Public Finance

Bastable, Charles F.
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First Pub. Date
London: Macmillan and Co., Limited
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3rd edition
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§ 1. For fiscal purposes durable capital has the closest resemblance to land—the two are indeed sometimes inextricably mixed up together—and of its different forms houses and buildings generally are the most important from the same point of view. Sometimes as an integral part of the land tax, but more often with a distinct position, we find the charge on houses used both for local and general purposes. The reasons for its employment are to be found, partly in its connexion with land, partly in the universality of the use of houses, which extends taxation to all classes, partly in the convenience and readiness of assessment, and finally in the belief that the value of a person's house was a satisfactory test of his income. These considerations have very different weight at different periods. In early times the one object was to secure receipts, and for this purpose houses, or something connected with them, were convenient objects of imposition.


As in the case of land, the precise form adopted varied; at first houses were taxed simply as part of the land on which they stood, being treated as a particular kind of improvement. The hearth or chimney tax was in use in the feudal period. The substitution of windows for chimneys made another variety, to be succeeded by taxation assessed according to the class of house, or the letting value. The problems and course of development of the land tax reappear with modifications in the case of the house tax.


§ 2. England shows this development. The hearth tax, established in 1662, was so unpopular that it was abolished in 1688, but soon replaced by the window tax, under which a scale of payment was fixed—ten windows and under, 1s., increasing at a higher rate for a larger number. With several changes in the rates, and with additional stringent provisions to check evasion, the tax continued all through the eighteenth century. In 1815 its yield was about £2,000,000. Sounder ideas of taxation led to its repeal in 1851. Adam Smith's suggestion that inhabited houses should be taxed on their annual value was adopted in 1778, in addition to the existing window tax. Houses under £5 value were to be free; those between £5 and £50 to pay 6d. in the pound (2½ per cent.); those over £50, 1s. (5 per cent.). Several increases of the tax were made for war purposes, till in 1808 the rate on houses of £40 and over was 2s. 10d., or nearly 15 per cent. By a curious selection the house duty was repealed in 1834 instead of the window tax, but on the repeal of the latter in 1851 it was reimposed. Houses under £20 were exempted, and business premises paid only two-thirds of the rate on ordinary houses, i.e., 6d. and 9d. per pound respectively. The last change has been made in 1890, when Lord Goschen restored the old system of grading. Houses between £20 and £40 pay only 3d., and those between £40 and £60, 6d., the corresponding rate on business premises being 2d. and 4d. The yield of the tax was by those changes somewhat reduced from its highest point of £2,000,000; in 1900-1 it amounted to £1,700,000.*35


To arrive at the total pressure of taxation on buildings we must add (1) the income tax in schedule A, amounting at 8d. to about £4,850,000, and (2) the great mass of local rates. Taking the figures in the last chapter, if the balance of rates can be assigned to buildings, we would get the enormous sum of £35,700,000, as their local taxation.*36 The occupier, the ground landlord, and, in the case of business establishments, the consumers of the commodities are all participants in the burden, but we must again note that a great deal of this expenditure is economically reproductive, so that the taxes are paid out of a fund created by their employment.


§ 3. France has not reached the same stage of development as England in regard to this form of taxation. The separation of the land and house taxes has only lately been accomplished, and the door and window tax still exists. in addition to the Mobilier, or tax on letting value. The latter, suggested under the monarchy as a substitute for the personal Taille, was in its origin, as established by the Constituent Assembly in 1791, a tax on income, based on the presumption that house rent was a measure of its amount, but owing to the belief that income increased more rapidly than the cost of housing, the tax was on a progressive scale so calculated as to be proportional to income, and some qualifications were made by using other elements. In 1798 these refinements were abolished, and the Mobilier became a house tax. The tax (which is combined with the personal tax, to be discussed in the next chapter) is apportioned, and amounts to about £3,500,000, of which nine-tenths come from the house tax part.*37 The contributions to local taxation through the additional centimes*38 are of an even larger amount.


