Public Finance

Bastable, Charles F.
Display paragraphs in this book containing:
First Pub. Date
London: Macmillan and Co., Limited
Pub. Date
3rd edition
31 of 46




§ 1. Direct taxation of enjoyment or consumption is, as we have seen in the preceding chapter, of comparatively little financial significance. In this respect it presents a marked contrast to that system of indirect taxation that has now to be examined. All European countries rely on what is known in England as 'the Excise' for a substantial part of the revenue receipts.*13 Any failure in this branch of taxation would be a fiscal disaster very hard to retrieve. Even the United States, which in times of peace can dispense with internal taxation of most commodities, had, under the pressure of war, to apply this system in a particularly rigorous form.*14 Nothing but a much higher standard of morality in regard to the payment of direct taxes, or a very unlikely reduction of expenditure, will render the remission of taxes on commodities possible. Another noteworthy feature of the taxes under consideration is their modernness in their present form. The English Excise is hardly 250 years old,*15 and the corresponding branch of revenue in other countries cannot claim much higher antiquity. A reference to general economic conditions supplies the explanation of their relatively recent origin. An extended and productive system of indirect taxation requires for its effective operation a large development of money transactions, with an accompanying separation of employments. Any attempt to tax producers or dealers in the expectation that they will recoup themselves by charging an increased price for their wares is obviously impracticable where most production is for domestic use, and such exchanges as do take place are transacted by means of barter. Besides, the natural tendency of financial policy is to begin with customs duties, partly as being easier to collect, but also as, in the popular belief, falling mainly on foreign producers. A further pre-requisite for the creation of an excise is the formation of an administrative organisation capable of effectively supervising the production of the dutiable articles within the territory of the State.


The tax system is, however, in all its divisions, the result of a gradual evolution, and therefore we need not be surprised at finding earlier forms of taxation falling on the production of commodities, and hence ultimately on consumers. The claim of the feudal over-lord to ill-defined prerogative rights is one source. Market fees and tolls were the foundation on which a system of indirect taxes could without difficulty be constructed, and the older import and export duties presented a convenient analogy. A charge on the sale of a domestic article did not seem a greater violation of the subject's liberty than if it were imposed on the introduction of a foreign one. The licenses on trades and occupations supplied another means for attaining the same end. When confined to particular industries they must evidently be regarded as part of the expenses of production, and—unless there is a differential gain—will be ultimately shifted to the consumers of the products.*16 A license graduated in proportion to the out-put or amount of sales is hardly distinguishable from a tax on the commodity produced. The relations of mediæval traders and craftsmen to their rulers and municipalities brought this kind of taxation into use as an expansion of the general property tax. Still more important was the influence of the quasi-private receipts of the Sovereign, which led to the monopolising of certain forms of production in order to increase the royal revenue. The state monopolies, of which so many examples are to be found in ancient and mediæval finance, are, however, so far as the price of the commodity is thereby raised, nothing but a special form of taxation. As already explained,*17 the normal profit on the capital employed is a part of the economic receipts, but any excess is unquestionably taxation.


In these different ways the indirect taxation of consumption has been attempted, and the last-mentioned—monopoly—is even yet employed as being, under certain conditions, a convenient mode of levying taxation.


§ 2. The problems presented to the financier in connexion with the whole system of indirect taxation are numerous and important. The earlier methods were directed simply to obtaining resources for the immediate wants of the State, without regard to the ulterior effects on the economic position of the nation. This irrational and almost instinctive procedure was soon replaced by attempts to use taxation as a means of guiding private expenditure in the supposed best direction. The desire to employ taxation as a moralising agency is even at present—as the duties on alcoholic drinks prove—an element of no inconsiderable weight. The proper development of the taxes on commodities has, moreover, been hindered by mistaken views as to the true effect and operation of this part of the tax system. The earlier excises aimed at including all the various articles of consumption: it was thought that the maxim of equality demanded nothing less than this comprehensive procedure. The often described alcavala and bolla were imposed, the former on the sale, the latter on the manufacture of all kinds of goods. The excises of the seventeenth and eighteenth centuries were regarded by financiers as the principal form of taxation, destined, if not to replace all other kinds of imposts, at least to hold the principal position in the fiscal system. Dutch methods of taxation had shown how productive taxation on commodities could be made, and the greater the number of the taxed articles the more perfect was the system deemed to be. Popular sentiment by no means agreed with this idea of theorists and statesmen. The unpopularity of direct imposts has often been noticed as one of their defects, but no form of taxation has ever excited more genuine dislike than the 'general excise' which Walpole was unjustly accused of attempting to introduce into England. We have seen the weighty reasons that forbid the adoption of indirect taxation on a great number of articles,*18 and here we may add that the historical movement of the eighteenth century made such a course impossible as a permanent system of finance. The political revolution placed power in the hands of a class that would not tolerate it, while the less-noticed, but quite as important, industrial revolution established conditions under which it would not be endurable.*19


The influence of economic doctrines is also to be traced in the later legislation on the matter. Without at all asserting that modern taxation in this department is in full conformity with the prescriptions that result from economic principles, it may be said that there has been a decidedly beneficial remodelling of internal taxation, which has removed many of the objections that might be urged against its cruder forms, and there is every reason to hope that this progress will continue.


