Public Finance

Bastable, Charles F.
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London: Macmillan and Co., Limited
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§ 1. Besides the system of taxation intended for the support of the central government, and therefore usually described as 'general,' or 'imperial,' the compulsory revenue needed for the due maintenance of local authorities requires to be considered. This latter class of charges is just as much entitled to the name of taxation, and in many respects exhibits the same features, as the imperial tax revenue. Local and central government are simply different forms of the state organisation, and clearly show their fundamental resemblance in their financial systems. The need of revenue, the general characteristics of that revenue in respect to its origin, and the influence that it exerts on individual and national wealth are the same in the case of central and local bodies, and thus it might almost seem that no necessity existed for a separate treatment of the tax receipts of those smaller units that historical circumstances or the needs of social life have called into being.


But, notwithstanding this general similarity, there are certain peculiarities in the methods of local finance that make it desirable to devote a separate chapter to the consideration of the principles that should guide its working. Without in the slightest abandoning the conception of the unity of all taxation, we may examine those aspects of local taxation that give it in some degree a distinct and special character, and enable us to contrast with advantage the two categories of revenue belonging respectively to supreme and to subordinate political bodies.


One very obvious though rather superficial reason is found in the great magnitude of each class. The British Imperial revenue for 1898-9 was, in round figures, £108,000,000; that for local purposes (excluding loans) was £80,000,000. In other countries there is the same possibility of opposing the two sets of charges without finding any such difference as to warrant us in regarding either as entirely insignificant. When we add that local charges are, on the whole, increasing more rapidly than imperial ones, it is easy to understand the interest that has been excited respecting them.


There are other and deeper reasons. Local institutions have a special function as representing the interest of particular districts; they are confined to a somewhat narrow range of duties, and as a consequence their revenue system is simpler and less involved than that of the State. A rural commune must have a comparatively primitive form of financial organisation, and even in the case of the largest subdivisions the absence of military and naval expenditure and the large portion of other public duties discharged by the agents of the central government keep down their requirements. The expenditure of a great municipality or a large American State is no doubt considerable and for very varied objects, but cannot compare in extent or in comprehensiveness with any national budget. Moreover, the restraints imposed on their financial action, either by legislation or (in federal States) by constitutional limitations, are a serious check on the power of local bodies.*89


Another reason may also be assigned: the subjects with which local administration has to deal are mainly of an economic character, and very often admit of rather definite measurement. Water-supply, lighting, drainage, and the care of roads are instances. The conduct of such matters, if it has some resemblance to the duties of the national government, has others no less strong to the management of an industrial company. The propositions that 'contributions should be proportional to advantages received,' and that 'political power should depend on the amount contributed,' are much more plausible when applied to local than to general government. The extent of this resemblance will, of course, depend on the special character of the subdivision. A rural parish, or commune, is in this respect very different from London or Paris, but the prominence of economic interests in the widest sense is traceable in all forms of subordinate governments.


§ 2. The history of local institutions has already been briefly noticed in connexion with expenditure,*90 and it throws light equally on their receipts. One prominent class of these bodies is really a 'survival' of what were at one time sovereign powers.*91 The 'States' of Germany and America and the 'cantons' of Switzerland are well-known examples. Lower down in the scale the commune is the primitive political 'unit' whose importance has decayed with the growth of the State. In all of them the taxing power has been limited by the pressure and competition of the national government, and in the earlier forms by the slow development of taxation. The manor or village community depended on economic revenue not on taxation in the modern sense. One striking feature in state development has been the absorption of the more productive forms of compulsory revenue by the central financial system. It was only natural that the monarchical State, with its hostility to feudalism and to local privileges and immunities of all kinds, should endeavour to take into its own hands the customary taxes of districts and municipalities. The centralising movement of the sixteenth and seventeenth centuries was specially noticeable in respect to taxation.


Motives of convenience assisted in promoting this change. Some of the principal forms of revenue were manifestly unsuitable for small territorial divisions. The taxation of commodities or of income was far better fitted for the control of the central government. Thus both political and economic reasons existed for the failure of the older tax revenue of towns and localities.


The existing systems of local administration have in many cases a quite different origin; instead of being older than the State, they are its direct creation. In France, for example, the whole tax-system of the 'departments' and 'communes' rests on legislation not a century old, and though English institutions have a longer history, they are equally the expression of the State's will.*92 Thus local institutions are not always survivals, or even revivals, of the past; they are often entirely new formations, devised to satisfy the needs for which devolution of authority has been deemed expedient.


