in-trade ; and only at a much 
 later period do we find the general property tax, 
 where the tax is imposed upon the individual with 
 respect to his entire property, whether that property 
 consists in things or in simple relations." ^ But 
 the first approach to the personal taxation nearly 
 always broke down. It broke down very badly in 
 the American General Property Tax, where every- 
 thing that could not be seen and handled as you 
 walked the streets practically escaped the tax roll. 
 It broke down in our own system of local rating, 
 which degenerated into a tax upon houses and 
 
 ^ Beadjuslments, p. 1.
 
 20 PRINCIPLES OF TAXATION 
 
 land.^ It broke down in the old Land Tax wliicli 
 was originally intended to cover many kinds of 
 wealth.^ It broke down in Pitt's Income Tax of 
 1799 wliicli tried straight away to be a tax on the 
 total income of the individual levied direct upon 
 him. You all know that this lasted but a short 
 time, and that as soon as the tax was made im- 
 personal and assessed on sources of income, as far 
 as possible allowing the burden by the principle of 
 deduction to reach in due time and in due propor- 
 tion every possible beneficiary from each source, 
 then it became immediately a powerful engine of 
 revenue, doubling the yield compared with the 
 earlier scheme.^ 
 
 Everywhere the earlier attempts at personal 
 taxation failed. In France the personal taxes prior 
 to the Revolution gave way to a whole group of 
 objective taxes, but with the advance of society 
 a new and successful attempt is being universally 
 made towards subjective taxation and an accurate 
 reflection of the differences of " ability to pay." 
 The premature attempts failed for two reasons ; 
 first, the absence of adequate machinery for dealing 
 with wealth except in its most local aspects, and, 
 secondly, of that development in the civic conscious- 
 
 ^ Cannan, History of Local Rates in England. 
 
 ^ Armitage Smith, Principles of Taxation, p. 60 ; Hook, " Present 
 Position of the Land Tax," E.J., 1905, p. 374. 
 
 ^ 1851 Comm., 5061. Mi. Pressley said : '' In 1801, when the tax was 
 10 per cent and the law required that everybody should make a return 
 of his property, the net assessment (i.e. yield) was £5,628,000, but in 
 1806, the rate then being also 10 per cent, the produce of the tax 
 under the present principle . . . was £11,633,000.'' Vide 1920 Comm., 
 Appendix No. 7 (g).
 
 1 TREND OF RECENT DEVELOPMENTS 21 
 
 ness, by which alone a burden can be borne, in a 
 system which reconciles inquisitorial methods and 
 the safety of State interests with the freedom of the 
 individual. Even the extraordinary conservatism 
 of France, which has long been content with its 
 rough approximation to the taxation of income by 
 way of a group of separate presumptive taxes, is 
 fast breaking down. 
 
 13. A Personal Tax to be Successful must 
 be National 
 
 The necessary failure of all local administration 
 to handle subjective taxation, owing to the fact 
 that wealth becomes more and more widespread and 
 elusive, has led to a greater reliance of local taxa- 
 tion upon real or specific taxes, and so, as Professor 
 Seligman has said, there is a double movement 
 going on at one and the same time, a movement 
 from personal to real taxes in local taxation, and 
 a counter movement from specific taxes to highly 
 sensitive subjective taxation, for the country as a^ 
 whole. ^ No personal tax can be administered with 
 safety, facility, and equity unless it covers the whole 
 of an economic community represented by a nation. 
 That is why, if the proposed devolution of Govern- 
 ment in the United Kingdom is made to involve 
 the separation of the taxation of income into three 
 or four distinct groups under direct local autonomy, 
 it must be a retrograde movement, and against the 
 nature of things. It would be a sacrifice of pure 
 
 ^ Readjustments, p, 2.
 
 22 PRINCIPLES OF TAXATION 
 
 taxation principles, as emerging from universal 
 experience, to other political considerations.^ 
 
 14. Tlie Use of Presumptions in a Personal Tax 
 
 A proper tax upon incomes is hardly possible 
 in a community that is not fairly advanced both in 
 its people and in its government. Some sections of 
 the people may not be able to give a clear account 
 of their incomes or to have a clear conception of 
 what is involved, and alternatively the government 
 may not be strong or bold enough to compel de- 
 claration, even if the people know the facts about 
 themselves. When either of these features is pre- 
 sent there is a reliance upon " presumptive " taxes 
 or conventional expedients. The most familiar 
 example to us is the expedient adopted in this 
 country because, as it is usually expressed, " the 
 farmer does not keep accounts." He does not, 
 quite frequently because he cannot, but there is 
 some little improvement in this respect. I remem- 
 ber a farmer who was very obstinate on the question 
 whether some mistake might not have been made in 
 the matter of some change given to him by a tax 
 collector, and reiterated that it " could not be so 
 for he kept accounts ^ Interested in such a rare 
 case, I pressed him for some explanation of his 
 methods, which was given on these lines : " When 
 I leaves home on the Wednesday — market day — I 
 writes down what money I has. When I get back 
 I writes down what I've got left. I takes one from 
 
 1 E.J., 1912, " Irish Fiscal Autonomy and Direct Taxes" (S.)-
 
 I TKEND OF RECENT DEVELOPMENTS 23 
 
 t'other and then it shows what I've spent." On 
 another occasion, in my days as a Surveyor in a 
 rural district, a farmer claiming to have made a loss 
 filled up the simple form of account then officially 
 provided, and showed the value of his live stock at 
 the beginning of his farming year. As he had made 
 a similar claim in the previous year, the accounts 
 were compared, and he was asked, without being 
 given the figures, why there was such a difference 
 in the value of his stock on the night ending the 
 one year, with that shown in the morning beginning 
 the following year. Nonplussed for a moment, he 
 quickly remembered that " that was the night of 
 the thunderstorm." Unfortunately for his ex- 
 planation, the stock on the value shown in his 
 accounts had increased in that fateful night ! 
 Whether simple or cunning, the farmer's case has 
 been met for over a century by a conventional or 
 presumptive tax. At one time his profits were 
 assumed to be three-fourths of his rent, then one- 
 half, and for a long time one-third. In recent 
 years the presumption has been increased to a sum 
 equal to the rent, and now it stands as double 
 the rent paid. The assessments upon small retail 
 traders have often approximated to presumptive 
 methods, for the traders themselves have but little 
 idea of anything but their turnover, and even then 
 the " missis goes to the till." So the revenue 
 official, meeting the case with a round figure based 
 on such evidence as may be available, has a better 
 idea than the man himself of the annual earnings. 
 In Canada, when they were feeling their way
 
 24 PRINCIPLES OF TAXATION chap.i 
 
 cautiously towards an income tax, it was proposed 
 to establish by samples in each class of business the 
 average ratio borne by the rental value of premises 
 occupied for business, to the profits of the business, 
 and to produce a sort of index or factor which 
 might be applied in all other cases in order to 
 ascertain or estimate profits.^ Unless businesses 
 were very similar in size and also similarly situated, 
 the method, like the method of dealing with 
 farmers' profits, is innocent of all recognition of the 
 principles of economic rent. 
 
 In France, before the recent introduction of the 
 present income tax, the effect of an income tax was 
 sought to be obtained by presumptive or objective 
 taxes — often referred to as the " four old women " 
 — on real estate, personal property, a licence tax on 
 business and professions, and a tax on doors and 
 windows. 2 
 
 There is no country in which the whole system 
 of taxation is one, logically worked out from first 
 principles. Everywhere the accidents of political 
 and commercial considerations in past history are 
 perpetuated, and condition the present systems. 
 But there is little doubt that these are gradually 
 gravitating towards one or two common main types 
 in which personal taxation of income is taking the 
 predominant part, while various systems of indirect 
 taxation and tariffs are taking a less important 
 place relatively, even though their absolute yield is 
 maintained. 
 
 ^ Vineburg, Provincial and Local Taxation in Canada, p. 59. 
 * Kennan, Income Taxation, p. 79; For. Income Taxes, 1905, p 142.
 
 CHAPTER II 
 
 THE INDIVIDUAL STANDPOINT FOR THE 
 TAXATION OF INCOMES 
 
 It is proposed in the second and third lectures to 
 consider the principles of taxation as they arise 
 from the viewpoint of the individual taxpayer, 
 without regard to the convenience of the State 
 administration or to its efficiency, or to any par- 
 ticular effects upon the business community. As 
 has been remarked already, many of the principles 
 are most clearly seen in the study of the taxation of 
 incomes, and the present treatment will be devoted 
 to that special aspect of the matter. It is not my 
 intention to make a detailed inductive study of all 
 the different schemes in vogue, but rather to set 
 out abstract principles, and illustrate them occasion- 
 ally from the present state of taxation at home and 
 abroad. 
 
 1. The Measurement of ^^ Ability " hy Time : 
 the Power to " Carry Over " 
 
 Before " ability " can properly be tested by 
 " income " we must have a unit of time, a definite 
 conception of what constitutes income, and the 
 measure of its amount. If there are different 
 
 25
 
 26 PRINCIPLES OF TAXATION 
 
 measures of amount for different purposes we liave 
 to consider whicli is the most appropriate for tlie 
 reflection of relative " ability," and also, in view of 
 the standpoint of the State, which can most practi- 
 cally be compassed by its administration. Then 
 follows the application of the various aspects of 
 ability to which reference has been made. 
 
 We are so used to considering income " by the 
 year," that it seems to be almost an ordinance of 
 nature. Yet vast numbers think only of their 
 weekly wage, and could not readily say what their 
 yearly income is. Those who think in terms of 
 annual income plan their expenditure very much 
 upon a yearly basis, without special regard to 
 monthly fluctuations due to holidays, or the winter 
 coal and light. Their ability to pay an annual tax 
 can clearly be measured in the same way. But the 
 weekly wage -earner's outlook is much more limited 
 — he may be relatively prosperous and relatively 
 depressed within a short space of time, owing to 
 an alternation of overtime with short time ; his 
 tenancy is weekly ; and he has relatively little 
 power of " carrying over." His ability cannot be 
 held in suspense. Often his only means of looking 
 well ahead is that provided by coal clubs, holiday 
 clubs, and the like. His " ability " to pay taxation 
 must be measured by a shorter term. That is why 
 some people who favour a graduated deduction 
 from wages by a stamp system, instead of an income 
 tax, regard the annual income as quite incongruous 
 for the conditions to be met. By the time the 
 money comes to be paid, the facts of the moment
 
 THE INDIVIDUAL STANDPOINT 27 
 
 are quite out of accord with it, whereas deduction 
 must always exactly fit the ability. The quarterly 
 methods actually adopted in this country are some 
 recognition of the principle involved.^ But the 
 high rate of tax is bringing the time question in 
 regard to ability into prominence in other ways. 
 The " base " of the tax must be a long enough period 
 to give a fair average indication of means — the 
 base upon which a man's household and conditions 
 of life are naturally laid out — but it must not be so 
 extensive that the time for paying a tax does not 
 follow closely upon the period over which it has 
 been computed. It is for this reason that many 
 people are now calling into question the three years' 
 average system. If a man has profits for 1917 of 
 £1000, for 1918 of £3000, for 1919 of £8000, and 
 for 1920 of £12,000, he is called upon to pay during 
 the year 1920, on £4000 income, some £1200 
 in tax, or only 2s. in the £ on what he is receiving 
 at the time of payment, whereas if the sequence of 
 profits were reversed, but the total remained the 
 same, he would be called upon to pay on £7G6G 
 income, some £2300 in tax at a moment when his 
 current ability is measured by £1000 a year income 
 only. Of course in theory he should save up the 
 tax during the prosperous time, and have it ready 
 to hand out during the lean time, but human nature 
 being what it is, such a proceeding is the counsel of 
 perfection for many men, and in practice one must 
 expect a clamour for relief in the latter case, with 
 no corresponding provision for the State to benefit 
 
 1 1920 Comm., Q. 25,248— Report, Section viii
 
 28 PEINCIPLES OF TAXATION 
 
 in the former. It is, therefore, " heads-I-win-and- 
 tails-you-lose " for the individual taxpayer against 
 the community of taxpayers. The operation of the 
 Super-tax one year later serves to aggravate the 
 trouble. The movement in favour of taxing on the 
 actual profits of the preceding year in this country 
 as is commonly done abroad, so that the tax follows 
 hard upon the profit to which it relates, and the 
 punishment fits the crime, has been growing in 
 force. ^ But in this as in other things, human 
 nature is prone to feel its hardships more acutely 
 than its blessings, for Professor Haig told me 
 recently that the United States were seriously con- 
 sidering abandoning the " previous year " method for 
 our average system. The " average " method has 
 one important feature, which has generally escaped 
 notice. It lessens the actual burden of tax because 
 it lowers the rate of tax on a progressive scale.^ 
 The duty chargeable upon £2000 per annum made 
 in three successive years will be considerably less 
 than that chargeable over the three years if the 
 profits are £1000, £2000, and £3000 respectively. 
 The truth is probably that an average more properly 
 indicates the economic ability of well-to-do people, 
 but that we come into conflict with another of Adam 
 Smith's canons, that of convenience. Nearly all 
 taxation in practice is a compromise between two 
 or more ideal positions. 
 
 The foregoing remarks apply, of course, only 
 where the individual is directly assessed, and such 
 
 ^ 1919 Coram. The majority of the witnesses pressed for a change, 
 p. 105. 
 
 2 Ibid. Qs. 11,155-9.
 
 n THE INDIVIDUAL STANDPOINT 29 
 
 questions of principle do not arise so clearly in tlie 
 assessment of companies, where the " ability " of 
 the individual is in question only as he receives his 
 taxed dividends. So it is not uncommon for the 
 average to apply to companies in the continental 
 systems, although the single year is the general 
 practice.^ In Prussia the average was abolished 
 for individuals, but retained for companies, in 1916. 
 Probably the ideal course, though not always the 
 most practicable, would be to adopt the current 
 year as the basis for companies. 
 
 2. The Time Element in Relation to Fairness and 
 Convenience 
 
 The principle of convenience in fitting the appro- 
 priate tax to the appropriate profit as closely as 
 possible was effected in the British Excess Profits 
 Duty by the separate assessment of each account- 
 ing period, whether for a quarter, a half-year, a 
 year, or some irregular period, for each business, as 
 the smallest unit of assessment, immediately its 
 accounts were closed. 
 
 The principle of average rather than fluctuating 
 " ability " was responsible for the provision for 
 equating the results, and for setting off deficiencies 
 against excesses, which is practically confined to 
 the British scheme. Under the American scheme, 
 where the excess of profit above a certain interest 
 on capital employed is charged according to a 
 graduated scale, each year's result necessarily 
 
 ^ For. Income Taxes, 1913, p. 24.
 
 30 PRINCIPLES OF TAXATION 
 
 stands by itself, and cannot conveniently be merged 
 with others. This means, of course, that fluctuat- 
 ing businesses pay, in the long run, a higher 
 amount of tax than businesses in which the same 
 aggregate profits are made more evenly. 
 
 Companies have a power of holding their 
 " ability " in suspense to a much greater extent 
 than individuals. But even there, under strain, 
 limits will appear. When the Munitions Levy was 
 brought in, the whole machinery for imposing what 
 was generally described as a " tax " — despite any 
 agreement to the contrary which might be derived 
 from the Parliamentary procedure which attended 
 its introduction — had to be improvised and worked 
 out and the tax administered by persons who were 
 amateurs at such work, while, in the meantime, the 
 regular administration of the Excess Profits Duty 
 on controlled establishments was held in suspense.^ 
 The very considerable delay that ensued in making 
 the assessments for any given period, left the Com- 
 panies with their profit resources for that period 
 held in suspense for such a length of time that the 
 importance and weight of the impending State 
 claim for taxation was lost sight of in the immediate 
 pressure or advantage of other possible uses for the 
 money. So when the State called for its tax it 
 found in a vast number of cases that the Company 
 was " unable to pay," because the money was by 
 that time represented by new buildings and plant. 
 The State has had great difficulty to get its money, 
 for there is never the same readiness to raise new 
 
 ^ Vide Hansard, 3rd May 1917, and debates passim.
 
 THE INDIVIDUAL STANDPOINT 31 
 
 capital for the payment of taxes or debts as there 
 is for permanent extensions and fixed assets. Of 
 course, the deduction of tax at the source when the 
 recipient receives his income is the closest possible 
 " fit " of taxation to ability in point of time ; but 
 only if ability is regarded as satisfied by proportional 
 taxation. The satisfaction of ability by progressive 
 taxation is badly served in this respect, because it 
 is only for a few people that the rate of tax deducted 
 corresponds to the rate actually to be borne by 
 them after adjustments or repayments or further 
 charges have been made.^ 
 
 3. Conception of Income : (1) The Idea of Money 
 Received 
 
 Some people think that " an income " is some- 
 thing saved, others that it is something spent. We 
 can appreciate the point of view of the wage-earner 
 who exclaimed, " Income ! 'ow can a man have an 
 income when he's got nine children ? " 
 
 There will always be room for great difference of 
 opinion and national practice in drawing a working 
 line in that uncertain region lying between unmis- 
 takable " income " and unmistakable " capital " 
 in an economic sense. When we have to decide 
 what " means " or what " revenue " shall be taken 
 into view in considering tax-paying "' ability," the 
 room for difference is wider still. 
 
 Every one must live in some house or other, and 
 
 ^ The recommendations of the recent Commission (on the subject of 
 graduation) will lead to the deduction of the "standard rate" bemg 
 finally correct over a much wider range of income.
 
 32 PRINCIPLES OF TAXATION 
 
 therefore a payment for rent can be regarded as 
 normal or essential out of every income. If a man 
 lives in his own house and pays no rent, should the 
 rental value be treated as income ? A. has £400 
 salary and £40 from dividends on £800 stock, and he 
 has to pay £40 out for the house he lives in. His 
 net income after paying rent is £400. B. has £400 
 salary and £800 in a house, worth £40 a year, which 
 he lives in. His net income free from the rental is 
 also £400. In this country we think instinctively 
 that the two cases have the same " ability " and 
 that each has an income of £440 per annum. But 
 such a view is by no means one of the innate ideas 
 in human nature.^ In America, the idea of annual 
 or rental value is by no means so common as here — 
 property is bought and sold freely, and it is taxed 
 for local purposes on its capital value, so that the 
 average American thinks first of the capital value, 
 and if he thought at all of the annual value he would 
 get it from the capital value, whereas we normally 
 think first of rental value and derive capital value 
 from it. Professor Plehn has asserted that not 
 more than one per cent of the assessors in the United 
 States are familiar with the conception of annual 
 value. ^ It is small wonder then that when a 
 scientific income tax on modern lines was first 
 introduced in Wisconsin in 1911 popular opinion 
 was against counting the homestead as income, 
 and a great deal of education in a paternal strain 
 from the administration was necessary before the 
 
 1 E.J., 1913, p. 3 ; Annals of the American Academy of Political and 
 Social Science, Mar. 1915, p. 3. 
 ^ E.J., 1910, p. 8,
 
 n THE INDIVIDUAL STANDPOINT 33 
 
 strange idea was assimilated.-^ In the Western 
 Australian Income Tax there is no provision for 
 charging the annual value of a residence. But of 
 course we are not strictly logical : why should not 
 the annual value also of our furniture be counted as 
 income ? If the habit of hiring furniture were 
 common, and the ownership of it exceptional, it 
 would be just as easy a notion to accept. 
 
 In most countries income received in kind, such 
 as free lodging, board, etc., is regarded as taxable, 
 but not so in this country. Some countries are 
 much more stringent than others in charging the 
 profit from occasional dealing in stocks, shares, or 
 property, etc.,^ but in this country we do not regard 
 them as forming part of " income " ability unless 
 they constitute more or less regular practice 
 amounting in effect to a business.^ 
 
 When we come to deal with regular receipts 
 which contain capital elements, the scope for 
 argument is very wide. 
 
 4. Conception of Income : (2) The Advantages 
 of '' Co-operative Action " 
 
 At the present time feeling runs high upon the 
 subject of the co-operative " divi." Is the " divi- 
 dend " or " deferred discoimt " which a member of 
 a co-operative society receives out of the surplus of 
 profit of the society, in proportion to his purchases 
 from the society, " income " which ought to appear 
 
 1 E.J., I'JVS, p. 3. 
 
 2 For. Income Tuxes, 19i;5, p. 20. 
 
 3 1920 Comni. Report, p. 20. 
 
 D
 
 34 PKINCIPLES OF TAXATION 
 
 in Ms statement of income as a representation of 
 true ability ? If one workman earns £156 a year 
 and has £10 " dividend " because he spends his 
 wages at his co-operative store, has he a greater 
 ability to pay taxation than another workman 
 who also has £3 a week and buys his things at 
 the ordinary shops ? " Yes," says the anti-co- 
 operator, " certainly he has. He adds to his wages 
 a profit from mutual trading, competitive in its 
 essence." " No," says the co-operator. " If a man 
 makes or does something for himself, such as repair- 
 ing his own boots, instead of sending to a bootmaker, 
 he does not make a profit out of his own labour." 
 Similarly if two join together to serve each other, 
 no profit arises. The anti-co-operator urges that 
 profit arises immediately mutuality commences, 
 and there is only a question of degree between 
 the case of two and that of the whole nation 
 trading together. There are other arguments of 
 a political and economic character for the taxa- 
 tion of co-operative trading, but I am referring 
 here to the conception of income. The chief 
 practical difficulty that arises in fitting this case 
 into the ordinary definition of profit or income is 
 that in the net effect a man may get his goods at 
 an average cost price whether the original charge 
 be at cost and the dividend 7iil, or the charge be 
 moderate and the dividend moderate ; or, again, the 
 charge the general market value and the dividend 
 the commercial profit ; or the charge very high and 
 the dividend very high : in fact if you rest on the 
 actual amount of the Dividend your profit may be
 
 THE INDIVIDUAL STANDPOINT 35 
 
 anything you like to make it by arrangement in 
 your books — it is arbitrary. The Income Tax 
 Committee in 1905 reported : ^ 
 
 " The suggestions made to us that the ' dividend ' which 
 is paid to members of these societies constitutes a profit 
 which would properly be taxable, rest, we think, on a mis- 
 apprehension of the nature of the dividend. The so-called 
 ' dividend ' arises from the fact that the prices charged by 
 the society to its members are in excess of cost price. If 
 the goods were distributed at the exact price, there would 
 be no ' dividend,' and it follows that no question of income 
 tax could arise. But the societies, for what they consider 
 good reasons, prefer to fix a scale of prices which leaves a 
 margin over and above cost. Thus an adjustment has to 
 be made periodically, and the balance between cost price 
 and distributing price is divided among the members in 
 proportion to the value of their purchases. This ' dividend ' 
 is clearly not profit, but merely a return to members of 
 sums which they have paid for their own goods in excess of 
 the cost price. There can be no doubt that the procedure 
 which we have described— resulting as it does in periodical 
 returns to members — is conducive to thrift, and we see no 
 reason for discouraging it." 
 
 " A Society may, however, of course, make profit on 
 dealings with non-members. This profit is, in the case of 
 most ordinary societies, very small in amount. But, so far 
 as any such profit is made, and so far as any interest is paid 
 on capital, if that profit or interest comes into the hands of 
 any person whose income is over £160, it ought to be, and 
 it is, taxable." 
 
 If this mutual trading is regarded as income the 
 only escape from arbitrariness in application appears 
 to be to disregard the amount of " dividend " and 
 treat the profit as the difference between the net 
 
 ^ 1905 Coram. Report, par. 136-7.
 
 36 PKINCIPLES OF TAXATION 
 
 cost to the member and the full market price, 
 neither more nor less.^ Some analogous considera- 
 tions arise in considering the " cost " of life insur- 
 ance, where high bonuses and high premiums must 
 be considered together. 
 
 The current questions are not so much those 
 of definition as whether participation in such 
 methods of supplying our needs do or do not 
 increase tax-paying ability. 
 
 5. Conception of Income : (3) Municipal Trading 
 
 Where the profits of municipal trading are 
 charged to any income tax there may be a useful 
 payment to public revenue unconsciously borne by 
 the community which it is unwise to disturb.^ In 
 the abstract, however, the actual effect is that if the 
 tax were not charged the profits would be larger, and 
 therefore, where applied to the relief of the rates, 
 these rates would be lower. In this way every 
 ratepayer is paying the income tax at a flat rate. 
 But some ratepayers should be exempt and others 
 should pay at a high rate, whereas if the incomes 
 are roughly proportioned to the rental values of 
 their dwellings, the charge is at a uniform rate, and 
 has no regard to the finer tests of ability to pay. 
 The taxation of such profits therefore appears to be 
 unscientific in its ultimate basis, from the individual 
 
 ^ A fuller discussion of that economic conception of income which 
 would cover the advantages derived from co-operation, may be found in 
 the reservation to the Report of the Royal Commission on Income Tax, 
 1920, signed by the present writer. Vide p. 166. 
 
 *1920Comm. Qs- 12,983-6. Qs. 11,455-66.
 
 THE INDIVIDUAL STANDPOINT 37 
 
 income point of view, whatever may be said from 
 the other standpoints. One of the reasons usually 
 urged for charging municipal profits is that other- 
 wise they would get an unfair advantage over 
 private trading profits. This, however, seems to 
 assume that income tax enters into costs, and that 
 if a man has less to pay he can afford to charge less 
 — a doctrine that has more popular sentiment than 
 economic reason behind it. The Australian Com- 
 monwealth and the provincial Governments do not 
 charge municipal revenues. When our Excess 
 Profits Duty was imposed, it was provided that the 
 sinking fund charge might be a deduction from 
 profits, where any portion of it fell upon the rates, 
 otherwise Excess Profits Duty would have been 
 payable on an " excess " which was merely the 
 difference between a sum now raised out of rates 
 and the larger sum so raised before the war, and the 
 Excess Profits Duty would most obviously have 
 increased the rates. ^ 
 
 6. Progressive Taxation based on the Principle of 
 Diminishing Utility 
 
 When Adam Smith referred in his first canon to 
 contribution " in proportion to their respective 
 abilities, that is in proportion to the revenue 
 enjoyed," it may be considered that no warrant 
 was given for a progressive rate of taxation, and 
 that he had distinctly in view a proportionate or 
 flat rate. Thus £1000 taken from an income of 
 
 1 Vide Hansard, 7th Dec. 1915. 1341.
 
 38 PRINCIPLES OF TAXATION 
 
 £10,000 would be in proportio7i to £100 taken 
 from an income of £1000. But in another place 
 he seems to lend countenance to progressive rates, 
 for after the assertion, surprising to us in these 
 days, that the proportion of income spent in house 
 rent to other expenses is highest among the rich, so 
 that a tax on house rent would in general fall 
 heaviest upon the rich, he says : " It is not very 
 unreasonable that the rich should contribute to the 
 public expense, not only in proportion to their 
 revenue, but something more in proportion." ^ 
 
 Progressive taxation of income is now wellnigh 
 universal, and it is difficult to realise that only two 
 decades ago it was still looked upon askance by all 
 but advanced thinkers in this country, and in 
 France it is still viewed with much suspicion. The 
 nineteenth-century economists in the main accepted 
 proportion with an element of degression and an 
 exemption limit, and they regarded any departure 
 from a plain proportional rate as a dangerous and 
 socialistic step leading to confiscation. In 1861 Mill 
 said : " The rule of equality and of fair proportion 
 seems to me to be that people should be taxed 
 in an equal ratio on their superfluities, necessaries 
 being untaxed, and surplus paying in all cases an 
 equal percentage. This satisfies entirely the small 
 amount of justice that there is in the theory of a 
 graduated income tax, which appears to me to be 
 otherwise an entirely unjust mode of taxation, and, 
 in fact, a graduated robbery." ^ In his Principles 
 of Political Economy his language is less forcible. 
 
 1 Wealth of Nations, V. ii. part 2. ^ 1861 Comm. Q. 3540.
 
 n THE INDIVIDUAL STANDPOINT 39 
 
 At the same date, Newmarch said graduation 
 was " confiscation, punishing prudence and virtue, 
 taxing a man for being good to himself and doing 
 good to others." ^ 
 
 The best known early nineteenth-century view is 
 M'Culloch's oft-quoted remark, "When you abandon 
 the plain principle (of proportion) you are at sea 
 without rudder and compass, and there is no amount 
 of injustice you may not commit." Curiously it 
 was M'Culloch's view that the taxpayers should be 
 left in the same relative position in which they had 
 been found. Those who thought of this tax as a 
 definite payment, like Sargant, said there was 
 nothing to justify asking a rich man for a shilling 
 for what another gets for ninepence. — One wonders 
 whether Sargant had ever paid a doctor's bill ! 
 
 Although a progressive produce tax existed in 
 Athens six centuries before Christ, and possibly an 
 income tax in Egypt a thousand years earlier, 
 while in this country there was progression in the 
 fourteenth and fifteenth centuries,^ the idea only 
 took root sporadically so far as incomes were con- 
 cerned. In the French tax on a tenant's rental, 
 progression was designed to secure a proportional 
 tax on the income because the ratio of rent to 
 income fell as the income got higher, and also, as 
 Seligman says, " to compensate the lower classes 
 for the other duties." ^ 
 
 The principle of progression has, however, never 
 
 1 1861 Comm. Qs. 747-50. 
 
 * Vide Kennan, Income Taxation, cha]). i. Also article on " Gradu- 
 ated Taxation," by Prof. Seligman, in Dictionary of Political Economy. 
 ^ Seligman, Income Tax.
 
 40 PRINCIPLES OF TAXATION 
 
 lacked exposition from the time of Montesquieu. 
 Paley, in 1830, gave the first complete English 
 exposition — ■" We should tax what can be spared." 
 The Dutch writers proceeding from the exemption 
 of the subsistence income gradually reached pro- 
 gression with mathematical forms. ^ By 1894 Selig- 
 man, surveying the whole subject with the growing 
 continental practice, was able to urge that the 
 apparent stability or certainty of proportional taxa- 
 tion might really involve the greater arbitrariness, 
 and that the " confiscation " objection had been 
 answered. 
 
 The application of progression in the British 
 income tax was delayed far beyond that in the 
 German scheme, probably because the latter 
 system of direct taxation on the individual lent 
 itself more easily to the principle on its practical 
 application than the British system of taxation at 
 the source, where the difficulties are very real, and 
 led to a compromise even at that date. 
 
 It was not until the marginal theory was 
 thoroughly worked out on its psychological side 
 that progressive taxation obtained a really secure 
 basis in principle. It seems to us now a bare 
 truism to say that taxation is a sacrifice or a " hurt," 
 and that to take away a shilling from the 10,000th 
 £ is not so hui"tful as to take a shilling from the 
 100th £. The principle is based upon the diminish- 
 ing utility of money or wealth as a whole to its 
 possessor. While the utility of increments of any 
 particular commodity may rapidly diminish, and 
 
 ^ Seligman, Progressive Taxation.
 
 THE INDIVIDUAL STANDPOINT 41 
 
 reach zero or even disutility (as when a schoolboy 
 has exceeded a fourth helping of plum pudding, or 
 as when we have heard " The end of a perfect day " 
 indifferently sung for the hundredth time), the 
 utility of commodities in general does not reach zero 
 so readily. The utility of money, therefore, while 
 continually diminishing to the individual possessor 
 as he has more and more, does not actually become 
 nil until the aggregate is enormous, and possibly not 
 even then, for even if a man is surrounded with 
 everything that money can buy, an additional sum 
 may still have some value to him as ministering to 
 his 'pride. 
 
 7. Progressive Taxation has also been based on 
 Increased Productivity 
 
 It must not be forgotten, moreover, that pro- 
 gression has been justified on the " production " 
 side by reference to the fact that the larger the 
 income the greater its power on being focussed or 
 grouped for the production of further income, and 
 therefore, the more it can be tapped without hurt. 
 This cannot, however, be said to apply to a large 
 income made up of various mixed investments, but 
 only to a business income in the hands of a powerful 
 and highly intelligent direction. This justification 
 has been put forward quite recently for the progress- 
 ive taxation of businesses according to their size, 
 reckoned by their capital.^ This, indeed, would be 
 the only way in which the ability arising through 
 power of aggregation could be reached. But if the 
 
 1 E.J., 19H>, p. 419 (S.) ; Political Science Quarterly, Mar. 1918.
 
 42 PRINCIPLES OF TAXATION 
 
 larger business is not in fact more profitable— what 
 then ? If its proceeds formed part of a large 
 number of smaller incomes, the ability, tested on 
 the spending side, is in direct conflict mth ability on 
 the production side. But at any rate it may be 
 conceded that direct progressive taxation of busi- 
 nesses is the only true way of reaching greater 
 ability on the " production " side of wealth. 
 