§ 3. The first problem to be faced in determining the character and extent of the taxation on commodities is the number of articles to be taxed. As we cannot with prudence bring all, or even the greater part, of the commodities produced under duty, it is necessary to make a selection, and to do so on certain definite principles. The old and simple rule of taxing whatever is most easily reached can hardly claim scientific justification. It is the product of fiscal necessity, not of providence and deliberation. One very important condition is the amount of revenue required; the expediency of taxing a given article will always, in some degree, depend on this condition. If, as we have found,*20 the whole category of indirect taxes is the outcome of the heavy expenditure of the modern State, it is plain that the greater the outlay the more imperious will be the calls of the Exchequer for receipts from this source. A great growth of expenditure means heavier taxation of commodities.*21 It is next necessary to settle the proportion that can be obtained by the various kinds of direct taxation, as well as by those further imposts that we have grouped under the title of taxes on acts and communications, before we can say what sum must be gained through the excise and customs. This, again, suggests a fresh consideration. From the economic and fiscal point of view, the existence of import duties establishes the expediency of corresponding excise ones. Any other policy is detrimental to the revenue and therefore to be condemned. We may, however, escape the discussion of this question at present by regarding the protective import duties as being equivalent to bounties on production, and therefore forming a part of expenditure.*22 When the amount to be raised through internal taxation of commodities has been fixed, the more difficult question of distributing the total charge among the several dutiable articles, and of saying what these shall be, arises. One very plain limit is supplied by the condition of maximum productiveness in the case of each article. The rule of charging only what 'the commodity can bear' has not always been as carefully observed as it should be, but it is now well understood that increased rates may give diminished receipts. No single class of goods could yield the amount that modern fiscal systems require. But it is not merely the need of attaining the highest productiveness that leads to an extension of the list of dutiable goods; considerations of equity also come into play. The different classes of society do not expend their incomes in the same proportion on the many articles of consumption, and even persons in the same class have very different habits and tastes. A tax that presses heavily on one individual or class may scarcely affect another. Hence it is necessary to make a judicious selection of objects, in order to secure a fair distribution of the charge in accordance with the general rule adopted as a guide.*23 The inclusion or exclusion of necessaries will depend on the view taken as to the treatment of the minimum of subsistence. If its exemption be deemed proper, all taxation that would trench on it is to be peremptorily forbidden: where the duty of all to contribute to the service of the State is recognised, duties on such articles as corn and salt may be the easiest way of enforcing that responsibility. At the opposite extreme, the mode of dealing with articles consumed only by the rich will be affected by the amount already obtained through income and property taxes and duties on the transfer of wealth, as well as by the extent to which the idea of progressive taxation is accepted. Heavy imposts on luxurious expenditure tend to press more heavily on the rich, and are in principle the same as a progressive income tax,*24 though their actual operation may vary more according to circumstances.


The main brunt of indirect taxation will, in most modern communities, fall on the great intermediate class of goods that form the staples of consumption. It is one of the earliest observations in finance that taxation on the expenditure of the working classes will yield much better results than that which is placed on the apparently more profitable outlay of the comparatively few rich persons.*25 The objects of general expenditure must be brought under contribution, in order to secure the high return that is needed as a justification for the imposition of so vexatious a system as the excise.


Thus far we have reached rather limits within which the field of taxation has to be kept, than direct indications as to the suitable articles and the rates to be imposed. Another class of considerations will help us to make some further progress. An excise system must depend largely for its success on the technical conditions of the industries that it supervises. Where industrial improvement is rapid, the restrictions needed for the protection of the revenue are felt as a serious hindrance. The adoption of new processes, so necessary for the most effective production, is not readily carried out, and the system of taxation violates the maxim of 'economy' by inflicting loss on the community without corresponding gain to the State. The only escape is found in restricting the objects of taxation to a small number of articles, and in so choosing them as to include only those industries in which invention is not very active, or in which interference with it will not be seriously felt.


Again, it is evident that some commodities are far more closely connected with the work of production than others. A duty on manufactured silk would obviously have less effect on industry in general than one on iron. The former would—apart from its diffused effects—only concern the producers and consumers of silk goods; the latter would affect almost every industry of importance by enhancing the price of one of the most essential auxiliary materials of production. This contrast between auxiliary articles and those destined for direct consumption*26 leads to the rule that taxation of raw materials or goods that aid production should, as far as possible, be avoided. Not only are the real effects of duties on such articles harder to estimate; there is the further evil that the taxes have to be advanced by the producers for a longer period, and the ultimate increase of cost to the consumer is made greater by the interest on those advances. It is true that the State receives the money at an earlier time, but its gain is not sufficient to counterbalance the loss through interest on the locking up of what would otherwise be active capital.