In such instances their power of taxing is a concession strictly limited by the terms of the grant. The adoption of new expedients is precluded, so that very often merely the amount of one particular tax has to be settled, and that only within definitely fixed limits. Local taxation becomes, in fact, a kind of supplement to the general system, admitting of little independent movement. The two opposing tendencies that affect local administration are in full operation here. On the one hand there is the desire of skilled financiers to keep the errors and mistakes of the smaller bodies under supervision. Party spirit and class-interest are intensified when confined to a small area, and are but too ready to employ taxation as an engine of oppression; and even when no injustice is intended, the ignorance of the real working of taxation that is so common amongst local administrators would, if unchecked, prove disastrous to the national interest. Hence the limitations on the form and amount of taxation as well as on its application. The citizen who is unfairly burdened by his local taxes has as legitimate a claim to relief as if the general charges were too heavy in proportion to his income.


Side by side with this idea of more careful control there is the disposition to extend the sphere of action of local authorities. It is felt that political education is promoted by inducing citizens to manage their common affairs in an independent manner. To awaken or to strengthen the feeling of responsibility is impossible unless power to act is also bestowed. A local body cannot be expected to feel any great interest in its work if all the important parts of the system are predetermined. To secure a vigorous municipal life there must be a good deal of latitude given to the corporations engaged in its management. Wider taxing powers and new forms of local revenue are, therefore, often suggested as indispensable steps in reform. To understand the position of the question, we must bear in mind the existence of these apparently contradictory sentiments, both, in some cases, vehemently held by the same persons.


§ 3. The first step in an examination of the principles of local taxation is the determination of the proper line of division from the general state revenue. We have seen that the distribution of duties between central and local administration conforms on the whole to certain general principles,*93 and the most natural course would be to apportion the charges on a similar system, but, in fact, there is no real correlation between the two: the division of duties is largely independent of the division of taxes, just as both are distinct from the distribution of public property and quasi-private receipts. The partition of taxes between the two classes must depend on, or at least be guided by, financial and economic considerations.


Some important taxes are at once on sound principles shut out from use as local resources. The customs are only levied at the national frontier; any attempt to restore the provincial customs boundaries that hampered the trade of France before the Revolution, and in the 19th century that of the German and Italian States, would be a retrograde as well as an unpopular step in finance. The taxation of commodities in transitu is only legitimate when exercised in a way calculated to cause the smallest amount of delay and inconvenience. To regulate trade between small areas for fiscal purposes would be at once costly and unproductive, and therefore uneconomical.*94 The earliest step towards federation between independent States has been the abolition of custom-houses at their frontiers, and there is no probability that a reversal of this salutary process will be witnessed. Octroi duties are, indeed, an exception, but their continuance can be readily explained. They are confined to towns, and therefore are regulated with comparative ease, having, in fact, some resemblance to the market dues once so common in British towns. They make as near an approach to direct taxes on local consumption as can well be devised, with some additional incidence on the surrounding country through their effect on demand. Besides, they are unquestionably a decaying form. France and Italy are the only countries where they are in full force, and even in these they are looked on as a necessary evil. It is almost certain that in the progress of reform they will ultimately disappear. On the same grounds local excise taxes are practically prohibited. To impose a duty on an article without having the power of levying an equivalent customs duty would mean the sacrifice of local producers, unless they had a strict monopoly up to the amount of the tax: such a tax would be easily evaded by moving outside the boundary. Thus the great forms of indirect taxation on commodities are withdrawn from the list of local resources. Direct duties on consumption might be used, but, as will appear,*95 they are difficult to manage and only moderately productive.


Income and property taxes are equally unavailable, though for a different reason. Both are essentially personal and apply to a given individual. Now to tax a person on his income for the service of the locality in which he resides is open to the double objection that it is likely to be evaded and is grossly unfair. Local authorities have no efficient machinery for detecting concealed income: they are in a worse position than the English revenue officials in regard to foreign investments, where failure is admitted. The mere moving from the area for part of the year would upset the arrangements. As to unfairness, Lord Goschen's view seems conclusive: 'It appears to be impossible to devise an equitable local income tax, for you cannot localise income. An attempt was made in Scotland, and it broke down when an English Lord Chancellor, who drew his £10,000 a year in London, but had a small place in Scotland, was made to pay income tax on the whole of his income in that country as well as in this.'*96 No real correction could be made without exempting all income earned outside the district, or, in other words, changing the income tax into a partial produce tax. No matter how large the local division may be, the same objection lies. American States and Swiss cantons are as little suited for the application of separate income taxes as England, Ireland, and Scotland. Owing to the variety of modern incomes and the trouble of following them to their sources, the income tax should always be general. A property tax is in much the same position in local taxation, though its defects as a part of any tax-system are so great that it is doubtful whether it should be admitted even into the list of good national taxes. It appears to have the two great faults of injustice in distribution and liability to evasion.*97