 8. Progression has been alleged to be justified upon 
 the " Rental " Conception in Econo?nic Theory 
 
 The latest justification of progression is Mr. 
 J. A. Hobson's doctrine of the taxation of surplus : 
 
 If the price or reward of a given factor in pro- 
 duction, whether interest or wages, is fixed by 
 the reward payable to the marginal supplier, the 
 superior reward paid to a person with a position of 
 advantage is in the nature of economic rent, and as 
 its withdrawal would not lead to the withdrawal of 
 the supply, it is capable of bearing taxation without 
 further shifting. Mr. J. A. Hobson is, perhaps, our 
 most thoroughgoing exponent of this analysis, and 
 he divides the reward paid into. " costs " and 
 " surplus." The taxation of costs cannot in direct 
 theory be achieved — it is thrown off, either because 
 the reward esse^itial to maintain the offer is 
 diminished and the offer is withdrawn, or because 
 the efficiency of the agent offered is diminished. 
 For example, if a man is having a bare subsistence 
 wage he may be made to pay a tax, but the final 
 burden of it is shifted to the community, for his
 
 THE INDIVIDUAL STANDPOINT 43 
 
 diminislied. efficiency reacts on price. Similarly, if 
 the minimum interest which induces a given bit of 
 saving is encroached upon, the saving is withdrawn, 
 the supply of capital diminished, and its general 
 price to others increased. But where tax falls on 
 " surplus " it stays there. ^ 
 
 If no economic friction existed, taxation would 
 rebound continually from all elements of costs, 
 shifting and shifting until it all rested finally in 
 " surplus." But friction exists to a most important 
 extent, and there is a rival tendency for taxation to 
 stick where it is first laid on, so that the theoretical 
 result is not achieved, even imperfectly. Mr. 
 Hobson admits that " at present it suffices to 
 register a clear judgement to the effect that it is not 
 feasible or equitable to attempt to earmark and 
 attack for revenue the separate items of surplus as 
 they emerge in the present distribution of rent or 
 dividends or profits." 
 
 As the test is not quantitative, it is not possible 
 to discern easily which elements of income possess 
 this peculiar quality of final inability to shift 
 taxes, and which are pure costs. The principle of 
 surplus is therefore not available directly as a 
 practical canon in taxation. But Mr. Hobson 
 presumes that these rental or surplus elements are 
 more likely prima facie to exist in the incomes of 
 larger amount — the larger the income the greater 
 the proportion of it which is rental and not costs — 
 so that a progressive income tax in a rough way is 
 taxation on the principle of surplus. But in my 
 
 ^ J. A. Hobson, Taxation in the New State.
 
 44 PRINCIPLES OF TAXATION 
 
 judgement this assumption is so little likely to accord 
 with the facts that a progressive tax can hardly be 
 based upon it. For an income of £1000 from a 
 happy investment in oil or rubber contains a great 
 deal of surplus, whereas an income of £10,000 from 
 house property or consols contains none at all.^ 
 
 Another writer, R. Jones, boils down all the prin- 
 ciples of taxation virtually to one, which is " for the 
 State to take the least useful parts of incomes," 
 which taken in a national rather than a personal 
 sense almost comes to the Hobsonian position.^ 
 
 9. Objections to the " Diminishing Utility " Basis 
 for Progression 
 
 The principle of regular diminution of utility has 
 not been unchallenged. Sir Sydney Chapman has 
 urged that different schemes of consumption are as 
 a rule variations of certain distinguishable types, 
 which are kept comparatively intact over lengthy 
 periods by habit and social assimilation, though 
 they are never so well defined that their existence 
 cannot be overlooked. Objectively viewed these 
 types may merge into one another, but subjectively 
 — to the individual — they exist as discontinuous. 
 People usually advance in the social scale by distinct 
 steps. He then considers the case of men spending 
 different incomes but aiming at a specific standard 
 of £300 a year, and I have elsewhere dealt with 
 the same idea. 
 
 ^ These paragraphs are reproduced from an Address to the British 
 Association. Vide E.J., Dec. 1919. 
 
 * R. Jones, The. Nature and First Principle of Taxation.
 
 THE INDIVIDUAL STANDPOINT 45 
 
 " I do not of course carry this principle of action 
 so far as to distinguish between two incomes of 
 £500, one of which is going to a man who is always 
 ' hard up ' because he happens to be at the lower 
 edge of a social group whose habits, etc., are con- 
 ditioned by incomes falling between £500 and £1000 
 — say £750 average ; while the other income goes 
 to a man who would ' feel ' the payment less 
 because he lives on the upper side of a group whose 
 incomes range from £250 to £500, with an average 
 of £350. Such differences in relative sacrifice can 
 never be objectively measured." ^ 
 
 You will now understand what Sir Sydney 
 Chapman means when he says that this view in- 
 volves the hard saying that the marginal utility of 
 money may be greater to a man after his circum- 
 stances have improved ! " It is a common experi- 
 ence to meet with people who have attained a slight 
 accession of income and whose enjoyment of life has 
 obviously been increased quite out of proportion to 
 the accession of income." ^ 
 
 On the practical side Chapman agrees that the 
 difficulty cannot be recognised, and the State must 
 be no respecter of persons but adopt the same 
 fiction as is essential in so much political doctrine 
 and deal with a mode or average type for the whole 
 class. But he challenges the ordinary presentation 
 of diminishing utility on the lines of diminishing 
 sacrifice to the individual, and prefers to put it that 
 wants satisfied by earlier increments to income are 
 of more importance than the wants satisfied by late 
 
 1 1920 Coram. Q, i)G03. '"■ E.J., li)13, p. 30.
 
 46 PRINCIPLES OF TAXATION 
 
 increments, whether the satisfaction of the former 
 causes more utility or not. We must judge of the 
 value of satisfaction of wants in a moral scheme of 
 consumption. Although this idea works well for a 
 comparison between an income of £200 and one of 
 £2000, it is really only a new way of expressing the 
 degressive idea ; and it does not seem to serve us 
 very well in establishing a charge upon £200,000 at 
 a higher rate than that upon £50,000 per annum 
 when one can hardly distinguish the difference in 
 the social importance of the wants satisfied. 
 
 10. Graduated Taxes in Practice 
 
 Once grant that some form of progressive taxa- 
 tion is proper, what form should it take ? This is 
 perhaps one of the most important problems of the 
 moment, and it is said to put the supporters of the 
 diminishing utility principle in a dilemma. 
 
 This diminishing utility may be pictured in two 
 ways, as in the table below, assuming that it 
 diminishes "m the same ratio.'' The first column 
 sets out one meaning, viz. that a 2s. drop (or one- 
 tenth) in the utility per £ at £1000 is matched by a 
 similar drop of one-tenth at £2000, and again at 
 £3000. Of course we soon reach finality, viz. at 
 £9000. The second colunm shows the kind or type 
 of diminution which, I believe, correctly represents 
 our psychology (viz. a deduction of a constant 
 fraction from esLch foregoing stage), and that is one- 
 tenth. The 2000th £ is assumed to have one- tenth 
 less utility than the 1000th £, the 3000th £ one-
 
 n THE INDIVIDUAL STANDPOINT 47 
 
 tenth less than the 2000th, and so on. In this way 
 zero is constantly approached but never actually 
 reached. You can even increase the " one-tenth " 
 fraction at each stage (say, one-ninth at the 2000th 
 £) provided always that the increment in the 
 fraction is a continually diminishing increment.^ 
 
 Diminishing Utility of Money 
 " In the same ratio." 
 
 £ 
 
 Method 1. 
 
 Method 2. 
 
 100th 
 500th 
 
 1000th 
 
 £1 
 
 18s. 
 
 16s. 
 14s. 
 12s. 
 10s. 
 
 8s. 
 6s. 
 4s. 
 2s. 
 nil. 
 
 One-tent) 
 £1 
 
 \ less of the preceding. 
 
 188. 
 
 1-8 
 
 16-2 
 
 1-62 
 
 2000th 
 3000th 
 
 14-58 
 1-458 
 
 13-122 
 1-312 
 
 4000th 
 
 11-810 
 1-181 
 
 5000th 
 
 10-629 
 1-063 
 
 6000th 
 
 9-566 
 •956 
 
 7000th 
 
 8-610 
 -861 
 
 8000th 
 
 7-749 
 
 •775 
 
 9000th 
 
 6-974 
 
 1920 Comm. Q. 9606.
 
 48 PRINCIPLES OF TAXATION 
 
 If taxation, based on the second column of the 
 above, took away x from the 3000th £ it would 
 
 13T22 
 
 have to take away x at the 9000th £ (or 
 
 ^ 6-974 ^ 
 
 nearly 2x) to deprive the owner of the same 
 
 " utility," and that equality of deprivation is the 
 
 rationale of progressive taxation. 
 
 Based on this principle the usual curve shown 
 
 in graph form, which gets flatter, but never quite 
 
 horizontal at the highest points, is justified. 
 
 1 1 . Progression justified as an Engine of Social 
 Improvement 
 
 Until recent years there has been a kind of tacit 
 understanding that to have any other objects than 
 pure revenue was at least impolitic and possibly even 
 wrong. But opinion of late years has developed 
 rather towards the position that if the State follows 
 too closely the ideas of pure equity, it is practically 
 handicapping existing rights, that is to say, it is 
 acquiescing in the view that here in the twentieth 
 century " all is for the best in the best of all pos- 
 sible worlds." 
 
 It is now considered that the State may have a 
 duty to develop in a direction away from the exist- 
 ing state of affairs, towards a better ; or, to use 
 Professor Marshall's words, " to use its powers for 
 prompting such economic and social adjustments 
 as will make for the well-being of the people at 
 large." ^ Now, of course, one of the most import- 
 ant powers of the State is its control over taxation, 
 
 1 After-War Problems, p. 317.
 
 n . THE INDIVIDUAL STANDPOINT 40 
 
 and therefore we begin to lean towards the use of 
 taxation in a national problem of d}Tiamic effects. 
 Proceeding from a kind of postulate that the upper 
 classes have no such excess of happiness over the 
 lower classes as might be expected from their better 
 material position, Professor Marshall develops the 
 view that one does relatively little hurt by actually 
 taking away the gratifications of the former, as 
 compared with the real hurt of touching the latter 
 classes. The whole of a very small family income 
 is put to good use, and should make little or no 
 contribution to the revenue. " It will not be possible 
 to abstain from taxing all the things consumed by 
 them, but the greater part of what they contribute 
 directly should be returned to them indirectly by 
 generous expenditure from public funds for their 
 special or even exclusive benefit." He concludes 
 that the ever-growing public expenditure on old age 
 pensions, etc., is not a charge — it is merely good 
 business, for the lives of the genuine workers as 
 happy and free citizens are an intrinsic part of the 
 national life, with which the wealthy could not 
 dispense. Professor Marshall says that the hurt 
 caused by obtaining £1000 of additional revenue 
 by means of levies of £20 from incomes of £200 is 
 unquestionably greater than that caused by taking 
 it from an income of £10,000. Looked at thus in 
 the aggregate, it has been termed " least aggregate 
 sacrifice." The only check upon this process is 
 the economic effect on capital of excessive taxes, 
 which may react on the people at large. It does, 
 however, justify a very large graduation of the
 
 50 PRINCIPLES OF TAXATION 
 
 additional burden. The only kind of taxation 
 which can really achieve it, is direct taxation of 
 income and property : for taxation upon consump- 
 tion through commodities has never yet been made 
 to reach the rich progressively, as compared with 
 the poor.^ 
 
 This conception of " hurt " is one against which 
 we must be on our guard. There is in connection 
 with all that follows on this line, something akin to 
 what medical men call " tolerance," and it is only 
 upon the first few impacts of new burdens that the 
 conception really assists us much. Canard said, 
 " Every old tax is good, every new tax is bad, but 
 the new becomes good in time." 
 
 When one's station of life has become thoroughly 
 accommodated to a certain burden, the word 
 " hurt " is inappropriate — it does not express that 
 difference between our state of feeling in the station 
 we actually occupy, and what we should feel like 
 if we had no taxes to pay. One might almost as 
 well describe the difference between our present 
 happiness and what we might enjoy in Paradise as 
 being a " hurt." 
 
 If the civic sense is sufficiently developed, taxa- 
 tion may tend to have less and less the aspect of 
 "hurt." There may be so much of what econo- 
 mists call " consumers' rent " in the price paid for 
 the State advantages that it is a misnomer. Of 
 course we want to get a given boon for as little 
 outlay as possible, and the lower the price the 
 greater the " consumers' rent." But is the differ- 
 
 ^ Loc. cit.
 
 n THE INDIVIDUAL STANDPOINT 51 
 
 ence between two " consumers' rents " a hurt 1 Sir 
 Leo Money recently told the Royal Commission on 
 Income Tax that his taxation was the best expendi- 
 ture he made, and he got most satisfaction for it.^ 
 
 But as soon as we approach the standard of life 
 with a view to reducing it, then the conception is 
 applicable and the term " hurt " has a real aptness 
 so long as the memory is an enduring one. In the 
 words of the poet, " Sorrow's crown of sorrow is 
 remembering happier things." Fortunately the 
 memory is short, and tolerance saves us from a 
 long succession of pains. 
 
 It is quite clear that the two main principles of 
 graduation which can be derived from the principles 
 of diminishing utility are those of " least aggregate 
 sacrifice " and " equal sacrifice, " and the former is 
 the more dangerous because it seems to be more 
 arbitrary. It certainly leads to pure confiscation 
 of income at certain levels, whereas the latter can 
 hardly be said to take away the whole of any 
 additional part of income however great the wealth. 
 Thought is at the present time moving so actively 
 in this direction, that the misgivings of some 
 antagonists of graduation, during the nineteenth 
 century, seem to be fully justified.'^ 
 
 12. The Difficulty of fixing a Scale of Rates by 
 Formulae 
 
 It will now be obvious that the increment in the 
 rate must be a diminishing increment, and there are 
 
 1 1920 Comm. Q. 10,765. 
 * Vide Professor Edgeworth, 1920 Comm. Q. 11,785.
 
 52 PRINCIPLES OF TAXATION 
 
 various schemes for getting curves which will, with 
 the same mathematical functions, achieve three 
 ends, viz. (1) serve the needs of the mass of incomes 
 from £200 to £2000, (2) not become too nearly pro- 
 portional at a high level, and (3) not end in taking 
 20s. in the £ at a certain level within the range of a 
 (humanly) possible income, or, indeed, not collapse 
 under the weight of its own mathematics and return 
 to the millionaire his whole tax. One such formula, 
 in recent years put forward by a Member of Parlia- 
 ment, played some strange tricks when it reached 
 the high incomes.^ In this country we have a 
 wholesome terror of algebra, and even if we rested 
 our tax scale upon a curve, that support would 
 have to be carefully kept out of sight. It is to be 
 wondered whether our House of Commons would 
 ever be induced to incorporate a curve of the third 
 or fourth degree in an Act of Parliament. May 
 I note the courageous effort of the Australian 
 legislature : 
 
 Where 11 = rate of tax in pence per £, and I = taxable 
 income in pounds sterhng. For incomes exceeding £2000 : 
 
 1 Hansard, 13th July 1914, col. 1636. The formula provided for 
 ascertaining the rate, on an income of x pounds, of y pence in the £ 
 as follows : 
 
 (x - 10,000) {x - 50,000) (x - 100,000) 
 ^ " (3000 - 10,000) (3000 - 50,000) (3000 - 100,000) ^ 
 
 J 2 (a; -50,000 ) (x - 100,000 ) (a; -3000) 
 
 ( 10,000 - 50,000) ( 10,000 - 100,000) ( 1 00,000 - 3000) '*' 
 
 (x- 100.000 ) (x - 3000) (x - 100,000) 
 
 (^0,000 - 100,000r( 50,000^000) (60,000-10,000) "^ 
 
 (x-3000) (x- 10,000) ( x- 50,000) 
 
 (100,000-3000) (100,000-10,000) (100,000-50,000)* 
 
 It works satisfactorily in the lower ranges, but at £30,000 the rate is 
 16-6d., and at £80,000, ll-6d., rising to 240d. at about £180,000, and 
 thereafter with gigantic strides.
 
 n THE INDIVIDUAL STANDPOINT 53 
 
 For so much as does not exceed £6500 the rate is obtained 
 thus : 
 
 , = l/i^Y-U/^-Ly,i2vW^J_\ 5.5a/^^Y 
 
 30\1000/ ^\iooo/ ^^viooo/ ^•7\iooo/ 
 
 and for every £ in excess of £6500 the rate is 5s. ^ 
 
 This may satisfy the canon of ability (though 
 even that is doubtful, as it is proportional on all 
 income over £6500), but is it quite what Adam 
 Smith asked for in the way of certainty for the tax- 
 payer ? A Chancellor may have a good idea of the 
 meaning of tl^ose " damned dots " and yet blench 
 at this prospect. 
 
 It is not easy in a lecture to deal with the actual 
 form of the curves proposed at different times. 
 There is always a tendency to regard a neat or 
 elegant device as " natural " and therefore fair, 
 and to suppose that we have rescued progression 
 from the charge of arbitrariness. But no one can 
 tell, when all is done, which curve really represents 
 our subjective sacrifice. Even if you decide that 
 a certain burden is fair at £10,000 compared with 
 one at £200, the paths between those points, and 
 beyond, are legion, and who can say which best 
 reflects the relative feeling of " hurt " or sacrifice 
 at different points in the line ? " The heart 
 knoweth its own bitterness, and the stranger inter- 
 meddle th not with its joy." 
 
 I have elsewhere suggested that it is very 
 difficult for a man to say quantitatively that one 
 boot pinches three times as much as the other, even 
 
 ^ Vide Profeasor Edgeworth's article, E.J., June 1919.
 
 54 PRINCIPLES OF TAXATION chap.h 
 
 where both are his own, and how much more diffi- 
 cult is it for one man to say that his boot pinches 
 twice as much as another's ! Perhaps the person 
 who is best qualified to judge as to whether a given 
 scale does achieve equal marginal sacrifice is the 
 man who has, in a brief interval of time, gone 
 from one point thereon to another widely different, 
 by a great change of fortune. Even he may be 
 so overcome by his sudden accession of wealth as 
 to regard but lightly the new burden until he 
 has accustomed himself to the social demands or 
 standard of his new scale of income. As Pascal 
 said : "La coutume est une seconde nature qui 
 detruit la premiere." ^ 
 
 When I was a Surveyor of Taxes I often felt 
 inclined to put up a prominent notice in my office : 
 " Please don't say you would be pleased to pay the 
 tax if you'd only got the income, because you 
 wouldn't." 
 
 ^ Pensees, I. Art. vi. 19.
 
 CHAPTER III 
 
 THE STANDPOINT OF THE INDIVIDUAL IN RELATION 
 TO TAXES ON EXPENDITURE, SPECIAL RECEIPTS, 
 AND SAVINGS 
 
 1 . Expenditure as a Test of Ability to Pay 
 
 William Newmarch, to whom these annual lectures 
 stand as a memorial, once remarked in evidence : 
 " The principles of taxation, the system of taxation, 
 ethical and technical, is gov'erned by three leading 
 principles. In the first place persons must be 
 taxed according to their respective abilities, in the 
 second place, saving or contribution to capital must 
 not be taxed, and in the third place, the law should 
 studiously avoid making the payer his own assessor. 
 The tax on incomes necessarily and inevitably 
 offends more or less against all those principles, and 
 it is therefore a bad tax. Taxation according to 
 ability is to require from all subjects of the State an 
 equality of sacrifice, which for fiscal purposes may 
 be defined to be taxation in proportion to expendi- 
 ture." ^ In a rather close examination upon his 
 evidence he was asked to explain his view that tea 
 and sugar were " the fairest subjects of taxation 
 
 1 1861 Comm. Qs. 682 and 694. 
 65
 
 56 PRINCIPLES OF TAXATION chap. 
 
 because they are articles of largest consumption," 
 and tliat taxes did not interfere with trade. — " It 
 falls equally upon all, but does it demand equal 
 sacrifices from all ? " to which he replied, " Every 
 man has an opportunity to decide the measure of 
 sacrifice that he will make." When asked w^hether 
 the sacrifice of a washerwoman on her pound of tea 
 was equal to that of the Duke, he said that " it was 
 no part of the system to readjust the vicissitudes of 
 fortune." Newmarch clearly believed that a tax 
 on tea satisfied all the fundamental conditions of 
 taxation, and especially that of equality. There 
 are many economists, from Newmarch and Mill ^ to 
 Professor Pigou,^ who think that the exemption of 
 savings or the taxation of income spent is the ideal 
 course. But nearly every one has moved away 
 from the crude views of Newmarch. It is difficult 
 even to suggest that a man who has £300 a year and 
 has to spend it all has the same ability to pay as one 
 with £400 who is able to live on £300 per annum, 
 and save £100 plus the interest thereon annually. 
 For in a few years the latter would have amassed 
 several thousands of pounds, when the former is 
 penniless. The fact is of course that there is a 
 conflict of principles, viz. the measurement of 
 taxable ability by income, and the economic ne- 
 cessity for not discouraging the accumulation of 
 capital. The exemption of savings from an income 
 tax comes down logically to an expenditure tax. 
 But we may ask : If a man is so rich that he finds 
 
 ^ Principles, Book v. chap. iii. (S. 5). 
 * Pigou, Wealth and Welfare,
 
 m STANDPOINT OF THE INDIVIDUAL 57 
 
 it hard work to spend his money aiid it accumulates 
 almost without effort on his part, is it any reason 
 why his taxation should be restricted ? The 
 question of the relative effects of different kinds of 
 taxes upon accumulation falls to be considered in 
 the fifth lecture, but the exemption of savings can 
 clearly not be justified on the principle of ability 
 alone. 
 
 2. Double Taxation under the Income Tax 
 
 It is urged that our present system amounts to 
 the double taxation of income, a discrimination 
 against the " Savings-use " as compared with the 
 "Spendings-use."^ If I have £100 (charged to 
 income tax upon its receipt) and decide to spend it 
 on expensive dinners, I have done with it immedi- 
 ately. But if I decide to buy a piano with it, I 
 receive an income of enjoyment (perhaps !) from 
 that instrument for years without molestation by 
 the tax collector. If, however, I put it into railway 
 stock my annual income therefrom — received tem- 
 porarily in currency notes, it is true, but actually 
 turned irmnediately into concerts — is greatly 
 diminished. To that extent I am encouraged to 
 spend and not to save. For if the future excess of 
 consumption goods over present consumption goods 
 was just sufficient without a tax to induce me to 
 save, any reduction of that excess by taxation 
 makes me more careless of the future and dis- 
 inclined to exchange its enjoyment for present 
 enjoyments. 
 
 * Pigou, op. cit.
 
 58 PRINCIPLES OF TAXATION 
 
 An alternative method would be of course to 
 exempt the income derived from savings, at any 
 rate during the lifetime of the saver, and this might 
 appear to be more logical than exempting the 
 amount of income saved. For at the time it was 
 " incoming " it would rank for the purpose of 
 reckoning ability, but during the spending of its 
 interest or produce annually afterwards it would 
 not. There is a dialectical answer to the claim for 
 exempting savings from taxation which may be put 
 thus : When you consume an income from savings, 
 you consume something larger than you would have 
 consumed if you had spent the original money 
 instead of saving it. This " something more " is 
 the economic reward of " waiting " or compensation 
 for " abstinence." That reward is a kind of 
 income, and there is no reason why the income 
 earned from " waiting " or " abstinence " should 
 not be charged like any other income. You might 
 as well exempt those elements of a large dividend 
 which are the reward of risk taking. Let us assume 
 that a man saves £100 and at the end of ten years 
 has had £5 per annum, and still having his £100 
 he then spends it. He pays tax in all upon £150, 
 either under the present system, when his tax is on 
 the £100 at first and the £50 by annual instalments 
 afterwards, or under an alternative system of taxa- 
 tion on expenditure, where he pays on £5 per year 
 for ten years and £100 in the tenth. In either case 
 he pays on £50 more than if he spent the £100 in the 
 first year. It seems to be a misnomer to call this 
 " double taxation." What is really intended by
 
 m STANDPOINT OF THE INDIVIDUAL 59 
 
 those who talk of the discrimination against the 
 " savings-use " is, I think, on the following lines : 
 Capital accretions are socially of great importance, 
 so much so, that in our taxation system we ought to 
 discriminate in favour of the " savings-use " com- 
 pared with the " spendings-use." The claim is 
 really to favour saving rather than to remove a 
 burden on it. 
 
 The first difficulty of taxation by reference to 
 expenditure alone is that it does not reach what I 
 have called " special faculty," and a few references 
 must first be made to this, as it comes between the 
 consideration of taxation of income and that of 
 capital. 
 
 3. " Special Ability " or " Windfall " Taxation 
 
 [a) Increment Value Duties} — It is a normal 
 thing to settle a man's " ability " by looking at his 
 regular income, but if something comes along for 
 him which is over and above his ordinary expecta- 
 tions, and is therefore an " extra " in relation to 
 his normal standard of life— especially if it is un- 
 expected or undeserved — such a receipt is supposed 
 to possess a peculiarly high degree of " ability." It 
 ranks in that respect quite outside the ordinary 
 tests of income. Popular feeling has hankered after 
 the special taxation of " windfall " items to a 
 remarkable extent of late years, and as a develop- 
 ment of modern times one is almost obliged to lay 
 it down as a principle that irregular or spasmodic 
 
 ^ These passages were written before the abolition of the Land 
 Values Duties in the Finance Act of 1920.
 
 60 PRINCIPLES OF TAXATION 
 
 receipts which were not required or essential in order 
 to provoke or sustain any economic effort or sacrifice, 
 possess in the abstract a higher degree of " ability to 
 pay " than corresponding amounts of regular income 
 or capital. Whether this principle can properly 
 form the basis of a practical tax is still a matter of 
 doubt, which the record of recent attempts has not 
 yet set at rest. 
 
 The term " windfall " was first actively used in 
 platform rhetoric, in connection with the " Incre- 
 ment Value Duty," and it expressed pretty exactly 
 the popular idea or justification for a special charge. 
 Yet in this particular instance the increment in 
 value to be taxed was frequently not a windfall at 
 all, but an accumulation of compound interest on a 
 site that had had to wait for a long time before 
 it ripened into full saleability. That compoxmd 
 interest had not been taxed to income tax during 
 the period over which it accumulated, and so a 
 special duty merely filled up the gap in the income 
 tax scheme which took no account of such an 
 accumulation of unpaid interest.^ But there were, 
 and are, notorious instances of '" jumps " in site 
 value far exceeding any " interest-on- waiting," and 
 these increments may be considered to have a 
 " special ability " quite apart from the question of 
 the total income of the recipient. In the German 
 scheme the main leading principle was always, of 
 course, that the " tax " was merely a restoration of 
 a part of surplus value which is never actually the 
 property of the owner, but which being socially 
 
 1 E.J., 1913, p. 204 (S.).
 
 m STANDPOINT OF THE INDIVIDUAL 61 
 
 created is socially owned. ^ Nevertlieless,the faculty 
 principle, or " ability " to bear a public impost, 
 crops out occasionally. It is generally in the 
 special faculty aspect rather than the ordinary 
 aspect of ability, for it is said, in effect, that a 
 '■ windfall " is better able than regular income to 
 bear a tax without hardship, whereas the principle 
 of ability in its ordinary aspect makes taxpaying 
 capacity increase progressively with total income. 
 This special aspect is particularly present in the 
 arrangements for duty to be paid when the fund for 
 payment actually comes into the payer's hands. 
 But the ordinary aspect is almost absent in both 
 systems, for whether the taxpayer's ordinary income 
 be £1000 per annum, or ten times that sum, he 
 pays the same duty. A small concession to the 
 principle is, however, present in both systems. In 
 Germany all increment arising on sales of property 
 not exceeding £1000 in value (or, if unimproved, not 
 exceeding £250) was exempted if the income of the 
 vendor (and his wife) was not more than £100 a year, 
 and if he did not deal in property as a business.^ 
 Our system grants exemption on the increment in 
 value of a site of a house resided in by the owner, 
 where the annual value of the house does not 
 exceed £16 in the country, and amounts corre- 
 spondingly higher for London and large towns. 
 There is also a provision to exempt land occuj)ied 
 and cultivated by the owner where he does not own 
 more than fifty acres, and the average total value 
 does not exceed £75 per acre, provided that it is 
 
 ^ Local Government Review, Dec. 1912 (S.). - Loc. cit. (S.).
 
 62 PRINCIPLES OF TAXATION 
 
 not occupied with a house worth over £30 rent per 
 annum. Neither system recognises the " faculty " 
 principle sufficiently to grant " set-offs " for decre- 
 ment against increment, or to complete a partner- 
 ship between the State and the individual in relation 
 to losses as well as profits. But the German plan 
 provided for a second taxation upon a second and 
 " duplicated " increment. Thus, if a property rises 
 from £1000 to £1500 in value (tax being paid), then 
 falls in value, and again rises to £1500, in Germany, 
 duty would be payable on the second increment, 
 and so on indefinitely, but British duty would never 
 again be paid until the value of £1500 is exceeded. 
 Therefore our system is more impersonal and objec- 
 tive, carrying out more completely the " public- 
 value " principle to the exclusion of the " special - 
 ability " principle. 
 
 In regard to the rate of tax, if in nothing else, 
 the British system is simplicity itself, for it takes 
 one-fifth of the increment in excess of ten per cent. 
 But the German law here exhibited the utmost com- 
 plexity and ingenuity. A few of the " stages " may 
 be quoted by way of example. The tax was 
 
 10 per cent if the increment is not over 
 
 10 per cent, 
 
 11 per cent if the increment is between 
 
 10 and 30 per cent, 
 
 and the tax increased by 1 per cent for each 20 per 
 cent increase in increment, until 20 per cent was 
 payable where the increment was 190 to 200 per cent, 
 and by 1 per cent then for each 10 per cent incre-
 
 m STANDPOINT OF THE INDIVIDUAL 63 
 
 merit up to a maximum tax of 30 per cent where 
 the increment exceeded 290 per cent.^ 
 
 (6) Reversion Duties. — The Reversion Duty was 
 a still clearer example of the " special-ability " 
 principle, but even here the capital value of the 
 property reverting is really a deferred annual pay- 
 ment, which should be added to the ground rent to 
 give the real consideration for the use of the land 
 over the period, and on this payment no income 
 tax has apparently been borne by the owner. The 
 10 per cent duty may be regarded as equivalent to 
 a deferred tax on these deferred annual payments.^ 
 
 (c) Excess Profits Duties. — The justification for 
 the Excess Profits Duty was peculiarly the " special- 
 ability " principle. 
 
 The pre-war amount of profits was accepted as 
 that to which there was a normal title, and anything 
 above it was " war luck " — " a windfall," — some- 
 thing which had a special power to afford the tax. 
 As the Chancellor frequently said : " Any business 
 which in these difficult times has more than it had 
 in pre-war times, may be reckoned /or^t^^^a^e," and 
 it was this good fortune that gave the basis of 
 principle to the tax. But it is not necessarily 
 good fortune to an individual shareholder viewed 
 in the light of his total circumstances. All you can 
 say to the individual is : "I know that your income 
 as a whole has shrunk from £1500 to £1000, and 
 the income tax progression will properly recognise 
 that fact — I am concerned with that particular 
 
 1 Loc. cit. p. 415 (S.). 
 * Economic Review, 1911 (S.) ; Incidence of Taxation of Lensrhohls.
 
 64 PRINCIPLES OF TAXATION 
 
 dividend of £100 which, through no virtue of yours, 
 would be £200 during the war if it was not taxed, 
 and I frankly pick it out for special treatment and 
 take a part of the increase because of its wind- 
 fall or ' lucky ' character. The exigencies of the 
 times are such that I cannot be a partner in your 
 losses and give you a set-off for the dividends that 
 have diminished." This is the only kind of answer 
 that can possibly be given to the individual so far 
 as the old Excess Profits Duty is concerned, apart 
 from the question of practical expediency. We 
 are still left to consider excess profits as they exist 
 apart from war-time, and to ask whether, granted 
 there is " special ability," a windfall or luck receipt, 
 such special ability can be independent of the 
 amount of individual incomes and reside in a 
 corporate or non-personal body.^ 
 
 A theoretic basis for the proportional taxation of 
 the excess profit (unrelated to any standards) — i.e. 
 Sit a flat rate — may perhaps be iound in the benefit 
 principle, if it is postulated that the State and the 
 community during war - time supply elements 
 through which excess profits arise, and that such 
 external assistance is unrelated to previous circum- 
 stances or to the absolute size of the business. 
 Under this conception, the " tax " element is in 
 the background, and the position emerges that the 
 payment is a business expense, a royalty, a condition 
 precedent to the making of profit. It is a payment 
 out of gross profits before they can become income at 
 all. If excess arises through increased output at 
 
 ^ These paragraphs are reproduced from the E.J., 1917 (S.).
 
 "I STANDPOINT OF THE INDIVIDUAL 65 
 
 original prices, the communal necessities have 
 provided the conditions under which that supply is 
 taken up, and a charge is made for supplying those 
 conditions ; if the excess arises through higher 
 prices on normal output, the State makes a similar 
 charge. Apart from the rare cases where excess is 
 due entirely to reduced expenses, these two classes 
 or a combination of them cover the field, and a 
 proportional charge is, at any rate, comprehensible 
 on this principle. The basis for a progressive charge 
 on the simple excess is not so clear without recourse 
 to some element of faculty. As soon as it is 
 decided to relate the excess to a basis of capital or 
 pre-war profit, before applying a progressive tax, 
 the popular idea, as to special war-time " ability to 
 pay," seems to have a chance to operate. 
 