The system of taxing commodities is consequently most effective when it is confined to a comparatively small number of goods, which form the typical objects of the general expenditure of the various classes and grades of the community, and which, at the same time, are not important elements in auxiliary capital. The production of these goods must, moreover, not be in a very scattered form, or in the hands of small producers, as excise supervision then becomes too burdensome to the industry and too costly to be effective. All the real aims of taxation on commodities can be accomplished without including many items in the list of dutiable goods. Productiveness, economy, and equity, are the ends in view; and they cannot all be secured without this limitation of the field of the tax collector; while equity, which seems to be violated, is really and substantially attained by a small, as well as by an extensive number of taxes. One article of general consumption is a better object for purposes both of revenue and justice, than thirty or forty minor commodities on which the cost of collection would be high and the ultimate incidence uncertain.


The last important influence that affects the selection of the objects of indirect taxation is the desire to discourage certain forms of outlay that are regarded as pernicious, or, to take the mildest view, not promotive of economic or other virtues. This idea, which lies at the root of all sumptuary taxes, is represented in modern finance by the treatment of intoxicating drinks and tobacco. In nearly every country these articles form the mainstay of the revenue from indirect taxation, owing to the two conditions of large consumption and heavy taxation. So far had this movement been carried in England, that it was quite within the limits of probability that both excise and customs would be confined to these commodities of doubtful advantage, as the former virtually was.*27 The recent pressure due to war expenditure has for the time checked this tendency, and, indeed, in the customs revenue reversed it.*28 Though the French contributions indirectes have a broader basis, they are yet largely dependent on the wine and spirit duties; while the tobacco monopoly is highly productive. The internal revenue of both the United States and Russia is in a similar position, and the inferior yield in Germany is admittedly one of the weak points in the fiscal system of that empire.


§ 4. One result of the preceding inquiry as to the conditions that should be taken into account in framing a system of duties on commodities is to give strong support to the position that such duties must be varied according to the country in which they are applied. The really productive objects of taxation are not quite the same in any two countries. The tastes and habits of each community have to be carefully observed and taken into account, otherwise the revenue receipts will suffer. But the financier has not merely to study the direction of demand; he must further pay attention to the agencies of supply. The system required for a wine-producing country, such as France or Italy, is not the same as that best fitted for districts in which alcohol is produced by an elaborate manufacturing process. Adjustment to the economic environment, so exceedingly desirable in the arrangement of taxation, necessitates the adoption of special taxes in different cases in order to gain the best results.


The same point is further enforced by the varying amount of revenue that is required, and the extraordinary differences in the amount of consumption on which taxation can be imposed. The exemption of necessaries from duty must be contingent on the power of obtaining the required amount from other objects. Thus salt, which is rightly free in England, has to be taxed in India owing to the absence of other resources, and sugar, which was released from taxation in Great Britain in 1874, has again (1901) in consequence of financial pressure, become an important object of imposition.*29 The true test of financial competence is to be found in the application of the general principles to the varying circumstances of each particular nation in such a way as to realise the ends of a sound and prudent policy.


The modern developments of financial conditions have, it must be said, tended to bring about a greater approach to uniformity in the taxation of consumable commodities, both in respect to the objects taxed, and the procedure employed. Economical and political causes have both contributed to this result. The modern industrial system with its uniform and mechanical methods of production, the general diffusion of a taste for articles of convenience, and the formation of powerful fiscal administrations have all helped to make the excise systems of European States more nearly resemble each other. Scientific investigation has also aided in producing this situation. The skilled financial advisers of a government are acquainted with, and ready to adopt, what is effective in the forms and methods of other nations.


Even greater progress in this direction may be anticipated in the future. We may not unreasonably hope that some of the anomalies at present existing will be removed, and that by due co-ordination and uniformity in method the hindrances to production and exchange that indirect taxation now causes may, if not entirely removed, be at least reduced to a minimum.


§ 5. The freedom of this country from internal taxation of commodities was one of the boasts of Englishmen so late as the seventeenth century. Under Elizabeth the granting of monopolies was the first step towards what might have become an effective system of taxation, but this encroachment was successfully opposed. The introduction of the excise on the Dutch model, said to be the proposal of Pym, was due to the needs of the Parliament in its struggle with Charles I.; it included a large number of articles of necessary consumption, chiefly food and clothing. Retained during the Protectorate, with some modifications, as an important source of revenue, the excise was re-established after the Restoration in the form of a tax on beer and ale, partly as a compensation for the abolition of the feudal dues, and partly as a resource for the growing needs of the Sovereign.*30 At the close of the reign of Charles II. the yield of these taxes was £620,000.