The reasons for the removal of taxes on income, property, and commodities from the list of local resources are in a great degree technical, and rest on the difficulties of their fair or economic application. But it is further plain that there must be a large body of productive taxation reserved to the central government. Even if all the taxes mentioned were eminently fitted by their nature to contribute to local revenue, they would have to be kept for the still more important services of the national administration. So much depends on division of duties between the two sets of organs and their relative cost, that it is hardly possible to lay down any general rule on this part of the subject. We may, perhaps, fairly assume that at lowest one-half of the total sum collected in taxes will have to be taken by the central government.


§ 4. On the other hand, there is a different class of taxes well fitted for local treatment. Such are those levied locally on fixed property and permanent occupations carried on in the locality. First in natural order is the land tax. Both abstract reasoning and experience tend to show that a large proportion of local taxation must be obtained from this important 'object.' In rural districts there is little else to be taxed, and in the case of towns the value of land is so much increased by the action of social conditions that it forms a most suitable mark for the larger taxation that the wants of urban societies make necessary. The theory of incidence also supports this view. Other charges are often shifted to rent, while it can hardly ever transfer its peculiar burdens. As a land tax tends to become a tax on rent, and can generally be so regulated as to take that shape, it has definiteness of incidence in its favour; while its pressure falls on a form of wealth that is likely to grow without effort on its owner's part. The doctrine of taxation in proportion to service, though untenable in general, has here some force. The chief gain of local expenditure accrues to those who own property in the district. Some advantages may be more evident in their effects than others, but in a broad general way the advance of a locality means an advance in the rent of its area. There are, no doubt, exceptions: unfortunate proprietors have sometimes had to pay for 'improvements' that lowered the value of their land,*98 but on the whole the opposite effect is more common.


Next to the land tax we may place the house tax as a convenient form of local impost. It is, indeed, somewhat more complicated in its operation; its incidence, which by regarding houses as a particular manufactured commodity, would appear to be on the occupier, really varies according to the method of imposition and the particular local conditions, and it has the disadvantage of affecting one of the most important elements of necessary expense,*99 but on the other hand it is easily collected, tolerably proportional to income, and does not touch those unconnected with the district. If houses are to be taxed the revenue thence derived should, we believe, go to local, not to general revenue. The same reasons that have been noticed in the case of land apply, though with less force, to that of houses. This form of property gains in value by expenditure, but it also deteriorates through use, and therefore the indeterminate portion of the tax that falls on the house-owner should be kept within moderate bounds.


A third form of local taxation is discovered in the taxes on the exercise of occupations known as 'licenses.' These are better suited for local than for general taxation. They can be readily collected, and, if properly chosen, do not hamper industry. The system of low license duties on most trades and employments has the chief attributes of a fair local tax. The English method of appropriating the spirit licenses to the local bodies might with advantage be further developed.


Very similar in outward appearance are the licenses for direct enjoyments, and, though they differ in their essential character, they also may without impropriety be assigned to the several localities.*100 Certain difficulties do indeed arise in this connexion. A license taken out in one place may be required for use elsewhere, or may even be exercised in several different localities. In practice the right of transfer may be allowed, or, better still, such cases may be reserved for the central revenue, leaving only the localised privileges to the smaller bodies. As a further resource, some of the taxes on acts may be usefully employed by localities. Thus the transfer of property, registration of companies, and other charges on legal transactions would provide a fund for the payment of the expenses connected with these administrative functions. Those taxes that closely resemble fees will come under the same rule as to their division.*101 Each administration will retain for itself what it collects.


The foregoing suggested distribution must necessarily be modified to suit the needs of particular financial systems. Thus the house tax forms a part of general taxation in several countries: its complete surrender to the local authorities when proposed in England was made contingent on the position of imperial finance, and has not yet been carried out.*102 We can hardly imagine the Indian Government yielding up the land revenue to the provinces. The line of division has to be varied, but it is nevertheless well to know the general principles that should assist in determining it.