The door and window tax was established under the Directory in 1798. At first a rated tax, it was apportioned in 1802, and, with the exception of 1831-2, it has so continued, with a steady increase in amount. From a little over £500,000 in 1830 it has risen to nearly £1,600,000 in 1885, and £1,900,000 in 1900, while the additional centimes, that were only £100,000 in 1830, exceeded £2,000,000 in 1900. The total may therefore be regarded as about £4,000,000, obtained by an inconvenient and vexatious method.*39 To the foregoing the building tax, now separated from the pure land tax, adds a sum of £3,000,000 for the principal, with additions coming very close to £3,600,000 (£3,150,000 of that amount being for the communes and departments in about equal proportion). As the tax is now a rated one the increase in value of house property, even if the present rate is maintained, will add to the yield. The total burden on houses is therefore, speaking broadly, about £17,000,000.*40


Italy had, as we saw, established a distinct house tax in 1865. The amount obtained by it in 1866 was £1,300,000; by 1886 it had more than doubled, being nearly £2,650,000. Moreover the local charges, superimposed on the principal, came to almost the same amount. For the year 1892-3 the total State taxation amounted to £3,435,000. Though the absolute amount is much less, the pressure is probably greater than in England or France.*41


Belgium, Spain, and Portugal do not separate their land and house taxes; it is therefore impossible to deal with them under this head.


The Prussian house tax was made distinct in 1861, and separately collected since 1865, being proportioned to value—2 per cent. (or 4 per cent. in the case of houses let to tenants). It grew with the increase of wealth from £850,000 in 1878 to over £1,500,000 in 1889-90. The local charges came to less than half that amount, giving a total of about £2,200,000.*42 Like the land tax it passed from the State to the local bodies in the financial year 1895-6.


In most of the smaller German States the house tax is a part of the land tax. Bavaria, as in the case of land, applies the 'area' and 'productive power' principle to the taxation of houses.


The Austrian house tax, in existence since 1820, yielded for 1893-4 about £3,000,000, and that for Hungary, about £1,000,000, not including the local charges.*43


§ 4. From the facts just given, we can see that the course of development in respect to the taxation of buildings is towards taking their value, or, if possible, their annual yield, as the basis of assessment, and at the same time towards separating them from land. The French door and window tax may, therefore, be at once condemned as a pernicious survival of an antiquated method: its abolition, or absorption in the mobilier, is merely a question of time.


The problem of assessment has usually been dealt with in the way approved by Adam Smith, but with a large allowance for expenses and repairs, varying in the different countries. On the whole, it is easier to ascertain the letting value of houses than of land, and there is, besides, the element of cost of construction to be used as a corrective. Some difficulties, however, certainly exist. It is not easy to deal with deterioration and the resulting loss of value, more particularly in respect to buildings employed in production. Revaluation at short intervals is the only suitable way, but it is both troublesome and expensive. The opposite case, i.e. where improvements have been made, is also complicated. Increased value ought certainly to be taxed, but the effect in checking improvements is serious. The usual course of allowing a period to elapse before rating new constructions affords the best practical solution.


The taxation of expensive private dwellings, such as noblemen's mansions, has attracted more attention than its intrinsic importance warrants. In England such houses have been rated at a nominal figure on account of the supposed expense of maintaining them, which is thought to reduce their letting value. On the other hand, the cost of construction, or again that of reconstruction, has been proposed as the basis for valuation. Neither is, however, adequate. Letting value fails where the objects are not really and in fact let to tenants. Cost would give much too high a value in some cases, as expenditure is not always represented by additional value. The true test in such cases lies in the utility of the house and surroundings, which selling or market letting value would measure, but which, in its absence, must be estimated, either by reference to similar dwellings let elsewhere,*44 or by the probable expenditure of the possessor on his house accommodation. The modern tendency to apply commercial principles, even to aristocratic residences and estates, will afford a means of readily gauging value in these instances.


§ 5. Far more important is the very difficult question of the incidence of house and building taxes.*45 So many elements are combined that the assignment to each of its separate share is a task of some complication. The value of the ground on which the buildings stand is determined by the law of rent, and a tax that falls on it would, therefore, appear to be untransferable. A house is a particular kind of commodity, and its share of taxation may be supposed to come under the laws that determine the incidence of taxes on commodities. Accordingly, Adam Smith, Ricardo, and Mill have agreed in asserting that taxes on ground rent fall on the landlord, while those on building rent fall on the occupier. The builder must, they thought, get his fair profit and will therefore escape taxation. The solution is unluckily not quite so simple. First, as to ground rent, wherever there is an alternative use for land, it is plain that a tax on it, if employed for building, is strictly limited by that other use; thus until the rent of land for building exceeds that of agricultural land by the amount of the tax, no landlord will let it for that purpose. The tax on this minimum ground rent would be passed on to the builder, and by him to the occupier; but once it is reached the ground landlord has a differential gain, and cannot escape by withdrawing his land, as he would thereby lose still more. We can, therefore, accept the doctrine of the non-shifting of a tax on ground rent as generally true. The other part of the doctrine requires more consideration. The rent of houses depends proximately on the conditions of supply and demand; taxation levied from the occupier is equivalent to so much additional rent; it resembles a rise of price in the case of an ordinary commodity. The consequent check to demand tends to take off part of this increase, and therefore the initial effect is to throw some of the tax on the house owner.*46 As houses are a very durable commodity, the adjustment of supply to the altered demand may take a long time to accomplish. It will largely depend on the economic position of the locality; if it is progressing, the tax will hinder building until rent rises to its old level; but if it happens to be stationary or declining the burden remains on the house owners, who are the possessors of a particular kind of fixed capital. Even in an advancing locality the shifting may be on the ground rent. The increase of house rent that checks building thereby reduces the demand for building ground, and consequently lowers its value. It is highly probable that some at least of the burden will be so distributed. Or, again, it may happen that, owing to their situation, the premises command a specially high, or what is popularly called a monopoly value, in which case the owner, having obtained the highest possible rent, must submit to pay the public charges; the mere building owner will recoup himself at the ground landlord's expense.*47