Whatever may have been the advantages of the Revolution of 1688, reduction in the burden of taxation was not one.*31 The cost of the French war and the entanglement of England in the European disputes respecting the Balance of Power, along with the colonial and commercial policy that resulted from the predominance of the moneyed interests, largely augmented the annual expenditure. During the eighteenth century the process of building up the excise by the inclusion of fresh articles and the increase of the rates on those already taxed was in process. Breweries and distilleries were soon placed under charge; the malt duty was imposed (1697), and later on developed into an important tax. Several articles of necessary consumption were brought within the fiscal net. Salt, leather, soap, and candles are enumerated, and their taxation condemned, by Adam Smith.*32 The extension of the system was, however, carried on in a tentative way; new taxes were tried, and if they proved to be unpopular or unproductive were repealed, perhaps to be soon reimposed under more favourable circumstances. The best known incident in this part of fiscal history—Walpole's excise scheme—was really a reform in the customs treatment of tea and tobacco, and excited prejudice rather by what it seemed to lead to, than by its actual provisions. The financial result of the many measures passed respecting the excise during the eighteenth century is best shown in the increased receipts. At the commencement of that period they had averaged £1,200,000;*33 by 1792 they had risen to £10,000,000. From the latter date the extraordinary drain of the Revolutionary war with France affected the financial policy of the country, and caused those fresh applications of taxation that have been so often described by historians. The existing rates were in nearly every case raised to the highest productive point (often as experience proved beyond it). The duty on salt was doubled, and later on again subjected to a 50 per cent. increase. Glass, tiles, and leather were also made liable to additional charges. Beer and ale, as might be expected, received specially severe treatment. At the commencement of the French war the various taxes on these articles or their constituents yielded £3,578,000; in 1815 they came to almost £9,600,000. The spirit duties were trebled during the course of the war, until in 1811 they stood at 10s. 2¾d. per gallon, or almost the present rate.*34


Such very great increase of taxation, accompanied as it was by corresponding advances in respect to other classes of imposts, could not long survive the return of peace, aided by the application of proper fiscal methods. Unfortunately the abandonment of the income tax, and the injudicious methods of borrowing pursued by Pitt and his successors, made reform a work of some difficulty. The debt charge of £32,000,000, and the heavy military and naval expenditure, not readily brought back to a peace footing, both hindered immediate remissions or exemptions. The national industries had, besides, become adjusted to this very heavy taxation, and caution was needed in the attempt to alter the situation. At first the want of revenue was so great that certain excise duties were increased, e.g. those on soap, malt, and British spirits. This extreme pressure did not, however, last long, and it became possible to carry out some moderate reforms. The salt duty was reduced, and its abolition fixed for an early date (1825). That on leather was lowered one-half, and the very high tax on British spirits (11s. 8½d. per gallon) was placed at 7s. in order to meet the illicit trade and in connexion with the lower duties on wine. The exertions of Huskisson were, however, chiefly directed towards the improvement of the customs, which, indeed, most urgently required reform. The internal taxes were not directly affected by the disturbing influence of the Protectionist system, and therefore the changes to be carried out were of a comparatively moderate character. They may be said to consist in (1) the elimination of raw materials from the list of goods liable to duty, (2) the contraction of that list to a very small number of articles, and (3) the placing of the weight of internal taxation on intoxicating drinks. A further aim has been to secure a complete hamony between the excise and customs systems, which has been reached by the abandonment of Protection, and the establishment of exactly equivalent duties in both departments. In fact, that substantial unification of the excise and customs, for which Walpole vainly risked his popularity has been definitely accomplished so far as financial effectiveness is concerned.


Some of the facts of this reform of the excise are not without interest. After the disappearance of the salt tax the duties on leather and candles did not long remain. In 1830-1 they were repealed. The impost on soap—that 'tax on cleanliness'—survived till Mr. Gladstone's first Budget in 1853. Glass was released in 1845, but paper continued liable to duty till 1861. Starch and bottles were exempted in 1834, bricks and tiles in 1850. These repeals of duty, which seem so trifling, were really, taken together, a considerable boon to British industry, and to the bulk of consumers. The progress of the chemical industries may be dated from the repeal of the salt duty. Bricks, tiles, and glass are constituents of that most necessary commodity—a house, besides being of use in numberless other ways. The paper tax was even more than a 'tax on knowledge': it hindered the development of an important industry, and raised the price of an article capable of many different uses. These advantages were well worth the sacrifice of the revenue obtained from the abandoned duties.*35


The treatment of alcoholic drinks stands apart from the general system pursued with respect to industries. In their case there has been no remission, except when there was a prospect of increasing productiveness. The only exception to this rule—the repeal of the beer duty in 1830, by which £3,100,000 of revenue was sacrificed—had in part the aim of making the malt tax more productive, and this was in good degree attained. Besides, the double system of taxing both malt and beer was recognised as inconvenient. During the half-century 1830-80 the malt tax was the mode in which beer and ale were taxed, and supplied a standing grievance to agriculturists. Its large yield—£8,000,000 in 1877—made it impossible to repeal it, but in 1880 the existing duty on beer was imposed in its place, partly to relieve the depressed farmers, but also in accordance with the principle that a tax should be as near the point of consumption as can be arranged, in order that the preliminary processes may be released from excise restraints. The returns from the beer duty for the twenty years 1881-1900 quite realised expectations. For 1899-1900 the amount was £11,887,000. An increase in duty (1s. per barrel) raised the yield to only £13,500,000 in 1900-1, indicating a decrease in consumption. The year 1901-2 gave £13,300,000, thus showing a slight decline.