§ 5. But given the partition of revenue between the two forms, we have next to see whether the rule of justice that we accepted for general taxation can be applied without reservation in local finance. Taxation in proportion to income gives a substantially just division of general burdens, but in the case of smaller districts the burden is not a general one. Many important local services are specific, and can be dealt with on the rule of payment for benefit received. A large part of the so-called English 'rates,' such as those for water supply, lighting, cleaning, drainage, &c., may be best measured for each payer by the advantage, or rather the quantity of the service. The citizen, in fact, pays for the supply of certain useful commodities. The local authority is performing a strictly economic duty. Taxation so far should be in proportion to advantage. Difficulties, however, soon arise in the attempt to apply this principle. In addition to the direct service rendered there is a margin of advantage accruing to the whole society, some of the service is not done for specified persons and some of the duties of local governments are of national advantage. The necessity of investing capital, the repayment of which is spread over a long period, complicates the case. To get a fair division of the charge between owners of land, possessors of fixed capital, including houses and the immediate users of these public services, is no easy task. It involves (1) a determination of the real incidence of the different modes of taxation, and of the extent and rapidity of the process of shifting; (2) an estimation of the truly equitable division between the several interests; and (3) a full recognition of the practical limits that any effective system must observe.


As regards the first head the general principles of incidence have to be considered, but the special incidence of land, house, and capital taxes are of particular importance. For convenience we may here so far repeat and anticipate the result elsewhere stated.*103 The immediate consumer, i.e. the occupier of a house, or the user of other taxed convenience, looks on local taxation as simply a part of the price of the utilities he receives. So far as the outlay benefits him directly, he bears it as payment for increased advantage, and taxation is only shifted by him when the sacrifice it imposes reduces demand; heavy local taxation, unaccompanied by corresponding increase in utility, tends to diminish demand for the services so charged, and gives a backward shifting on the producers, i.e. the house-owners or other holders of the articles. The check to these particular forms of industry will ultimately reduce the capital and labour employed in them, and thereby pass the pressure on to the landowners in the shape of lowered ground rents so far as land entered into the supply of services. Such seems to be the process by which the 'orthodox' views on the incidence of rates were reached, the burden being ultimately distributed between the owner of land and the consumer. In respect to taxes on agricultural tenants, the same train of reasoning suggests that the incidence is ultimately on the landlords, as outside competition hinders any forward movement to the consumer of produce.*104 It is hardly necessary to say that this doctrine assumes a uniformity in the course of shifting that has no real existence, since it omits some circumstances that are essential elements in the problem. Amongst these are: the long duration of the arrangements between owners of land and of capital; the position of qualified monopoly that owners of land in towns possess, and which with its advantages has the disadvantage of exposing them to the action of shifting; the slowness with which adjustments are made, which hinders much reliance in matters of legislation being placed on the operations of shifting in securing a proper division of the burdens.


The second head, that respecting the true interpretation of the rule of just taxation, is made more difficult by the complicated interests, some present, some future, that modern society is ever creating. In apportioning taxation between occupier, house owner, and ground landlord, we may discover that each of the two latter interests is divided into three or four parts, all in equity bound to share in the burden for the common advantage. Still greater difficulty is caused by the manifold duties of local government, some of which are merely delegated for convenience, not because they are solely of local interest. Police, prisons, poor-relief and education may be cited as examples. We cannot with any reason maintain that owners, whether of land or other property, and ordinary householders, are alone interested in the efficient management of these important matters. The policy of defraying all these charges out of particular funds with the practical exemption of others no less liable is a grave injustice. The cost of expenditure that is in essence for general purposes should follow the same distribution as that of general taxation.*105


Thus the rule of taxing according to interest affected is not a complete and absolute principle for the distribution of local finance. Certain forms of direct public services can be so dealt with. Another portion may be fairly placed on the owners of durable property, as those who benefit most by an active and judicious local administration. A third and not inconsiderable share may be levied from the community generally by the agency of local licenses and taxes on transactions, and still more by a tax proportional to house rent, which is a good rough measure of taxable capacity.*106