In the case of buildings used for production or business there may be a further shifting. The taxes levied on factories and shops form a part of the expenses of the manufacturer or trader, and tend to raise the prices of the commodities supplied by him; but where the taxation is uniformly distributed, a general rise of prices from this cause being impossible, the tax would not be transferred. As this uniformity is never really found, there will be a disturbance of values through taxation, with an ultimate incidence on interest and employers' gains. The taxation of houses in all countries varies according to locality, and the modern improvements in transport and business organisation have brought retail prices nearer to a general level. The result is that the shifting of building and house taxes to consumers of commodities is hardly possible, prices being limited by outside competition, and it must therefore be on the owners of the ground, in so far as it does not rest on the house owners, traders, and manufacturers in question. Still the levelling force of competition is not universal, and shifting is not always possible, and it may be that in the influence of taxation we have at least a partial explanation of two important economic facts: (1) the curious local diversities of prices, and (2) the failure of various local industries.*48 The creation of various interests makes the matter more complex. Between the ultimate owner of the soil and the immediate occupier there are often, as already noticed, several intermediate interests, and the house and building taxes may be placed on them in different degrees. The tenant, free to leave, can, if the economic conditions favour, throw back his taxes, but the leaseholder cannot. For this reason legislative provisions are urgently required to secure a due division of burdens that the process of shifting cannot fairly distribute, and the problem of devising a fair house tax is made more difficult. Division of rates between occupiers and owners is an old proposal tending in this direction. More radical is the plan for taxing ground rents, either by a special charge imposed on them or by the method of deduction, the holder of each interest retaining the amount of the tax on the payment made to his immediate superior.*49 The policy of confining general taxation of land and houses to their contribution in common with other kinds of revenue to an income tax appears to be the soundest. Local finance is thereby supplied with a special kind of taxes and the question of unequal valuation between localities is reduced in importance.


§ 6. The taxation of land and buildings covers most fixed capital. Many doubtful points may arise as to the treatment of machines and fittings, but they usually come in connexion with the taxation either of mines (a form of land) or of factory buildings, and are taken as part of a general property or income tax, or come in as indications to be used in the taxation of business. Proposals to tax fixed capital as such have been made, but they have not as yet been reduced to practice. Apart from the taxation of land and buildings and the taxes on particular commodities, we have next to examine the taxation of floating capital.


The question of a tax on interest presents itself in practical finance chiefly as to dividends and mortgages. They represent the great mass of wealth that is invested by its owners for gain without their direct supervision. Floating capital as such is so closely combined with other elements and is so hard to trace, that its separate taxation is scarcely ever presented. Unless this large part of wealth is reached in some way there is an undue encouragement given to it. Investments in land and industrial enterprises are checked, and the distribution of taxation is so far unfair. These reasons point towards the adoption of the general income tax, which will necessarily include the revenue from floating capital.


The separate taxation of floating capital for general or local purposes in a direct form is not found in England, but Schedule C (and part of D) of the income tax discharges this function, and loans in the form of mortgages come under Schedule A. The yield of Schedule C for 1900-1 came to £1,671,000. The taxes on acts are of service, as they compel these forms of wealth, so difficult to be reached by direct means, to contribute to the revenue.