The duty on hops, first imposed in 1710, became later on a subsidiary duty to the main tax on beer. It had the grave defects of being uncertain in its yield and pressing on the raw material, which was moreover an agricultural product. Accordingly this tax was repealed in 1862, leaving nothing of the kind, except the trifling duty on chicory, in the English excise. Its yield had varied from £86,000 in 1852 to £728,000 in 1855.


British spirits have presented greater difficulties. If the principle of fixing the duty in proportion to the amount of alcohol contained be adopted, the rate on spirits should much exceed that on beer, and the aim of encouraging temperance would lead to the same result. On the other hand, the principal seats of production of spirits are in Ireland and Scotland, and the average consumption in their case is also greater. Heavy taxation of the more alcoholic drinks therefore presses unfairly on those parts of the United Kingdom. Finally, the enforcement of the revenue laws in wild and mountainous districts was no easy matter, and consequently the limit of productivity was at first rather low. Existing methods are the outcome of the efforts to meet these several obstacles.


The scale of duty, previously fixed on different principles in the three countries, was unified by Robinson (1825), the only difference being the higher rate in England (7s. per gallon). By a series of measures the Scotch and Irish duties were brought up to the level of the English one, itself raised by degrees, until in 1858 a uniform duty of 8s. per gallon was imposed. The increase in return was considerable. In 1829 the yield had been £4,800,000; by 1851 it was over £6,000,000. For 1859 the amount received was a little under £9,000,000. An increase to 10s. per gallon in 1860 made the tax still more productive, till in 1868 it was £10,500,000. The great prosperity of trade, and the more efficient excise administration, caused large annual increases, until in 1875-6 the highest return—£15,150,000—was obtained. From that date there was a decline for several years, but the yield again increased, and a new maximum was reached in 1891-2, when the receipts from this source were £15,693,000. After some fluctuation 1899-1900 gave another maximum yield with £19,335,000, followed by a slight fall in the succeeding year, and a heavier one in 1901-2 to £17,630,000.*36


It is therefore apparent that the excise system of England, so far as it applies to commodities, is almost exclusively a tax on alcoholic drinks, and is carried out by supervision of the brewing and distilling industries, which involves a very complete control of their operations. The modern tendency to concentrate the production of both beers and spirits at a few centres makes this system less troublesome, and the heavy taxation in turn favours the larger producers. Further steps in this direction have been taken in the last few years by the extensive creation of limited companies, possessing a qualified monopoly of special forms of beer, ale, or whisky, and who therefore bear the first weight of increased taxation. The whole situation is a highly artificial one; by it the State draws very large resources from the taxation of what is an instrument of luxury, in many cases one of vice. The aim of reducing the national consumption of these drinks is naturally postponed to that of maintaining so material a support of the public revenue, and the problem of adjusting the duties between the different classes is very imperfectly dealt with. There may be some reason for favouring such beverages as are believed to possess some nutritive power and to be less likely to cause intoxication; but the present scales of duty seem unfair as between the consumers of spirits and those of beer.


The trade licenses which accompany and are officially regarded as a part of the excise have been already discussed.*37


From one point of view the internal tax system also deals with the important article of tobacco; but until within the last few years it has been confined to the negative function of preventing its cultivation in the United Kingdom. This system of prohibition, which seems to be a direct violation of industrial liberty and an interference with a probably gainful employment, dates in England from the times of Charles II.,*38 and has been justified on the grounds of the inferiority of the home-grown plant and the great trouble of collecting a very high duty on an article of local production. At present licenses are granted for the purpose of experimental growing, though there is little probability of the cultivation extending.


The processes of the English taxation of commodities are reduced almost entirely to levies on the producers of the taxed articles, the sale licenses being rather charges on the profits of the occupations, which, however, does not prevent their being useful as adjuncts of the excise by bringing all producers and dealers under the notice of the authorities and facilitating supervision. Duties purely on sale are not employed, though the bonding system, by which goods are retained under official control free of duty until withdrawn for use, nearly approximates to that form. Neither are duties on the land under cultivation for a crop of the taxed article in use. Finally, the method of monopoly is not a part of English policy. Spirits, beer, and tobacco would be the only objects for its operation, and each of them is treated in another way. In fact, the great characteristic of this form of British taxation is the simplicity alike of its objects and its processes.


§ 6. The French organisation is much more elaborate and possesses a longer history. Under the Ancien Régime indirect taxation had been extensively employed. The necessities of the State had led to the heavy and unequal salt tax, to the duties on drinks, on leather, iron, and other useful articles, to the monopoly of tobacco, and the costly and vexatious inter-provincial duties. The origin of the system may be traced to the fifteenth century, in which the monarchy was reconstructed after the English wars. A great expansion, however, took place in the seventeenth century, when the administration of Colbert had recast the financial system, and when such a new source of revenue as tobacco was secured.