§ 6. The especially economic character of local administration is particularly noticeable in its direct effect on the value of portions of private property situated within its jurisdiction. The opening of a new street or the removal of insanitary buildings may add greatly to the utility and even the selling price or rent of adjacent property, and the fortunate owner discovers that his wealth is increased by the action and at the expense of the local governing body. Here there is at all events a seeming unfairness. It may be plausibly urged that where there is special gain there should also be special contribution. When property is improved, or, in current language, 'bettered,' there is some reason in calling on the owner to pay a part of the cost of that improvement, as otherwise the rule of just distribution of the burden would be violated. Notwithstanding the very plain and simple reasons which would appear to dictate this method of providing some of the revenue necessary for important improvements, it is noteworthy that there are very few traces in Europe of any such expedient.*107 It has been reserved for the state legislatures of the American Union to give it a wide development under the title of 'special assessments,'*108 by which a special charge is imposed on property that has gained through municipal action. The particular machinery by which the amount of the assessment is determined varies from state to state (and even from town to town), and need not be considered here; but the general principle deserves some consideration. On the one hand there is very strong ground for believing that where outlay is incurred for the advantage of a limited class of owners they may justly be required to pay for the peculiar advantage that they have obtained. Besides, there can be little doubt that the wide use of special assessments makes the work of improvement easier. The ordinary ratepayer will not feel the same hostility that he does at present to costly but necessary alterations. But on the other hand these very advantages suggest some serious objections. The local administrators and the owners of the 'bettered' property may form widely different estimates as to the value of the improvements in question, and in such cases the latter will not always be mistaken. Again, the relief given to the general ratepayer is not wholly beneficial; it tends to weaken his vigilance—at best not very keen—in respect to unprofitable schemes, and to foster the undesirable feeling that the voters should support extensive municipal works, leaving part of the bill to be paid by a limited, and perhaps politically powerless, class. Rigid limitation as to the share of cost to be assessed on the owners*109 will greatly reduce, but cannot altogether remove, this evil. A further difficulty arises in connexion with the fixing of the properties to be assessed, and the amount of 'betterment' given to each. To attain any satisfactory result a careful judicial inquiry before a competent and impartial tribunal is an essential condition. On the whole, it seems most in accordance with the evidence to conclude that the employment of special assessments, while justifiable in principle, and in some important instances desirable, needs to be carefully controlled; the proof of benefit bestowed must be very clear and well established, and the amount diffused over the general community, and therefore, even on the strict 'benefits' principle, payable from the rates, must be taken into account. With the observance of such precautions it is possible to secure a contribution out of the fund created by the direct action of the local government, and at the same time to avoid unfair pressure on individuals.*110


§ 7. After all these different expedients have been carried as far as circumstances will allow, it may be necessary to readjust the balance between the central and local governments, either (1) by a transfer from the funds of the former in the shape of (a) payments for certain services, or (b) assignment of revenue, or (2) by the employment of its taxes as a base on which to raise additional local resources. Most financial systems have adopted one or both of these expedients. To begin at home: Complaints as to the pressure of local burdens led by degrees to payments from the central government for various services that appeared to be of a general character. This process began in 1835 by small payments in connexion with criminal administration. It was later on applied to the support of the police force, and gradually extended to other services, until in 1885-6 the total amount came to £5,775,523.*111 The objections to this hap-hazard system were obvious. Additional grants were made to buy off opposition in Parliament and were always arranged on the basis of a compromise. The Imperial Exchequer was burdened and there was confusion between the two classes of revenue and expenditure, as what was outlay on one side was income on the other, the same sums being counted twice over. Accordingly the extensive reform of local government by the establishment of County Councils in 1888 was accompanied by a change in the relations of the Exchequer to local finance. The Grants-in-Aid were, speaking broadly, abolished, and a separate local taxation account created to which certain portions of the central revenue were assigned.*112 The aim of this reform was to secure the complete separation of local from central finance, thereby restoring simplicity to the national budget, and also to prevent the further demands on the part of the localities, while by the assignment of a part of the Probate Duty the alleged unequal treatment of real property was at least reduced.*113 Unfortunately the new scheme was imperfectly carried out, and the old policy of grants was revived in a new form. The large grant in relief of rates on agricultural land, introduced by the Act of 1896 and extended to Ireland by the Local Government Act of 1898,*114 placed an annual burden on the Exchequer of over £2,200,000. A further difficulty arose in the distribution of the funds assigned to the local taxation account. As the automatic rule of payment in proportion to expenditure or efficiency had been abandoned, it became necessary to take some arbitrary basis of distribution, which must from the nature of the case be unsatisfactory.*115 There is an entire absence of equity in the actual system of distribution, either as between localities, or between the several countries that make up the United Kingdom. The effect of these contributions on local finance was not encouraging to either economy or administrative efficiency. Finally, so far from improving the form of the public accounts, the system of assigned revenues has made budget statements more complicated, and has, to some extent, obscured the real growth of important branches of revenue.*116 Still, on weighing the two systems, there is a slight balance of advantage in favour of the assignment of revenue, provided (a) that suitable taxes are selected, and (b) that the true relations of local and central finance are properly explained.