 Each business may be looked upon as a collective 
 entity of " hard assets " with a capital cost value, to 
 which there is attached, with its ordinary human 
 association, a normal accretion of products, viz. 
 average interest ; then any concern, which by 
 fortunate Konjunktur has a much larger normal 
 accretion than others {i.e. a real goodwill), has a 
 greater capacity to bear tax thereon without impair- 
 ment of its present or progressive productive power. 
 Thus by vesting an impersonal faculty in each self- 
 contained aggregation of assets this form of taxation 
 may be reached. But when the second kind of 
 relationship, that which compares the excess with 
 the pre-war profit, prevails, and the tax is progress- 
 ive accordingly, we seem to get near to the principle 
 that " to him that hath shall be given, and from
 
 66 PRINCIPLES OF TAXATION 
 
 him tliat liatli not shall be taken away even that 
 which he hath." The potentiality of each group of 
 assets is stereotyped at its pre-war results, which 
 are assumed to be what were right and proper in its 
 particular circumstances. There, is however, little 
 to show how far such basic considerations have 
 really been responsible in the general systems 
 actually in force. 
 
 {d) War Wealth Taocation. — In a similar way the 
 present agitation for the taxation of war fortunes 
 is by reference to the principle of special ability. 
 It is said that at a time when many people found 
 their capital reduced through the war, those who 
 had accretions to it have a special ability attaching 
 to the increase. One man has his capital decreased 
 from £50,000 to £40,000, and another has his 
 increased from £10,000 to £40,000, but under all 
 ordinary taxes they will now get treated alike. 
 But one is an unlucky man, the other is lucky, and 
 a new discrimination may be introduced by a 
 special tax, reflecting this difference in special 
 ability. If the tax is graduated according to the 
 total fortune, either pre-war or present, it follows 
 the ordinary ability principle and is progressive 
 with total resources. But in so far as it is graduated 
 also according to the amount of the increment 
 during the war, it is based on this special ability. 
 For example, if a war increase of £10,000 upon a 
 pre-war basis of £20,000 bears a rate of 10 per 
 cent and a war increase of £10,000 on a pre-war base 
 of £200,000 bears a rate of 50 per cent, we should 
 bring the scheme under the principle of ordinary
 
 in STANDPOINT OF THE INDIVIDUAL 07 
 
 ability. But if an increment of £50,000 (whatever 
 the basis) is taxed 20 per cent and an increment of 
 £100,000 (on the same pre-war level) pays 50 per 
 cent, it would be on the principle of special ability, 
 on the ground that the windfall is increasing in 
 taxpaying power as it increases in size.^ 
 
 4. " Special Ability " Abroad 
 
 The Australian Commonwealth taxes cash prizes 
 in lotteries on 10 per cent of the gross proceeds, 
 although the rate of tax applicable to the income of 
 the recipient may be quite different, and in Tasmania 
 a further 10 per cent is chargeable. In Western 
 Australia stakes won at horse races are charged — 
 the Turf Club or racing proprietor paying at a flat 
 rate and deducting the duty from the stakes when 
 paid over. On the whole, however, it is rarer for 
 this class of receipt to, be chargeable because it is 
 generally considered to involve the corresponding 
 responsibility in the case of losses, and if the 
 principle is carried through there would be no net 
 revenue derived. Such a consideration has been 
 important in regard to the taxation of ordinary 
 speculative gains in stock exchange transactions.^ 
 
 5. Expenditure Taxes 
 
 Of course taxation of income not saved is full of 
 practical difficulties, but it is sometimes thought 
 
 ^ Both of these classes of taxation were illustrated ia the proposal 
 made before the Comiiiittee on War Wealth. 
 
 * It is not strictly necessary for all losses to be allowed. Vide 
 Income Tax Report, par. 94, where it is proposed that losses shall be 
 allowed only from profits of a similar character.
 
 08 PKINCIPLES OF TAXATION chap. 
 
 that the same result can be reached by taxing the 
 things upon which income is spent. 
 
 It is clear that failing the possibility of taxation 
 on the whole expenditure we could reach the same 
 goal by putting a tax upon particular items provided 
 that those items figured in every one's expense in 
 exact proportion to the whole expenditure. Thus 
 suppose we wished to tax an expenditure of £300 to 
 an amount of £10 and an expenditure of £600 by 
 £20, and failed to do it by direct means, we might 
 select several articles, for example, beer, sugar, tea 
 and tobacco. If every one spent, say, a fifth of his 
 income in these four articles, we should get £60 
 spent in the one case and £120 in the other, and a 
 tax amounting to 3s. 4d. in the £ on those articles 
 would bring us the required revenue. But this 
 would be flat or 'proportional taxation. Such a 
 system in practice fails to do justice to the principle 
 of ability because if any such articles in general 
 use are chosen, the proportion of income spent on 
 them tends to diminish as incomes increase — a 
 man with £50,000 a year certainly does not spend 
 £10,000 a year in beer, sugar, tea and tobacco. So 
 far, then, from the taxation being progressive it is 
 actually degressive and badly so. No system of 
 taxation of commodities has yet succeeded in being 
 properly progressive. Then it fails to do justice to 
 personal obligations, and indeed does them an in- 
 justice ; for the more claims a man has on him 
 through a large family, the greater is the tax to 
 be paid, instead of the less. Again it makes no 
 discrimination between earnings and investment
 
 m STANDPOINT OF THE INDIVIDUAL C9 
 
 income, for if tliey are spent alike they are taxed 
 alike. And tlien, of course, the " special ability " 
 attaching to certain receipts gets no recognition in 
 the form of heavier taxation. 
 
 As will be shown in the next lecture, administra- 
 tive difficulties introduce a second kind of regression. 
 If the article taxed is one in general consumption, 
 not only does the man who has the less real ability 
 by reason of his family obligations tend to consume 
 a larger quantity in proportion to his income, and, 
 therefore, to pay a higher tax, but he also pays 
 relatively more because he has an inferior quality. 
 Most taxes have in practice to be specific and do not 
 vary freely with the sale prices of an article. 
 Alcoholic liquors for example are taxed broadly 
 according to their alcoholic content, and the price 
 of the rich man's wine contains a far less tax 
 proportionately than the same sum spent in beer. 
 Although cigars are charged at a higher rate than 
 tobacco or cigarettes, price for price the expen- 
 sive brands have a far lower percentage of tax.^ 
 A similar difficulty arises over the better kinds 
 of tea. In countries with extensive tariffs the ex- 
 amples of this regressive taxation, where the burden 
 varies inversely with ability, can be multiplied in- 
 definitely.^ 
 
 If we had a graduated tax on present expendi- 
 ture, the rich man would be charged at the same 
 rate whether he had inferior or better clothes, or 
 food, or furniture. As it is, any attempt to get a 
 
 ^ These facts were recognised in the Budget proposals of 1920. 
 '^ Higginson, Tariffs at Work, chap. iii.
 
 70 PRINCIPLES OF TAXATION 
 
 perfect system by taxing the articles themselves, 
 leads merely to regressive taxes. 
 
 Taxation of residents according to the value of 
 their houses, is a tax on expenditure, and a rough 
 kind of income tax, in so far as it is true that the 
 income tends to vary directly as the size of the 
 house. But as I have shown in British Incomes and 
 Property, the proportion of income paid in rent gets 
 continuously less as the income gets greater. For 
 the smallest class of incomes 30 per cent has been 
 paid in rent. When we reach £400 to £500 it is 
 about 10 per cent, and at £4000 it is 5 per cent only.^ 
 Therefore a flat rate of charge on the rental value is 
 really a regressive tax on the income, and when we 
 reflect that the man who has the greatest family 
 obligations and therefore the least taxpaying ability, 
 is the largest consumer of this " commodity," it is 
 seen to be a more regressive tax still. Professor 
 Marshall has pronounced in favour of a steeply 
 graduated house duty, for national purposes, in 
 relief of the pure income tax, and not suffering from 
 the defects of the latter or acting as a double tax on 
 savings.^ He thinks also that there should be a 
 tax on domestic servants and that the house tax 
 is in effect such a tax. His statement that " rich 
 people with small families select well-appointed 
 houses in expensive neighbourhoods, and poorer 
 people with large families go where accommodation 
 is cheap " may be true, but it does not alter the 
 plain statistical facts as to the relation between 
 
 ^ British Incomes, pp. 454-402. 
 ^ After- War Problems, p. 324.
 
 m STANDPOINT OF THE INDIVIDUAL 71 
 
 incomes and rent, and tlie regressive nature of the 
 duty. 
 
 Whatever virtue a tax on rental value may have 
 as a pseudo or presumptive income tax, the local 
 rating system in this country may be said to possess 
 it. I cannot burden these lectures with a discussion 
 of the difficult and well-worn question of the inci- 
 dence of rates, but it will be sufficient to say that a 
 contribution is secured from the tenant which has a 
 rough relation to his gross income, though not one 
 which squares precisely with modern conceptions of 
 ability. Enough has been said to show that rates 
 are gravely regressive, both from the point of view 
 of total income and also the general family obliga- 
 tions resting upon it. 
 
 6. Indirect Taxation in General 
 
 Must we conclude then that indirect taxation of 
 commodities is inherently bad ? If it existed by 
 itself it would be very bad, but as a minor part of a 
 general scheme, carefully watched, it can be made 
 to conform roughly to the principle of ability, over 
 an area which, though rightly taxable, cannot be 
 properly reached by direct taxation. Direct taxa- 
 tion of the poorer classes must be in frequent and 
 varying doses if it is to conform to the short 
 period fluctuating ability of those classes, and such 
 a tax is troublesome to assess and to collect. It 
 is frequently alleged to be impossible to tax the 
 working-classes, and that any tax which they may 
 appear to pay, either direct or indirect, is actually
 
 72 PRINCIPLES OF TAXATION 
 
 thrown off, by means of increased wages, on the 
 other classes. For it is said, if they receive only a 
 subsistence wage, its reduction by taxation reduces 
 efficiency, and more wage has to be paid to make 
 up the old standard, and that no permanent en- 
 croachment upon a minimum standard is possible. 
 In the last chapter I referred to Mr. Hobson's 
 division of the reward paid into " costs " and 
 " surplus," ^ and his contention that the taxation 
 of costs cannot in direct theory be achieved. 
 Mr. Hobson sets out to show : 
 
 (1) " That all taxes must be treated as deductions from 
 real income. 
 
 (2) " That income is divisible into (a) economically neces- 
 sary payments for the use of factors of production, i.e., 
 costs, and (6) unnecessary or excessive payments, i.e., 
 surplus, and 
 
 (3) " That all taxation should be directly laid upon surplus, 
 because, if any taxation is put upon ' costs ' the process of 
 shifting it on to surplus first involves waste and damage to 
 production, and is frequently made a source of extortion 
 from consumers ; secondly, it deceives the public by con- 
 cealing the final incidence." 
 
 Mr. Hobson elaborates a new kind of " ability " 
 to pay, viz., that power to suffer finally and without 
 affecting production, which surplus, or the non- 
 functional sections of reward, — reward not required 
 or earned in an economic sense, — really possesses. 
 This is an extension of the " windfall " or special 
 faculty principle to which I have already referred, 
 and is quite different in character from what is 
 ordinarily reckoned as ability, dependent on quanti- 
 
 ^ Hobson, Taxation in the New State.
 
 HI STANDPOINT OF THE INDIVIDUAL 73 
 
 tative rather than functional or qualitative tests.^ 
 The ordinary principle of ability judges upon a 
 vertical scale of magnitude incomes that are alike 
 in " quality," but the special principle judges upon 
 a horizontal scale of similar magnitude things that 
 differ in quality. 
 
 T. Cunningham, a writer in the middle of the 
 eighteenth century said, " You are forced to bear 
 the Bearer as well as his share of the burden ; which 
 will always be the consequence of laying taxes upon 
 workmen, labourers, and servants, or upon any 
 Thing they must necessarily consume ; for such 
 taxes only serve to enhance the price of labour and 
 consequently the price of everything thereby pro- 
 duced, which, of course, lessens our exportation and 
 injures every branch of our Trade." ^ 
 
 Down to 1750, throwing off taxes by the poor was 
 put forward without argument as obvious, but after 
 that it was more in dispute. " The labourer must 
 live by his wages, and he that employs him, by his 
 profits, and if by taxes you increase the necessary 
 expense of both, the former must have higher 
 wages, and the latter greater profits, otherwise the 
 one must starve and the other become bankrupt." 
 From one and the same persons, we get the contrary 
 arguments, that it is cruel to the poor to tax them, 
 and that they cannot really be taxed. There is, of 
 course, some truth in the contention, but it is very 
 materially restricted or modified by two important 
 considerations. 
 
 ' These paragraphs have been taken from the E.J., Dec. 191'J (S.)- 
 * Cunningham, History of National Debts and Taxes (1773).
 
 74 PRINCIPLES OF TAXATION 
 
 7. Wages contain, in fact, a Taxable Element 
 
 First, the theory assumes that the whole wage 
 is wisely spent, and, that prior to the imposition of 
 the tax every penny is employed in making or 
 keeping up efficiency. But this is manifestly not 
 so. Probably in the spending of every wage there 
 is some part that is ineffective and some part that 
 is positively detrimental from the efficiency point 
 of view. If we can succeed in pegging a tax at that 
 point, and reduce the quantity of the commodity 
 obtained, we may in the one case leave efficiency 
 unaffected, and in the second positively increase it. 
 Suppose that a wage of 60s. is commonly spent so 
 as to include 1 lb. of tea, 4 oz. of tobacco and 14 
 pints of beer. Let us assume that if the fourth 
 quarter of tea were forgone no harm would ensue, 
 and that if the fourth ounce of tobacco were given 
 up, efficiency would be unaffected, but that the 
 giving up of the last 7 pints of beer left the worker 
 more alert and competent and made the mother 
 attend to the children better, while the remain- 
 ing quantities of these commodities had certain 
 virtues in maintaining well-being and contentment. 
 Then the imposition of a tax on these commodities, 
 putting up their price so that only these reduced 
 quantities were obtainable with the old outlay, 
 would in two cases have no reaction upon efficiency, 
 and in the other would probably increase it. In 
 short, a wise selection of commodity taxes searches 
 out the non-functional surplus in spending, where 
 an income tax cannot.
 
 Ill STANDPOINT OF THE INDIVIDUAL 75 
 
 Of course the wage-earner can insist on having 
 the old. quantities of such goods, and make up the 
 difference in his expenditure on essentials like food 
 or boots. But human nature being what it is, the 
 increased dearness of a particular article is more 
 likely to have a definite effect on the consumption 
 of that article than an income tax which would tend 
 to be saved out of all the commodities. That is 
 to say, a direct tax on a wage-earner is more lil^ely 
 to reduce expenditure on primary essentials, and so 
 to react on efficiency as to be thrown off on to other 
 classes, than consumption taxes on specific non- 
 essentials. 
 
 The second point is that the efficiency given by 
 the direct expenditure of the community may equal 
 or exceed the efficiency taken away by the tax. 
 Suppose school feeding were paid for by imposing a 
 sugar tax — the net effect on the health of the family 
 might not be adverse, if the detriment caused by de- 
 priving the children of some sugar was more than 
 made good by the benefit from the food provided. 
 
 In so far as collective spending is wiser than 
 individual spending, a tax may increase efficiency, 
 and therefore not be thrown off. While so great a 
 proportion, on the average, as one-sixth to one-fifth 
 of a worker's income is spent in beer, it is idle to 
 talk about taxation being thrown off because 
 efficiency is reduced. This could only be the case 
 if the worker insisted on having an unreduced 
 quantity of beer, and the extra expenditure thereon, 
 caused by the tax, curtailed other items of the 
 household budget.
 
 76 PRINCIPLES OF TAXATION 
 
 The trutli is that there are two aspects of 
 " economic costs," viz., what the worker as a pro- 
 ducer will not offer his work without, and what he 
 cannot go on without ; and that in practice, since 
 there is always a margin of wastage in wages in- 
 efficiently spent, a wage that in the net sum spent 
 efficiently is just a subsistence wage, is actually on 
 the gross sum received, but not wholly wisely spent, 
 rather more than a subsistence wage. Part of the 
 gross sum received may therefore possess the 
 Hobsonian " ability " after all. Only consumption 
 taxes can possibly tax these personal elements, and 
 obviously they should be placed almost entirely on 
 the non-essentials. 
 
 What has been termed the " cynical " principle 
 of taxation, viz., " get your revenue where you can 
 with as little fuss as possible," is responsible in 
 most countries for much financial legislation, which 
 offends against the principle of ability, both from 
 the point of view of regression and " taxable 
 surplus." 
 
 8. The Family as the Unit of Taxation 
 
 It is obvious that consumption taxes must fall 
 upon the common purse of the consumers, otherwise 
 people are being taxed who have no incomes. That 
 common purse is usually the wage of the wage- 
 earning father of a family. If this indirect taxa- 
 tion, by commodities, is necessary in order to reach 
 easily, and without too great expense, classes or 
 elements of income which are difficult or expensive 
 to touch by income tax methods, then it is clear
 
 m STANDPOINT OF THE INDIVIDUAL 77 
 
 that any income tax system which, is correlative to 
 the indirect or commodity taxation should be so 
 framed as to correct its anomalies. If it is to do 
 this, the unit of income taxation must also be the 
 family, and so we find that in most countries with 
 a developed income tax charged upon smaller in- 
 comes, there is something analogous to subsistence 
 allowances for the wife and young children.^ The 
 worst features of the regressive taxation burden 
 upon a family are therefore relieved by the special 
 allowances in the income tax, when the two taxes 
 are added together. In Sir Herbert Samuel's 
 address on the Taxation of Various Classes of the 
 People,^ we get the following aggregated figures for 
 taxation paid for a family of four persons in 1918-19 : 
 
 Income. 
 £100. £13^*" or 13-8 per cent paid in taxation 
 
 (all indirect). 
 £150. £16^"^ or 10-9 per cent paid in taxation 
 
 indirect, and 4/6 or •! direct, equals 
 
 11 per cent. 
 £200. £206-9 or 10-1 per cent indirect, and 7/6 or 2 
 
 per cent direct, equals 10*3 per cent. 
 £500. £3013-9 or 6-1 per cent indirect, and £35 or 
 
 7 per cent direct, equals 13*1 per cent. 
 
 These figures are for earned incomes, and it will be 
 seen that real progression hardly begins until £500 
 is reached, for the extraordinary progression in the 
 income tax barely compensates for the regression 
 in the other taxes, when all are taken together. 
 
 It is thought by some that the incomes of grown- 
 up sons and daughters who live with their parents 
 
 1 1920 Comm. ; Appendix 14 (a) and 14 {b). 
 * Journal of the Royal SlalisUcal iSociety, Mar. 1919.
 
 78 PRINCIPLES OF TAXATION 
 
 should be aggregated as a " family income " witli 
 appropriate subsistence allowances.^ But although 
 it is only a question of degree, the extent of their 
 actual contribution to the common purse would 
 often be far more than covered by such allowances, 
 and what they have over and above this contribu- 
 tion they are usually free to spend on themselves. 
 That part is hardly an addition to the common 
 tax-paying ability, but is retained by them as in- 
 dividuals. It is not usual for a common responsi- 
 bility for the living of the mother and the younger 
 children to be assumed by such adults. In this 
 matter, much must depend upon the mode of life in 
 the several countries concerned. Most Continental 
 systems of income taxation make special allow- 
 ances for dependents, and some even give relief 
 for prolonged illness and other inroads into tax- 
 paying ability.^ The unit of taxation tends rather 
 towards the household. For example, in Prussia, 
 the incomes of husband, wife, and children under 
 age are aggregated, but in this as in most of 
 the systems there is respect paid to the earnings 
 from independent sources, and it cannot be said 
 that there is any general principle logically carried 
 through. 
 
 In this country allowances for " children " were 
 a feature of the earliest income taxation, and 
 then they were dropped because of administrative 
 difficulties.^ 
 
 1 Hartley Withers, Our Money and the State. 1920 Comm. ; Qs. 6888, 
 6929, 12,244, 12,261, 12,287, etc., 15,780-882. 
 - For. Income Taxes, 1913, p. 15. 
 ' Dowell, iii. p. 103.
 
 Ill STANDPOINT OF THE INDIVIDUAL 79 
 
 9. The " Turnover Tax " 
 
 Tlie taxation of consumption or expenditure 
 might be carried out by a " turnover " tax on all 
 retailers. But such a tax would enter twice or 
 more times into price when goods are bought for 
 use for business purposes. A man might buy a 
 dozen gas mantles and use six in his house and six 
 in his shop — the latter would be a business expense 
 and enter into price, so that on the sale of his goods, 
 tax would be paid upon tax. Such a result would 
 be very difficult to avoid. The Mexican system is 
 the best possible example of such a tax, where the 
 duty has been imposed either by larger payments 
 on the sales as a whole or by something similar to 
 our receipt stamp on all smaller sales. As it applies 
 to all sales whether for further manufacture or not, 
 there may be a very considerable enhancement of 
 price on certain classes of goods. If devices were 
 adopted, analogous to drawbacks, in order to 
 make the tax a true flat rate upon all expenditure 
 irrespective of the class of goods or accidents of 
 manufacture, or to give it a true progressive 
 effect, the tax would certainly be unworkable in 
 practice. 
 
 Prior to 1853 there was a graduated receipt 
 stamp duty in this country at the following rates : 
 
 [Table
 
 80 
 
 PRINCIPLES OF TAXATION 
 
 Amounting 
 
 to 
 
 £5 and not amounting 
 
 to £10 — 3d. 
 
 
 
 £10 
 
 jj )) 
 
 
 „ £20 — 6d. 
 
 
 
 £20 
 
 )5 J) 
 
 
 ., £50 —Is. 
 
 
 
 £50 
 
 )) 55 
 
 
 „ £100 —Is. 6d. 
 
 
 
 £100 
 
 
 
 „ £200 —2s. 6d. 
 
 
 
 £200 
 £300 
 
 „ „ 
 
 
 „ £300 —4s. 
 „ £500 —5s. 
 
 
 
 £500 
 
 )) )) 
 
 
 „ £1000— 7s. 6d. 
 
 ,, 
 
 
 £1000 
 
 or upwards 
 
 
 10s. 
 
 This duty was repealed in 1853 and the fixed Id. 
 duty then introduced, the following statement on 
 the subject being made by the Chancellor of the, 
 Exchequer (Mr. Gladstone). " We propose next to 
 deal with an article which in its present state is 
 most unsatisfactory, and that is the article of 
 stamps on receipts. This is a duty which does not 
 grow as it ought with the transactions of the country, 
 a duty which is evaded wholesale, and a duty which, 
 I must say, entails very considerable inconvenience. 
 It is not the mere question of charge that measures 
 the burden and annoyance of a tax, but the neces- 
 sity of dealing in particular papers stamped with 
 particular amounts, which you have to send and 
 get as occasion requires, with trouble and loss of 
 time — all these are little things, but all of them enter 
 very much into the question of inconvenience and 
 create just objections to the tax." ^ 
 
 The French duty of 1 91 4 charged a tax graduated 
 in four stages from 20 centimes on 200 francs to 50 
 centimes on 3000 francs or over. 
 
 The Mexican scale of charge is I centavo on 50 
 centavos to 1 dollar, 2 centavos on I dollar to 20 
 dollars, and 2 centavos for every additional 20 
 
 1 Dowell, iii. p. 300.
 
 m STANDPOINT OF THE INDIVIDUAL 81 
 
 dollars. Although indefinitely ad valorem, it could 
 hardly be said to be a progressive tax on income 
 spent, for all the purchases might be in small quan- 
 tities, though it certainly has progressive tendencies. 
 It fails to reflect any of the other aspects of ability. 
 
 10. Taxation of Capital 
 
 We have now passed from the taxation of 
 incoming wealth with its alleged drawback that it 
 discriminates against saving, to the taxation of 
 consumed wealth, and found that the latter leaves 
 much to be desired, and cannot fully discharge 
 the true obligations of a complete tax. We are 
 brought then to the taxation of unconsumed wealth 
 or " capital," in the ordinary sense. 
 
 The taxation of capital may be carried out in 
 various ways. It may occur in an irregular way in 
 the course of taxation of income, where income is so 
 defined as not to exclude every capital element. If 
 no exemptions exist in the income tax for a wasting 
 asset, like a leasehold, we have taxation of capital 
 mixed up with taxation of pure income, and this 
 may generally be justified if the receipts are being 
 used as though they were income.^ The practice as 
 regards such allowances in the income tax is varied, 
 and the evidence before the Royal Commission on 
 the Income Tax has shown that the question is an 
 extremely difficult one. I would refer those especi- 
 ally interested to the evidence.^ 
 
 ^ Vide Edinburgh Review, Oct. 1919 (S.). 
 ^ 1920 Comm., Q. 9883 et seq., Q. 9589 et seq. 
 
 G
 
 82 PRINCIPLES OF TAXATION 
 
 The next type of capital taxation is regular 
 annual taxation, and here obviously the tax has to 
 be small enough to be paid out of the annual 
 income. It may be the sole representation of the 
 principle of ability where no income tax exists by 
 its side, as in the case of the general property tax 
 in the United States of America until 1913. It 
 was almost the only tax for long periods in various 
 countries. As such it lends itself very ill to the 
 finer tests of ability that we have set out, for it is 
 not progressive, it rarely includes all kinds of wealth, 
 it rarely makes allowance for family conditions. 
 
 The actual ascertainment of income may be, and 
 often is, more difficult than that of property values. 
 In a farming or planting community few people 
 could reckon up their annual incomes with accuracy. 
 Part of the income is in kind, part of it is derived 
 from sales which are subject to deduction for 
 various expenses. To tax in such a community on 
 a basis of income would lead to endless confusion 
 and evasion. To tax on the basis of property is 
 simple, and comes to very much the same result in 
 the end as would be reached by a rigorous tax on 
 incomes. 
 
 In a complex community of modern times, how- 
 ever, such as all European countries and most of 
 the United States have come to be, the general 
 property tax proves hopelessly impracticable. It 
 leads to glaring inconsistencies and inequities, and 
 fails completely to attain its professed object. 
 
 Every man should pay according to his ability, 
 and ability must be tested separately by reference
 
 in STANDPOINT OF THE INDIVIDUAL 83 
 
 to the amount, character, permanence, and obliga- 
 tions of his wealth and resources. It is interesting 
 to consider the various capital taxes, such as 
 Estate Duties, from the point of view of their 
 "responsiveness" under each head.^ 
 
 When the wealth measured is income it need not 
 be pure economic income but should be what is, by 
 general standards and habits, treated as spendable 
 income, and measured over such periods of time as 
 to give fairly stable results. 
 
 11. The Possession of Capital, as affecting '' Ability 
 to pay " in Incomes 
 
 One aspect of ability comes out most clearly in 
 reply to the question : Does your income depend 
 upon your personal effort for its continuance ? 
 Does it stop when you stop ? Upon this is based 
 the discrimination between " earned " and " un- 
 earned " income, which is so well known and under- 
 stood that I need hardly spend much time upon it. 
 It is, however, necessary to clear up some misunder- 
 standings that gather round it, which arise through 
 confusion in terms. There is an idea that the dis- 
 tinction is made for some reasons of social worth in 
 the income itself or because it is more honourable to 
 work than to sit still and receive out of the labour 
 of others, or because there is something not quite so 
 righteous about " lazy " income. Without sup- 
 porting in any way the special position of a rentier 
 
 ^ For a more detailed consideration, vide Edinburgh Review, Oct. 
 1919 (S.).
 
 84 PRINCIPLES OF TAXATION 
 
 class, or the accumulation of capital in the hands of 
 idle people, I feel I can characterise such a view of 
 the difference between wages and interest as eco- 
 nomic priggishness. If I get £10 for refraining from 
 consuming and as the reward of " waiting " or 
 " abstinence," I do not rank it on any lower plane 
 than £10 I get from toil — it is just as much a reward 
 for services rendered. The terms chosen are very 
 unfortunate from that standpoint and have led to 
 much confusion of thought and unnecessary ran- 
 cour. You have only to examine the reasons upon 
 which the distinction is based to find that " earning " 
 or " not earning " have nothing to do with the case 
 at all. The question of desert does not really arise. 
 The true question is : Does this class of income 
 entail any special class of expenses in general, and 
 without reference to the circumstances of the 
 particular person to whom it may go ? The 
 question " What have you got to do with it ? " 
 is the personal one which involves the domestic 
 allowances. 
 
 The reasons for giving favoured treatment in 
 this country were almost entirely because certain 
 obligations attach to one class of income from which 
 the other class is free, obligations which reduce its 
 efiective amount for the purpose of present clear tax- 
 paying ability. If the Committee of 1906, instead 
 of applying a 9d. rate in place of the Is. rate to 
 this kind of income, had said any such income should 
 be reduced to 75 per cent of its gross amount to 
 get its effective taxpaying amount, and then charged 
 upon like terms with other income, the distinction
 
 XII STANDPOINT OF THE INDIVIDUAL 85 
 
 would have been quite clear to all. The Committee 
 fished about amongst the terms " permanent " and 
 " precarious," " investment " and " personal effort," 
 " industrial " and " spontaneous," but were frankly- 
 trying to find a term clear of elements of investment 
 and return upon capital.^ The connotation of the 
 word '' unearned " as used in the phrase '"' unearned 
 increment " has been quite wrongly lifted for its 
 use here. It is the presence or absence of capital 
 resources that warrants the whole distinction for 
 taxation purposes. It was long ago recognised that 
 £100 from toil was " weaker " than £100 from divi- 
 dends, because the toiler has to make provision for 
 precariousness of employment, sickness, old age, and 
 other infirmities, and also because he is tied and 
 often has to incur extra expenditure through living 
 near his work and being unable to select his abode 
 very mdely. In this connection it must not be 
 forgotten that we do not get our season ticket 
 expense between house and business, or the extra 
 cost of our meals in town, allowed as deductions 
 from income. 
 
 I ought here to refer to the confused meanings 
 that have come into these terms, though I have 
 dealt with the subject at much greater length else- 
 where.^ The first use is the Revenue use which I 
 
 ^ 1906 Comm. Report, para. 18 e.t seq. 
 
 ^ Some paragraphs here are taken from the E.J., June 1915 (S.). 
 The Royal Commission of 1920 have, for such reasons as those here set 
 out, recommended the substitution of the term " investment income " 
 for " unearned " ; and also the abolition of different rates of tax, and the 
 adoption of the method of reducing earned income by a constant pro- 
 portion to obtain assessable income. In this way there is no longer a 
 suggestion of any difference in qualitij, but rather one of quantity, and
 
 86 PRINCIPLES OF TAXATION 
 
 have explained. The second use of the terms 
 " earned " and " unearned " gives them a subjective 
 and qualitative connotation, for they are made to 
 convey moral and ethical implications, and to 
 express relation to some subjective standards of 
 quality. No one can read the propagandist litera- 
 ture from the time of Mill through the " single- 
 tax " periods down to the 1910 land campaign 
 without realising that these implications were 
 allowed to creep in and occupy a disproportionate 
 part in argument. Their appeal to primitive 
 passions was an effective finish to political harangue. 
 So the landlord, after being convicted of receiving 
 something for nothing (in the way of action or 
 function), may be shown to live the life of a wastrel, 
 " battening " on the labour of others, consciously 
 hard and unrelenting. Doubtless, too, the fact of 
 large aggregations of " unearned wealth " in the 
 hands of single individuals has an ethical, as well as 
 an economic, import, that has been increasingly 
 realised in late years. One need not look far, 
 therefore, to find reasons for the new elements of 
 meaning that these words have gained. They have 
 been completely given over to, and filled up by, this 
 sense in Lord Hugh Cecil's exposition of political 
 theory, " Conservatism," in his chapter on Property 
 and Taxation. 
 
 He furnishes the word " unearned " with a 
 complete and special ethical connotation of his own, 
 which is thereupon postulated as the general con- 
 
 the allowance of a definite amount to represent the general social 
 expenses to which such income is ordinarily subject.
 
 in STANDPOINT OF THE INDIVIDUAL 87 
 
 notation and as the basis of the modern taxing idea. 
 He has then little difficulty in showing that tliis 
 " unearned " aspect of wealth is quite fallacious as 
 a canon for taxation, and by sweeping it away he 
 comes to the conclusion of his argument in triumph. 
 It is not too much to say that he ignores both the 
 general revenue significance of the term already 
 dealt with, and also the special economic sense 
 to which reference will be made hereafter. After 
 dealing with the necessary limitations on absolute 
 ownership, he says : " The conception which lies 
 more or less definitely in people's minds, that a 
 man is justly entitled to what he owns because he 
 has deserved to acquire it, is, I suggest, a delusion ; 
 and all consequent distinctions about earned or 
 unearned increment of wealth are equally un- 
 founded." 
 
