This book is DUE on the last date stamped below
UNIVERSITY of CALIFORNIA
LOS AaCELES
LIBiiARY
THE FUNDAMENTAL
PRINCIPLES OF TAXATION
IN THE LIGHT
OF MODERN DEVELOPMENTS
MACMILLAN AND CO., Limited
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TORONTO
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
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