An analogous policy has been pursued in Belgium, where the octrois were removed in 1860 and replaced by parts of several indirect taxes.*117 Prussia has also used the system of subventions.*118 This method receives an extension by making the local taxes merely additions to the general ones. Thus the French communes and departments draw important tax revenues from the 'Centimes additionnels,' i.e. charges added to the four direct contributions. The same plan has been used in the German States and Austria though under the reforms of the 'Miquel' laws independent communal taxes are now developed in Prussia.*119


Some high authorities approve of this policy of making local taxation a mere appendage to general taxation. 'It is rightly asserted,' says Leroy-Beaulieu, 'that the French system of movable additional charges on the existing direct contributions, of uniform accountability, and the collection of direct local taxes by the agents of the State, makes the management of local finance simpler, clearer, and less costly, and gives the taxpayers much greater security against peculation and exaction. We do not hesitate for our part to declare for that system.'*120 But notwithstanding this weighty judgment we are forced to believe that there is an advantage in having a separate system of local taxation. The aims of the two classes are so different and the rule of distribution varies so much, that a decided boundary between them is rather desirable. Both will naturally avail themselves of such material and agencies in the shape of valuations and officials as exist, but this does not necessitate the treatment of local taxes as merely added percentages to established general taxes. The success of local government depends on the energy and vigour with which it is worked, not on restraining its action within the narrowest limits. 'The ideal condition of finance in a perfect system of local self-government' has been described as 'one in which each local authority levies its own taxes upon its own subjects within its own area; in which it has the power of applying the proceeds of these taxes within certain limits fixed by the general law, for the local advantage of its own citizens; and in which it has power to increase or diminish its taxes at its own discretion, according to its means and its wants.'*121 The benefits of fiscal autonomy may perhaps not be so great as in certain conditions to compensate for the want of the harmony and regularity that state intervention secures; they are, however, sufficient, in conjunction with the reasons already given, to justify strenuous efforts for securing a distinct tax-system, and this is possible without any sacrifice of the guarantees for good government.*122 At the same time we may fully recognise the convenience of supplementing local revenue from general taxation with the double object of securing adequate funds and more equitable distribution of burdens, though, while granting this, we must also insist that the extent to which the process is applied ought to be confined within the narrowest limits consistent with attaining the end in view. The allotment of part of the taxation available to meet the general expenditure is a measure that always stands in need of justification; it has a presumption against it which must be rebutted by sufficient evidence.*123


§ 8. The relations of local and general finance suggest another closely related point, viz. the extent of the fiscal liberty to be bestowed on the local financial powers. Between the extremes of complete regulation and almost complete independence we may discover a series of steps corresponding to the size of the bodies and the political training of the people. The national government may fix the particular taxes and their amount, or it may, as with the French communes, let the latter be varied if its permission is sought. Again, it may lay down the forms of taxation and place bounds to its amount, either definitely determined or variable. Or, finally, the duty both of selecting the taxes and determining their amount may be given up to the local government. The first mode means the reduction of the local authority to impotence so far as taxation is concerned; it simply executes the Sovereign's orders. The other extreme approaches closely to independence. The taxing power is always an attribute of sovereignty: a body that had full taxing power would have got very near that position. Accordingly, we find that the customs duties in all Federal States come under the control of the central government. The extent to which the right of independent taxation has been restrained is a mark of the progress of the State towards unity. Co-ordinate fiscal authorities have to be kept within bounds by constitutional rules, but we may safely conclude that in a durable State the supreme power in financial matters will sooner or later be vested in the central government.