France has employed a substitute for this part of the income tax in the Impôt sur les valeurs mobilières, introduced in 1872, by which 3 per cent. was imposed on the shares of companies either home or foreign; the yield, which in 1873 was £1,250,000, increased by 1880 to nearly £1,600,000: by 1890 to over £2,000,000. The rate was raised to 4 per cent. in 1890, and the estimate for 1902 is £3,130,000, or nearly double the receipts of 1880.


Italy, like England, reaches interest by means of a general income tax, and such is the usual method. In fact, one of the strong reasons for its introduction is precisely the desire to make capital contribute its due share. In some of the South German States a special capital tax has been developed. Bavaria has a capital tax besides its income tax, and both Würtemberg and Baden have somewhat similar imposts.


The great objection to a separate tax on the yield of capital is the extreme difficuty of making it effective. The necessary result of the ease with which it is escaped is injustice in its distribution. The French tax on valeurs mobilières falls on the shares of companies; it is analogous to a corporation tax and tends to discourage those associations. Investments abroad are much more easily kept out of the tax collector's ken, and thus the progress of home investments is checked. On the whole the reasonable conclusion is that the distinct tax on interest has no place alongside of the land, building, and business taxes that form so large a part of the fiscal receipts.


Its incidence, which in the case of a complete and comprehensive tax on interest is on the holders (unless in so far as the supply of capital is checked by the lower returns) is affected by the partial form that it usually takes. A tax on, e.g. mortgages lowers the profitableness of that particular kind of lending, and will therefore force the mortgagors to pay at a higher rate under the penalty of getting a less amount of accommodation. Thus the incidence will probably be partly on landowners requiring loans, partly on capitalists in general, as some of the capital that would have gone to land will seek other outlets and lower the rate in them. The same reasoning applies to other similar cases—taxation of corporations or any special use of capital. The question, already noticed in connexion with land, of the wiping out of the tax by the sacrifice of the capital of the original holders presents itself here. Stocks or shares subject to a tax must sell for less than if they were free from it, and it may be thought that the transactions of the Stock Exchange speedily discount these public charges and estimate the taxed shares on their net revenue. In dealing with this case two considerations deserve notice, (1) the ever present possibility of the repeal or alteration of the tax, and (2) the extent to which other primary forms of revenue are burdened with like charges. If revenue from land, buildings, capital, and personal exertions is all subject to the same charge there can be no depression of their relative values. The so-called 'throwing off' (Abwälzung) of taxation means simply that taxation as a whole is a deduction from the resources of the country where it is imposed.


§ 7. The scantiness of direct and special taxation on loan floating capital is further accounted for by the greater prominence of industry as an object for the financier. Pure interest is not so readily taxed as profits; the older English writers have in fact preferred not to separate this compound element of income. Taxation of profits takes the joint yield of capital and business ability for its object, a course justified by the close connexion that exists in reality. The financier must deal with external characteristics, and, as rent has to be taxed through land, so have earnings been selected as a mark for imposition in preference to the more refined elements of interest and employers' gains. The actual taxes on industrial receipts may indeed include the several factors of rent, interest, wages, and employers' gain, since both land and labour may contribute to the creation of what is popularly and legally described as 'profit.'


The original form of this taxation is found in the licenses for trade so common in earlier times. Traders who at first were supposed to pay the import and export duties imposed on their commodities were besides subjected to duties for pursuing their particular avocation. The whole mediæval system of incorporations and guilds, which survived till the French Revolution, placed certain burdens on those engaged in industry, and the modern 'tax on business' may regard this as its precursor. Within the present century there has been a marked development of this form of taxation, influenced very much by the French system to be presently described.


Some very difficult questions are raised by the taxation of profits, questions that it is to be feared can in practice admit of only a partial solution. Foremost of these is the ascertainment of the actual amount earned. Valuation of land and of buildings is a complicated and expensive process, but it is light compared with the task of measuring the fluctuating gains of industrial production. It would sometimes be impossible for the taxpayer himself to say what were his gains in a given year, but a greater difficulty lies in his unwillingness. The unchecked declaration of the contributor is quite ineffectual, while official assessment involves a considerable amount of arbitrary interference with private affairs. Taxes on industry and profit as distinct from a general Income Tax are usually based on certain legal presumptions. The letting value of the area occupied, the character of the business, the number of persons it employs, the population of the district in which it is carried on, may be used separately or in combination as indices of taxable capacity. None of these tests can be expected to give an exact result, but their use tends to obviate the dangers of fraud on the one hand and inquisition on the other. Productiveness and a tolerable approach to just distribution are the two essentials in taxation: the unfairness that the use of presumptions must more or less cause is on the whole a less evil than the encouragement to dishonesty that self-assessment gives. Moreover the gains of industrial occupations are now too large a part of the national revenue to be allowed to escape taxation without causing greater injustice than their exemption would remove. Profits hold the place that land revenues formerly occupied.