 After a space he goes on : " Let us say, then, 
 that a man gets wealth by lending his possessions 
 or lending his exertions. A distinction may fairly 
 be drawn between the two forms of lending, and the 
 word ' earning ' may be properly applied to the 
 second method of acquisition. But, if so, ' earning ' 
 must not be understood to connote any element of 
 desert ; for a moment's consideration is sufficient 
 to show that exertions are not paid for in proportion 
 to their desert." Here he compares the easy gains 
 of popular or vicious writing with the niggardly 
 profits of good scientific work, and refers to the fact 
 that a barrister and a ploughman, a prima donna 
 and a labourer do not necessarily differ in desert. 
 He continues : " The whole process is non-ethical,
 
 88 PRINCIPLES OF TAXATION 
 
 and upon whatever ground the owner can claim a 
 right to his gain it cannot be on the ground that he 
 deserves it." After dealing at some length with 
 the nature and causes of " increment," he says : 
 
 " It seems, therefore, evident that the claim of 
 the people, either as users or as an organised com- 
 munity, to appropriate either all the value of land 
 or any particular increment in that value because 
 they have created it and are therefore entitled to 
 a share of it different from what they can fairly 
 claim in respect to anything else, is a pure delusion. 
 But if it be once realised that the forces that make 
 wealth are never ethical, and that the gains made by 
 lending any possession . . . are equally unearned, 
 and that even gains that depend upon exertion 
 do not correspond to desert, the whole conception 
 expressed in the phrase ' unearned increment ' is 
 cut up by the roots. All property is seen to be 
 on the same moral level, as something acquired 
 without injustice, that is to say, without fraud or 
 violence, but not meritoriously so that the owner's 
 title may rest on his virtues." 
 
 All this is most true, and it would also be 
 relevant if the taxing distinction in question had 
 ever been based on moral issues. It is, however, 
 quite certain that our present tax authorities afford 
 no favours on the basis of desert ; illegal gains can 
 be charged to income tax,^ and there is no doubt 
 that a professional burglar in making a return for 
 assessment could claim the lower rate on " earned 
 income." 
 
 ' See judicial dicta in Partridge v. Mallandaine, 18 Q.B.E. 276.
 
 ni STANDPOINT OF THE INDIVIDUAL 89 
 
 The third connotation of unearned is economic 
 and functional, and was introduced by Mr. Hobson. 
 In his words ^ there is a "fundamental distinction 
 between costs and surplus. Costs, or the payments 
 necessary to evoke and maintain the use of the 
 existing power of production, represent the per- 
 manent harmony between capital, labour, and 
 ability. . . . The surplus passes in innumerable 
 fragments to the owners of a scarce factor of 
 production, wherever it is found. ..." But the 
 surplus is divisible into two parts. The "product- 
 ive surplus," coming as a rise of interest, profit, or 
 wages, causes growth in the industrial structure by 
 bringing into productive use more or better capital, 
 labour, or ability. It is necessary to the progress of 
 society. But the unproductive surplus arises where 
 scarcity " enables " a factor to extort a price for its 
 use which is not effective for stimulating supply " — 
 it includes " the whole economic rent of land and 
 such payments to capital, ability, and labour . . . 
 as do not tend to evoke a fuller or a better pro- 
 ductivity." 
 
 It will be obvious that this distinction is very 
 different from the others. Interest is " unearned " 
 in the Revenue sense, but in the Hobsonian sense 
 only excess interest beyond the minimum for use of 
 capital plus compensation for risk, etc., is " un- 
 earned." Similarly, all the profits of a private 
 business or from professional services are " earned " 
 in the Revenue sense, whereas in the other view 
 parts of the profits may be " unnecessary " to make 
 
 ^ The Industrial System, p. vii
 
 90 PRINCIPLES OF TAXATION 
 
 the business or professional man work just as well 
 and just as liard, and those parts are therefore 
 " unearned." 
 
 Moreover, particularly in regard to interest, the 
 *' unproductive " part is not a constant for all 
 individuals — it is essentially a psychological and 
 personal question. The whole fund of saved capital 
 is the resultant of many different forces, and the 
 effect of lowering the rate of interest may diminish 
 the tendency to save with some, increase it with 
 others, or leave it unaffected. Even a four per cent 
 rate contains an unproductive non-functional sur- 
 plus for some individuals, and a ten per cent rate 
 may be wholly productive and functional for others. 
 As Mr. Hobson says : 
 
 " This objectively conceived surplus is supple- 
 mented by a subjective ' surplus ' consisting of the 
 differential ' surpluses ' of certain owners of pro- 
 ducing power who do not require the payment of 
 the normal minimum price as an inducement to 
 evoke the industrial use of the particular power 
 which they own." 
 
 He is followed by Professor Hobhouse, who says 
 that " policy is on the right lines in beginning 
 the discrimination of earned from unearned income. 
 The distinction is misconceived only so far as income 
 derived from capital or land may represent the 
 savings of the individual and not his inheritance. . . . 
 If Liberal policy has committed itself not only to 
 the discrimination of earned and unearned incomes, 
 but also to a super-tax on large incomes, the ground 
 principle, I take it to be, is a respectful doubt
 
 in STANDPOINT OF THE INDIVIDUAL 91 
 
 whether any single individual is worth to society by 
 any means as much as some individuals obtain . . . 
 the principle of the super-tax is based on the con- 
 ception that when we come to an income of some 
 £5000 a year we approach the limit of the industrial 
 value of the individual. . . . The true function of 
 taxation is to secure to society the element in wealth, 
 that is of social origin." ^ 
 
 Mr. W. H. Mallock, like many others, quarrels 
 with the idea involved through not getting beyond 
 the terms used, when he regards the income received 
 from investments made out of money saved from 
 " earnings," as " earned." 
 
 I have brought this section under the present 
 lecture, although at first sight it might appear to be 
 related to the taxation of capital, because in most 
 countries the discrimination is not achieved by 
 taxing income in two difierent ways, but by having 
 alongside a common income rate a special or extra 
 regular tax on capital values.^ 
 
 ^ Liberalism. 
 * These are summarised in the Edinburgh Review, October 1919 (S.).
 
 CHAPTEK IV 
 
 THE STANDPOINT OF THE STATE 
 
 1 . The State has an Independent Standpoint 
 
 We have been so far discussing tlie individual point 
 of view — the kind of considerations that will occur 
 to Smith and 'Jones when they are weighing their 
 respective burdens and criticising the distribution of 
 taxation between them. It is important, of course, 
 that any Finance Minister should give full considera- 
 tion to the feelings of the taxpayers, but he has also 
 certain little preoccupations of his own which do 
 not greatly concern the taxpayer as an individual 
 payer. The legislature imposing taxation has to 
 give particular attention to aspects of the matter 
 which are more lightly passed over by the in- 
 dividual, except so far as he may be thinking 
 politically and as a voter interested in the national 
 finances. 
 
 The State as a tax-gatherer has to ask and 
 answer the following questions : 
 
 1. Is the proposed tax economical, or will it cost 
 an unwarrantable amount to get it in ? 
 
 2. Is it within the powers of the administration 
 for assessment and collection, or is it too full of 
 
 92
 
 cHAP.iv STANDPOINT OF THE STATE 93 
 
 difficulties to be workable ? Allied thereto is the 
 question : 
 
 3. Will it be specially open to evasion and pro- 
 voke dishonesty ? 
 
 4. Will the imposition of the tax tend to dry up 
 the source of the tax, and so prove abortive for 
 the Revenue ? 
 
 5. Does it raise political difficulties at home and 
 provoke unrest ? 
 
 6. Does it raise international difficulties or 
 provoke conflict with other taxing jurisdictions ? 
 
 2. The " Economy " of the Tax 
 
 If the initial outlay for establishing the 
 machinery for collecting a tax were so costly that 
 the periodical yield of duty hardly paid a reasonable 
 rate of interest on that outlay we should regard the 
 tax as uneconomical in the highest sense. Such 
 cases are rare, but it is a charge frequently brought 
 against the increment value duties that the original 
 valuation upon which the whole measurement of 
 the duty depends has been so costly that a com- 
 mercial yield of interest and a sinking fund to get 
 rid of that outlay have not been obtained from the 
 duty, and will not in future be obtained, so that 
 there is no net yield of revenue. While such 
 extreme cases are unusual, it is not difficult to find 
 in the past many taxes which have had very little 
 margin over and above the expenses of current col- 
 lection. This feature is naturally most obvious 
 with indirect taxes and tariffs. In backward or
 
 94 PRINCIPLES OF TAXATION 
 
 badly developed countries, where the administra- 
 tion over a wide area is weak, such as Persia or 
 Turkey, the farming of taxes has not been un- 
 common, and it is peculiarly wasteful. From a 
 recent account of China we learn the following : ^ 
 
 The basis of taxation is a State claim to a share in the 
 produce of the soil. The rent was actually fixed in 1712, 
 and this still theoretically governs the whole of the Land 
 Tax Assessment for China, but in practice various surcharges 
 are put on which, on a most moderate estimate, treble the 
 cost to the taxpayer without adding to the amount which 
 reaches the Central Government. The tax is, in fact, 
 farmed, only the surplus being remitted to Peking, after the 
 expenses of professional administration in the widest sense 
 of the word have been deducted as a first charge. 
 
 Mr. Jamieson in 1905 estimated the total Land Tax 
 leviable at 375,000,000 taels, whereas the collection, as 
 regards the surplus reaching Peking, was only 26,000,000 
 taels, while the actual collection from the pubUc was almost 
 certainly not less than 102,000,000 taels. Sir Robert Hart 
 has estimated the collection as high as 400,000,000 taels. 
 
 The next Chinese tax is Likin, a kind of octroi, or a 
 tax on goods in transit. Although repugnant to the com- 
 mercial Treaties, the tax has been condoned, especially by 
 being accepted as security for foreign loans. This, together 
 with the other miscellaneous taxes of the Chinese system, 
 forms part of the fiscal scheme which has been denounced 
 as " rotten to the core, childish and incompetent." 
 
 The immense crop of taxes that followed upon 
 the Napoleonic wars, with a tariff in this country 
 on 1150 articles, included many that were quite 
 unproductive and others that were very wasteful.^ 
 
 ^ Edinburgh Review, October 1919. 
 * Armitage Smith, Principles, p. 81.
 
 IV STANDPOINT OF THE STATE 95 
 
 3. Practicability 
 
 The first argument that is brought against every 
 new proposal departing from conventional lines is 
 nearly always that it is " impracticable." No one 
 alleges that it is impracticable to raise the rate of 
 income tax, estate duty, or tea duty, but if some 
 one proposes graduation or differentiation there 
 must be an inquiry as to whether it is 'practicable.^ 
 Can it be worked ? This question follows directly 
 upon proposals for preferential tariffs with draw- 
 backs, tariffs with ad valorem charges, luxury 
 taxes, turnover taxes, capital levies, levies on war 
 wealth, graduated taxes on business profits, and so 
 on. Many a proposal that is clear and equitable in 
 theory is beyond administrative ingenuity to work. 
 Many thought that differentiation between earned 
 and unearned income could not be worked, but 
 certain difficulties were got over by what was 
 frankly a compromise or concession. The crucial 
 case was the business worked by its owner, when 
 it had to be decided how much of the profit was 
 interest on capital and how much was earnings. 
 The difficulty was met by calling it all " earned." 
 The rest of the field of administration was com- 
 passable, and lent itself to regular rules easily 
 applicable. 
 
 The crucial case for the Capital Levy in the 
 valuation is the trust and life interest ; and in the 
 collection, the reversion and the personal business. 
 The difficulties of the luxury tax lie in a classifica- 
 
 * 190G Comm. Report.
 
 9G PRINCIPLES OF TAXATION 
 
 tion wliich shall have regard to the wide range of 
 articles of one type from the poor and essential to 
 the luxurious and non-essential, and also to the fact 
 that superior quality is not necessarily the sign of 
 luxury, but may be real economy and yet fail upon 
 a test of mere price. 
 
 A crucial case for the taxation of " war " for- 
 tunes arises when a comparison of valuations shows 
 a chargeable increase, but the assets are unchanged 
 and are still giving the same, or approximately the 
 same, real services to the owner. Such a case 
 would be the ownership of a number of properties, 
 with no increase of net rent, and therefore yielding 
 an income which, while not greater than before in 
 nominal amount, is actually far less in purchasing 
 power. The capital valuation in such a case upon 
 present scarcity values might well show a very 
 marked increase,^ 
 
 The difficulty in the case of a graduated tax on 
 business profits is a satisfactory criterion of capital 
 employed in the case of businesses which have a 
 goodwill superimposed on the original money put 
 in and so firmly established that it may almost be 
 said to have solidified into a hard asset. Is such 
 additional capital to be ignored ? 
 
 The land value duties have been a good example 
 of practicability endangered and wrecked by the 
 complexities of the law of real property. 
 
 It will be found generally that if a tax is believed 
 to be practicable over a considerable part of the 
 
 ^ Vide the Evidence before the Select Committee upon the Taxation 
 of War Wealth.
 
 STANDPOINT OF THE STATE 97 
 
 field to which it is to be applied, and the impractica- 
 bility is confined to a minor part, most States will 
 embark upon the scheme, and by a sacrifice of logical 
 principle at the point of difficulty and the adoption 
 of a few conventions, will satisfy the equities 
 roughly. This is generally possible if it is so 
 arranged that the State rather than the taxpayer 
 is the loser by it. Do we decline to have an income 
 tax because the farmer finds it impossible to say 
 what his income is ? No, but we invent an income 
 for the farmer — giving him the option to pay on 
 less if he can show cause, but in no case charging 
 him more. Do we refuse differentiation because the 
 business man cannot say exactly how much of his 
 profit is interest on his capital and how much is 
 the remuneration of his own work ? No, we agree 
 to treat it all as " earnings." ^ 
 
 In Prussia the taxation of companies on their 
 profits is not strictly compatible with the personal 
 income tax on total income, for while the former 
 diminishes all incomes alike, some incomes should 
 be chargeable at low and some at higher rates. 
 The exemption — so far as the companies are con- 
 cerned — of the first 3 J per cent of the dividends 
 paid by them, is a recognition of the elements of 
 double taxation although carried out in an illogical 
 manner.^ 
 
 In India the considerable administrative diffi- 
 culties of an ad valorem tariff are got over by 
 adopting conventional values for the various com- 
 modities where those difficulties are greatest. 
 
 ^ 1906 Comm. Report, para. 19. Economic Review, 1909, p. 412 (S.). 
 " F<yr. Income Taxes, 1913, p. 18.
 
 98 PRINCIPLES OF TAXATION 
 
 4. Practicability — Tariff Practice 
 
 The tendency of classification in tariffs is, of 
 course, to become increasingly minute and special- 
 ised owing to the highly diversified character of 
 modern manufacture and industry. If tariffs pro- 
 ceed by broad groups, then we find that in any 
 one group there are articles the nature and value 
 of which show wide variations. If the duties are 
 specific, then, of course, the cheaper varieties are 
 taxed at a higher rate in proportion to their value. 
 Such a greater specialisation tends to greater con- 
 formity with the equitable principle from the point 
 of view of the individual, but from the point of view 
 of the State it adds very much to the difficulties of 
 administration. Where the duty is an ad valorem 
 one, the duty charged varies directly with the 
 value of the imports, and so the incidence is the 
 same for cheap goods and dear goods. If you can 
 ensure a highly skilled and pure administration, then 
 the principles of taxation can be closely approxi- 
 mated to, and all annoyances of further detailed 
 classifications can be avoided. 
 
 I suppose the discussion as to the relative merits 
 of the systems is far from being concluded, and the 
 introduction of specific tariffs no doubt does mean 
 a greater interference with the relative demands for 
 the principal classes of goods than business men 
 generally will care to face. On the other hand, the 
 ad valorem system is a probable encouragement to 
 all kinds of commercial ingenuity, and to a general 
 lowering of the commercial morale.
 
 STANDPOINT OF THE STATE 99 
 
 In the United States the administrative problem 
 has been boldly and on the whole sensibly handled. 
 Not only do we find a highly specialised system of 
 appraisers, but also the demand for declaration 
 by importers, consignees, and agents for manufac- 
 turers. 
 
 Mr. Higginson tells us that attempts to put the 
 responsibility of the values upon minor officials, 
 who do not really know the facts, are widespread. 
 Moreover, in smaller countries where specialisation 
 in valuation is limited, and it can be retained in a 
 few hands, the ad valorem system can be properly 
 worked. In India conventional values are adopted, 
 but, while they may with a light rate of duty get 
 over many difficulties, they do not respond to 
 variations in trade. 
 
 Considering the interests of the State as we find 
 it now, specific duties are probably the best, despite 
 the great difficulty of subdividing the tariff and 
 forecasting the effect of the duties on different 
 grades. 
 
 Mr. Higginson has remarked that the duty of 
 7s. per pound upon imported cigars in England 
 makes the smoker of a 3d. cigar contribute to 
 the national revenue a far greater amount in 
 proportion to his needs {i.e. his expenditure) 
 than the purchaser of a genuine Havana. In 
 this sense, therefore, we have a tax opposed 
 to the principle of ability and of a regressive 
 order. He says that while the democratic in- 
 terests of America favour the freer and more 
 elastic ad valorem duties, the German mind has
 
 100 PRINCIPLES OF TAXATION 
 
 naturally tended to consider the power of the 
 administration.^ 
 
 When we come to consider the questions which 
 arise as a general result of a tariff, practicability is 
 again important. For example, drawbacks are 
 very easily devised in theory, but they are extra- 
 ordinarily difficult to secure administratively against 
 fraud. There is probably at the present day no 
 really satisfactory and sure method of securing 
 the State against abuse. Recent experience of 
 an analogous kind in connection with the motor 
 spirit duty will be in point here. 
 
 Canada has experience of an intermediate tariff 
 which has been used as a means of bargaining for 
 favourable treatment of home products abroad. 
 Such a scheme seems to be free from some of the 
 objections of the maximum and minimum tariff. 
 
 The practical administration of a preferential 
 tariff is, however, full of radical difficulties, similar 
 in character to those found in connection with the 
 ad valorem duties, and the under- valuation of goods. 
 These are got over in practice very largely by a wide 
 interpretation of the rules as to the extent to which 
 British labour is represented in the imports. 
 
 5. Practicability dependent upon the Powers exercised 
 by the Administration 
 
 It is of course always difficult to say in advance 
 whether a tax will be found to be workable or not, 
 
 ^ Higginson, Tariffs at Work, which should be consulted on the whole 
 subject. These anomalies were remedied to some extent in the Finance 
 Act of 1920.
 
 STANDPOINT OF THE STATE 101 
 
 and " workability " itself is a question of degree. 
 Moreover, what is found practicable in one country 
 may easily fail in another, and a country must 
 choose the system which is within its administrative 
 ability. The conditions are perhaps fourfold : 
 
 (a) Geographical. 
 (6) Political. 
 
 (c) Strength of administration. 
 
 (d) Character of people. 
 
 In a country with very wide-reaching spaces like 
 Brazil, geography is against it being economical 
 in a practical sense to have an elaborate internal 
 organisation for tax administration. It is quite 
 natural to take the simple course of collecting revenue 
 at a few ports easily within the range of the Govern- 
 ment's officials.^ If a country is dead set against 
 an impost on political grounds, a scheme that is 
 otherwise workable may be made wellnigh impos- 
 sible. For example, probably no tax could succeed 
 against the organised and carefully advised opposi- 
 tion at every stage of law that has met the Land 
 Values Duties. Certainly, German success in work- 
 ing a system in some respects less justly framed and 
 more complicated cannot be explained merely upon 
 the differences between the two countries as regards 
 the intricacies of land tenure. A "war wealth" 
 levy in this country would be unworkable if it met 
 with organised opposition, for so much depends 
 upon the goodwill of the taxpayer. A measure 
 
 ^ Cp. After-War Problems, Professor Marshall's chapter on " Taxa- 
 tion."
 
 102 PRINCIPLES OF TAXATION 
 
 of goodwill alone made the Excess Profits Duty- 
 possible. 
 
 " Strength of administration " can be illustrated 
 in many ways by comparison between an organised 
 and stable civil service and the American system in 
 force until recent years, which gave little room for 
 the development of scientific methods. The last- 
 mentioned condition, " Character of the people," 
 may be illustrated by what the Germans would put 
 up with in the way of browbeating and inquisitorial 
 action by their officials. The German people were 
 able long ago to enjoy all the advantages of a, 
 highly flexible, smoothly graduated tax upon 
 income assessed in a single sum because they paid 
 the price, and that price consisted in being sub- 
 jected to a fire of highly personal questions in 
 which the taxpayer had to account for every 
 action and expose his motives to the full official 
 scrutiny. 
 
 The police system played no small part in the 
 success of the Prussian taxation. But something is 
 said to have been attributable to the development 
 of a " public conscience " — a contention we might 
 have been more inclined to accept five years ago 
 than we are now ! 
 
 Of course a tax may be so inherently difficult 
 that, outside these conditions, it would be unwork- 
 able anywhere. It seems possible, in the light of 
 French experience, that the luxury tax is in this 
 class. Certainly highly elaborated tariffs frequently 
 present awkward features. But some countries are 
 content with a degree of success that would never
 
 STANDPOINT OF THE STATE 103 
 
 be tolerated in others, so that questions of prac- 
 ticability are relative. 
 
 6. Fraud and Evasion 
 
 The most important feature of practicability- 
 relates to the prevention of fraud and evasion. Is 
 it possible, with a given tax, to prevent undue 
 evasion without framing such rules and regulations 
 as will make life a burden to the ordinary honest 
 man ? The State has to postulate that there will 
 be a considerable number of people ready to take 
 advantage of any laxity or any loophole, and it is 
 therefore necessary to see whether an administra- 
 tive scheme can be devised which is not oppressive 
 but which at the same time will discourage fraud 
 and also expose it. It used to be urged that the 
 income tax was bad because, in Gladstone's words, 
 it made a " nation of liars," and that the best type 
 of tax was one which did not make a man his 
 own assessor, and therefore did not lead him into 
 temptation. 
 
 The smaller types of fraud, trifling omissions from 
 tax returns, petty smuggling, understatements of 
 values, etc., are perhaps, like travelling in a carriage 
 with a ticket of a different class, or passing a child 
 on the railway not strictly in accordance with its 
 age — acts which accord with a somewhat low code 
 of morals in this regard, rather than transgressions 
 against a higher code. The conscience in relation 
 to general or intangible bodies is sensibly lower than 
 in regard to personal real people we know — the
 
 104 PRINCIPLES OF TAXATION 
 
 revenue and the railway are " fair game." The 
 State is very intangible to the average man. 
 
 Just as a schoolboy who would not think of 
 robbing his mate of a top will gladly raid an orchard, 
 as a matter which is on a quite different plane, so 
 Smith, who does not dream of going into Jones's 
 house and taking his money or silver, will just as 
 effectively rob him by evading his own proper share 
 of income tax. 
 
 Still, the attitude of the ordinary man to that 
 abstraction which is called the State has perhaps 
 somewhat improved since the days of Charles Lamb, 
 who said with regard to smuggling, " I like a 
 smuggler, he is the only honest thief, who robs 
 nothing but the revenue — an abstraction I never 
 greatly cared about." 
 
 Byron, too, wrote to Moore in June 1815, when 
 the rate of income tax was 2s. in the £ : 
 
 A word more ; — don't let Sir John Stevenson (as an 
 evidence on trials for copyright, etc.) talk about the price 
 of your next poem, or they will come upon you for the 
 property tax for it. I am serious, and have just heard a 
 long story of the rascally tax-men making Scott pay for his. 
 So take care. Three hundred is a devil of a deduction out 
 of three thousand. 
 
 It needs a well-developed civic sense to feel as 
 deeply conscientious in small matters in our relation 
 to the State as in matters which immediately and 
 personally affect people about us. Four distinct 
 attitudes of mind may be noted. First, it is never 
 difficult to find some real or fancied inequity in the 
 State procedure towards us which will serve as a
 
 IV STANDPOINT OF THE STATE 105 
 
 justification for " getting our own back," and this 
 quickly serves to appease a scruple or condone the 
 offence. If a man has suffered at the hands of the 
 State by payment of tax on something which he 
 thinks should have been free, he will often take the 
 " squaring-up " process into his own hands, and use 
 the first opportunity to get even. Secondly, since 
 the State has put up various protective devices 
 against fraud and evasion, there is to some people a 
 certain kind of fascination in getting through them 
 unscathed — something a trifle smart or romantic, in 
 an- otherwise drab world, which may be boasted 
 about with great credit after dimier. Thirdly, the 
 feeling that other people similarly situated are not 
 paying " their whack " apparently almost impels 
 some to protect themselves, or get on to an equal 
 footing. At any rate this extenuation is very 
 frequently put forward. If there is any distinction 
 to be drawn in this matter of everyday evasion, it 
 is perhaps that people think the more passive an 
 action, the less blameworthy. The omission of an 
 item of income from charge is thought excusable, 
 whereas the overstatement of one's insurance or 
 the number of one's children in order to get 
 greater allowances is rather like a criminal act. 
 The smuggling through of dutiable articles for per- 
 sonal use seems to be a far less heinous offence 
 than getting goods past the customs which are 
 to be sold in the ordinary course of business. 
 Fourthly, when we leave the region of indisput- 
 able facts and come to the region of questions 
 of degree or of opinion, human fancy excels all,
 
 lOG PRINCIPLES OF TAXATION 
 
 in giving itself what is euphemistically called 
 " the benefit of the doubt." Most men would 
 scruple to give a false statement of the actual rent 
 they pay or receive, but if they have to give the 
 rental value of property they occupy — say for the 
 purpose of local rating — many do not hesitate to put 
 the lowest credible figure, certainly lower than they 
 would accept in the market. They would not 
 understate a holding of shares for estate duty, 
 but they would put the lowest conceivable value on 
 their furniture and similar possessions subject to 
 valuation. The same thing happens in getting goods 
 passed on ad valorem tariffs — it is always "up to " 
 the State to give effect to a different opinion. 
 Similarly in the vital factor of " stocktaking " for a 
 specially heavy duty lil<:e Excess Profits Duty, the 
 stocktaker may adhere rigidly to the rule " stock to 
 be taken at cost price or market value if lower," 
 in so far as the market value is a figure which 
 may be tested by comparison with prices outside 
 in the market. But with goods in a half-finished 
 condition which cannot readily be compared with 
 similar goods there is room for some difference of 
 opinion, and here some managers in the past have 
 had shocking fits of pessimism. 
 
 It was mid- Victorian wisdom to adopt such taxes 
 that the taxpayer would hardly realise he was being 
 taxed, and thus avoid tempting him into a liar. But 
 opinion to-day is that it is a good thing that the tax- 
 payer should feel something of the burden, and that 
 taxation must be settled on its merits as for reason- 
 able citizens, honest and honourable, and should
 
 STANDPOINT OF THE STATE 107 
 
 not be conditioned by the aspect of dishonesty and 
 evasion. On the whole I am inclined to think that 
 the general sentiment of tax honest}^ in this comitry 
 was rapidly improving prior to the war. But the 
 fever of profit-making and the high rates of taxation 
 brought about a bad relapse, and it has recently 
 been estimated that the loss in income- tax and 
 Excess Profits Duty in the last few years has 
 amounted to over 1 00 million sterling. The slightest 
 alteration in profits was so costly under Excess 
 Profits Duty that these figures must be regarded as 
 quite exceptional, and as not giving a proper recog- 
 nition to the real honesty of the average taxpayer. 
 But the State must look rather carefully before it 
 adopts any tax in which it is likely to be quite 
 powerless against fraud, or can only protect itself 
 by imposing such conditions on every one as to make 
 the scheme burdensome. For the taxpayer is none 
 too reasonable in the matter. In one breath he is 
 loud in his complaints as to the amount of evasion 
 and the way in which the Revenue allows itself to 
 be cheated, and in the next he hotly resents some 
 personal question addressed to him on his own tax 
 returns, failing to recognise that he himself cannot 
 escape the tests provided for carrying out his own 
 policy. It may be taken as axiomatic that the 
 more closely the tax conforms to just principles the 
 more open it will be to evasion, and the problem 
 for the State is always how closely to conform to 
 principle without giving up its safeguards.
 
 108 PEINCIPLES OF TAXATION chap. 
 
 7. Automatic Checks upon Evasion 
 
 In tlie imposition of many different kinds of tax 
 the State may provide its own remedy, one acting as 
 an automatic check upon the other. For example, 
 the ascertainment for house duty and rating of the 
 annual value of residences forms a rough check upon 
 the statement of income of the resident.^ Estate 
 Duty returns are checked to some extent by those 
 parts of the prior income tax returns which were 
 not readily open to evasion. The duties payable 
 under Excise and Customs are used in many 
 countries as presumptive checks upon the accuracy 
 of returns of profits. But of late years a still more 
 effective check, almost in the nature of retribution, 
 has come to light, especially in the fourth section to 
 which I have referred, viz. a realm of valuation or 
 opinion, for under an ad valorem customs duty, 
 which of course is the most just and also the most 
 difficult form, the tendency to undervaluation is 
 checked by the State having a right to pre-emption, 
 i.e. the right to take over the goods at the value set 
 upon them by the owner. ^ This certainly secures 
 a useful lower limit to values. Somewhat similar 
 is the claim of a community to acquire land or 
 property on the basis of the value on which the 
 owner has paid taxes, which can be used with great 
 effect to maintain assessable values. 
 
 Government Departments in some instances 
 during the war secured the right to acquire plant 
 and buildings at the value to which they might be 
 
 -^ British Incomes and Property, p. 459 (S.)- 
 ^ Higj/inson, Tariffs at Work, p. 65.
 
 IV STANDPOINT OF THE STATE log 
 
 written down at the end of the war for Excess Profits 
 Duty, and this was some check upon the zeal of the 
 taxpayer in claiming the depreciation allowances. 
 In the case of undeveloped land duty, the interests 
 of the taxpayer dictated a low value (for he had to 
 pay an annual tax upon it), but for the Increment 
 Value Duty he would wish for a high value, since it 
 formed the datum line from which to measure 
 future increments. Similarly the taxpayer wanted 
 a high value for Increment Value Duty, but at the 
 same time had his eye upon a low valuation for 
 Estate Duty. 
 
 Compensation on the basis of taxation has always 
 been a familiar dilemma, and it is wonderful how tax 
 returns go up on the rumour of an improvement 
 scheme. I remember very well when the Licensing 
 Acts first came into action, dispossessed licencees 
 before the Licensing Magistrates claiming to " do " 
 four or five barrels a week, who had perhaps a short 
 time earlier, before the same individuals sitting as 
 tax commissioners, put their trade at two or three 
 barrels. 
 
 Many taxpayers who were quite proud of their 
 prowess in securing good terms for themselves in the 
 assessment of profits during 1912 and 1913, lived to 
 regret their skill when those years formed the datum 
 line from which to measure excess profits during the 
 war. The rubber industry had revelled in a High 
 Court case decision (thought by some to be of doubt- 
 ful validity) which enabled them to claim consider- 
 able capital development expenditure as a deduction 
 from profit in pre-war years for income tax, but found
 
 110 rillNClPLES OF TAXATION 
 
 under the Excess Profits Duty that they were doubly 
 hit, for if they took a profits standard, their pre-war 
 profits had been reduced for taxation purposes, and 
 if they took a percentage on capital as a standard, 
 their development expenditure had not been put to 
 capital but to revenue. No wonder that the tax- 
 payer has asked for the best of both worlds. The 
 capital values adopted for Excess Profits Duty may 
 also have a reflex action upon Estate Duty. Under 
 the proposed taxation of war increases of capital, 
 the suggestion is that the taxable field shall be the 
 difference between a valuation of the individual's 
 wealth in 1914 and the same person's wealth in 
 1919. So his desire would be to make the 1913 
 valuation as high and the 1919 valuation as low as 
 possible — his memory, reversing the usual process, 
 must be good for the earlier years and bad for the 
 most recent.^ It has been suggested that any one 
 who has kept no record of what his possessions were 
 in 1913 might capitalise his income as returned for 
 income tax or super-tax in that year. This is a re- 
 finement of cruelty worthy of the Spanish Inquisi- 
 tion. The taxpayer certainly bids fair to be in a 
 worse dilemma than he was placed by the Excess 
 Profits Duty. 
 
 Equally at the present time there is the devil and 
 the deep sea for those who look forward to the doubt- 
 ful choice between a capital levy and a graduated 
 tax on business profits on the American model. 
 What does the taxpayer desire to have regarded as 
 the capital value of his business ? For one tax he 
 
 ' Committee on Taxation of War Wealth, Vid^ Evidence (S.).
 
 STANDPOINT OF THE STATP: 111 
 
 would like it as high as possible, and for the other 
 no figure could be too low to please him. 
 
 Where the profits of a single business have to be 
 divided between two taxing jurisdictions, as for 
 instance in the determination of the profits arising 
 in this country from a cable with America or of a 
 meat-importing company, there is great room for 
 ingenuity in the selection of methods of determina- 
 tion which shall throw the weight of profit into the 
 area where taxation is lightest.^ 
 
 Although Italy has a system of income taxation 
 which has more resemblance to our own than most 
 taxes, under-assessment has in the past been so 
 regularly recognised that it seems to be generally 
 practised without thought of fraud.^ It is of course 
 possible to imagine a State in which the public 
 conscience is so highly developed that, with a little 
 assistance in interpreting the law so that the tax- 
 payer may be protected from being led by his own 
 zeal in meeting his full liabilities to over-assess him- 
 self, self-assessment may be safely indulged in. 
 Adam Smith tells us of a remarkable instance, 
 which is worthy of the commimal spirit of the early 
 Christians : "At Hamburg, every inhabitant is 
 obliged to pay to the State one-fourth per cent of 
 all that he possesses. . . . Every man assesses him- 
 self, and, in the presence of the magistrate, puts 
 annually into the public coffer a certain sum of 
 money which he declares upon oath to be one- 
 fourth per cent of all that he possesses, but without 
 
 1 Vide aW) KJ., 1912, p. 12G (S.), and E.J., l!)i;5, p. 145, and Iho 
 provisions of the Anu'iitan and (Colonial Tax Acts. 
 