The extent to which the liberty of experiments in taxation should be conceded to the subordinate bodies must, we believe, be carefully limited. For the smaller units the taxes should be absolutely laid down, and also the maximum to be raised, but the opportunity of economy should not be denied them on the condition that they duly discharge their necessary functions.*124 The larger circumscriptions are fairly entitled to greater latitude. A higher standard of intelligence may be expected from their representatives, and their economic resources are more varied. But even with them the need for supervision cannot be said to be absent. They may impose taxes that press heavily on unpopular sections in their district; they may deal unjustly or ignorantly with important economic and social interests, or they may go counter to the financial policy of the State. For these reasons the unitary form of government is in its financial aspects superior to the federal one, even though the larger liberty of levying new varieties of taxation is a certain advantage in the latter.

Notes for this chapter

In such governments as England or France the legislature can completely control the fiscal expedients of municipalities and other smaller territorial administrations. The powers of the American 'State' are limited (a) by the federal constitution, (b) by the state constitution. Cities are controlled by state legislation. Cp. Bryce, American Commonwealth. i. 498.
See Bk. i. ch. 7, §§ 2 sq.
This is true even of the American colonies in the period between the separation from England and the establishment of the present constitution.
The great measures of legislation on local government are (1) The Poor Law Act, 1834; (2) The Corporation Reform Act, 1835; (3) The Local Government Act, 1888, creating County Councils; (4) The Local Government Act, 1894, establishing Parish and District Councils.
Bk. i. ch. 7, §§ 6, 7, 8.
The following is curious as coming from a strong supporter of free trade: 'I should be inclined to suggest as a possible means of taxation ... a customs duty or octroi on the admission of articles of general consumption into a locality.' Giffen in Memoranda, 98; see also Row-Fogo in Economic Journal, xi. 356-7
Bk. iv. ch. 5, § 6.
Local Taxation, 204.
For further discussion of the property tax see Book iv. ch. 4, §§ 3, 4.
Cp. Report of Town Holdings Committee (1891), Questions 176-180.
See Bk. iv. ch. 2, § 5, for a discussion of the incidence of house taxes.
The Final Report of the Royal Commission on Local Taxation recommends the transfer of 'licenses' to the local authorities.
Bk. ii. ch. 5, § 3.
Goschen, Local Taxation, 205: 'It may happen that owing to events at present unforeseen, it will be impossible for the Imperial Exchequer to part with so important a source of revenue as the house tax.' The Majority Report of the Local Taxation Commission approves of the surrender.
See Bk. iii. ch. 5, §§ 5, 6, 7; Bk. iv. ch. 1, § 9; ch. 2, § 5.
On the question of incidence see Goschen, Local Taxation, 163-168, and the fifth Report of the Committee on Town Holdings, No. 341 (1890), especially Questions 41-5, 88-101, 331 (Sidney Webb); 1804-32, 2024-26 (Munro); 1243-46 (Farrer); 2714-22 (Rogers). The Memoranda on Classification and Incidence, issued by the Local Taxation Commission, contain the latest views on this important matter, see also 'The Incidence of Urban Rates,' Edgeworth, Economic Journal, x. 172 sq.; 340 sq.; 487 sq.
The distinction drawn in the text between expenditure for general purposes and that for the particular advantage of the locality has been well expressed in recent discussion by describing rates levied for the former as 'onerous,' those for the latter being 'beneficial.' The serviceable terms, which seem to have been first applied in this connexion by Sir G. H. Murray (Economic Journal, iii. 701), are employed in the Reports of the Royal Commission on Local Taxation and are best used with direct reference to expenditure. It should be added that the distinction between the two classes has been long recognised by scientific students; cp. e.g. 'Da die Gemeindewirthschaft in so vielen Punkten eine Art von Mittelstellung zwischen Staats- und Privatwirthschaft einnimmt, so darf man auch bei ihren Steuern nicht vergessen dass zwar manche ihren Ausgaben nur decentraliserte Staatsleistungen betreffen,' Roscher, 159. Cp. also Cohn, §§ 125-6, and 459.
'It is one of the fairest and most unobjectionable of all taxes. No part of a person's expenditure is a better criterion of his means, or bears on the whole more nearly the same proportion to them.' Mill, Principles, Bk. v. ch. 3, § 6. Supported by Engel's researches.
See Rosewater, Special Assessments, 2-21, for instances.
Rosewater, ib. chs. 2, 3. It may be added that the rapid growth of towns in America made this system almost necessary. Owners of property hardly felt aggrieved when they really got full value for the charge. Though they did not contract with the municipal authorities (as not seldom happens in Great Britain), there was in fact a quasi-contract, which saved trouble.
For the provisions in various American towns see Rosewater, 64-65.
Special assessments in the United States represent a capital sum; but as they can be collected by instalments this is really non-essential. Either a fixed rate extending over a number of years, sufficient to pay off the principal expense, funds for which could be obtained by borrowing (cp. Bk. v. ch. 8), or redeemable rent charges seem to be the best technical forms.
See the history lucidly given in Sir E. W. Hamilton's 'Memorandum' (C. 9528), reproduced in Memoranda, 11-19; also Chapman, Local Government and State Aid, ch. 7. Each of these 'grants in aid' was clearly due to 'the pressure brought to bear on the government' by interested parties, as, indeed, Sir E. W. Hamilton's narrative shows. One important item is the cost of the Irish police, which exceeded £1,408,000 in 1895-6, and is still paid by the central government.
These were (1) the license duties; (2) a proportion (one-half) of the probate duty; (3) 6d. per gallon on spirits and 3d. per barrel on beer, i.e. taxes on acts, property, and commodities. In 1894 a portion of the new estate duty equivalent to the previous probate duty was substituted for the latter.
See Final Report of Commission on Local Taxation, 'The principles on which Mr. Goschen's scheme was founded are in our opinion broad and sound.' 17; cp.112. For a more unfavourable view see Farrer, Mr. Goschen's Finance, 80 sq.