The continuous development, apparently broken by the Revolution, soon returned to its old course, though purged of many of the defects that had previously existed. The vices of pre-revolutionary taxation arose rather from defective administration than from the inherent badness of the articles selected for duty. There were innumerable personal and local discriminations; the noblesse were exempt from various charges, and some districts were free from duties that pressed heavily on others. Thus salt was under six different systems, according to the particular province, not to speak of the many local privileges. Similar complexities were connected with the duties on wines and brandies. But far greater was the evil of the mode of collection, which was by the system of farming or letting out to companies, who contracted to pay a certain sum in return for the collection of the duties. This system, so characteristic of Roman Finance, recurs in the French indirect taxes, and did much to increase their unpopularity. The 'Farmers-General' were objects of universal dislike, and some of the members of the body paid the penalty during the Revolution.*39


One of the first results of the disturbances that broke out in 1789 was a check to the collection of the indirect taxes. The offices for the duties on salt, on wines and spirits, and also the internal customs were attacked. Contraband salt and tobacco were freely sold, and the toll-barriers of the city were thrown down.*40 The failure to collect the Taille was more than paralleled by the case of the indirect taxes. The strong popular sentiment undoubtedly encouraged the Constituent Assembly, already imbued with the physiocratic dislike to taxes on consumption, to take the somewhat rash course of abandoning the greater part of the obnoxious duties.


After an ineffectual attempt to maintain it provisionally the salt tax was abolished in March 1790. In 1791 the aides, or drink duties, met the same fate, as did also the tobacco monopoly. The abolition of the octrois was decreed in February 1791.


So complete a break with past financial conditions could not continue,*41 and accordingly we find that the work of the next ten or fifteen years consisted in building up the structure on the same general lines, but without the serious faults that it had previously contained. The salt tax was restored in 1806, but the old inequalities and the system of monopoly were not brought back. The suitability of tobacco as an object of heavy taxation made it advisable, after a series of ineffective attempts at taxation in the ordinary way, to re-establish the state monopoly of that article in 1810. The octrois were gradually re-introduced, beginning with that of Paris in 1798, and soon extending to other towns. Finally, the complete freedom of spirituous liquors from taxation was put an end to by the law of 1804, which imposed a tax on wine and cider when in the possession of the producer. Further taxation of this promising source speedily followed in the duties on the transport of drinks, and the tax on the amount sold by dealers. Thus in less than twenty years the system apparently overthrown at the Revolution was again in force, freed from its most objectionable features.*42


§ 7. The existing French system, which in its main outlines was established at the fall of the first Empire, shows, when compared with that of England, a number of suggestive resemblances and equally suggestive differences. There is the same broad general treatment as respects the commodities selected for taxation and the proportionate burden placed on each class; there is also the same readiness to levy the duty at the most favourable point, and lastly there is the same prominence given to this kind of indirect taxation in the fiscal system. On the other hand the French system has a wider basis. Salt, so necessary both for domestic and industrial uses, is an object of charge. So is that very general article of consumption, sugar, whose treatment has so often harassed financiers, and which was for over a quarter of a century freed from duty in the United Kingdom. The paper tax has only been suppressed in the last fifteen years, while matches—whose taxation in England Mr. Lowe could not propose without losing whatever financial popularity he had possessed—are placed under a state monopoly, as is also gunpowder, while dynamite is taxed. Oil is another important commodity that has to suffer taxation, to which may be added candles. Acid and vinegar may close the list, which establishes that France possesses that diversity of indirect taxes which McCulloch believed to have been too hastily abandoned in England.*43


Again, the procedure of the French administration is much more varied. Up to 1901 the drink duties were levied partly on wine in circulation, partly on the retailers who sold it, partly on its entry into towns, but this system only applied to the country districts and smaller towns. The two latter charges were, in 1875, in the case of towns over 10,000 inhabitants, combined in a single tariff (taxe unique). For Paris and Lyons a single duty—the taxe de remplacement—covered all three.*44 Beer and spirits are taxed at the point of manufacture, in fact on the system of the English excise. Salt and sugar are similarly dealt with, but in all these cases the duty on transport may come into operation.


A more remarkable feature is the use of monopoly as a fiscal agent. It is true that in England the Post Office is under this régime, but ordinary commodities are quite free from it. In France, besides the small monopolies of gunpowder and matches—the latter created in 1872, and conceded to a company, but taken up by the State in 1890—there is the great tobacco manufacture, which is altogether a state concern. Experience has shown that only by this means could sufficient revenue be obtained from it.*45


These contrasts are to some extent due to the more rigorous administrative system of continental countries. Interference with internal trade would be much more difficult, and cause more irritation in England. But the different position of the two countries is a far more powerful cause. It is comparatively easy to watch the manufacture of drinks in the United Kingdom owing to the concentration of the industry. The problem of supervising the vineyards of the French peasantry proved too difficult for the revenue officials of that country, and led to the repeal of the inventory duty of 1804. The insular position of Great Britain has been a further assistance in protecting her excise system from the introduction of contraband goods. Thus the price of the state manufactured tobacco in France has to be varied according to the proximity of the district to the frontier. The methods of each country are in fact adapted to meet the circumstances peculiar to its situation.