 ^ Kennan, Income. Taxation, p. 154 ; Vida), Ulmpfit sur le revenu-
 
 112 PRINCIPLES OF TAXATION 
 
 declaring what it amounts to, or being liable to any 
 examination upon that subject. This tax is gener- 
 ally supposed to be paid with great fidelity. A 
 similar mutual confidence exists in Underwald and 
 Zurich. A sober and parsimonious people having 
 no hazardous projects of trade do not feel that they 
 have occasion for any concealment." ^ 
 
 8. Communal Evasion 
 
 A State has to contend frequently not merely 
 with evasion by individuals but also with what I 
 may call " collective or communal evasion." If it 
 adopts the expedient of getting revenue from smaller 
 areas comprised within it — in respect, let us say, of 
 its expenditure of a local character — it frequently 
 apportions the total charge amongst them accord- 
 ing to their aggregate assessments to a given 
 common tax. Obviously, in a given area, the total 
 tax raised for that area may be fairly apportioned 
 amongst its inhabitants, even though all the assess- 
 ments are half what they ought to be. But that 
 area will score heavily compared with neighbouring 
 areas where the State tax is apportioned. Thus in 
 the United States, in many cases State or County 
 expenditure was spread over the township on the 
 basis of the general property tax. As the methods 
 of assessment to this tax had gone all to pieces, and 
 the ratio of assessed value to true or full value 
 varied from 10 or 20 per cent to 80 or 90 per cent, 
 it is clear that the gravest inequities arose. The 
 
 ^ Wealth of Nations, vol. ii. Part ii. Art. 2.
 
 STANDPOINT OF THE STATE 113 
 
 State Boards of Equalisation were begun partly to 
 meet this evil, and partly to deal with the proper 
 assessment of large corporate concerns with pro- 
 perty in many different areas, where local assessors 
 were powerless. These equalisation boards in some 
 instances evolved into the State Tax Commissions 
 which are doing important work.^ 
 
 Years ago it was quite common for the rate 
 values in an English parish to be far below the true 
 rental values, and even now some parishes rate on 
 only about 50 per cent of the rack rental.^ Special 
 provision had to be made when the Imperial income 
 tax was imposed, so that in so far as the rating was 
 utilised as a basis this feature should not pre- 
 judice the uniformity of assessment to property tax. 
 So far as the parish is raising revenue for itself, it 
 matters little, provided that the valuations are in 
 proper proportion to each other — the rate in the £ 
 of the tax is jpro tanto higher. But when the quota 
 to be borne by the parish out of the union 
 expenses is being fixed, it becomes important, and 
 the union assessment committees frequently take 
 steps to get proper equalisation. 
 
 In the same way if a union as a whole is under- 
 rated it gets overhauled by the county authorities, 
 when the county rate is being determined. 
 
 I may perhaps leave the subject of evasion by 
 quoting an early attempt at an up-to-date type. 
 
 In the Anti- Jacobin, 1798, there is a burlesque at 
 the expense of the Duke of Northumberland, who, 
 
 ^ H, L. Lutz, The State Tax Commission. 
 * "Land Valuation and Rating Reform," E.J., 1911, p. 25 (S.). 
 
 I
 
 114 PRINCIPLES OF TAXATION 
 
 besides avoiding the powder tax by getting his 
 servants to stop using powder, had claimed a 
 deduction in respect of his eight children from the 
 Triple Assessment, the immediate forerunner of the 
 Income Tax, under a provision which had been 
 made for the relief of the poor tradesman or manu- 
 facturer with a numerous family. It concludes 
 with these verses : 
 
 Again the Taxing-man appear'd — 
 
 No deadlier foe could be ; 
 A Schedule, of a cloth yard long, 
 
 Within his hand bore he. 
 
 " Yield thee, Duke Sniithson, and behold 
 
 Th' assessment thou must pay ; 
 Dogs, horses, houses, coaches, clocks. 
 
 And servants in array." 
 
 " Nay," quoth the Duke, " in thy black scroll 
 
 Deductions I espye 
 For those who poor, and mean, and low. 
 
 With children burthen'd lie. 
 
 " And tho' full Sixty Thousand Pounds 
 
 My vassals pay to me. 
 From Cornwall to Northumberland, 
 
 Through many a fair county ; 
 
 " Yet England's Church, its King, its Laws, 
 
 Its cause I value not ; 
 Compared with this my constant text — 
 
 A penny saved is got. 
 
 " No drop of Princely Percy's blood 
 Through these cold veins doth run, 
 
 With Hotspur's Castles, blazon, name, 
 I still am poor Smithson. 
 
 " Let England's youth unite in arms. 
 
 And every liberal hand 
 With honest zeal subscribe their mite 
 
 To save their Native Land.
 
 STANDPOINT OF THE STATE 115 
 
 " I at St. Martin's Vestry Board 
 
 To swear shall be content, 
 That I have children eight, and claim 
 
 Deductions ten per cent.'' 
 
 God bless us all from factious foes, 
 
 And French fraternal kiss ; 
 And grant the King may never make 
 
 Another Duke like this. 
 
 9. Taxing by " What the Traffic will bear " 
 
 If the State is taxing for revenue only, tlie 
 effect of an increased tax on a commodity upon its 
 own revenue from that tax through diminished 
 demand following an enhanced price has always to 
 be most carefully considered, and in the case of 
 Excise and Customs duties is generally found rather 
 troublesome to estimate. It is obvious that if the 
 commodity is one for which the demand is fairly 
 elastic, a small increase in price may cause a heavy 
 falling off in demand, and in the net result less 
 revenue may come in than before the duty was 
 increased. It is a problem very similar to that 
 involved in fixing railway rates, in finding " what 
 the traffic will bear." The Government has to 
 prognosticate the elasticity of demand and this is 
 naturally a most difficult problem. It is not merely 
 that fewer people will want to buy, or will have 
 an effective demand at a higher price. The law of 
 substitution may operate, and people will find a 
 way of satisfying the same wants by recourse to 
 other articles— alternative beverages or alternative 
 methods of lighting are cases in point, and the 
 principle is so obvious that I need not labour it here.
 
 no PRINCIPLES OF TAXATION 
 
 10. Political Aspects 
 
 Will a proposed tax raise political difficulties at 
 home or provoke unrest ? This is peculiarly a 
 question for each country to decide for itself without 
 reference to others. Can any one explain why the 
 Match Tax should have had such a remarkable 
 fate ? A differential tax upon a form of wealth 
 which is predominantly identified with one political 
 class brings about its own peculiar political diffi- 
 culties. This is illustrated in many countries 
 between the agrarian interests — usually conserva- 
 tive — and the manufacturing interests — usually 
 liberal — in the settlement of tariff policy. Students 
 of German and American tariff history will be 
 thoroughly acquainted with the fact that rival 
 taxation programmes may form the basis of whole 
 political contests. 
 
 The Land Taxes of 1910 may be said in many 
 ways to have raised political issues on party lines — 
 at any rate, if it was not actually foreseen at the 
 time of proposal that they would do so, they had 
 that ultimate effect. In some countries where such 
 matters are more important than here, the political 
 issue may be a matter of jealousy between the legis- 
 lative and executive wings of the government. 
 
 A good example of pure revenue policy being 
 materially affected by political considerations is 
 the adoption of the French Minimum Tariff. The 
 general or conventional system as adopted by 
 Germany and many other countries is the establish- 
 ment of a general tariff, and then by reciprocal treaty
 
 IV STANDPOINT OF THE STATE 117 
 
 cpncessions, making reductions on such a tariff 
 to form what is known as a Conventional Schedule. 
 The French system prescribed a minimum below 
 which the tariff rates could not be lowered without 
 the authority of the Legislature, as a check upon 
 the executive authority and plutocratic power. 
 This is supposed to have the advantage of giving 
 the fixed degree of protection and stable conditions 
 for industry without all kinds of official variations.^ 
 Similar jealousy of one section of the administrative 
 power may be found in connection with the Dingley 
 tariff. Tariff negotiation is, of course, a somewhat 
 delicate matter and is much better dealt with by 
 ministers and officials than by open discussion in 
 legislatures. 
 
 1 1 . Conflict with other Jurisdictions 
 
 The great dilemma before State administration 
 throughout the world at this time, in various forms, 
 goes right down to fundamental principles. It 
 may be described as the conflict between " situs " 
 and " ownership " as the basis of liability to taxa- 
 tion, or, to take the terms now becoming familiar, 
 between " Origin " and " Residence." ^ 
 
 Twenty-five years ago, when the taxable capacity 
 of Ireland was being investigated and vigorously 
 discussed, this difficulty ran throughout the matter, 
 but was never really laid bare.^ What is the taxable 
 
 ^ Higginsoii, op. cil. p. 13. 
 
 ^ 1920 Comm. Evidence, 9573, etc. (S.) ; Appendix, " Report of Sub- 
 Committee on Double Taxation," p. 171. 
 
 * British Incomes and Property, pp. 3G7-9 (S.).
 
 118 PRINCIPLES OF TAXATION 
 
 capacity of a country ? Is it what the residents in 
 that country can afford to pay, or is it what the 
 income produced in that country can justify ? 
 Suppose that all the property in Ireland belonged 
 to Englishmen resident in England, and all the 
 property in England to Irishmen resident in Ireland, 
 would the taxable capacity of Ireland be greater or 
 less than that of England ? Are we considering the 
 taxable capacity of a people or not ? We are back 
 to the old contention that taxes are paid by persons 
 and not things. If you want to see how deep- 
 rooted is the instinct to tax on two principles, 
 imagine the feeling of an Irish Government imposing 
 a separate income tax. Would they refrain from 
 taxing a property in Sligo merely because the income 
 from it went abroad ? One imagines that they 
 would feel it was specially chargeable. But suppose 
 that a millionaire settles down in Sligo who draws 
 all his income from England, would they decide to 
 exempt him ? Certainly not. It is very difficult 
 for States to make up their minds which principle 
 to adopt, and most of them end in taxing imder 
 both principles, hence the great problem of double 
 taxation, which exists not merely as between this 
 country and the Dominions,^ but also as between 
 the large and the small jurisdiction wherever 
 federal government is found, and where co-equal 
 jurisdictions exist within one economic sphere. 
 Any one who wishes to study the extraordinary 
 problems that arise will find them fully and freely 
 illustrated by State taxation in the United States, 
 
 ^ On the whole subject vide 1920 Comm. Evidence and Report.
 
 IV STANDPOINT OF THE STATE 119 
 
 By way of example take mortgages, mider the 
 General Property Tax. A. resides in New York and 
 has lent money on mortgages on a property in 
 Kentucky. The Kentucky authorities tax the 
 property in full, and think they have the clearest 
 possible right to do so. But, under the theory of 
 the tax, a resident has to make a return of his whole 
 property, and the New York resident is also sup- 
 posed to " show up " the mortgage. Both sides 
 defend their claim on principle by most extensive 
 arguments. A recent writer says : " The old, old 
 break in logic of course comes at this point. The 
 property mortgaged is already assessed — the suc- 
 cessive assessment of the mortgage is a second 
 assessment on the same property or rather on the 
 income of the same property. The answer of the 
 proponent of credit taxation reveals the wide differ- 
 ence in thought of those who favour exemption of 
 credits from those who favour their taxation. The 
 taxation man says — ' The owner of these credits 
 enjoys an income, has a property right in his posses- 
 sion, and is as able to pay a tax as the man who 
 happens to hold the physical property.' One 
 thinks of taxing things, the other of taxing persons. 
 The whole history of the futile attempts to tax 
 credits is a history of this hazy confusion of thought. 
 The man who proposes to exempt credits argues 
 logically on the basis of the taxation of things, his 
 opponent presses with equal logic the argument for 
 personal taxation." ^ 
 
 The existence of intangible credits, especially in 
 
 ^ Readjustments, p. 96.
 
 120 PRINCIPLES OF TAXATION chap. 
 
 a form other than mortgages, brings out the full 
 weakness of the property tax — ^the conflict of juris- 
 dictions. The physical property where situated is 
 located and taxed, the intangible is assessed and 
 taxed to the owner where he resides, both on the 
 legal theory that personal property follows its 
 owner and on the economic theory that the person 
 owes a tax allegiance to the place where he lives. 
 
 It was not merely in economic principles that 
 the difficulties existed. " The real break-down was 
 in administration. Real property can be seen and 
 cannot escape. But intangible property lilvc credits, 
 mortgages, stocks, etc., were veritable will o' the 
 wisps of taxation." ^ 
 
 The assessor had not only to detect the presence 
 of property, but must ferret out as well its quantity, 
 and its kind. And he was a locally elected officer 
 in a government whose fundamental administrative 
 theory has always been that efficiency consisted 
 largely in getting re-elected. To do his duty he 
 must antagonise those to whom he must appeal to 
 hold his job. And if this were not enough the work 
 he did was looked upon with disfavour by all who 
 could really have done it, and the salary was fixed 
 at about the value of the sort of men willing to 
 accept it.^ 
 
 The practical difficulties have led to many solu- 
 tions. As regards mort-gages the changes have been 
 summarised in eight classes : 
 
 1. Exemption. 
 
 2. Taxation as a share in the property, at the situs of the 
 
 1 LOC. Cit. 2 jr^Qg gj-^_ p_ 9g_
 
 STANDPOINT OF THE STATE 121 
 
 property and accompanied by a prohibition of any contract 
 by which the mortgagor might agree to assume the tax 
 (California). 
 
 3. The second plan without prohibiting contracts — a 
 plan really amounting to exemption (Wisconsin). 
 
 4. A low rate of taxation imposed when the instrument 
 is presented for recordation (New York). 
 
 5. A reduced and fixed rate of taxation, assessment made 
 as before (Maryland). 
 
 6. A rigid system of private and public spying with 
 liberal rewards to the spies (Ohio-Iowa). 
 
 7. A rigid centralised administration and a limited rate 
 for all property (Ohio). 
 
 8. Substitution of a progressive income tax for all taxes 
 on intangible personal property (Wisconsin).^ 
 
 It would take far too much, time for me to indi- 
 cate tlie numerous reasons given for these different 
 types, but of course the majority are really indefen- 
 sible in principle. Another writer has said that 
 double taxation prevails to a greater extent in the 
 United States than in any other part of the civilised 
 world. This is primarily owing to the complexity 
 of the system of government, " whereunder the 
 citizen and his property are subject to the taxing 
 power of two distinct sovereignties, the State and 
 the United States, and to the general ignoring of 
 interstate comity in the exercise of the taxing 
 power by the States over the persons and property 
 within their own jurisdiction." 
 
 Some effort is now being made by the separate 
 States to avoid this class of double taxation. The 
 method adopted in California and Oregon of taxing 
 
 * hoc. cit. p. 98.
 
 122 PRINCIPLES OF TAXATION 
 
 the separate interests of the mortgagee and mort- 
 gagor has been upheld as valid under the Consti- 
 tution by the Supreme Court. In practice it has 
 been impossible to prevent the mortgagee from 
 evading by forcing the tax on the mortgagor as a 
 condition of the loan, or by omitting it from his 
 property. It has been said that an effective system 
 of taxation which cannot be evaded will tend to 
 bring about equality, while a tax levied without 
 regard to effectiveness, though ostensibly equal, 
 may result in the grossest kind of inequality. 
 
 Another type of double taxation in the States is 
 the taxation of the same actual property in the 
 State where it is situated, and also upon the owner 
 resident in another State, and in this respect the 
 inheritance tax laws of the States run riot. Com- 
 pany shares are a common case. I have read of 
 one instance where railroad stock of the deceased 
 was subject to the tax of Wisconsin because this 
 State was his residence ; in Illinois because the stock 
 was physically in that State, being kept in a safety 
 deposit box in Chicago ; and in Utah because the 
 railroad company is a Utah corporation.^ 
 
 The National C^onference on taxation re- 
 solved : "Whereas, The problem of just taxation 
 cannot be solved without considering the mutual 
 relations of contiguous states, be it Resolved, That 
 this conference recommend to the States the 
 recognition and enforcement of the principles of 
 interstate comity in taxation." 
 
 These principles require that the same property 
 
 ^ Loc. cil. \}. 89.
 
 STANDPOINT OF THE STATE 123 
 
 should not be taxed at the same time by two State 
 jurisdictions, and to this end that if the title deeds 
 or other paper evidences of the ownership of pro- 
 perty or of an interest in property are taxed, they 
 shall be taxed at the situs of the property, and 
 not elsewhere. These principles should also be 
 applied to any tax upon the transfer of property in 
 expectation of death, or by will, or under the laws 
 regulating the distribution of property in case of 
 intestacy.^ 
 
 Opinion in the United States has hardened to the 
 view that a federal inheritance tax is an unwise and 
 improper encroachment by the federal government 
 into a just and proper field of State taxation. 
 
 It may be remarked that, so far as our own 
 system is concerned, Estate Duty is not chargeable 
 upon real property situated abroad. 
 
 The acute problem of double taxation within the 
 Empire is in all our minds. The United Kingdom 
 was first in the field, and taxed on the principles of 
 residence, origin, control, and every other pretext 
 it could invent, on the Donnybrook Fair principle, 
 " See a head, hit it." Now that the Dominions 
 have heavy taxes of their own, we are faced with 
 the problem of principle. Some of the Dominions 
 charge on both principles of origin and residence, 
 but others confine themselves to income arising 
 within their borders. France has been quite 
 modest in her new income tax and has not charged 
 income arising out of France. 
 
 The question as to what shall be given up by the 
 
 ' Loc. cil. p. 111.
 
 124 PRINCIPLES OF TAXATION 
 
 respective Exchequers in granting relief is of course 
 complicated by rights of possession, and by the 
 question of the obligations on expenditure incurred 
 by the Home Government. 
 
 Is any ground of principle at all to be appealed 
 to in all this ? My own view I expressed in evi- 
 dence recently as follows : ^ 
 
 " In a world in which there are no vested national 
 interests, where perfect reciprocity reigns, and where 
 an income tax similar in character exists in each 
 country, I imagine that its distribution might be 
 ruled according to the following principles : 
 
 " The tax that a man is called upon to pay to the 
 State may be said to be divisible into two parts, that 
 which is due for the specific protection and main- 
 tenance of particular sources of income, and that 
 which is due for the privileges which the citizen him- 
 self enjoys in his person and residence. I think no 
 one would contend that the Australian Government 
 has no right to make any charge in respect of a farm 
 there merely because its net produce goes to an 
 English resident ; similarly, no one would admit 
 that the English resident should be free from all 
 obligation to the British Government merely because 
 his income is derived from abroad. It is often 
 serviceable to remember that our income tax is a 
 combination of these two separate taxes, and the 
 Commission may recall that the confusion that has 
 arisen in the past on the subject of the taxable 
 capacity of Ireland had its origin in the failure to 
 distinguish these elements. It would seem to me 
 
 ^ 1920 Comm. Evidence.
 
 IV STANDPOINT OF THE STATE 125 
 
 tliat the origin tax, taken separately, might fairly 
 be levied on the benefit principle, and be a flat rate, 
 i.e. proportionate to the magnitude of the interests 
 protected — a sort of fee or charge. The Australian 
 Government would charge the same amount for 
 their services to the farm, whether the English 
 resident were a millionaire or a poorer man. There 
 are, of course, considerations which would make 
 the amount of the tax diminish with increasing 
 magnitude of the interests, but I think, on the 
 whole, they are not important. The resident's 
 tax, however, must necessarily be according to 
 ability, and therefore, in my judgement, progress- 
 ive. Speaking generally, upon incomes of con- 
 siderable amount, it would be much the larger 
 tax. Where origin and residence are in the same 
 country, we can well afford to blend the two into 
 one composite tax, and even admit the principle 
 of degression, remitting part of the fee, applicable 
 to origin, chargeable upon poorer people. As soon, 
 however, as origin and residence are distinct, there 
 would appear to be no theoretical reason why the 
 distinction should not make itself effective. In the 
 application of this principle, therefore, each country 
 would charge a combined tax upon its residents for 
 their income derived within the country, a resident's 
 tax for the income derived from abroad, and an 
 origin tax for all income going out, the net result 
 being that there would, apart from slight differences 
 in rates, be no problem of double taxation. 
 
 " The full application of such a principle in present 
 circumstances is, of course, impossible.
 
 126 PRINCIPLES OF TAXATION chap. 
 
 (1) There is no general reciprocity likely, and the 
 
 tax systems and principles of different 
 countries are very various. 
 
 (2) A piecemeal system admitting the principle 
 
 would be very difficult, because, in relation 
 to each of the countries considered, we are 
 either a debtor or a creditor nation. The 
 nations who stood to gain by it would come 
 in with us, and those who stood to lose 
 would stand aloof. Moreover, the practical 
 difficulties on accoimts on a piecemeal 
 system would be enormous, as the trade 
 carried on by various businesses does not 
 fall conveniently and separately into differ- 
 ent countries, and is very often merged 
 and indistinguishable. 
 
 (3) The amount of revenue to be given up by 
 
 this country would be very large, and 
 conformity to a mere abstract conception 
 would be too dearly purchased." 
 
 I certainly think that a State can tax beyond its 
 borders in respect of the property it protects, but 
 that it can most fairly do so on the benefit principle 
 or a flat rate. In this country we do not now allow 
 a foreigner living abroad any abatements, etc., in 
 respect either of his total income from all sources 
 or his income from this country. 
 
 How have such federal constitutions as Germany 
 and Switzerland dealt with this problem ? Gener- 
 ally double taxation is prohibited, and income from 
 real property is treated as left to the State where it 
 arises, and all other incomes follow the residence of
 
 STANDPOINT OF THE STATE 127 
 
 the taxpayer. Thus, land in Baden, owned by a 
 resident in Prussia, is charged in the former State. 
 His tax in each State is at a lower scale than his 
 total income would justify. In other instances the 
 rate of duty charged is determined by the total 
 income, but that rate is applied to the limited 
 income only.^ But the double taxation as arising 
 between units not within a federal union is a medley. 
 A kind of reciprocity for avoidance of double taxa- 
 tion existed between Germany and Austria before 
 the war. 
 
 If we suppose that all countries agree to tax by 
 origin only, State troubles would by no means be 
 over. Take the case of a company with orchards in 
 Canada, packing establishments, box-making, etc., 
 in Chicago, jam-making in the United Kingdom, and 
 retail sales in India, Australia, and Japan — where 
 do the profits arise ? The division of profits accord- 
 ing to the place of origin presents an almost insoluble 
 problem in accountancy and is, of course, not 
 strictly determinable. Many authorities leave each 
 case to be discussed on its merits. But in some 
 cases general principles are formulated. Take 
 Wisconsin for example : 
 
 " The Statute authorises a computation by taking 
 the gross business in dollars of the corporation in 
 the State and adding the same to the full value of 
 the property of the corporation located in the State. 
 The sum thus obtained is used as the numerator of 
 a fraction — the denominator of which is to consist 
 of the total gross business in dollars of the cor- 
 
 ^ For. Income Taxes, 1913, p. 16.
 
 128 PRINCIPLES OF TAXATION chap. 
 
 poration both witliin and without the State added 
 to .the full value of the property of the corporation 
 within and without the State. The quotient of 
 the numerator divided by the denominator is a 
 decimal which indicates the proportion of the 
 whole net income which should be apportioned to 
 Wisconsin. 
 
 " This somewhat complicated and arbitrary 
 method is applied quite frequently, but sometimes 
 leads to grotesque results. For example, a foreign 
 corporation may have a large amount of property 
 in Wisconsin, but its business, so far as Wisconsin 
 is concerned, may be carried on at a great loss. 
 Nevertheless, if profits have been large in other 
 States, the application of the above rule might show 
 a considerable income for Wisconsin. Yet on the 
 whole the plan has worked more smoothly than was 
 to be expected." ^ 
 
 12. Conflict of Sub-jurisdictions 
 
 In the problem of the State and its constituent 
 areas there are three kinds of solutions : 
 
 {a) The State may raise its revenue by applying 
 a surcharge to the local revenues, leaving the local 
 areas free to administer and assess how they wish. 
 This is the method often followed in American States, 
 which secures a percentage upon the general pro- 
 perty tax in each local area in the State. Some- 
 thing like this is the net result of the British method 
 of spreading the county rate over the parishes in the 
 
 1 Readjustments, p. 72, and E.J., JIar. 1913 (S.).
 
 STANDPOINT OF THE STATE 129 
 
 country, but so far as the whole Government is 
 concerned the method is inapplicable. 
 
 {b) The second method is for the State to apply 
 a tax over the whole area under its centralised 
 administration, and for the local areas or townships 
 to get their revenues by way of surcharges on the 
 State revenue. This is the German method. To 
 the Prussian State income tax in each local area 
 is added a special percentage settled, within limits, 
 for that locality.^ 
 
 (c) The third method is what is known in iVmerica 
 as segregation of the source, or separation of the 
 revenues, in which the State and the local areas 
 each have independent and appropriate sources of 
 revenue. For example, the local area is free to have 
 licenses, fees and taxes on real estate, like rates, 
 while the State takes customs and a general income 
 tax. It is difficult to say at the moment, under the 
 special conditions introduced by the war, which is 
 actually gaining the day as an accepted principle, 
 but separation of the source is not quite the fetish 
 that at one time it seemed to be.^ 
 
 ^ Departmental Report (1910) on Local Taxation in Prussia; also 
 Statistical Journal, April 1912, p. 487. 
 
 ^ Readjustments, p. 131, chapter on " Separation of State and Local 
 Revenues " by Professor T. S. Adams.
 
 CHAPTER V 
 
 THE STANDPOINT OF THE COMMUNITY: 
 ECONOMIC EFFECTS 
 
 1, Economic Effects may he distinguished from 
 Incidence 
 
 We have now to consider the attitude of the com- 
 munity, in its social and economic activities, 
 towards questions of taxation. It is conceivable 
 that the individual taxpayers might be satisfied 
 that a proposed burden was equitably apportioned 
 between them, and the State as tax-gatherer might 
 be equally complaisant, but that at the same time 
 the business world might find the particular kind of 
 tax objectionable as a hindrance to trade, to the 
 accumulation of capital, or to particular kinds of 
 investment. I have reserved for consideration here 
 the general effects of taxation, after the individual 
 has found a way to pay it, and the State has foimd 
 a way to collect it. It is commonly recognised that 
 the incidence of taxation is a very intricate problem, 
 which for its elucidation in many cases requires 
 great powers of abstract economic analysis. When 
 we inquire into the incidence of a tax we usually 
 mean " by whom is the tax finally paid ? " and 
 
 130
 
 cn.v STANDPOINT OF THE COMMUNITY 131 
 
 when we speak of effects, we have in mind something 
 beyond the incidence — whether the conduct of the 
 payer on account of the tax is modified in such 
 ways in his economic relationship to others as to 
 alter the equilibrium of business. For example, 
 we should agree that although the importer pays 
 the tea-duty, its final incidence, via the wholesaler 
 and retailer, is upon the consumer. But its effects 
 may be more far-reaching. Does it diminish the 
 consumption of tea and increase the profits of the 
 cocoa dealers, or does it diminish the demand for 
 children's boots, or is the effect generally diffused 
 over all business ? Would a " turnover " tax 
 have the effect of throwing business into the hands 
 of large firms which controlled various stages of 
 manufacture ordinarily carried on by separate 
 firms, owing to the fact that in the former case 
 the tax would be payable only once, and the. 
 aggregate p.rice effect of the latter could therefore 
 be undercut ? 
 
 I do not disguise the fact that this subject is the 
 most difficult one of all those dealt with in these 
 lectures, for if it is to be dealt with properly it 
 demands on the part of all some knowledge of 
 economic principles and the habit of economic 
 reasoning. I do not propose to deal with the 
 ordinary questions of incidence that may be found 
 in text-books — such, for example, as the fact that 
 taxes on monopoly produce tend to be borne by 
 the monopolist, and that taxes on monopoly profits 
 cannot be shifted, and so forth. Neither can I 
 cover the whole ground, except by the not very
 
 132 PRINCIPLES OF TAXATION 
 
 illuminating process of quoting a series of con- 
 clusions. So I propose to deal with two or three 
 questions rather more fully and by way of illus- 
 tration. 
 
 2. Capitalisation of Taxes 
 
 The principle of capitalisation, or amortisation 
 as it is sometimes called, is so far-reaching and 
 insidious that some reference should be made to it. 
 An attempt to tax by a special tax any particular 
 kind of interest or return on capital can rarely be 
 carried out properly — it nearly always amounts to 
 confiscation for the present holders, so that all 
 future owners are relieved from the burden. For 
 example, suppose it should be decided that all 
 dividends of gas companies must bear a special 
 tax of 4s. in the £, or one-fifth of the income. No 
 one looking round for investments would think of 
 putting his money into such shares without taking 
 the burden of the tax into account, in order that 
 after paying it he might be in the same position as 
 if he had invested in other shares of a like quality 
 or security, which he could only do if he paid a 
 price reduced by 20 per cent. One would expect 
 prices of gas shares to drop to this extent in the 
 market, and if any present holder wanted to sell, he 
 would suddenly find one-fifth of his capital con- 
 fiscated, although the tax is ostensibly a tax on 
 income. In no case does a future holder by pur- 
 chase pay the tax, for he gets a full market yield of 
 interest.
 
 V STANDPOINT OF THE COMMUNITY 133 
 
 The one condition is tliat tlie capital in question 
 must have a free current yield which is on com- 
 parable terms with other forms of interest, and is 
 therefore bought and sold in the market. But the 
 effect here is not quite final. In the case of 7iew 
 openings for such capital, the offer to be made by 
 the promoter must allow for the burden, otherwise 
 the issues will fail by competition with the general 
 return on capital. One of two things must happen : 
 either the demand for gas is inelastic, and people 
 must have it whatever it costs, in, which case the 
 quantity of gas consumed will be unaffected, but its 
 price will be higher because of the special burden ; 
 or the least eligible propositions for gas production 
 will not mature, because they will no longer be pay- 
 ing propositions, and the restriction will come back 
 upon the public in this way. Gas production is 
 peculiar, and admits of little competition. If the 
 product is in free competition with large supplies 
 from untaxed sources, the price cannot be greatly 
 revised, and the special burden tends to be borne by 
 " home " business in a restriction of supplies. 
 
 A distinction must always be drawn between the 
 effects of a differential tax on existing yields and 
 that upon future openings for investment ; and the 
 economic effects are different again where the tax is 
 a differential tax upon the whole profits, rather than 
 upon the economic share of capital as such. 
 
 Just as a differential tax tends to be a confisca- 
 tion of values for present owners, so a differential 
 exemption or privilege tends to be a bonus to present 
 owners. Suppose the State decided to give gas
 
 134 PRINCirLES OF TAXATION 
 
 dividends a special exemption in a tax that is other- 
 wise general. Present holders enjoy a privilege 
 which is worth money, and when they sell shares 
 they can capitalise practically the whole of the 
 benefit in extra price, for no holder is going to let a 
 buyer have a special privilege without paying for it 
 in full, and, virtually, the buyer finds himself with 
 the general market yield on capital. 
 
 3. Examples of Capitalisation : the Land Tax 
 
 The effect is not really dissimilar where the tax is 
 partly on economic rent and partly on interest. A 
 good example of an " old tax being no tax " is the 
 old Land Tax. We now find that a given piece of 
 land has a practically fixed annual charge attached 
 to it, like a feu-duty or ground-rent, and indistin- 
 guishable therefrom in its effects. Is this a tax or 
 not in the ordinary sense ? Some twenty years ago, 
 when the burdens on particular classes of property 
 were being considered, I remember that one high 
 official gave it in evidence as his view that the Land 
 Tax was not a tax at all any longer, for it was 
 taken into account by every purchaser in the price. 
 Even when land has passed by inheritance it has had 
 only the value as reduced by the fixed charge since 
 the time of the first imposition. Can this be said to 
 be any tax on the present generation ? Does it 
 represent any sacrifice, like a tax, to inherit a piece 
 of land for which no one can remember ever getting 
 the full rack rental ? 
 