English Agricultural Grant £1,340,000
Scotch " " 185,000
Irish " " 730,000

See the vigorous criticism by Hamilton and Murray in their separate Report, Local Taxation Commission, Final Report, 116-120; and Chapman, Local Government, ch. 8.
It has been alleged that 'ear-marking' of certain sources of revenue for the local taxation account is a mere fiction, since, whatever funds may be assigned, it is necessary to impose fresh or retain existing taxation to meet the gap in the national revenue, and it is this fresh (or retained) taxation that goes to the aid of local finance. This is true, but it is equally true of the transfer of any form of taxation, owing to the fact that imperial and local finance are essentially connected. The revenue system is fluid, and the ultimate adjustment always operates on the 'marginal' expenditure and the 'marginal' revenue. See Bk. i, ch. 8, § 4.
75 per cent. of the coffee duty, 25 per cent. of the spirit duties, the excises on sugar and wine, and 40 per cent. of the postal receipts. See De Parieu, iv. 386 sq. for a full discussion.
Particularly by the Lex Huene of 1885, repealed in 1893; see 'Die Lex Huene.... und ihre Wirkungen.' Finanz Archiv, x. 488-498.
i. 712. Mr. O'Meara—Municipal Taxation, ch. 5—pronounces in favour of the Continental system of Centimes additionnels, but the much higher authority of Mr. Blunden may be cited in support of the position in the text. Local Taxation and Finance, 72. The Prussian reform which practically abandoned the system of Zuschläge, except in the case of the income tax, also supports it.
For a detailed account of Prussian local finance and the recent changes therein, see Wagner, iv. 64-97; also 'Local Government and Finance in Prussia,' Diplomatic and Consular Report, No. 487 (year 1899), and J. Row-Fogo, 'Local Taxation in Germany,' in Economic Journal, xi. 354-78. The last-named writer seems to have in some way misunderstood the brief statement in the text, which is in accordance with the facts.
Farrer, Mr. Goschen's Finance, 54.
Mr. Row-Fogo (Economic Journal, xi. 355) refers to the text, and confesses himself 'entirely unable to appreciate the weight of this argument,' which is natural enough, as he has misconceived its meaning. The question is not one of 'making up the roll.' The real point is the amount of discretion given.
The various Reports made by the Commission on Local Taxation agree in recommending additional aid from the central Government to local finance. The chief feature of difference is respecting the form of the relief. The proposal of a definite grant from the Consolidated Fund, adjusted at intervals of ten years, and equal to one-half of the 'onerous' expenditure (see supra, § 5), is strongly urged in the separate Report of Sir E. W. Hamilton and Sir G. Murray. The crux of such schemes is the discovery of a just method of distribution. The plans suggested for this purpose seem to involve a series of arithmetical calculations resting on no solid basis of equity. See Final Report [Cd. 638], 23-32, 73-83, 133-140.
Bk. i. ch. 7, § 9, for these duties.

Book III, Chapter VII

End of Notes

24 of 46

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