§ 8. The actual taxation of profits in England apart from the license duties on particular trades and occupations is carried out by Schedule D of the income tax. The former element is a small one, and is mixed up with various direct taxes on consumption. Thus out of £3,900,000 received for the local authorities in the year 1900-1 on account of licenses, £1,640,000 belonged to taxes levied on consumption, leaving £2,250,000 for industrial taxation, which, as the total return of licenses has not within the last twenty years varied more than 3 per cent., we may take as representing the normal contribution from this source.*50 Schedule D, which at the rate of 1s. 3d. gives a yield of £16,400,000, is the main tax on profits; but to it the taxation of farmers' profits under Schedule B should be added, though the latter has some points of connexion with the strict land tax under Schedule A, since the assessment is based on the rent,*51 and the real incidence of the tax is not clear. The yield from this Schedule is not more than £223,000. We thus get a total taxation of nearly £19,000,000.


§ 9. The French system of taxation of profits commenced with the law of March 1791.*52 One of the first measures of the Constituent Assembly had been the abolition of the restraints on industry, and no intention of taxing it otherwise than through the general tax, which the mobilier was intended to be, existed. Fiscal necessities forced the establishment of the Droit de Patente, which, like the mobilier, was estimated on the letting value of the establishment, the tax to be 10 per cent. for rentals under 400 livres, 12½ per cent. for those between 400 and 800, and finally 15 per cent. for those above 800 lives. Abandoned in 1793, it was restored in a different form in 1795. Subsequent changes in 1796-7-8 established the outlines of the present system, which has, however, been developed by a series of later measures.*53 The tax applies to all occupations and professions not specially exempted. It is divided into a fixed and proportional duty, and, unlike the other direct taxes, it is 'rated,' not 'apportioned.' Of its four classes or 'tables,' one (D) is imposed on salaries; the others embrace the various kinds of trades. The so-called 'fixed' duty is really graded. For the first class (Table A) its amount depends on (1) the kind of trade and (2) the population of the commune in which it is carried on—e.g. a trader in the first group of Table A in a commune with over 100,000 inhabitants pays £12 (300 francs), one in the eighth group only 10s. (12 francs). Were they in a commune with less than 2,000 inhabitants they would pay 28s. (35 francs) and 1s. 8d. (2 francs) respectively, and the latter would be exempt from the proportional tax. In the second class (Table B) special rates are laid down, ranging from £80 to £1, according to business and population of the commune. The third class (Table C) has a fixed duty for each trade, with additions for each workman employed.


The proportional duty is a certain percentage on the letting value of the trader's residence and establishment, varying from 10 per cent. to 2½ per cent. on the first class, 10 per cent. on the second, and in the third varying from 6.60 per cent. to 2 per cent., imposed at different rates on residences, warehouses, and factories. Thus a pin manufacturer who falls under the third group of Table C pays 18 francs, plus 3.60 francs per workman employed, 5 per cent. on his residence and separate shop, and 2½ per cent. on his factory. A Paris banker (Table B) pays 2,000 francs and 10 per cent. on his house and bank.*54


The object of this very complicated system is evidently to escape the arbitrary pressure of officials. External marks supply the materials for assessment, and prevent the honest from suffering through the evasions of other tax-payers. There is in addition an advantage given to the more successful producers and traders, as their extra gains are free from taxation. The State assumes that, in a given situation, so much profit will be made, and taxes accordingly; any defect or excess concerns the trader alone.


Certain gaps in the Patente tax are noticeable, especially that caused by the absence of agriculturists. The farmer is free from this tax; his profits do not contribute to the services of the State. The Impôt foncier is a tax on rent in the main, and cannot be regarded as counterbalancing the taxation of in lustrial profits.


In spite of its complication, inequalities, and failure to include agricultural profits, the Patente has the two great advantages of being productive and not very unpopular. As a contribution to the State it has risen from less than £1,000,000 in 1830 to over £2,000,000 in 1860, over £3,000,000 in 1880, and £5,200,000 in 1900. The additional centimes for local purposes have grown from being under £30,000 in 1830 to £900,000 in 1860, £2,200,000 in 1885, and £2,680,000 in 1900. With the small extra items there is thus a total amount of over £8,000,000 obtained from this source.*55 Licenses are also used in the French financial system, but their return, under £500,000 in 1883, was only slightly over it in 1889. To these should be added the duty on mines, which does not amount to £100,000.