 On the same occasion another official took the
 
 V STANDPOINT OF THE COMMUNITY 135 
 
 view that the Land Tax was a tax, and so we find 
 the unique feature of a Chairman and a Deputy- 
 Chairman of the Board of Inland Revenue taking 
 directly opposite views on a question of principle.^ 
 
 It is quite obvious that suddenly to give up the 
 old Land Tax would be an immediate bonus of its 
 capitalised value to the vast majority of owners, 
 exactly the same as if feu-duties or chief rents were 
 cancelled. But as recently as 1894 the State did 
 not take the " rent-charge view " very decidedly, 
 for it said that people with incomes under £160 
 should have the charge remitted, and others with 
 small incomes should have it halved, and it there- 
 fore treated the tax as a true tax.^ 
 
 Here, however, the amortisation of the differ- 
 ential favour was incomplete, for the purchaser of 
 land on which the tax was remitted was not entitled 
 to the same privilege unless he were in the same 
 economic position, and exempt from income tax. 
 So if a millionaire was competing with a poor man 
 at an auction for a piece of land, since the poor man 
 could get a higher yield he was theoretically in a 
 stronger position and could afford to outbid the rich 
 man. The economic tendency of the exemption 
 would appear, therefore, to be to give the poorer 
 people economic advantages in this class of invest- 
 ment in competition with other investors which 
 could not be enjoyed in other fields of investment, 
 
 1 Royal Commission on Agriculture, Qs. 45,247, 63,085, 63,425, etc. ; 
 E.J., 19th July 1911 (S.) : British Incomes and Frnpcrty, pp. 58 and 
 470 (S.). 
 
 - At the same time the burden was rcducdd to a maximum of a 
 shilling in the £ on the rental value.
 
 136 PRINCIPLES OF TAXATION 
 
 and so to throw the ownership of property into the 
 hands of smaller people.^ Of course, economic 
 tendencies rarely have an opportimity to work 
 themselves out fully, and much friction prevents 
 the theoretical results from full realisation. Just 
 as taxes tend to stick where they fall, so differential 
 favours tend to stay where they are given. If it 
 were not so, then the Agricultural Rates Act, in 
 charging half -rates on agricultural property, did 
 not benefit the farmers as ratepayers at all, but was 
 a present to the landowners. Similarly, the unfair 
 benefit which farmers were considered to enjoy for 
 some years prior to the war, in having a virtual 
 exemption from income tax upon their profits by 
 reason of the fact that they were deemed to make 
 only a sum equal to one -third of their rent for them- 
 selves, was an advantage that theoretically should 
 have been absorbed by the landlord in enhanced 
 rent. In all probability the duty involved was too 
 small for the " friction " to be overcome.^ 
 
 Now, lest you think me unpractical, may I give 
 three instances in which the capitalisation principles 
 may be an active question to-day ? 
 
 4. Recent Examples of Capitalisation 
 
 The first example is in relation to the existing 
 Excess Profits Duty. It will be remembered that 
 when shipping profits began to boom in a most 
 extraordinary way, the sale values of ships went up 
 enormously. The owner of a ship could sell and 
 
 1 E.J., 1911, p. 30 (S.). - E.J., 1911, p. 32 (S
 
 V STANDPOINT OF THE COMMUNITY 137 
 
 realise what was practically a large part of the 
 anticipated profit, and on this he was not liable to 
 taxation, because it was a " capital " transaction. 
 The purchaser, having regard to his high capital 
 outlay, was often entitled to much better standards 
 of profit or allowances for capital outlay, and higher 
 depreciation allowances, and to such an extent, in- 
 deed, that where such changes took place it seemed 
 lilvely that the Revenue would no longer get the large 
 sums of duty from shipping that the amount of profit 
 would otherwise have justified. The obvious remedy 
 was to treat the sale value of the ships as if it were a 
 taxable profit, and for a short time such a proposal 
 was actually down upon the amendment paper. 
 But, unless it formed a part of a general scheme 
 of taxation of capital realisations, it obviously in- 
 volved many anomalies, and the matter was finally 
 dealt with in quite another way. It was arranged 
 that the purchaser should be no longer allowed to 
 have any greater privileges in the matter of allow- 
 ances for capital and depreciation, despite his much 
 larger investment, than had belonged to the vendor.^ 
 By the principle of amortisation the purchaser 
 would then realise that, compared with other 
 capital investments of a like amount, he was sub- 
 jected to unusual tax discrimination, and, in order 
 to get the current expectations upon his money, he 
 naturally could not afford to offer so great a sum as 
 he would have done if his taxation privileges had re- 
 mained intact. In this way, in theory at any rate, 
 the vendor was indirectly taxed upon the sale price, 
 
 ' Hansard, 22nd June 1916, 385.
 
 138 PRINCIPLES OF TAXATION 
 
 for the purchaser would throw all his special burdens 
 into a depression of the purchase price. In prac- 
 tice, of course, whether these things really happened 
 or not is not easily discerned, because where there 
 is a great shifting of values, it is always difficult to 
 disentangle the effects of a particular cause. This 
 is exemplified in a striking way in the American 
 Excess Profits or Business Profits Tax. You will 
 be aware that this is a graduated tax in which a 
 profit which shows a very high percentage on capital 
 bears a progressive rate. For example, if the profit 
 were 60 per cent on capital, the amount between 
 8 and 15 per cent might bear a rate of X, between 
 15 and 25 per cent a rate of 2X, and between 25 and 
 35 per cent a rate of 3X, and so on, so that by the 
 time the whole 60 per cent had been taxed, it might 
 be reduced to a net figure of, let us say, 40 per cent. 
 
 Here it must be remembered that the capital 
 in question is not the share capital, but the whole 
 capital, including reserves, — that is, the cost of all 
 the assets. 
 
 Now let us suppose that the £l shares of such a 
 successful concern stood in the market at £8 before 
 the imposition of the tax. If you bought these 
 shares you would get a return on your money of 
 7 J per cent, which we will say, for argument's sake, 
 is the current expectation in that industry. Now, 
 if the distributable profit is suddenly reduced to 
 40 per cent, your investment of £8 will only bring 
 you in 5 per cent, and in order that the current 
 expectation of 7^ per cent may be granted, the price 
 in the market will sink from £8 to just over £5, and
 
 V STANDPOINT OF THE COMMUNITY 139 
 
 when you come to sell your shares the purchaser, 
 in order to get his 7j per cent, will only offer you 
 just over £5, and you will have lost the difference. 
 In your capital loss, therefore, you will have dis- 
 counted the whole future tax of this exceptional or 
 differential kind.^ 
 
 Now whether or not the share values of highly 
 successful concerns, in so far as they did not 
 represent hard assets, actually exhibited such a 
 drop, is not easy to determine, because, firstly, the 
 tax was rumoured for a long while, and, therefore, 
 the effect would not be sudden ; secondly, the tax 
 was expected to be temporary only, and, therefore, 
 to that extent, capitalisation of the burden would 
 be unnecessary ; and, thirdly, the general values 
 were altering rapidly. But there is little doubt 
 that the sudden introduction of such a scheme, 
 without any mitigating provisions, into a world of 
 stable values, would have the effect indicated.^ 
 
 The third illustration I shall give relates to 
 double taxation. Suppose there are some shares in 
 Australia which have been subjected to Australian 
 income tax, and also to British income tax 
 because the company is controlled in London, you 
 would get a total burden of, say, lis. in the £ on 
 the profits. Presumably the new investor in the 
 market buying such shares, as against shares which 
 bore only one of the two taxes, would pay such a 
 price as to get rid of the additional burden, and to 
 leave him with the current yield. Now if the whole 
 of the special burden were suddenly removed, that 
 
 1 E.J., 1919, p. 42G (S.). ^ Loc. cit. p. 42G.
 
 140 PRINCIPLES OF TAXATION 
 
 purchaser is given the bonus of the capitalised 
 relief, for the share purchased at a depressed value 
 suddenly attains a normal value, just as the 
 vendor would have suffered the capitalised burden 
 when imposed. Fortunately, for the present 
 problem, such sales cannot have been numerous, 
 first, because of war conditions ; and, secondly, 
 because existing holders, rather than sacrifice too 
 much, will generally have held on to their shares 
 until the promised relief from double taxation 
 matured. In a similar way, if you get an 
 anomaly such as is said to attach to the non- 
 allowance of wasting assets, it may be a severe 
 burden at the beginning, but, provided the rate of 
 tax does not greatly alter, the industry may, so to 
 speak, disperse the burden in the course of time, 
 and return nearly the ordinary rates of remunera- 
 tion upon capital and enterprise. Remedying the 
 anomaly late in the day may possibly be little less 
 than a present to the existing generation.^ 
 
 I merely instance this, not as an obstacle in the 
 path of reform, but only as a factor that has to be 
 borne in mind, for the insidious effects of capitalisa- 
 tion of differential burdens run through practically 
 all taxation problems. 
 
 5. Capitalisation ifi Increment Duties 
 
 An illustration of the principle in question which 
 will be in every one's mind, is the final effect of the 
 proposal to tax " increment," such as we have had 
 
 1 1920 Comm. Qs. 9509 and 9744.
 
 V STANDPOINT OF THE COMMUNITY 141 
 
 in the Inland Revenue duties. It has to be con- 
 sidered that, in settling the valuation, every in- 
 crease in sight is put into it, simply discounted for 
 the length of time before it takes place, and for the 
 probability that it may not occur. The value at 
 the extreme limit of time that one can see or cares 
 to reckon for, duly discounted, is the present value. 
 It is said, therefore, to be impossible to have a 
 prospective tax on the increment without depreciat- 
 ing the present value to the extent of a discounted 
 burden. Any buyer who throws such a burden 
 upon the vendor — and the whole burden of future 
 taxation is on present earnings — will see at once 
 that, in so far as a windfall occurs in a way or at a 
 date not now anticipated, it will be successively 
 taxed in due course.^ This doctrine has been 
 stated by Mr. Bickerdilce along the following 
 lines : 
 
 Any one who has paid that present value needs the 
 increment to enable him to earn interest. To tax the 
 increment simply knocks so much ofi the present value. 
 
 But do we really get out of difficulty even if we allow for 
 interest ? Do we get, in theory at least, a tax on " unearned 
 increment " pure and simple ? Is it not like a tax on win- 
 nings in a lottery, imposed after the tickets have been bought ? 
 Land is bought with the knowledge that its future value is 
 problematic. The purchaser gives a price for the prob- 
 abihty. If you announce that all the chances that turn 
 out well will be taxed, is it not exactly the same thing as 
 knocking something directly off the present value of all 
 the chances ? 
 
 Do we not then arrive at this conclusion, that the incre- 
 
 ^ E.J., 1913, p. 194, etc. (S.) ; Quarterly Journal of Economics, Aug. 
 1915, article by R. F. Tucker
 
 142 PEINCIPLES OF TAXATION 
 
 ment value tax is no different, as regards the question of 
 incidence and of equity, from a simple tax on existing land 
 values, and that it has this peculiar feature which differ- 
 entiates it from all other taxes in force, excepting the 
 old land tax, that the true incidence of the whole burden, 
 present and future, is on a limited number of existing owners 
 of land ? ^ 
 
 Mr. Bickerdike rightly concludes that Mill, and 
 others who have made no reference to interest, have 
 failed to see that part of present value must be 
 confiscated, and his criticism of the English Duty is 
 so far just, but in so far as his criticism goes beyond 
 the omission of interest, and he has in mind the 
 omission also to deal with the " lottery ticket," I 
 think his remarks require careful examination. 
 
 Probably Mr. Bickerdike would not wish to 
 insist greatly on the practical value of his " lottery 
 ticket." I feel somewhat in the position of the 
 Irishman who had " never seen the kettle, and if 
 he had it was lent him, and if it was lent he 
 returned it, and if he returned it it was all right 
 when he did so, and if it was broke when he re- 
 turned it, well then it was broke when he first had 
 it." For the real existence of the lottery ticket 
 may be doubted, but if it exists it is not much 
 good, and if it is, well it is not really a lottery, and 
 no one has read what is on the ticket. 
 
 Apart from other important considerations, there 
 is the mistaken assumption that the relation 
 between lottery ticket values and lottery prizes is a 
 simple mathematical one, and that a ticket is 
 
 1 E.J., Mar. 1912.
 
 V STANDPOINT OF THE COMMUNITY 143 
 
 " worth " the prize divided by the chances to the 
 average person. The relation is far more of a 
 'psychological character. Is it to be understood that 
 one grand prize of £1000 for a thousand tickets 
 would give the same ticket value as five hundred 
 £2 prizes ? Indeed no, and the point of maximum 
 appeal to the gambling interest is probably between 
 these two, but generally it may be said that a little 
 docked off the big prize would not affect the value 
 nearly as much as a reduction of the number of 
 chances. So a tax that " docks " something from 
 the prizes will not have such serious results as one 
 which proceeds to take the whole of every fifth 
 prize away. The " demand " side is little influenced 
 by the exact size of prizes, but greatly by the 
 chances. Our assumed interest-free increment duty 
 then will not have an exact mathematically- 
 equivalent effect on values, especially when the 
 prize is discounted over a long period, and we are 
 thinking only of present values. 
 
 On the whole, it may be said that, " even in 
 theory " Mr. Bickerdike's doctrine of universal 
 incidence on present owners needs such severe 
 qualification as to destroy its value as a valid 
 criticism of an interest-allowing increment tax 
 proposal. And in practice, too, it has very little 
 semblance of truth. The statement that the true 
 incidence, present and future, of a real windfall tax 
 is on a limited number of existing owners of land, 
 through the lottery principle, is similar in degree, 
 if not in kind, to a biological assertion that some 
 physical peculiarity that will some day be shown by
 
 144 PRINCIPLES OF TAXATION 
 
 a living organism is existing or potential to-day in 
 the antecedent ova several stages removed.^ 
 
 6. The Economic Effect of Death Duties 
 
 One of the things most frequently urged against 
 a tax is its effect in preventing the accumulation of 
 capital, or in wasting capital. The Estate Duties 
 have to meet such a criticism, and a little detailed 
 examination may serve to indicate the line of 
 approach to such a subject. 
 
 All taxation appears to affect capital accumula- 
 tion, because if, ceteris paribus, it ceased to exist we 
 should all have more either (I) to spend in consump- 
 tion or (2) to save as capital. It is unlikely that 
 (1) would monopolise the new fund, for even if it 
 tended to do so the increased demand for consum- 
 able goods would in itself set up an increased 
 demand for fixed capital to provide them. This net 
 loss of saving capacity through taxation may be 
 called " y." But, of course, all other things would 
 not be equal, and the cessation of Government 
 expenditure might so adversely affect the possi- 
 bilities of effective saving, that accumulation of 
 capital wealth would be actually retarded. A 
 potent factor in successful accumulation and main- 
 tenance of capital is the setting aside of part of 
 individual funds for collective use. This gain of 
 saving capacity through Government expenditure 
 may be called " x.'' 
 
 Hence we have the compulsory postulate at the 
 
 1 These paragraphs are taken from E.J , 1913 (S.)-
 
 V STANDPOINT OF THE COMMUNITY 145 
 
 outset that capital will be better situated by a 
 certain definite sum being raised in taxation than if 
 it were not raised, the net gain being x-y,a, positive 
 quantity. That definite sum having to be raised, 
 the question is : 
 
 // part of the sum is raised by Death Duties, will it 
 be less advantageous to capital wealth than if the whole 
 sum ivere raised by other taxes ? Do Death Duties (1) 
 annihilate accumulated capital, or (2) prevent accumu- 
 lation, and if so, do they do so more than other taxes ? 
 
 I propose no inquiry into the value of " a:;," but 
 deal entirely with " ^ " to see if non-recourse to 
 Death Duties will put " ?/ " at a minimum, and 
 therefore {x-y), the capital gain, at a maximum. 
 (Here it is necessary to point out that " Capital 
 Gain," x-y, is not synonymous with total national 
 gain. Even if one concludes that Death Duties 
 adversely affect capital, and more so than other 
 taxes, they may have other effects on national well- 
 being which are fully worth it. Accumulation of 
 savings is not the only important factor in well- 
 being and the nation might easily save too much. 
 I am not concerned with the wider inquiry.) 
 
 The first superficial observation when a payment 
 out of an estate is made is that the capital value of 
 that estate is reduced — the difference of capital has 
 " gone." The reply that capital can only be em- 
 bodied in material goods, and that these all remain 
 the same, nothing having been burnt or destroyed, 
 and that only a change in the title to use has taken 
 place, so that the National Capital is unchanged, is 
 only a little less superficial, and does not meet the
 
 146 PEINCIPLES OF TAXATION 
 
 point. For, of course — leaving the Government out 
 of tlie question for the moment — there is at any 
 given time a fund of immediate fluid savings offering 
 itself for embodiment in fixed forms, and it is out of 
 this that the estate duty payment comes. A pays 
 the Government by selling land to B, who buys it 
 by selling shares to C, who has not consumed all his 
 income in the year current but was looking for an 
 investment for the balance. If C had not bought 
 the shares he would have supported a new invest- 
 ment, and, let us say, built a house. So even if no 
 existing capital form is annihilated, we can at any 
 rate say that a new capital form has been prevented 
 from coming into being. 
 
 But, of course, we cannot ignore the question as 
 to what the Government does with the money. If 
 it builds the house that C could not build, then the 
 net effect on national capital is nil — there is merely 
 a transfer from individual wealth or rights to collec- 
 tive wealth or rights, just as there would be if, 
 wanting a building for offices, the Government took 
 over, as its tax, the ownership of an existing build- 
 ing. But if the Government drops the money into 
 the sea there is a net loss in national capital, and 
 C's potential house is never erected ; just as there 
 would be if the Government burnt the building that 
 it had taken over. 
 
 In either case, therefore — destroying existing 
 capital, or preventing accumulation of capital — we 
 are concerned with Government action. Hence 
 arises Plehn's warning that to regard death duty as 
 current revenue and not to treat the yield as a
 
 V STANDPOINT OF THE COMMUNITY 147 
 
 permanent endowment for a specific purpose is an 
 improvident proceeding, " inasmuch as the tax is 
 drawn from accumulated capital and not from 
 current income." It " would seem wise to use the 
 income solely for buildings or improvements of an 
 enduring character." But, of course, the specific 
 application is not necessary — if the Government is 
 spending in " permanent improvements " or objects 
 of a capital nature the equivalent of the death duties 
 it is as broad as it is long, and the other sources of 
 revenue, which appear to be coming out of income 
 and not capital, are assignable to non-permanent 
 expenditure. No doubt opinions differ as to what 
 constitutes capital expenditure, down from per- 
 manent military or naval works through battleships, 
 to a completed land valuation, or a real but intan- 
 gible organisation for National Insurance, but the 
 two last mentioned would not appear in any ordin- 
 ary computation of national capital, and, therefore, 
 may reasonably be held to be no substitute in this 
 connection for the cotton mills that might otherwise 
 have come into being. Gladstone held the view, 
 prompted, I believe, by J. S. Mill, that death duties 
 applied to the reduction of National Debt remained 
 " capital " still. The community are in debt to A, 
 and discharge the debt by buying War Loan with 
 the death duty from B, who sells a house to pay the 
 duty, A buying the house with the proceeds of the 
 War Loan. A is in the same " capital " position 
 as before, B is the loser by a house, and the 
 community are the gainers by the liability dis- 
 charged. This accords with the usual treatment
 
 148 PRINCIPLES OF TAXATION 
 
 of the National Debt in computations of national 
 wealth.^ 
 
 So much for the immediate effect of the transfer 
 of wealth. There is annihilation of existing capital 
 only in rare cases. There may be prevention of 
 immediately potential capital if the Government 
 has no equivalent capital expenditure. 
 
 But the last position is not peculiar to Death Duties. 
 By our postulate the money has to be raised. If it 
 is not paid by death duties on the wealthy, assume 
 that it may be obtained as income tax on the middle 
 class. The tax may then prevent them from saving 
 what they were in the habit of doing, they may be 
 pushed out of the new investment field and we may 
 thus get an equivalent prevention of immediately 
 potential capital. Or assume the revenue is obtained 
 from the poor. If it does not come out of potential 
 savings it must lessen consumption expenditure. 
 This may or may not be efficiency-expenditure, but 
 if it is, it reacts on productive capacity not only for 
 the labourer himself, but reduces also the total 
 industry-dividend, the share of the employer, and 
 therefore the saving fund of the wealthy. There is 
 no proof that the immediate effect of taking revenue 
 as death duty reduces immediately potential fixed 
 capital more than an income tax ivhich may equally 
 trench upon potential savings. 
 
 But the dynamic aspect over a series of years must 
 now be considered in addition to the static position for 
 a single year which is all we have so far treated. 
 
 ^ Vide "The Wealth and Income of the Chief Powers." S.J. 
 1919 (S.).
 
 V STANDPOINT OF THE COMMUNITY 149 
 
 Even if transferring wealth from individuals to 
 the community does not affect the grand total at the 
 moment, or even if there is little difference between 
 transferring the house that a man has already saved 
 (death duties) and the sterling that a number of 
 people might just be going to invest (income tax), 
 the knowledge that saved wealth will some day be 
 transferred may powerfully affect the desire to save. 
 
 A completely confiscatory duty would almost 
 stop most types of saving. 
 
 At one time it was thought that death duties 
 would " tend to diminish the funds destined for the 
 maintenance of productive labour," but that view 
 is to my mind tainted with the " wages fund " 
 fallacy. Mill considered the amount which would 
 be derived by a high duty would be but a small pro- 
 portion of the annual increase of capital in a wealthy 
 country like ours, and its abstraction (and annihila- 
 tion) would but make room for saving to an equiva- 
 lent amount.^ I agree with the first part of his 
 view, but the second I think can only be assumed 
 given certain conditions as to the rate of interest. 
 It might be true in times of rising prices and trade 
 activity, but not in times of stagnation. Sidgwick 
 thought that the bad effects are " not likely to be 
 at all equal in proportion to the similar effect that 
 would be produced by extra taxes on income, in 
 fact, the limits of taxation on inheritances will be 
 practically determined rather by the danger of 
 evasion than by the danger of checking industry 
 and thrift." 
 
 1 Mill, Principles, V. ii.
 
 150 PRINCIPLES OF TAXATION 
 
 Bastable urges the same point, and considers, 
 too, that the " equal amount of taxation would 
 have to be imposed in other directions, and would 
 in some degree trench on capital." 
 
 In the case of a mortgage on an estate raised to 
 pay the duty, when the efforts of the owner to 
 redeem it in fifteen years cause him to reduce expen- 
 diture, reduce wages and discharge servants, the 
 result does not seem to differ essentially from what 
 might follow an equivalent annual tax for fifteen 
 years. 
 
 At the root of the whole matter lies the question : 
 Will a man save less or more 'per annum if he has to 
 pay a lump sum at death instead of an annual tax ? 
 
 Now to the extent to which he himself turns the 
 lump sum into an annual tax, by specific insurance 
 provision, there is no difference. If he would have 
 paid the income tax out of potential savings, out of 
 consumption expenditure, or partly out of each, so 
 equally may he be expected to bear the annual 
 equivalent of the death duty. If this is widely 
 done, death duties are not specially disadvantageous 
 in their effect upon accumulating capital in com- 
 parison with an income tax. 
 
 Bastable regards the estate duty as a capitalised 
 income tax, and many others have held this view. 
 Seligman contests the point, but his objection, in my 
 judgement, only amounts to showing that this cannot 
 be used as a theoretical justification for the duty, 
 because of the divergent rates of income tax that 
 would result from the uncertainty of length of life. 
 It does not alter the argument that if all persons
 
 V STANDPOINT OF THE COMMUNITY 151 
 
 pool their risks in insurance the tax may in fact be a 
 general community income tax. But we have to 
 recognise that to a considerable extent it is not 
 turned into an income tax by the individual, and 
 it is over this field of inquiry that most difficulty 
 arises. 
 
 Apart from what the Government may do with 
 the money, and from the individual point of view 
 only, most writers seem to feel that the duty falls 
 on accumulated wealth rather than on income, 
 though admittedly the economic position of society 
 and the habits of the people are important factors. 
 
 Professor Cannan has said : " Perhaps, on account 
 of a certain obvious peculiarity of the time at which 
 they occur, death duties discourage accumulation 
 somewhat less than annual taxes, and consequently 
 are rather more favourable to the non-propertied 
 class. If they are graduated they necessarily tend 
 to cause greater equality of wealth." 
 
 Now, it may be demonstrable that two burdens 
 are actuarially alike, and yet the psychological 
 appeal to the taxpayer may be very different. The 
 bearing of this possibility upon this subject has 
 not been really finally worked out and agreed, but 
 Professor Pigou has recently treated it with some 
 fulness,^ He says : ''It has now to be observed that 
 the check on the supply of waitmg, brought about by 
 the expectation of death duties, is likely, ceteris paribus, 
 to be considerably smaller than that due to the expecta- 
 tion of the former kind. Let us suppose that a 
 million pounds has to be raised by taxation upon 
 
 ^ Pigou, Wealth and Welfare, p. 374, etc.
 
 152 PRINCIPLES OF TAXATION 
 
 the fruits of industrial investment. It is indifferent 
 to the State whether this annual sum is collected by 
 a tax on the annual returns of all enterprises, or by 
 a tax confined to the annual returns of enterprises 
 that have been established for some time. The 
 choice between the two methods is not, however, 
 indifferent to the persons concerned in the enter- 
 prises. Since these persons discount future taxes 
 precisely as they discount all future events, the 
 expectation of taxes levied after the second method 
 will have the smaller restrictive influence upon the 
 quantity of waiting supplied by them. The fact 
 that distance in time introduced a considerable 
 chance that the investor may no longer be living 
 when the postponed tax falls due, greatly emphasises 
 this difference. Hence, there is a special and not 
 generally recognised advantage in taxation by the 
 method of a time limit. Delay in the levy enables 
 the State to collect a given annual sum, in such wise 
 that the expectation of the levy exercises a smaller 
 restrictive influence upon the supply of waiting, and, 
 hence, upon the magnitude of the national dividend, 
 than would occur if the levy were immediate. 
 
 The argument, however, is not yet exhausted. 
 It has to be observed, further, that the superiority of 
 postponed, over mimediate, taxes is enhanced, when 
 the levy is made, not after a distinctive time, during 
 which there is a chance of the occurrence of the inves- 
 tor s death, hut definitely at his death ; for, obviously, 
 a certainty influences conduct more strongly than a 
 probability. Furthermore, there are additional
 
 V STANDPOINT OF THE COMMUNITY 153 
 
 reasons why this form of postponed tax should 
 impose a relatively small check upon the supply of 
 waiting. In some measure the stimulus to accumu- 
 lation consists in the hope of the distinction afforded 
 by dying very rich. That stimulus is not interfered 
 with by death duties." 
 
 Further points may be added to those put for- 
 ward by Professor Pigou if we once admit that our 
 income tax differentiates against savings -use in 
 favour of consumption-use. People may be divided 
 into two classes : (1) Those who are ambitious to 
 die as rich as possible ; (2) those who are indifferent 
 to the actual sum left at death. 
 
 In the case of (1), as Mr. Carnegie has urged,^ the 
 death duties have no effect on saving. In the case 
 of (2), prospective death duties may militate less 
 against saving than equivalent income taxes, 
 because there is always the chance of living to a good 
 age, and being able to avoid death duties by 
 division inter vivos at a late, but not too late, period, 
 and a good many people may take this chance of 
 " no tax at all," when no differentiation exists (for 
 them) against savings-use. (But if many actually 
 succeed, and realise their hope, then in order to 
 maintain the total yield, the death duties rates must 
 be pro tanto higher than the income tax rates.) 
 
 The whole fund of saved capital is a resultant of 
 many different psychological forces, which do not 
 answer in the same way to changes in conditions. 
 The behaviour of those who are saving against 
 risks or against being worse off, those who are saving 
 
 ^ Carnegie, Problems of To-day.
 
 154 PRINCIPLES OF TAXATION 
 
 to be better off, and those who save without effort 
 or self sacrifice out of superfluity, will be very 
 different. The net effect of all motives together 
 cannot be finally determined. If taxes are paid out 
 of pure economic (unearned) surpluses they have 
 less tendency to shift effects to other factors of pro- 
 duction and other social classes than if they are 
 paid out of " earnings " (salary, interest, or profits) 
 which have functional value in inducing full main- 
 tenance of the producing agent. 
 
 Despite these psychological considerations, how- 
 ever, on the whole, I think there may often be a 
 tendency to curtail expenditure to meet an annual 
 income tax, and to keep on saving and thus in the 
 long run add more to capital than would be the 
 case under the death duty regime. The very fact 
 that the total annual yield is made up of a large 
 number of comparatively small " doses," and that 
 to each individual the payments are regular, must, I 
 think, assist this tendency. In so far as this is true, 
 death duties trench more upon the annual new 
 investment fund and less upon the consumption 
 expenditure than income taxes would do, but not to 
 any marked extent. Of the £26,000,000 raised, a 
 large part would be covered by insurance and have 
 the same annual incidence as an income tax. Of the 
 balance only a small part, probably not more than 
 two millions, would be paid out of savings, where 
 it might under an income tax have come out of con- 
 sumption expenditure. This in relation to the total 
 annual savings of about £350,000,000 is almost 
 negligible. People greatly exaggerate this matter,
 
 V STANDPOINT OF THE COMMUNITY 155 
 
 because they forget that the money must be raised 
 somehow ; snidfrom the gross effect of the death duties 
 on capital, they fail to take off the effect that other 
 equivalent taxes would also have upon saving. 
 
 (1) As a broad conchision, therefore, apart from 
 other economic effects of death duties, even current 
 expenditure of the proceeds is likely to add to the 
 nation's power of accumulation more than the 
 actual capital it takes from individuals. 
 
 (2) Immediate effect on realised savings, {a) In 
 so far as Government expenditure is in permanent 
 works or reduction of debt there is only a transfer 
 of capital. (6) If it is not so spent, savings may be 
 " wasted," but if the money had been raised by 
 other taxes, potential saving might have been 
 " wasted " to just the same extent, and no special 
 disadvantage attaches to death duties. 
 
 (3) Ultimate effect on stimulus to saving. Owing 
 to powerful countervailing considerations the net 
 effect is only slightly against the death duties as 
 compared with other taxes. Reverting to the idea 
 with which I opened, the death duties may leave 
 " ?/ " almost at a minimum. This is only an expres- 
 sion of personal views and no reliable body of 
 received opinion exists. 
 
 7. The Effects of a Capital Levy on Saving 
 
 As a last example of the difficult consideration 
 of " effects " on saving, we may well refer to the 
 capital levy. 
 
 While one writer urges that a 7s. 6d. income tax
 
 156 PRINCIPLES OF TAXATION 
 
 on future savings must be a " grave discourage- 
 ment," another declares that he cannot imagine the 
 temperament on which " a capital levy would not 
 have an economically depressing effect." One well- 
 known publicist says that saving under modern 
 conditions is " one of the highest of civic virtues — 
 ultimately the attack on capital will recoil most 
 disastrously on those who labour with hand or 
 brain. Capital is a shy bird — you cannot compel 
 men to energy and responsibility, etc." The oppo- 
 site view is strongly expressed : " The levy is likely 
 to promote individual abstention from consumption, 
 more than War Bonds do. The head of a household 
 who has to meet a 10 per cent capital levy will be 
 much more disposed to insist on a drastic cut at 
 current expenses than one who has just invested an 
 exactly similar amount in Bonds and knows that 
 his income, far from being lowered, is actually being 
 increased," etc. 
 
 It is clearly a question whether the levy would 
 have a greater deterrent effect upon saving than an 
 income tax producing the same net change in net 
 annual income. 
 
 It will be obvious from a consideration of 
 published opinions, that little real light is thrown 
 upon the probable effect upon the mind of the in- 
 vestor, for they are very opposed and contradictory. 
 The contradiction really arises from the habit 
 (which is inveterate even among economists) of 
 thinking of the whole fund of accumulated savings 
 as though it were homogeneous, whereas it is an 
 aggregation of separate funds saved under entirely
 
 V STANDPOINT OF THE COMMUNITY 157 
 
 difierent motives and answering quite differently 
 to changes in economic conditions, i.e. a change in 
 the rate of interest increases some classes of saving 
 and diminishes others.^ It is necessary, therefore, 
 even if perilous, to consider the question under the 
 various sections into which the total saved fund of 
 the United Kingdom (amounting to some 350-400 
 million pounds per annum in pre-war years) may 
 be roughly divided. 
 
 Personal Savings against being ivorse off 
 
 (1) '' Long - dista7ice spending.'' When money 
 has to be spent in large lumps at considerable 
 intervals and the immediate income of the time of 
 spending is insufficient for the purposes, the prudent 
 person puts by against the event, and thus equalises 
 the charge. The simplest examples are Goose 
 Clubs, Coal Clubs, and Christmas Clubs, as well as 
 various devices for saving for " holidays." There 
 is no intention of being permanently " better off." 
 Such cases as these can be ignored, but the analo- 
 gous " saving " by the better classes is important. 
 A professional man with £1000 a year has a young 
 family, and realises that at a certain period some 
 thirteen to eighteen years ahead he will have to find 
 considerable sums to " put them out " — fees for 
 articles, college, and examination courses, etc. 
 Rather than reduce his income very heavily when 
 that time comes he prefers to put aside regularly^ 
 and so spread the burden. He could probably do 
 
 ^ Cp. Conner, Interest and Saving.
 