At the same time it must be said that in certain respects French taxation of home commodities falls short of the highest attainable standard. Some of the duties are of too small a yield to justify their retention. The salt tax, even though it is confined to that used for domestic consumption, is too irksome and unequal a charge to be maintained when its return for 1901 was only £1,360,000.*46 The taxes on oils, matches, candles, and explosives might also be removed. The sugar duty is a more doubtful case. Its yield is very considerable—£6,280,000 in 1901—and with the heavy burdens that the country has to meet such a resource should not be lightly abandoned.*47 Unfortunately the treatment of the duty on sugar has been complicated by the bounty system, which is evil alike for the treasury and the producers. Moreover, the technical problems connected with the measuring of the quantity and quality of sugar yielded are very difficult, as is also the question of substitutes. A uniform duty on the finished product, adjusted to equal the import duty on the article, is the best financial arrangement. The Brussels convention (1902) appears to give a satisfactory solution of the bounty question from the point of view of French financial interests.


The wine and spirit duties are an indispensable part of the system, and should be very cautiously treated. The exemption of wine consumed by the grower is a gap in the tax that at once reduces the receipts and makes its incidence unfair. Nothing but the hopelessness of levying the duty could excuse this omission. A system of licenses for private consumption, such as that adopted for private brewing in England, might in some degree remedy the grievance. A further cause of complaint has been found in the comparatively high duty on retail sales. The artisan who buys his wine in small quantities is more severely taxed than the large consumer, who has only the moderate duty on transport to pay. The impossibility of raising the latter tax without provoking an extensive contraband trade, and the loss that any lowering of the duty on retailers would cause, are the hindrances to reform. The duty levied on the entry of wine into towns with more than 4,000 inhabitants is a further pressure on the residents in them, though its consolidation with, or perhaps more accurately speaking replacement of, the duty on retailers, where the population exceeds 10,000, carried out in 1875, is on the whole a desirable measure. The attempt to exercise surveillance over the very large number of agricultural distillers has proved a failure, compelling resort to the tax on circulation of spirits. These difficulties—which are good examples of the inevitable dilemmas that indirect taxation gives rise to—are due in a great measure to the position of France as a wine-producing country. Taxation of the cheaper wines falls necessarily on the bulk of the population, as it is imposed on their usual consumption. The cry of a 'free breakfast table,' once so popular in England, would need for its realisation in France the removal of the wine duty. An important influence affecting the drink duties has been the desire to promote temperance, shown in the various proposals to exempt or tax at a low rate, the less injurious beverages (boissons hygiéniques) and place heavy duties on spirits. These efforts bore fruit in the law of 1900, which placed a low circulation duty on wine and cider, with a similarly low duty on the circulation of beer. The duty on spirits was so adjusted as, it was hoped, to balance the loss on these reductions. The result of the first year's operation of the new system has been a very heavy falling off in the wine and cider duties (from over £7,000,000 in 1900 to less than £3,000,000 in 1901), a like fall in the beer tax (from £1,070,000 to £540,000), and a comparatively slight increase of £700,000 in the spirit duties (12,980,000 in 1901 as against £12,280,000 in 1900).*48


Notwithstanding these grievances and gaps in the French system, it must be pronounced to be, on the whole, and considering the problems to be dealt with, a skilful application of well-devised administrative principles. Tried by the great test of productiveness, it answers the object for which it exists. The various indirect contributions bring in close on £26,000,000, of which the drink duties provide about £16,500,000, and the internal sugar duty £4,450,000. The monopolies gain over £18,000,000 (90 per cent. of which comes from tobacco). When the total is taken it comes to the large amount of £41,800,000. Of this great revenue, spirits, beers and wines, tobacco, and sugar are the principal sources, the other duties forming but a trifling supplement. As in England, these articles are the support of the Exchequer, while in France the drink duties further contributed £5,900,000 in 1900 to local finance.*49


§ 8. Italian finance has not had the same opportunities for the development of a productive system of indirect taxation as those possessed by England and France. The poverty of the people and the short duration of the present kingdom have both prevented the creation of a complete system. Nevertheless, the eminent statesmen and economists to whom the conduct of affairs has been entrusted have made great progress in this direction, and have endeavoured to apply scientific principles so far as the difficulties of the situation would allow.


The tax system of Italy had to be built up on that of the several States out of which it was formed, and it had to supply sufficient funds to meet the growing expenses of the new government. These conditions made the adoption of taxes, in other respects very undesirable, a necessity. The grist tax, which fell on the main item of subsistence, was at once oppressive and unequal, but it became a source of revenue from 1869 to 1882, bringing in 83,500,000 lire (£3,340,000) in 1878, and an average of over £2,700,000 for each year of its continuance. Salt—another necessary—has been kept under a state monopoly, as it was in most of the smaller Italian States, and its estimated yield for 1901-2 was £3,000,000. Spirits, beers, and mineral waters have also been placed under an excise; so have cotton oil, chicory, gunpowder, and the more important article of sugar. A monopoly of tobacco has been conceded to a company, and the net return from this source is one of the largest items in the budget (over £8,000,000 in 1901-2).*50