§ 10. Italy, as already stated, has followed England in adopting the income tax. Profits come under Schedule B, which comprises 'mixed revenues' as distinct from those due to capital or personal action solely, and their taxation is very imperfectly carried out. Profits are taxed at one-half only of their amount.


The German States developed a tax on industry (Gewerbesteuer), probably suggested by the French Patente. The Prussian tax was established in 1810, and modified after the French war in 1820. Further alteration took place in 1843, 1861, and 1872. It grouped contributors into three classes: (1) traders and manufacturers, (2) hotel and inn keepers, and (3) hand-workers who employ assistants. The rate of duty varied according to the population, there being four different scales. A medium rate was fixed for each trade on this basis, and the total amount for the district (arrived at by multiplying the medium rate by the number of contributors) is redistributed by the local authorities. Some industries were specially charged, while agriculturists and the professional classes were exempt. In 1810 it returned only £90,000, by 1864 it had risen to £580,000, and in 1887-8 to £1,000,000—i.e. less than one-sixth of the Patente, or of Schedule D. By the law of 1891, which came into force in 1893, the structure of the tax was altered, and while the method of grouping was retained, the amount of product and the capital employed became the principal elements in arrangement. Contributors are grouped in four classes, the highest consisting of those with a product exceeding £2,000 or a capital over £50,000. The later legislation of 1893 provided for the transfer of the reformed business tax from the domain of state to that of local taxation.*56


The secondary German States have been influenced by the example first of France and later of Prussia. Saxony since 1874 has used the general income tax as the method of taxing industries. Bavaria, Würtemberg, and Baden have employed a special trade tax (Gewerbesteuer), on the model of the French Patente. The recent tendency, however, is in the direction of the general income tax. As yet Bavaria and Würtemberg have not adopted this form, but retain the produce taxes in a developed shape.*57


Austria also employed a trade tax yielding a revenue of about £1,000,000 annually until the reform of 1896, by which a system of taxation equivalent to an income tax was introduced. The product of the 'industrial' and 'company' taxes in 1900 amounted to £3,400,000.


§ 11. In the United States the taxation of industry by the Federal Government has been confined to occasional licenses on some trades. Nor have the 'States' gone further in this direction. One increasingly important section of industries has, however, received special treatment, viz. the public companies that have been so largely developed under the liberal provisions of American commercial law. The corporation tax is in the main an American institution, and its growth is instructive both for the economist and the student of finance.*58 Regarded from the economic point of view, the corporation is a means of distributing income to its members, and therefore taxation Imposed on it falls on some or all of the classes that receive from it. Viewed as a business tax, the great defect of this impost is its inequality. It selects one form of industrial undertaking and penalises it. The amount of the penalty indeed varies with the particular form of the charge, which may be imposed on business transacted, on capital value, on gross receipts, or on net earnings,*59 but the defect is to be found in all these forms, though as between different corporations the last mentioned basis is unquestionably the right one. Perhaps the best plea for the tax is that it, to some extent, relieves the property tax, which has even greater defects. Scientifically considered, the corporation tax is an imperfect business tax, just as the latter is but one section of a true income tax.


§ 12. The principal features of the taxation of profits, as actually carried out, show that two alternative methods are open. Either the taxpayer may be assessed on his (supposed) real net receipts, or certain external indications may be taken as a guide. The former is generally found where profits are taxed through a general income tax. England and Italy supply us with the leading examples. The difficulties in the way of arriving at the true net profits have hindered other countries from completely following this course. The French method has seemed, if less equitable in the abstract, yet in reality fairer. It does not, in Mill's phrase, 'tax conscience.' Nevertheless there is a cumbrousness and, in part, a want of elasticity about it. The long lists of trades coming under the Patente, with the great varieties in the permanent and the proportional charges, must add to the labour of administration. Its inequalities must also be great. Neither the population of the district nor the rent of residence and business premises can give anything more than a faint presumption of profits. The Patente is very far from being a proportional tax on industrial gains. It rather resembles a charge on certain necessaries of the business, such as buildings, labour, or motive power. It accordingly marks a lower stage in the development of taxation. The fair assessment of profits may be at present beyond the power of financial administration, but efforts should be made in that direction. It may be suggested that the external marks, which are now regarded as conclusive, should rather be used as presumptions, whose weight will be affected by other conditions, and it is probably by this method that advance will actually be made.