 158 PRINCIPLES OF TAXATION 
 
 this whether there were interest or not, and though 
 a higher rate makes it slightly easier (and he may, 
 therefore, have to save a little less) in general, 
 interest has no important bearing on his resolve, and 
 his mind is fixed rather on the capital sum that will 
 be requisite. Assuming for the moment that the 
 net income from which he has to save does not 
 differ greatly under the rival methods of taxation 
 of his earnings (which have not changed since the 
 time before the levy), his saving will not be greatly 
 affected if the income tax on unearned income is high 
 or low. But the apprehension of a further capital 
 levy is important — it may " catch " him in the middle 
 of his programme before the time for spending has 
 arrived. To him this fund is not capital at all, it is 
 merely a suspended expenditure account, and a levy 
 is peculiarly hard upon him. He will be led either — 
 
 (1) to save still more than before so that the net 
 
 sum left after a repetition of the levy will 
 be the sum required ; 
 
 (2) to abandon part of his programme, not save 
 
 at all, and put his sons to less dignified 
 
 professions ; 
 
 or (3) to leave the expenditure to come in a lump 
 
 when it falls due, and if necessary borrow 
 
 and pay ofi out of his subsequent earnings. 
 
 The first course is very unlikely, and having 
 
 regard to the peculiar inequity of a levy on " long 
 
 distance spending," the fear of a levy is likely to be 
 
 far worse than a high income tax. 
 
 (The example is, of course, not exhaustive of this 
 class — it is merely an illustration.)
 
 V STANDPOINT OF THE COMMUNITY 159 
 
 (2) Insurance at death. Tliis is generally a pro- 
 vision for family and dependents in the extreme 
 event, and the capital sum for which a man will 
 insure cannot be greatly affected by the difference 
 in the net rate of interest, except over intervals of 
 time so long that countervailing considerations 
 (such as social habits or the expectancy of life) may 
 affect premiums also. There would, therefore, be 
 no great effect upon savings through a change in 
 income tax (except that a low tax on current 
 earnings would give a larger income out of which to 
 save), but if the present exemption in favour of 
 savings by way of life insurance premiums is con- 
 tinued, the effect of a high rate of tax would be to 
 force savings out of other categories into that differ- 
 entially favoured form. On the other hand, the 
 apprehension of a levy (which would apply to the 
 value of the accumulated premiums) destroys any 
 such differential advantage. But suppose that the 
 life insurance allowance ceases, and there can be a 
 straight comparison between a high income tax and 
 a capital levy. Then the choice is between (I) a 
 high income tax on the income before it is saved, 
 plus a high income tax on the yield of the savings 
 (which is hidden and never really felt or noticed by 
 the insurer), and (2) a low income tax in both 
 respects, plus a prospect of a substantial curtailment 
 of the capital provision. Provision of this kind is 
 in so many cases an absolute necessity (the insurer 
 feeling that he must on no account leave his family 
 badly provided for) that, as between giving up 
 insurance wholly or in part and the more lieroic
 
 IGO PRINCIPLES OF TAXATION 
 
 course of insuring for a larger gross sum, in order 
 that the net sum may remain as originally intended, 
 the average man will choose the latter alternative. 
 In so far as this is so, a larger sum will be saved under 
 the levy scheme than under the income tax. Stated 
 in economic terms the " demand for a standard 
 provision at death is very inelastic." 
 
 (3) Endowment insurance. In so far as this is a 
 mere variant of the foregoing insurance plus a 
 provision for an income in old age, after 60 or 65, 
 the capital sum is the main consideration, and the 
 demand will be inelastic, so that the levy method 
 will tend to increase the amount that is saved. 
 But in so far as it is an alternative form of investment 
 — the income tax allowance being assumed to be 
 withdrawn — people think more of the total capital 
 that is coming to them than the hidden net income 
 which accumulates to make it up, and the appre- 
 hension of a levy is a more real thing than the unseen 
 differences of income tax. The tendency in this 
 section will be for a levy to diminish the savings 
 under this head. As the investment section of en- 
 dowments for the wealthier classes is probably 
 greater than the life insurance provision, the balance 
 for the whole class is rather against the levy. 
 
 (4) Savings to he better off. Ordinary investments 
 in property, shares, etc., by the individual, exercis- 
 ing a definite choice between spending and saving, 
 as a class represents mainly saving for an improved 
 immediate income. 
 
 The very low net yield of investments under a very 
 high income tax must have a grave effect on this
 
 V STANDPOINT OF THE COMMUNITY 161 
 
 class of saving. It is not unlikely that with many 
 people a low income tax, giving a large income out 
 of which to save, and a larger margin of returns on 
 the investment, will be preferred ; and that the fear 
 of a repetition of the levy will hardly outweigh such 
 definite advantages. It is impossible to judge with 
 any exactness, and on the whole it is probable there 
 will be no great difference in this section in the 
 effects of the two methods. 
 
 (5) Savings out of superfluity. The type of rich 
 people like Carnegie, who find it easier to let their 
 superfluous income pile up than to think out ways 
 of spending it, is not unimportant. The great 
 point is that saving is automatic and does not 
 depend on a nice balance of future advantages, or 
 the exercise of any individual will at all. Here the 
 low income tax would yield a wider margin of 
 surplus to be saved, and the " fear " of the levy is 
 not a determining factor. Moreover, if the indivi- 
 dual is running a business which offers possibilities of 
 expansion, the pure love of power and scope will 
 cause the absorption of the surplus moneys without 
 regard to the future. Here the levy method would 
 have no worse effects, and, if anything, slightly 
 better, than its rivals. 
 
 (6) Impersonal or collective saving. A very sub- 
 stantial contribution to the total accumulated 
 savings is made by companies, etc., reserving sums 
 out of profits. These reserves {a) bear a normal 
 rate of income tax only, and (6) are only remotely 
 affected by a levy — i.e. in their influence on the 
 market value of shares. But the important point 
 
 M
 
 162 PRINCIPLES OF TAXATION 
 
 is that the personal question whether to spend or to 
 save, and the temptations of riotous living, are 
 hardly present at all. The directors, often only 
 slightly concerned in their personal holdings, find 
 it quite easy to declare safe dividends of moderate 
 amount, and to put the whole of the balance by, 
 especially as the main feature in their minds is the 
 expansion of business for which they see the 
 clear opportunities. On the whole, this class of 
 saving will be hardly deterred at all by the mere 
 fear of a levy, and it will be much encouraged by the 
 low rate of income tax which we still assume is in 
 force, so that there will be a net advantage under 
 the levy scheme. 
 
 On forming a kind of tentative mental balance- 
 sheet of the different classes, bearing these propor- 
 tions in mind, one may conclude that, upon the 
 whole, on something of the order of 35 per cent of 
 the savings there would be balance in favour of the 
 levy, not quite counterbalanced by the disadvantage 
 on a smaller section, with a large part indeterminate. 
 These proportions, which are, of course, open to 
 challenge in every way, only illustrate the kind of 
 quantitative determination that one's mind would 
 strive after if the data were available. The most 
 that can be said is that the extreme statements 
 made on both sides of the controversy as to the 
 effect on the total savings are probably both wrong, 
 and that the total net effects would not be greatly 
 different under the two methods. In proportion as 
 the fear of repetition is less, the advantage of the 
 levy method will become more apparent in this
 
 V STANDPOINT OF THE COMMUNITY 163 
 
 particular respect. One must beware of making 
 the social psychology more actuarial than it really 
 is. As Romanes said : " Reason is very far indeed 
 from being the sole guide of judgement that it 
 is usually taken to be — so far, indeed, that, save 
 in matters approaching downright demonstration 
 (where, of course, there is no room for any other 
 ingredient), it is usually hampered by custom, 
 prejudice, dislike, etc., to a degree that would 
 astonish the most sober philosopher could he lay 
 bare to himself all the mental processes whereby 
 the complex act of assent or dissent is eventually 
 determined." ^ 
 
 But a very important reservation has now to be 
 made. It has been assumed throughout the above 
 that the status quo in the matter of distribution of 
 wealth has not been profoundly modified by taxa- 
 tion by way of a levy. For if by the levy the rich 
 have been made poorer and the poor richer, the 
 aggregate power to save (or to balance the spending- 
 use against the savings-use successfully in favour of 
 the former) is diminished. Mr. W. H. Mallock has 
 dealt pertinently with the point,^ and though the 
 figures given may not be absolutely accurate they 
 illustrate the argument : — According to the Census 
 of Production (1907) " income goods " to the value 
 of 300 million pounds are converted into new capital 
 annually. This saving of income, or this diversion of 
 productive power from the production of consum- 
 
 * Thoughts on Religion, p. 136. 
 * Mallock, Cajntal, War, and Wages.
 
 164 PRINCIPLES OF TAXATION 
 
 able goods into agencies for producing more goods, 
 is, as matters stand, equivalent to a voluntary tax 
 on total income. At present, tkree-fourths of tliese 
 savings (which in all are about £15 per head of the 
 occupied population) come from the richer classes 
 (about £170 per head) and the rest from the poor 
 classes (about £4 per head). But in proportion as 
 incomes were equalised, these savings or this volun- 
 tary tax would have to be equalised also. If all 
 the income from capital were divided among the 
 workers equally, it would mean for each a bonus of 
 about £15 in addition to his total income. But if 
 all were credited with an equal share of capital all 
 would have to save equally, unless the total saved 
 capital is to diminish. The individual savings must 
 rise from the present £4 by an additional £11 to £15. 
 The net addition, therefore, to the individual's 
 spendable income would be £4 only. This extreme 
 instance shows how unlikely it is that £^ will be 
 saved out of a total income of S.x, if S.x is divided 
 among many instead of a few. 
 
 The conclusion here, therefore, is that in propor- 
 tion to the magnitude of the debt redeemed, and to 
 the steepness of the graduation, the saving power of 
 the community as a whole is diminished by a levy 
 forthwith, and that even if the lower taxation pro- 
 duced subsequently on account of the levy method 
 gives a slight balance of advantage in the incentive 
 to saving out of the future incomes as so redistri- 
 buted, that balance is hardly likely to outweigh the 
 damage done to total saving power by the redis- 
 tribution itself. The net result of the fear of a
 
 V STANDPOINT OF THE COMMUNITY 165 
 
 further levy in the first few years following the 
 imposition of the first may be a slight diminution 
 in the total saving of the country. 
 
 8. Effects on Prices 
 
 As an example of a case where a tax might even 
 serve to cheapen goods, we may take the operation 
 of the American tax on business profits. It will be 
 remembered that the standard was not less than 7 
 and not more than 9 per cent on capital, or 8 per 
 cent if there were no pre-war profits. The tax on 
 the excess was progressive, viz. 20 per cent on the 
 excess profit up to 15 per cent ; 25 per cent on the 
 excess from 15 to 20 per cent ; 35 on the excess from 
 20 to 25 per cent ; 45 on the excess from 25 to 33 
 per cent, and 60 per cent on the excess profits over 
 33 per cent. In the case, therefore, of a business 
 making 35 per cent, the true net rate would be 24-8 
 per cent on the whole profit, reducing it to a dis- 
 tributable yield of 26-3 in the following way : 
 
 Capital 
 
 £10,000. 
 
 Profits £3500. 
 
 Tax on first, 
 
 say £900 
 
 Nil. 
 
 
 ,, ,, next 
 
 600 
 
 15% 
 
 = £90 
 
 
 500 
 
 25% 
 
 = £125 
 
 
 500 
 
 35% 
 
 = £175 
 
 
 800 
 
 45% 
 
 = £360 
 
 
 200 
 
 60% 
 
 = £120 
 
 Tax on 
 
 £3500 
 
 £870 
 
 or 2t-8% 
 
 
 
 The yield would be reduced from 35 per cent to 
 26-30.
 
 1G6 PRINCIPLES OF TAXATION 
 
 It will be seen, therefore, that on this method of 
 taxing by " slices " the final rate of the scale must be 
 very high before the average rate is at all heavy. 
 For example, the true rate on a 20 per cent profit is 
 10-75 per cent only, reducing the profit to 17-85 per 
 cent on capital. A 15 per cent dividend would be 
 14-1, allowing for the tax. If the rate of profit was 
 100 per cent, the tax would reduce it to 52-3 per 
 cent. 
 
 It is difficult to see how this gradual entry into 
 taxation can constitute at any ordinary point a 
 severe deterrent to personal enterprise beyond that 
 point. 
 
 Now assume a monopoly revenue of £50,000 upon 
 £100,000 capital (or 50 per cent). It may be that 
 the monopoly revenue on the larger supply from a 
 capital of £130,000 would be £52,000 (or 40 per 
 cent), and the extra £2000 profit resulting from 
 the larger supply from the extra capital of £30,000, 
 being only 6f per cent, is not considered worth 
 while. If the graduated tax reduces a 50 per cent 
 yield to 35 per cent, the monopolist would be left 
 with £35,000 made on £100,000, but it might reduce 
 a yield of 40 per cent only down to 33j per cent 
 and leave him with £43,333 in the second case, 
 instead of £52,000. In this case the employment 
 of £30,000 more capital may yield £8333 more 
 net profit, or nearly 28 per cent, and so be well 
 worth while. The monopolist will be induced 
 to supply a larger quantity of goods at a much 
 lower price, because the differences in the total 
 yield of capital are so much reduced in taxation,
 
 V STANDPOINT OF THE COMMUNITY 167 
 
 and the relative yield of marginal capital so much 
 increased.^ 
 
 9. Effects of Import Duties 
 
 Import Duties are such a well-worn topic that I 
 need not devote much time to them. In a discussion 
 of broad principles I may shift the responsibility of 
 discussion of a political matter by quoting from the 
 leading tariff writer of the chief tariff country : 
 " They are commonly shifted to the consumer and 
 are meant to be so shifted. In the controversy 
 about protection, zealous advocates of high duties 
 are led occasionally to maintain that taxes on im- 
 ports are borne not by the domestic consumer, but 
 by the foreign producer. This may sometimes be 
 the case, just as it is sometimes the case that an 
 internal tax is borne for a longer or shorter period 
 by the producer, and not the consumer. Occasion- 
 ally, where the producer (domestic or foreign) has a 
 monopoly, he may bear a part of the tax— conceiv- 
 ably may bear the largest part of it. Sometimes he 
 seems to bear it though he does not do so in fact. 
 He sells the commodity at the same nominal price, 
 but with shorter measure or poorer quality. Most 
 often of all, the same unconcealed and simple result 
 ensues, both from internal taxes and customs duties 
 - — the commodity rises in price by the full amount of 
 the tax." 
 
 It is best, of course, frankly to admit all this on 
 economic grounds, and then to say that we want 
 the duties for ulterior objects — i.e. for their further 
 
 ^ Tliese paragraphs are taken from li.J., Dcv. 1919 (S.).
 
 168 PRINCIPLES OF TAXATION 
 
 dynamic effects in inducing a domestic supply. As 
 to whether the nation as a whole gets a good bargain 
 at the price paid is, of course, the whole issue 
 involved in protection, and has a different answer 
 for each time and place. 
 
 As Professor Taussig points out, supervision 
 for customs duties can be limited to the ports, — 
 a few leading spots, and no elaborate organisa- 
 tion is required over a wide area. Hence, a thinly 
 peopled developing country finds these duties a 
 most convenient form of raising revenue. The 
 " incidental effects on the course of domestic 
 industry are at first overlooked, and then when 
 they have established themselves are welcomed." 
 Moreover, their removal means a grave disturb- 
 ance to established or vested interests. Taussig 
 says that apart from duty on sugar and the 
 objectionable and regressive duty on wool, the 
 tariff in the States has fallen mostly on finer goods, 
 and the enhanced prices have been a tax on the 
 better classes. His conclusion is : " The main 
 objection against our regime of higher protection 
 was not so much that it caused disproportionate 
 burdens on those least able to pay as that it gave a 
 disadvantageous direction to the productive ener- 
 gies of the community." ^ 
 
 You often hear it levelled against a proposed 
 protective duty, that either it will keep things out 
 and therefore bring in no revenue, or it will bring 
 in revenue and fail to protect — a kind of fatal 
 dilemma. But it has always struck me as a 
 
 '■ Taussig, Principles, vol. ii., chapter on Taxation.
 
 V STANDPOINT OF THE COMMUNITY 169 
 
 particularly inept sort of jibe. For it assumes that 
 one can have only one object (either revenue or 
 protection) and not a major and a minor object. 
 As the man said when there were two ladies in a 
 dark lobby and he did not kiss the one he had 
 intended to, " even failure has its compensations." 
 And most of us would agree that failure was not 
 easily to be distinguished from success !
 
 CHAPTER VI 
 
 THE STANDPOINT OF THE COMMUNITY I 
 ULTERIOR OBJECTS 
 
 1 . Ulterior Objects allowable if Secondary 
 
 We have all heard that it is wrong to marry for 
 money, but quite praiseworthy to marry where 
 money happens to be. So taxation for other than 
 revenue objects, to punish or to discourage, taken by 
 itself might sometimes be indefensible. It should 
 be called what it is, a fine or penalty, and not a tax. 
 To this class one might perhaps assign the claim of 
 the person who hates cats, and who would therefore 
 put a tax on them in a sort of spite, regardless of 
 the possible revenue, cost of collection, hardship to 
 individuals, and a mouse millennium. 
 
 If, however, in the course of deciding how to 
 raise a revenue, the State can so place its burdens as 
 not to discourage things that are worthy, and not 
 to encourage things that have hurtful tendencies in 
 the State, plain common sense is its justification. 
 But the extent to which a government should be 
 swayed by revenue considerations only, as against 
 ulterior aims, is always a nice question of degree, 
 and the actual and avowed attempt to achieve 
 special economic development by taxation is in 
 some senses a modern manifestation. 
 
 170
 
 cH.vi STANDPOINT OF THE COMMUNITY 171 
 
 " Taxation for revenue only " was a Victorian 
 slogan the echoes of which we still hear. If a tax 
 modified or set out to modify economic conditions 
 it was suspect at once ; but the public attitude 
 of mind towards the principle has considerably 
 changed of late years. 
 
 As Professor Marshall says, " equity was con- 
 sidered an adequate guide to the philosophy of 
 taxation." ^ This " equity " had regard, of course, 
 to existing conditions, and was on the basis of 
 existing rights. So that, if existing conditions or 
 existing rights were not all that could be desired, 
 the taxation scheme is under suspicion of being 
 wrongly based, and even of aiding and abetting 
 abuses. Professor Marshall says that " while a 
 joint stock company is obliged to accept existing 
 rights as final, the State is rather under an obliga- 
 tion to go behind them, to inquire which of them 
 are based on convention or accident rather than 
 fundamental moral principle, and to use its powers 
 for promoting such economic and social adjust- 
 ments as will make for the well-being of the people 
 at large." ^ In his view the problem of taxation is 
 one of constructive ethics, calling on its technical 
 side for careful economic and political thought. 
 
 2. Redistribution of Wealth 
 
 The first problem is that of the distribution of 
 wealth, and, starting with the right of the State to 
 improve it by way of taxation, one can, without 
 
 1 After -War Problems, -[y 317. ~ Hid.
 
 172 PRINCIPLES OF TAXATION 
 
 recourse to ability to pay, or to the principles of 
 equal marginal sacrifice, or to economic surplus, 
 reach progressive taxation. 
 
 As I showed in my second lecture, Marshall's 
 doctrine of least aggregate sacrifice as distinct from 
 equal sacrifice leads more easily and quickly to 
 pure confiscation of the higher reaches of income 
 than equal marginal sacrifice. Indeed, with the 
 assumption of the duty of the State to rectify in- 
 equality of fortune, it is difficult to stop short of this 
 position : that if we have to raise 500 millions for 
 State expenditure we should lop off the top 500 
 millions of individuals' incomes, by which I mean 
 that we keep paring away at the excess of the 
 income of the richest above their next richest 
 neighbours until we have the amount we want. 
 This means in actual practice that all incomes 
 would be cut down to £2000 and less, and that a 
 £500 or £1000 income would pay nothing. Such 
 action does not reach a socialistic redistribution, 
 for that, of course, would continue the " taking- 
 away " process, beyond the needs of State expenses, 
 to hand the amount to the poorest classes, and would 
 cease to be taxation, rightly defined. 
 
 Dr. Marshall says that, " while special provision is 
 made for those whose incomes f aU short of the neces- 
 saries of life and vigour, every one else must bear a 
 considerable share of the national burdens, but the 
 shares must be graduated very steeply.'' ^ This can- 
 not be achieved by commodity taxation, but only 
 by a very large use of taxes on income and property. 
 
 1 After -War Problems, p. 319.
 
 VI STANDPOINT OF THE COMMUNITY 173 
 
 Suppose that, having cut down all incomes to 
 say £2000, the State requires another 100 millions. 
 Acting on the same principle, the incomes from 
 £1500 to £2000 would then be entrenched upon, by 
 way of a further attack on the old victims, and a 
 new attack on the original £1500 to £2000 class. 
 But the £1400 man would still pay nothing. If we 
 concede the full logic of the State's obligation to use 
 its powers for improving distribution, as the first 
 principle of laying out taxation, I do not think we 
 can stop short of this, but it clearly does violence 
 to the first principle of relative " ability," and its 
 economic consequences to the dynamic life of the 
 community would be disastrous. So personally I 
 adhere to the view that first one must assume the 
 differences in wealth and ability to have some 
 ethical or economic warrant behind them, and tax 
 on equitable grounds on that assumption ; pro- 
 vided, secondly, that the burden so laid has no 
 economic reactions inimical to the progress of 
 society, one can then examine the basic assump- 
 tion, and if it is felt that it is not fully sound, 
 and that some people are richer and others 
 poorer than can be justified either on ethical or 
 economic grounds, one can go cautiously away from 
 the first results by judicious modifications. For 
 example, suppose we think of the community as 
 consisting of a doctor with £500 a year, and another 
 with £15,000, and the principle of equal marginal 
 sacrifice leads to the view that we can take £20 from 
 one and £7000 from the other, we do this without 
 any implication as to their relative worth, skill, or
 
 174 PRINCIPLES OF TAXATION 
 
 industry. Judged by external tests, tlie difference 
 in remuneration is fully warranted, and we have no 
 hesitation about that side of it, but settle our taxa- 
 tion by differences of ability on the spending side. 
 Now suppose the class worth £500 never saves any- 
 thing, and the class worth £15,000 if untaxed saves 
 £6000, and we have to face the fact that if accumu- 
 lation of capital has any value in social and national 
 progress, our line of taxation has cut off our only 
 fund for securing that advantage. We may have 
 to modify our first taxing proposal for the national 
 good, even in the ultimate interest of the £500 class. 
 Or again, suppose the cutting down of £15,000 to 
 £8000 makes the great doctor disinclined to use his 
 powers or exert special abilities, the nation may 
 ultimately be much poorer than if it taxes all 
 the £500 people even say £40 each, which is again 
 higher than would be justified on the first principle 
 alone. 
 
 This is an inexact and very homely attempt to 
 indicate that the principles of relative " ability " 
 and maximum national advantage may not give 
 coincident results. Now, when we introduce the 
 third principle — the obligation of the State to 
 rectify unjustifiable differences of wealth — we put 
 it upon the State to inquire into the merits of the 
 two incomes and to ask such questions as the 
 following : Is it really possible for pure ability to be 
 worth so much more than ordinary powers can 
 command ? Is not the reward too high ? Does not 
 this man exploit the monopoly of his name and 
 fame, and draw as unearned wealth fees from a lot
 
 VI STANDPOINT OF THE COMMUNITY 175 
 
 of old ladies who fancy they have something the 
 matter with them ? Unless we are going to deny 
 that men differ in ability, in application, and in 
 thrift, and that those differences are rightly re- 
 flected by some difference of fortune, we cannot 
 carry the obligation of the State to rectify in- 
 equalities of fortune beyond that part of the 
 inequality which we can confidently assert is 
 not a proper reflection of the inequality of ability, 
 application, and thrift. 
 
 It is for these reasons that I feel the doctrine 
 adopted by some modern writers that progressive 
 taxation finds its true theoretical justification or 
 basis in the obligation of the State to rectify in- 
 equalities in distribution, is partly illogical and 
 considerably over-emphasised. In my judgement it 
 does no more than lend support to the progressive 
 principle, and if given pre-eminence is misleading 
 and dangerous. 
 
 Professor Taussig thinks that "ability" justifies 
 proportional taxation only, and that progressive 
 taxation finds its justification in amending the exist- 
 ing social order. He says : " The question of equity 
 in taxation cannot be discussed independently of 
 the equity of the whole existing social order. The 
 courageous advocates of progression base their 
 views precisely on the ground that the existing 
 social order is not perfect, and that taxation should 
 be one of the instruments for amending it." ^ 
 
 But Taussig admits that " equality of sacrifice " 
 if applied unflinchingly leads to high progression, 
 
 ' Taussig, Principles, vol. ii., chapter on Taxation.
 
 176 PRINCIPLES OF TAXATION 
 
 and he thinks this is to admit that the working of 
 individualism is not to one's liking. Taussig also 
 asserts that the discrimination between income from 
 effort and income from investment can only pro- 
 perly find a basis in a similar discontent, whereas 
 I have endeavoured to show that in the difference 
 between the two such classes of income there is no 
 such implication — they are equally worthy and 
 useful, but one entails greater compulsory spending 
 obligations, and leaves a net residuum of pure 
 taxable capacity less than the other, with equal 
 gross amounts. So on neither count do I accept 
 Taussig's results when he says : '' Any conclusion 
 then in favour of progressive taxation and of the 
 higher taxation of funded incomes must rest, to be 
 consistent, on a frank admission of unwelcome 
 features in existing society and on a programme of 
 social reform." But fortunately when he comes to 
 application of the principle he says : " Progressive 
 taxation, so far as it aims to correct unjustified in- 
 equalities, evidently deals with results, not causes. 
 It is obviously better to go to the root of the matter, 
 and to deal with the causes. Much the more 
 effective and promising way of reform is to pro- 
 mote the mitigation of inequality in other ways, — 
 by equalisation of opportunity through widespread 
 facilities for rational education, by the control of 
 monopoly industries, by the removal of the condi- 
 tions which make possible illegitimate profits. Pro- 
 gressive taxation, which deals with income (or 
 property) solely according to size, and not according 
 to social desert, is less discriminating and also less
 
 VI STANDPOINT OF THE COMMUNITY 177 
 
 effective in reaching the ultimate goal than the 
 various ways of spreading material welfare." ^ 
 
 He urges all the points which I have put forward 
 to show that the theoretical engine of justice which 
 he has constructed will not work at all properly in 
 practice, and so he leaves the actual progressive 
 taxation of income without any reasoned basis. If 
 progression as we see it does not accord exactly with 
 the principle of securing social justice as he sees it, 
 then I think it indicates that we must declare it to 
 rest on the other principles to which I have referred, 
 which could still stand secure even if every in- 
 equality of fortune were a true and proper reflection 
 of inequalities in effort, ability, and thrift, and these 
 differences were themselves recognised as justifiable. 
 In the latter case apparently Taussig would find no 
 justification for progression at all. 
 
 In my judgement, progressive taxation has the 
 happy result of assisting to rectify inequalities, 
 many of which are not economically or ethically 
 justifiable, but it does not exist to do this, and it 
 has its justification quite apart from this. 
 
 3. The Doctrine of Established Rights 
 
 It has been stated that the old ideas of taxation 
 for revenue only were based upon a political 
 philosophy of established rights. 
 
 Adam Smith is supposed to have thought only of 
 the individual and the State in a fixed relationship 
 to each other, and never to have dreamt that the 
 
 1 Taussig, Principles, vol. ii., chapter on Taxation.
 
 178 PRINCIPLES OF TAXATION 
 
 State could use its powers of taxation to further in 
 a dynamic sense a progressive society. We are told 
 that just as the State can modify the static world 
 and the relationship between itself and its constitu- 
 ents, by national insurance, pensions, etc., so it can 
 remedy abuses and promote changes by its taxation 
 policy, and this is entirely a modern conception. 
 While I do not deny the general character of 
 eighteenth-century political philosophy, I think it 
 is demonstrable that Adam Smith was not shackled 
 in the manner suggested. In one place he refers 
 to the hurtful nature of fines on renewal of leases, 
 very much as modern writers might do, and suggests 
 that the practice might be discouraged by heavier 
 taxation.^ 
 
 In another place, when he is discussing the arbi- 
 trary conditions that were often laid down for 
 cultivation of the soil, and their restrictive effects, 
 he suggested a higher rating to discourage the 
 practice.^ Similarly he wanted to discourage rents 
 in service. Then, to give an example of positive 
 policy, he was prepared to see special abatements in 
 taxation to encourage owners to cultivate their own 
 lands. ^ These instances hardly indicate that Adam 
 Smith was hide-bound in a policy of " taxation for 
 revenue only." Such a maxim would, of course, 
 readily emerge from the nineteenth-century policy of 
 laissez faire carried to extreme lengths, and from a 
 Spencerian political philosophy. But as our poli- 
 tical ideas have undergone modifications, and we 
 have begun to think of dynamic motives (or ulterior 
 
 ^ Weallh of Matioiu-i, vol U. 2 (1). ^ Ibid. ^ Ibid.
 
 VI STANDPOINT OF THE COMMUNITY 179 
 
 objects as I have called them), enthusiastic heralds 
 of the new thought have gone to extremes and have 
 certainly taken their doctrine too seriously. I have 
 shown that it is claimed that the social dynamic is 
 the true and only basis of progressive taxation. I 
 deny this, but admit that in its rectification of 
 inequalities when they are unjust it is a useful 
 concomitant. But some inequalities are quite 
 just, and like the rain the rectification falls on the 
 just and unjust alike. 
 
 4. Earned and Unearned Incomes 
 
 In a like way it is claimed that discrimination 
 between earned and unearned income is a part of 
 this dynamic policy, for it has been said that 
 taxation of unearned income at a higher rate is 
 " aimed at altering things." " It gives up the 
 simple ideal of equal sacrifice on the basis of existing 
 incomes, and substitutes for it the dynamic idea of 
 reducing certain incomes which come to their 
 possessors in certain ways." ^ This is tainted with 
 the idea of differences in economic or moral worth, 
 or in ethical deserts, and is plain rubbish for any one 
 who will read the report of the Committee of 190G 
 which recommended the change, or the long litera- 
 ture of discussion which led up to it. The discrim- 
 ination was based upon plain extensions of the 
 principle of pure ability, as I endeavoured to show 
 in the third lecture. In so far as there are a number 
 of people " reaping where they have not strawed," 
 
 ^ Taussig, op. cit.
 
 180 PRINCIPLES OF TAXATION 
 
 living idle lives, or " battening on society," the dis- 
 crimination has the fortunate result of burdening 
 them more than the workers. But it is rather in- 
 discriminating in its discrimination, for it burdens 
 equally the interest going to the worthy hard saver, 
 and to the mere unworthy inheritor — again upon 
 the just and unjust alike. 
 
 All this ex post facto special pleading is really very 
 much like claptrap. Surely there are at least as 
 many unworthy earned incomes as unworthy un- 
 earned incomes, and how discrimination can be 
 regarded as an engine of social justice, beyond plain 
 justice within the confines of taxation, is a mystery 
 to me. 
 
 5. Taxation of Alcohol for N on- Revenue Reasons 
 
 The same kind of confusion of causes is shown by 
 the new thought over the taxation of the liquor 
 trade. Alcohol is found to be at the root of very 
 grave social evil, and it is said that for that reason 
 it is taxed. Whatever might be our wish in this 
 matter, starting de novo, this can hardly be said to 
 be historically correct. For in the past the licence 
 payments have been, on the benefit principle, 
 equivalents to the State in return for monopoly 
 rights, and taxes on the product date certainly from 
 times when drink was not in any way regarded 
 as an injury to society. We now have certainly a 
 new justification for these particular taxes or for 
 increasing them, which perhaps I may express in 
 three ways : 
 
 1. It is not unreasonable to make a particular
 
 VI STANDPOINT OF THE COMMUNITY 181 
 
 traffic which is very costly to society in its indirect 
 effects, contribute something specially towards those 
 costs. 
 
 2. Taxes on alcoholic liquors are one of the few 
 effective ways of reaching the economic surplus 
 element in the wages of the poorer classes, i.e. that 
 part of their income which de facto has little or no 
 effect in maintaining their efficiency, and forms no 
 part of the true subsistence wage ; and 
 
 3. Indulgence in alcoholic liquor is with many an 
 evil, and the State may well discourage or punish its 
 use by special taxation. Here again you will see 
 the new doctrine of the State right to a dynamic 
 policy is only subsidiary and the taxation can be 
 justified without it. Once again, too, the rain falls 
 on the just and the unjust alike, for the policy is 
 carried out with no discrimination — the tenth pint 
 of the drunkard pays the same tax as his first, and 
 the same tax as the occasional pint of a most 
 abstemious man. If one could not justify taxation 
 of alcoholic liquors on general economic grounds, 
 but had to rely on the new-found principle, it would 
 find but poor justification in its actual working out 
 in practice. Again I regard the dynamic or ulterior 
 objects as useful and excellent adjuncts to good pre- 
 existent justifications for this type of taxation. 
 