Another noticeable feature of the Continental taxation of industry is its aid to local revenues. The £2,500,000 that the Patente gives to the French departments and communes is paralleled on a smaller scale in the case of Germany. There the local revenues are recruited partly by additions to the direct taxes, and, with some exceptions, this applies to the taxation of industry.*60 Austria follows the same method, by which a branch of income that is free in England is compelled to contribute to the public revenues of the locality in which it is situated. We have already seen reason to reject the plan of taxing income, or its separate parts, locally, and it appears better to use the license system for the purpose of recruiting local funds. Thus the Patente and licenses in France might be so remodelled as to create (1) a general tax on trade incomes, (2) a considerable local receipt from the 'fixed' part of the Patente, in combination with a further development of the existing licenses.


§ 13. The incidence of taxes on industry is not quite so definite as writers on finance often suppose. Pure or economic profit is made up of two distinct elements, and the extent to which the receiver of interest and the earner of employers' gain can shift taxation is not the same. In the actual forms of taxation a proportional tax on profit may cut away more of one element than of the other in different cases. Thus the distribution of the burden between interest and earnings may be unequal, but as regards outsiders, shifting to them can only be effected by the possible check to accumulation of capital. Where, however, taxation is not proportioned to pure profit the effect may be very different. It is not hard to understand that taxation so unequal as the Patente may drive out some of the producers, and enable the survivors to shift the charge to consumers. The tax becomes one of the expenses of production. Again, the local inequalities may allow of higher gains in some districts, and cause higher prices in others, in which latter case the consumer suffers. Differences between trades may, and probably will, affect the distribution of industry, and thereby cause a diffused incidence too complicated to trace. The same consequences must follow the use of taxes with different rates within a connected area like Germany. Specially heavy taxation in one State may actually, in some degree, increase the profits of producers elsewhere, by raising the price of the commodity within one district; but it is still more likely to press on the producers subject to it.


On the whole, the taxation of industry has not approached so closely to a tax on pure profit as that on land has to a tax on economic rent. This circumstance is partly due to the greater complication of the matter, but also to the less perfect development of fiscal methods.

Notes for this chapter

On the English house and window taxes, Wealth of Nations, 355-357; Dowell, iii. 165-192.
Bk. iv. ch. 1, § 4. Sir H. Fowler's estimate for England and Wales in 1891 was £23,560,000, but it should be remembered that other property is included under this heading. Local Taxation Report, xl.
The yield of the Personnelle mobilière has been as follows—

Francs (000's omitted).
Principal. Additional
1830 27,161 14,100
1870 46,004 44,337
1880 52,161 64,382
1885 57,846 74,240
1890 64,066 84,400
1900 72,700 102,675

Some of which, however, are reserved for the central government. In 1890 the centimes additionnels raised for state purposes came to 18,262,000 francs.
The figures for the 'door and window' tax are—

Francs (000's omitted).
Principal. Additional.
1830 12,812 2,711
1870 33,911 23,750
1880 36,588 33,594
1885 39,703 38,320
1890 42,609 42,186
1900 47,455 51,350

The Impôt foncier on propriétés bâties, now separated from the land tax proper, gives the following results—

Francs (000's omitted).
Principal. Additional. Additional
1890 63,418 8,739 32,422 33,936 138,575
1895 68,722 10,647 35,588 37,147 152,104
1900 72,911 12,579 38,362 39,623 163,475

Taking this with the preceding notes we reach the result in the text. Mr. Egerton in the year 1890, estimated that 'the total tax on land and houses in France will be found to amount this year to about £15,000,000 independently of the personal and 'mobilière' tax of £5,500,000 and of the door and window tax of over £3,000,000.' Reports as to the Taxation of Land and Buildings, (C. 6209), 16.

For the Italian house tax, Alessio, i. 233-266.
Cohn, § 306; Reports on Taxation (C. 6209), 31.
I.e. taking the florin at 2s. The figures are—Austria, 30,713,000 florins; Hungary, 10,000,000 florins.
The plan adopted in the recent valuation of buildings in France, Finanz Archiv, viii. 193-4.
Cp. with the discussion in the text the fuller treatment by Professor Seligman, Incidence, Part ii. ch. 3. His careful discrimination of the different effects of the tax according to its point of first imposition—on the landowner, builder, or occupier—is most valuable as a lesson in the effect of economic friction, but he seems to give too little weight to the forces that shift taxation on the ground owner. In his second edition, Professor Seligman remarks that this criticism 'seems to overlook' the statement in his text that 'as between the landowner and the tenant, the tenant is the weaker party' (Incidence, 241). The assertion so broadly made is a disputable one. It does not follow that because rent rises with increasing demand, it will rise still further in consequence of a tax. The difference of view as to the elasticity of demand for houses accounts for the difference on this point. Moreover, in the theory of incidence it happens that the holder of a differential gain is the weaker party (infra, Bk. vi. ch. 5, § 6). To avoid misapprehension, it must be added that it is not 'the tax' but a portion of it (as suggested by the word 'taxation') that has a tendency to pass on to the ground owner. Professor Edgeworth's complete agreement powerfully supports the position here taken (Economic Journal, vii. 66). See for further reference to the latest discussions Bk. iii. ch. 6, § 5.
If the house tax were levied directly from the building owner, the influence of economic friction would keep part of the burden on him.
Professor Seligman (Incidence, 242 n.) asks, 'But why should the landowner take less? The building owner is in the weaker position, for his building is on the land and under the law goes with the land.' This implies a misconception of the supposed case. It is the intending builder who is considered, and therefore, the question may be answered thus—because, otherwise, his site will remain vacant. The building owner is not in the weaker position, for his building is not yet on the land. In respect to existing leases there is no room for shifting between the building owner and ground owner, and when a lease has expired, the ground owner absorbs the building owner's interest, or, as Professor Seligman puts it, 'the building under the law goes with the land.' Cp. the statement 'this freeholder is generally spoken of as the "ground landlord," but ... is in no sense more the owner of the ground than of the house ... At the expiration of the lease both land and house revert to him together.' Report of Town Holdings Committee, vi. vii. This position is fully accepted by Lord Balfour and his co-signatories in the separate Report on urban rating and site values. Commission on Local Taxation, Final Report, 154. A slight alteration in the text meets Professor Seligman's other objection, viz. 'that there is no such thing as a strict monopoly value of a lot.
Fawcett, Political Economy (5th ed.), 626. His argument as to the incidence of rates on the consumer is based on too rigid an interpretation of the doctrine of equality of profits.
The latest scheme in this direction is that of a section of the Local Taxation Commission for a special charge on site values. This charge is to be divided between owner and occupier, the latter deducting one-half the tax from his payment. See Final Report, 153-176. More extreme plans are vigorously criticised in this Report.
Some small licenses on manufactures have been retained by the central government, viz. brewers, distillers, tobacco manufacturers, and medicines.
One-third of the rent is now taken as the profit of the farmer, who, however, if he prefers, may be assessed under Schedule D. Previous to 1894 one-half the rent was the standard in England and Wales.
Under the Ancien Régime industry was taxed through the personal Taille and the Vingtièmes.
Most important is the law of 1844, amended in 1853, 1872, 1880, and 1893.
For the Patente see Vignes, i. 52-53, ii. 333-380; Leroy-Beaulieu, i. 393-414; Wagner, iii. 468-489.
More accurate figures are—

Francs (000's omitted).
Principal. Additional. Total.
1830 23,047 5,209 28,256
1860 48,508 31,621 80,129
1880 79,009 85,597 164,606
1885 81,381 90,535 171,916
1890 83,844 95,874 179,718
1895 86,680 103,235 189,915
1900 91,937 114,182 206,110

The additional centimes include those for State purposes, which amounted to 20,200,000 francs in 1885 and to 39,000,000 francs in 1900.

For the Prussian Gewerbesteuer, Cohn, § 307; Wagner in Schönberg, 273; also Finanzwissenschaft, iv. 18, 20, 31, 32, 41; Taxation of Personal Property (Misc. No. 2, 1886, C. 4909), 8-10. For the recent changes see Wagner's article in Finanz Archiv, xi. 1-76, and J. A. Hill, 'The Prussian Business Tax,' Quarterly Journal of Economics, viii. 77-92.
See on these Stts Wagner, iv. 830-46, where the latest changes are noticed. For Bavaria see Schanz, 'Das Bayrische Ertragssteuersystem,' FInanz Archiv, xvii. 551-772.
See Seligman, Essays, 136-264 (chs. 6, 7, 8), for a history and discussion of this tax
For a full enumeration of the bases of the corporation tax see Seligman, Essays, 176-9. The most important are those given in the text; see also Adams, Finance, 449-466.
Cohn, §§ 461-3; Reitzenstein in Schönberg, 623; Fournier de Flaix, 401 seq. For the future in Prussia the industry tax will be altogether local.

Book IV, Chapter III

End of Notes

27 of 46

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