 6. Special Taxation of Land 
 
 The special taxation of land is one of the most 
 conspicuous examples of the new policy. So far as 
 this country is concerned we may begin with the
 
 182 PRINCIPLES OF TAXATION 
 
 Agricultural Rates Act, which represented an 
 attempt to ameliorate the conditions of agriculture 
 by giving a differential relief at a time of great 
 depression, and which was, therefore, a very nega- 
 tive example of policy. The land taxes of 1909-10 
 were the Increment Value Duty, the Reversion Duty, 
 the Undeveloped Land Duty, and the Mineral 
 Rights Duty. Economic justification is found for 
 the increment duty in most countries where it has 
 been attempted, on the benefit or betterment 
 principle, that is the resumption by the community 
 of part of the value socially created or created by 
 communal expenditure. But, as I have said already, 
 it has been justified in this country particularly upon 
 the windfall or " special ability " principle, the 
 principle that a receipt of money like an increment 
 in site value has a peculiar faculty for bearing taxa- 
 tion with less psychological sacrifice than a corre- 
 sponding receipt of ordinary income. In abstract 
 theory, such taxation should have no special 
 dynamic tendencies — the increment will be there 
 whether it is to be taxed or not, and the tax cannot 
 be shifted. I have indicated that the reversion 
 duty might be said to have an economic justifica- 
 tion as making good a technical omission in the 
 income tax, and the undeveloped land duty may be 
 thought also to fill up a gap which is left by leaving 
 the representation of ability solely to the test of 
 annual cash incomes. But, of course, ulterior 
 objects figured most prominently in the active 
 campaign for these duties. It is true that a fine 
 revenue was expected, and that the need of tapping
 
 VI STANDPOINT OF THE COMMUNITY 183 
 
 new sources was emphasised, but most people will 
 agree that breaking up the land monopoly, dis- 
 couraging the leasehold system, promoting the re- 
 lease of developing sites and therefore the expansion 
 of building activity, to say nothing of the general 
 discomfiture of dukedoms, were the great arguments 
 for the policy. It was frankly taxation mth ulte- 
 rior objects — " God gave the land to the people," 
 in many variants and every key. As the most open 
 and avowed example of the new doctrine of dynamic 
 taxing policy, these duties have been peculiarly un- 
 fortunate — much more so, in fact, than in theory 
 they really deserve, and I shall not attempt to 
 assess the reasons here. Our advocates of rating 
 reform in the special taxation of site values, or the 
 exemption of buildings, frankly hold out the im- 
 provement of our economic organisation as the goal, 
 and do not base their programme upon " benefit," 
 or upon " equality of sacrifice." Of course, the 
 whole family of the single taxers claim an economic 
 taxing justification in the peculiar character of 
 economic rent, but it is the economic result that is 
 put forward, rather than the merit of following a 
 correct theory. An enthusiastic commissioner at 
 Houston, Texas, thus extolled the system he had 
 introduced a couple of years before : 
 
 Under the Houston plan of taxation vacant lots 
 which have heretofore been used as a receptacle for 
 old tin cans and rubbish, are now being improved 
 and put to their best use. The longer the system 
 remains in operation the greater will be the benefit 
 to the majority of the people. The only man who
 
 184 PRINCIPLES OF TAXATION chap. 
 
 can complain is the man who is holding much 
 vacant land out of use, refusing to improve it, and 
 refusing to sell it at what it is worth for use to some 
 one else. When the Houston plan of taxation is 
 carried to its logical conclusion, people will begin to 
 realise what the millennium upon earth means.^ 
 
 Another modern single taxer says : " The pur- 
 pose of the single tax is much more than a mere 
 fiscal reform in the method of raising public 
 revenues. When fully applied, it will abolish land 
 speculation and involuntary unemployment. Full 
 application of the single tax will give to land users 
 all the profit and product of their labour in using 
 the land, and will necessarily make it impossible for 
 any person to gain a profit by merely owning land 
 without himself using it. This will not reduce or 
 interfere with the rent or income an owner may get 
 for the use of land improvements." ^ 
 
 But the strongest reasons for the single tax are 
 moral rather than fiscal. " Ground rent is the 
 surest and safest method yet invented by which one 
 person gets the product of another's labour, and 
 gives nothing in return. This is a moral w ron^." ^ 
 
 The general verdict seems to be that the exemp- 
 tion of building improvements greatly stimulates 
 building, and that was the experience in Australia 
 and New Zealand. But the taxation of land on its 
 building value instead of its actual yield had given 
 rise to the very irregular and patchy development of 
 the outskirts of American cities as compared with a 
 
 ^ Readjustments, p. 194 (J. J. Pastoriza). 
 » Readjustments, p. 223 (W. S. Wren). 3 Ibid. p. 225.
 
 VI STANDPOINT OF THE COMMUNITY 185 
 
 more regular and steady extension of towns here. 
 Owners of outlying sites which are beginning to get 
 a future building value, rather than pay heavy taxes 
 out of agricultural rents, precipitate the develop- 
 ment in order to get some kind of rent out of which 
 to pay the tax. Obviously the weaker owners 
 succumb first, and the building takes place in a 
 spasmodic and not very sightly fashion. In so far 
 as the holding up of central and fully eligible sites 
 is discouraged, of course, undeveloped land taxes 
 are quite useful stimulants and beneficial to the 
 community. 
 
 7. Ulterior Aims in other Taxes 
 
 One might spend time in going over numerous 
 small taxes in different countries that have been 
 imposed to meet definite evils rather than for fiscal 
 reasons. The negative policy of repression is much 
 more common than a positive policy of encouraging 
 worthy objects. 
 
 We still have some survivors of the immense 
 variety of taxes that existed during the eighteenth 
 century and the Napoleonic wars. Many of those 
 taxes were attempts at taxation according to the 
 principle of ability, and represented the best ap- 
 proach to an income tax that could be made by an 
 accumulation of presumptions. Amongst them I 
 may mention the odious hearth tax, the window tax 
 and its successor the house duty, taxes on carriages, 
 silver plate, men servants, female servants, horses, 
 racing, sporting, hair powder, armorial bearings.
 
 186 PRINCIPLES OF TAXATION 
 
 But the taxes on dogs were imposed with very little 
 fiscal design and almost entirely for reasons of 
 policy. Public feeling was so outraged by the dog 
 nuisance that Pitt was glad to remedy it by a tax, 
 which he attempted to frame in such a manner as to 
 be graduated according to ability.^ In 1853 Glad- 
 stone abolished the distinction and imposed a 
 higher rate. The evasions were most common, not 
 more than a quarter of the dogs being charged. A 
 new scare and a hydrophobia panic renewed the 
 efforts at repression, and in 1867 Childers reduced 
 the rate and made a serious and successful attempt 
 to remedy the evil. No one could for a moment 
 regard the dog tax as an " ability tax," and it 
 stands even now as primarily a non-fiscal imposition. 
 The gun licence was imposed in 1870 in response to 
 an agitation against the too free use of firearms that 
 then prevailed. 
 
 There were many taxes imposed without refer- 
 ence to personal ability, but purely for fiscal reasons 
 in times of great stress, such as taxes on auctions, 
 probate duties and stamp duties, and in an altered 
 form several survived. 
 
 Professor Marshall has suggested that present 
 fiscal needs justify some minor or " ability " taxes 
 being imposed, such as a steeper and higher in- 
 habited house duty, and a tax on domestic servants. 
 A tax which would have little bearing upon personal 
 ability but which might be imposed for fiscal 
 reasons, and also to some extent for other minor 
 objects, would be one on advertisements, a check 
 
 ^ Dowell, iii. p. 266.
 
 VI STANDPOINT OF THE COMMUNITY 187 
 
 upon wliich would, on the whole, be good, as the tax 
 would discriminate against mere size and vulgarity, 
 but not against real taste and ingenuity. 
 
 8. Taxation of Imports 
 
 The taxation of imports for objects other than 
 simple revenue is, of course, the most important 
 section of the subject of " ulterior objects," both 
 because it is oldest and also because it has been 
 so widespread. As I have already said, customs 
 duties have often been imposed because they have 
 been administratively the easiest way for a par- 
 ticular country to get revenue, and then they have 
 been continued by reason of their secondary effects, 
 when the revenue could have been dispensed with 
 or obtained in other ways. Moreover, there are no 
 taxes so difficult to remove, by reason of the vested 
 interests in trade which they set up and which 
 naturally object to any policy of " fast and loose." 
 When looking for motives for continuing protective 
 duties we must not forget such a case as that of 
 the United States, where constitutional difficulties 
 in connection with encroaching upon the taxing 
 rights of the several States have, until recent years, 
 almost deprived the federal government of the 
 opportunity for raising a substantial revenue out- 
 side the customs. But even so, it is not improbable 
 that the States would have had practically a free 
 trade history if it had not been for the Civil War, 
 with the revenue tendencies it started, and the 
 interests it set up.
 
 188 PRINCIPLES OF TAXATION 
 
 The ulterior objects of customs duties may, it 
 seems to me, be classified as follows : 
 
 1. To protect and benefit particular industries 
 
 wMch have been able to secure State action 
 frankly in their own interests. 
 
 2. To protect and benefit particular industries as 
 
 part of a national policy of benefiting all, 
 either by giving a definite direction to the 
 economic development of a country or as a 
 considered means of keeping its activities 
 diversified and well balanced, and prevent- 
 ing too great a degree of specialisation. 
 
 3. To benefit the nation from the point of view 
 
 of defence in event of war, by ensuring home 
 supplies of food or essential articles. 
 
 4. To prevent dumping. 
 
 5. To be used for retaliatory and bargaining pur- 
 
 poses against the tariffs of other countries. 
 
 6. To promote trade in particular economic 
 
 directions and further a unity already 
 existent from the point of view of political 
 government and sentiment. 
 
 7. To give a start to an industry which once 
 
 established will have such natural advan- 
 tages as to be self-supporting (the infant 
 industry plea). 
 Now it will be obvious that in a small part of a 
 single lecture I cannot hope to give an illustrative 
 treatment of all branches of tariff policy, so I 
 shall content myself with summarising my own 
 conclusions under each head, without extended 
 reasons.
 
 VI STANDPOINT OF THE COMMUNITY 189 
 
 The first class, that of the protection of industries 
 for sectional advantage, can be illustrated in the 
 tariff history of many countries, and this limited 
 policy has met with many successes. The particu- 
 lar industries protected have been prosperous, and 
 made profits beyond those which would have 
 accrued to them mthout the tarif!. Generally 
 speaking, the wdder the tariff the less the industries 
 working behind it have been able to secure ad- 
 vantages which would not have equally accrued 
 without a tariff. No reference is made under this 
 head as to the greater aggregate prosperity of the 
 country. 
 
 There are also illustrations of industries which 
 would have been better without protection — those 
 which depend more on self-reliance and ingenuity 
 for their success — where the high prices resulting 
 from inefficient business have kept the total volume 
 of business down to meagre limits. 
 
 Dr. Marshall recently said with great justice : 
 " Unfortunately the experience of many centuries 
 shows that a policy, which will confer a considerable 
 benefit on each of a compact group of traders or 
 producers, will often be made to appear to be in the 
 interest of the nation ; because the hurt wrought 
 by it, though very much greater in the aggregate 
 than the gain resulting from it, is so widely diffused 
 that no set of people are moved to devote much time 
 and energy to making a special study of it. Its 
 advocates speak with zeal and the authority of 
 expert knowledge. But they are bad guides, even 
 if unselfish and perfectly upright ; for a policy that
 
 190 PRINCIPLES OF TAXATION 
 
 makes for their peculiar profit is invested in their 
 eyes with a deceptive glamour." ^ 
 
 Under the second head, the protection of par- 
 ticular industries not for the sake of the persons 
 engaged therein, but as a part of a considered 
 general policy for the national benefit, bona fide 
 illustrations are far fewer. Obviously, it is most 
 difi&cult to say whether the policy is successful as a 
 whole, for it is always open upon the one hand to 
 allege that an acknowledged progress is due to the 
 tariff policy, and on the other to urge that that pro- 
 gress was due to different causes, and would have 
 taken place, or even have been greater, if the tariff 
 had not existed, and we have the great world causes 
 of gold production, population movements, and poli- 
 tical upheavals to compHcate the problem. Moreover, 
 we have to define "progress,'' and to ask whether 
 too much attention may not be paid, relatively, to 
 the statistics of foreign trade : whether a hectic 
 prosperity may not be secured by the too rapid 
 exhaustion of natural resources ; whether a greater 
 national income badly distributed is a boon ; 
 whether a high degree of specialisation and the sac- 
 rifice of the elements of a full life are better than 
 a more varied existence with less " material " pro- 
 sperity; whether "opulence" has been of greater 
 importance than " defence." When we have settled 
 what we mean by progress, we may begin our in- 
 vestigation of individual cases. In my judgement, 
 there is no single instance in which it can be demon- 
 strated beyond the cavil of individual prepossession 
 
 ^ After ■ War Problems, jd. 330.
 
 VI STANDPOINT OF THE COMMUNITY 191 
 
 or inclination, under one or other of these heads, 
 that a tariff has contributed a net advantage or dis- 
 advantage to a nation as a whole by the protection 
 of specific industries, apart from those dealt with 
 under particular heads hereafter. Germany prob- 
 ably did more in the direction of thinking of the 
 country as a whole than any other nation, and, even 
 there, other ulterior objects besides national develop- 
 ment upon a particular line were present. 
 
 Dietzel was a sound critic, and he said that the 
 recent failure of German policy must be a lesson to 
 England.^ From 1879 to 1891 the tariff was pro- 
 tective, then Caprivi added retaliation by a double 
 tariff. His inducements succeeded because (1) 
 there was a clear end in view to increase exports by 
 increasing agrarian imports ; (2) he started from a 
 known fixed basis ; (3) the conjuncture was favour- 
 able — an alleviating policy when others were aggres- 
 sive and startling the industrial world. A number 
 soon made treaties, and Russia was quickly brought 
 down from an obstinate position. 
 
 The 1902 policy had 7io conquests, for Italy and 
 Belgium were easy in any case. It had no settled 
 aim — it tried to satisfy the agrarian and industrial 
 claims at once. It had no fixed basis, and the con- 
 juncture (of irritable nations) made war favourable, 
 for Germany applied the method of " preparing for 
 war," and this was a contagious spirit. Negotia- 
 tions had to be based on new, uncertain tariffs. 
 Putting up tariffs for bluff, with bargaining inten- 
 tions, had let loose wholesale protectionist cupidities, 
 
 ^ Dietzel, lielaliatory Duties.
 
 192 PRINCIPLES OF TAXATION 
 
 riveting in their consequences, and pretence became 
 reality. Caprivi's refusal to adopt this method was 
 justified by facts. " We have driven the agrarians 
 into the arms of the manufacturers." " We made 
 it impossible for foreigners to guess how far we were 
 serious." " Had we adopted persuasion, foreign 
 agrarians and merchants would have been the allies 
 of our export manufacturers and would have 
 resisted the protectionist tendencies of their own 
 manufacturers." " Our agrarians welcome the 1902 
 tariff and do not mind its failure retaliatively," 
 The Billow policy failed where the Caprivi policy 
 would have succeeded. 
 
 Germany, of course, generally tried to get a 
 revenue as well as to develop along national scien- 
 tific commercial and political lines, but in the 
 former she was not very successful. In particular 
 the revenue from manufactures was small. Dr. 
 Marshall has well pointed out: In 1913, Germany 
 reaped about 2s. per head of her population from 
 taxes on finished goods of all kinds {fertige Waren) : 
 and it is probable that the population of Britain will 
 need to contribute about a hundred times as much 
 as this per head to her Exchequer after the war.^ 
 Germany's taxes on manufactures were but small 
 percentages on the values of the quantities taxed, 
 which were themselves not nearly co-extensive with 
 the quantities imported, since for one reason or 
 another the sharp edge of nearly every tax on manu- 
 factures had had to be blunted ; but there was no 
 mercy for the " food of the people." Her import 
 
 1 After -War Problems, p. 335.
 
 VI STANDPOINT OF THE COMMUNITY 193 
 
 duties on grain, even after allowing for large rebates 
 and bounties on exportation, yielded far more than 
 all those on finished and half -finished goods. Some 
 advocates of protection for British manufactures 
 will learn with surprise that her receipts from im- 
 port duties on " raw materials for the purposes of in- 
 dustry " (" Kohstoffe fiir Industriezwecke ") yielded 
 almost the same amount as those on finished goods. ^ 
 Naumann, in Central Eur ope, said that even the 
 recent agricultural protection had not secured a 
 progress more rapid than the previous policy, nor 
 better than Switzerland, Belgium, Holland, and 
 Denmark. 
 
 The third class of objects may be summed up in 
 Adam Smith's well-know^n words, "Defence is 
 greater than opulence." Germany again may be 
 taken as the example both for objects of defence and 
 offence, in a scientifically directed policy to secure 
 adequate food supplies and the existence of big or 
 key industries. I think that the most ardent free 
 trader will admit, after our recent experiences, that 
 we may well pay a price during peace, via protec- 
 tion, for an insurance against various dangers in 
 time of war, and that it may be a real economy to do 
 so. The question whether any differential gains in 
 the form of economic rent so created must neces- 
 sarily remain wholly in private hands need not be 
 pursued here. Sir T. Middleton and others have 
 shown that from the point of view of the human 
 effort required in this country to get a given yield 
 in agriculture we were not unfavourably placed and 
 
 1 After -War Problems, p. 335.
 
 194 PRINCIPLES OF TAXATION chap. 
 
 could more than stand comparison in efficiency with. 
 Germany.^ 
 
 I need not labour the key industry question, and 
 I think that if a matter is so vital to a State as to 
 be protected on this ground, its risks and profits 
 should not be left entirely to private persons even 
 behind a tariff wall, but that the State should take 
 its share of the capital involved, so that the tax- 
 payer may, in the event of profits, participate in 
 them, as against any burden he may assume as 
 consumer. 
 
 The fourth object, the prevention of dumping, is 
 distinct and local and is clearly a fair aim if dump- 
 ing is properly defined and distinguished from clear 
 competition on stable and sustained lines. 
 
 The fifth object, retaliation, is at the bottom of 
 the modern developments of tariffs, general, con- 
 ventional, minimum and maximum, and all their 
 complications. On the broad aspects, it may be 
 said that the usual allegations of protection of 
 national honour are not justified as the sole reasons, 
 for, generally, there is no element of national 
 insult, and, after all, sectional advantages are being 
 striven for. Further reprisals usually follow. His- 
 tory gives us a few surprising examples of success 
 from the Flanders duty on English woollen goods 
 in 1697, which induced England to give up lace 
 duties, down to modern times, but there is also 
 much clear failure and waste of national effort. As 
 Dietzel says, the most effective method is usually 
 
 1 E.J., 1917, p. 143 ; Middleton, Recent Development of German 
 Agriculture.
 
 VI STANDPOINT OF THE COMMUNITY 195 
 
 rather costly and involves real sacrifice, but if 
 success does not come early it is not likely to come 
 at all.^ Retaliatory duties have been often the 
 slippery slope to unvarnished and haphazard pro- 
 tection. Certainly in theory, both retaliation and 
 reciprocity if applied at the right time, and to the 
 right things, with a very wise and sensitive judge- 
 ment, may further free trade or national advantages, 
 and the extent to which this can eventuate in 
 practice depends upon the strength and reliability 
 of our political institutions as organs of economic 
 poUcy. 
 
 The sixth ulterior object is best illustrated by our 
 own proposals for colonial preference. There is no 
 other really good illustration within my knowledge. 
 
 The seventh object — the protection of infant 
 industries — is the one case of protection which is 
 held to be theoretically justified by practically all 
 parties, but by no means all agree that the same 
 result cannot as well be obtained by other methods, 
 such as direct subsidies. The whole matter is more 
 conspicuous for the thoroughness with which it has 
 been worked out in theory in the text-books, than 
 the extent to which it has been illustrated either by 
 them or in real tariff history. 
 
 Professor Taussig says that probably the 1857 
 duties in the United States, which on their face were 
 protective, did not in any important degree have the 
 effect of stimulating industries that could not have 
 maintained themselves under freedom of trade — the 
 extent to which mechanical branches of production 
 
 ^ Dietzel, lieldllatory Duties. 
 
 02
 
 196 PRINCIPLES OF TAXATION 
 
 have been brought into existence by the protective 
 system has been greatly exaggerated by its advo- 
 cates, and even the character and direction of 
 development have been influenced less than, on 
 grounds of general reasoning, might have been 
 expected.^ 
 
 9. Discriminations in Taxation 
 
 If the State wishes for national reasons to benefit 
 or assist certain trades, I think, in general, the 
 worst method is by discriminations or differentia- 
 tion in taxation. Direct subvention is open, kno\vn, 
 subject to constant check and control, and its cost 
 is spread over the nation. Indirect benefit is 
 hidden, unknown in amount, subject to little 
 control as to efficiency, etc., and the cost of what is 
 assumed to be a national benefit is paid by that 
 section of the community which happens to use the 
 products in question. During the war there was an 
 epidemic of attempts on the part of most worthy 
 and essential traders to get regarded as the very 
 pivot of the war, and to have special treatment by 
 way of relief from a general tax which was ad- 
 mittedly burdensome. I became convinced that 
 taxation must be a business apart, and cannot be 
 mixed up with the weighing of claims to financial 
 assistance, with the conditions of assistance, and 
 the necessity for expert consideration of the pos- 
 sibilities of each case. No taxation department 
 ought to be mixed up with that side of national 
 policy. 
 
 ^ Taussig, Tariff History of the United Stales.
 
 VI STANDPOINT OF THE COMMUNITY 197 
 
 10. Taxation of War Fortunes and Excess Profits 
 
 The proposed war fortunes tax, apart from its 
 fiscal results, will, it is claimed, have the merit of 
 allaying social unrest, and the sense of injustice 
 which rankles with many that at a time of general 
 suffering and privation certain individuals should 
 be advantageously placed. It is urged that the 
 heroic expedient of the capital levy would have like 
 results, and it would serve to enable the currency to 
 be deflated and to reduce prices generally. Neither 
 of these imposts would, of course, do very much as 
 a prevention against future profiteering, whereas 
 the Business Profits tax on American lines, taxing 
 profits progressively as they get more and more ex- 
 cessive and more " profiteering " in character, can 
 be urged to be a real dynamic force, and a kind of 
 economic brake. Moreover, if it is urged that on 
 the imposition of a tariff certain individuals receive 
 an unwarrantable benefit, such persons would come 
 automatically under the provisions of a duty which 
 thus becomes of double importance. 
 
 11. Conclusion 
 
 I am hopeful that my attempt to sketch out the 
 main principles of taxation emerging from the 
 world experiences of to-day from three distinct 
 points of view may have proved of assistance to 
 some of you, even if you are not personally engaged 
 in the fine art of " plucking the goose with as little 
 squealing as possible." I have not pointed the way
 
 198 PRINCIPLES OF TAXATION chap.vi 
 
 to a perfect tax, for in M'Culloch's adaptation of 
 
 Pope : 
 
 " Whoever hopes a faultless tax to see, 
 Hopes what ne'er was, or is, or e'er shall be." 
 
 Let the Chancellor have your sympathy, your 
 personal assistance, and if need be your conscience 
 money. There is nothing romantic about increas- 
 ing your burden of taxation, and the poet reserves 
 all his enthusiasm for the lady Godiva, who loved 
 the people well, loathed to see them overtaxed, and 
 accordingly — at what must be conceded to have 
 been some personal inconvenience — 
 
 " took the tax away. 
 And built herself an everlasting name."
 
 INDEX 
 
 Ability Principle, 7, 12, 15, 55, 83 
 Adams, T. S., 129 
 Ad valorem Duties, 95-100, lOG-9 
 Advertisements, 186 
 Agricultural Rates Act, 136 
 Agriculture, Royal Commission on, 
 
 135 
 Alcoholic Liquors, 69, 180-81 
 Amortisation, 132, etc. 
 Australia, 37, 67, 124-5, 139, 184 
 Austria, 127 
 Average, effects of, 27 
 
 Baden, 127 
 
 Bastable, C. F., 150 
 
 Benefit Principle, 6 
 
 Betterment, 7 
 
 Bickerdike, C. F., 141-3 
 
 Biilow, 192 
 
 Business Taxation, 41, 64-5, 96, 
 
 110-11, 197 
 Byron, 104 
 
 Canada, 23, 100 
 
 Canard, 50 
 
 Camian, E., 20, 151 
 
 Capital Accumulation, 56, 144-55 
 
 Capital Basis, 41 
 
 Capital Le\^r, 95-6, 155-64 
 
 Capital Taxes, 12, 81 
 
 Capitalisation of Taxes, 132, etc. 
 
 Caprivi, 191-2 
 
 Carnegie, 153, 161 
 
 Cecil, Lord H., 86 
 
 Chapman, Sir S., 44-5 
 
 Children, allowances for, 78, 114 
 
 China, 94 
 
 Cigars, 99 
 
 Communal evasion, 112 
 
 Companies, 97 
 
 Compensation, 109 
 
 Consumers' Rent, 50 
 
 Consumjition, test of ability, 12 
 
 Co-operative income, 33 
 
 Costs, Income Tax, 37 ; Taxation 
 
 of, 42, 76, 89 
 Cunningham, T., 73 
 
 Death Duties, 10, 12, 144-55 
 
 Diamonds, Taxation of, 10 
 
 Dietzel, 191-5 
 
 DifEei'ential Taxation, 132, etc. 
 
 Diminishing Utility, 37, 40, 44-8 
 
 Dingley Tariff, 117 
 
 Discriminations, 196 
 
 Dividend, Co-operative, 33-5 
 
 Dog Tax, 186 
 
 Domestic Circumstances, 15 
 
 Double Taxation, 2, 57, 118-29, 
 
 1.39 
 Drawbacks, 79 
 Dumping, 188, 194 
 
 Earned Income, 15, 83, 95, 179, etc. 
 Economic Effects, 130, etc. 
 Economic Surplus {see Surplus), 15 
 Economy, 3, 93 
 Edgeworth, Prof., 51, 53 
 Education Expenditure, 7 
 Efficiency (see Surplus), 75 
 Egypt, 39 
 
 Established Rights, 177, etc. 
 Estate Duty, 106, 110, 144-55 
 Estate Values, 10 
 Evasion (see Fraud) 
 Excess Profits Duty, 29, 37, 63-4, 
 109, 136-40, 197 ' 
 
 199
 
 200 
 
 PRINCIPLES OF TAXATION 
 
 Expenditure, test of ability, 31, 
 55 ; Taxes, 67 
 
 Family, as unit, 76-8 
 
 Farmers, 22, 97 
 
 Federal Inheritance Duties, 123 
 
 Federal Taxation {see Jurisdiction) 
 
 Flanders, 194 
 
 Formulae, 46, 52-3 
 
 France, 20, 24, 38-9, 80, 102, 116- 
 
 117, 123 
 Fraud and Evasion, 103-14 
 
 General Property Tax, 19, 82, 112, 
 
 119 
 Germany, 40, 60-62, 78, 99, 101, 
 
 116, 126, 129, 191-4 
 Gladstone, 80, 103, 147 
 Gomier, E. C, 157 
 Gun Licence, 186 
 
 Haig, Prof., 28 
 
 Hamburg, 111 
 
 Higginson, J. H., 69, 99, 100, 108 
 
 Hobhouse, L. T., 90 
 
 Hobson, J. A., 42-3, 72, 76, 89-90 
 
 Holland, 40 
 
 House Duty, 70, 185 
 
 Houston, Texas, 183-4 
 
 Hull, Mr., 14 
 
 " Hurt of Taxation," 49-51 
 
 Import Duties (see Tariff), 167, 187 
 Incidence, 130, etc. 
 Income, test of ability, 12 
 Income Tax (see Countries) 
 Increment Value Duties, 59-62, 
 
 109. 140, 182 
 India, 97 
 Indirect Taxes (see Expenditure), 
 
 31 
 Insurance, 159, 160 
 Investment Income, 83-91 
 Ireland, 117-18 
 Italy, 111 
 
 Jamieson, J., 94 
 Jones, R., 3, 44 
 Jurisdictions, conflict of, 117-29 
 
 Kelly, Michael, 11 
 Kennan, K. K., 24, 39, 111 
 Kind, Income in, 33 
 
 liamb, Charles, 104 
 
 Land Tax, 18, 20, 134-6, 181-5 
 
 Land Value Duties, 59, 93, 96, 
 
 101, 116, 181-5 
 Leaseholds, 63 
 Licensing Acts, 109, ISO 
 Life Insurance, 36 
 Local Administration, 21 
 Lotteries, 67 
 Lutz, H. L., 113 
 Luxury Tax, 102 
 
 M'CuUoch, 39, 198 
 Mallock, W. H., 91. 163 
 Marshall, Prof., 10, 48-9, 70, 101, 
 
 171-2, 186, 189, 192-3 
 Match Tax, 116 
 Mexico, 79, 80 
 Middleton, J. H., 193-4 
 Mill, J. S., 38, 56, 86, 142, 147, 149 
 Money, Sir Leo Chiozza, 51 
 Monopoly, 131, 166 
 Montesquieu, 40 
 Moore, 104 
 Mortgages, 119-22 
 Motor Spirit Duty, 100 
 Municipal Trading, 36 
 Munitions Levy, 30 
 Mutual Trading, 34 
 
 National Debt, 14/ 
 Naumann, 193 
 
 Newmarch, William, 1, 39, 55-6 
 New Zealand, 184 
 
 Objective Taxation, 17 
 " Origin," 117, etc. 
 
 Paley, 40 
 
 Partridge r. Mallandaine, 88 
 
 Pascal, 54 
 
 Pastoriza, J. J., 184 
 
 Persia, 94 
 
 Pigou, Prof., 56-7, 151, 153 
 
 Pitt, 20, 186 
 
 Plehn, Prof., 32 
 
 Political Aspects, 116 
 
 Pope, 198 
 
 Powers of Administration, 101 
 
 Practicability, 95-103 
 
 Preferential Tariff, 100, 195 
 
 Pressley, 20 
 
 Presumptive Taxes, 22, 185-6
 
 INDEX 
 
 201 
 
 Prices, eliects on, 165 
 Pride, as a taxation principle, 9 
 Productivity and progression, 41 
 Progressive Taxation, 31, 37-54, 
 
 171-4 
 Protection {see Tariffs) 
 Prussia, 29, 78, 97, 102, 129 
 Psychological Aspects, 154-00, 103 
 
 Quantitative, asj^ect of ability, 15 
 
 Rating, 19, 36-7, 71, 113 
 Receipt Duty, 79-80 
 Redistribution of Wealth, 171 
 Regressive Taxes, 68-71 
 Rental Tax, 39, 71 
 Reserves, 101 
 
 Residence, as income, 32 ; taxa- 
 tion, 70, 117, etc. 
 Retailers, 23 
 
 Retaliatory Duties, 188, 194-5 
 Reversion Duty, 63 
 Romanes, 163 
 
 Sacrifice, least aggregate, 49, 172, 
 etc. 
 
 Samuel, Sir H., 13, 77 
 
 Sargant, 39 
 
 Savings, 157 
 
 Savings Exemption, 57 
 
 Segregation of the soui'ce, 129 
 
 Seligman, Prof., 14, 17, 19,21,39,40 
 
 Ships, 137 
 
 Single Tax, 183-4 
 
 Site Values, 61, 183 
 
 Smith, Adam, 3, 4, 8, 12, 37, 53, 
 111, 177-8, 193 
 
 Smith, Armitage, 20, 94 
 
 Social Imi^rovemcnt and Pro- 
 gression, 48 
 
 Source, Taxation at, 40 
 
 Special Ability, 59-67 
 
 Special Assessments, 7 
 
 Stamp, Sir J. C, 4, 15, 18, 22, 32, 
 36, 41, 44, 60-01, 04, 70, 73, 83, 
 85, 91, 108, 110, 111, 113, 117, 
 128, 135-6, 139, 141, 144, 148, 167 
 
 Standjioints, set out, 5 
 State Standpoints, 92, etc. 
 State Tax Commissions, 113 
 Stevenson, Sir John, 104 
 Stock Exchange Losses, 67 
 Subjective Taxation, 17 
 Subsistence Taxation, 42, etc. 
 Substitution, Law of, 115 
 Super-Tax, 90-91 
 Surplus Taxation, 42, etc., 72, 89, 
 
 154 
 Swift, 8 
 Switzerland, 112, 126 
 
 Tariffs, 14, 69, 94-5, 98-100, 116, 
 
 167, 187-96 
 Tasmania, 67 
 Taussig, Prof., 168, 175-7, 179, 
 
 195-6 
 "Taxable Capacity," 117 
 Time Element, aspect of ability, 
 
 15, 25 
 Tucker, R. F., 141 
 Turkey, 94 
 Turnover Tax, 79 
 
 Ulterior Objects, 170, etc. 
 
 Unearned Income, 83-91, 179, etc. 
 
 United States Taxation, 14, 19, 
 28, 29, 32, 82, 99, 102. 110-13, 
 118-23, 138, 165, 183-4, 187, 195, 
 197 
 
 Vmeberg, 24 
 
 Wage-earners, 26, 71-8 
 
 War Wealth Taxation, 66, 96, 101, 
 
 197 
 Wasting Assets, 81, 140 
 Western Australia, 33 
 Windfnll Taxation, 59 
 Wisconsin, 32, 121, 127-8 
 Withers, Hartley, 78 
 Wren, W. S., 184 
 
 Printed by R. & R. Ci.akk, Limitrd, Edinburgh,
 
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