Italy, however, differs from both England and France in making use of the town duties on goods as a source of state revenue. The Italian octroi duties are notorious for their severity, falling as they do on articles of necessary consumption, as well as on the common enjoyments. Flour, rice, meat, butter, sugar, wine, beer, and spirits are all subjected to these local customs for the benefit of the State, with additional charges for municipal purposes. The inconvenience of this method is indisputable: it causes local variations in taxation levied for common purposes, and it is, besides, open to the general objections to the octroi system. The tax on wine may be defended on the same ground as the (now repealed) French entry duty, viz. that it is the only possible way of reaching an article of such general production and consumption, but this very difficulty seems to point to some other form of taxation as the most desirable solution. The total yield of £2,000,000 from octrois for state purposes is not large enough to justify the employment of so unfair and unpopular a method of taxation.


In extenuation of these seemingly oppressive and burdensome taxes it is necessary to remember the smaller amount of the national wealth*51 and the impossibility of limiting taxes to such articles of superfluous, or at best convenient, expenditure as alone are dutiable in England. Where good objects of taxation are wanting, the financier must perforce adopt those that are indifferent or bad. The direct taxation of the country is also heavy, and therefore the question of fiscal reform is primarily one of expenditure. Curtailment in the military and naval outlay and in the cost of administration would allow at least the removal of the octrois, combined with a reform of the tax on movable wealth, that would be a great relief to trade and secure a fairer distribution of the total load. A judicious reform of the drink duties might even raise their productiveness without injury in other respects. The whole position of Italian indirect taxation is a useful illustration of the modifications necessary in applying general principles to the economic system of a people at a somewhat low stage of industrial development. Such taxes as the grist tax or the existing salt monopoly would be unhesitatingly condemned on a priori grounds, but they were required in the particular situation.


The relation of indirect taxation to the consumption of the people is here shown afresh. It is not possible to gain large returns from a southern people through the duties on the stronger alcoholic liquors. Such taxation as that of England would check the use of spirits completely. The same statement would hold true of any particular article. The theoretical doctrine that the minimum of subsistence should be exempt from taxation, however well it may sound, can only be applied in a society that has a considerable disposable surplus. When dealing with such populations as those of Italy or India, taxation, in order to be effective, must fall on objects that constitute a part of necessary consumption.


§ 9. The system of excises had a comparatively early and wide application in Germany. Without entering closely into the details, it suffices to indicate the general fact. That the German cities should adopt a system of the kind was quite natural; it was merely an octroi applied by a virtually sovereign State, but it seems that the method was imitated by the various princes, and notably in Brandenburg, where 'the general excise' was introduced in 1640 for some towns and gradually extended. This tax, which was limited to the towns, affected corn, meat, drinks, raw materials, and imported goods. It was intended to fall on the country through the process of shifting, and was undoubtedly one of the principal sources of revenue. The reconstruction of the Prussian finances after the French wars resulted in the substitution of the 'meal and meat' tax (1820), which was imposed only on the towns, as a kind of compensation for the 'class tax,"*52 that affected the country districts. The yield of these taxes, which were given up in 1873, was about £400,000.


Other taxes, more in accordance with modern practice, were added. Breweries and distilleries came under excise supervision, and a moderate tax on the production of wine was imposed. Beet-root sugar was placed under duty in 1840, the old salt monopoly was retained, and tobacco was made to contribute through a tax on the land given up to its cultivation.


The chief interest of this part of Prussian finance lies in the fact that it has furnished the basis for the system of the present German Empire. Its development had in turn been influenced by the need of adjusting internal taxation to suit the regulations of the Zollverein, as, e.g. in the cases of the sugar and tobacco duties. The advances in technical precision and productiveness since the formation of the Empire have not been as great as might have been expected. The salt monopoly was changed in 1867 into a tax on the article, which has been retained up to the present. The other subjects of taxation are, it must be said, treated in an unsatisfactory way. The sugar duty, which ought to be fairly productive, is affected by the bounty system, which in some years has absorbed the greater part of the receipts.*53 But this difficulty has been much reduced, and will soon be removed by recent legislation, and now by international agreement. The yield of the tax may therefore be expected to increase with the increase of home consumption. The tobacco tax is suffering in a different way. At present it is levied through the inefficient excise system, and its amount is consequently low, £630,000 (12,600,000 marks) in 1899-1900. The remedy proposed in 1885 was the establishment of a monopoly, on the same system as that existing in France, Italy, and Austria, but it was defeated, and no further reform has been carried out. A like attempt which was made with regard to the refining of spirits met with the same fate. However, the rate of duty has been increased considerably, in the latter case with very beneficial results to the revenue, the receipts for the year 1899-1900 amounting to almost £7,730,000. Beer is also a source of revenue, but to a much smaller amount, owing to the lower rate, and the retention of separate duties by the state governments of Bavaria, Würtemberg, and Baden, which reduces the receipts of the Empire. The yield for 1899-1900 was £1,750,000.


German internal taxation is in some respects unfortunately placed. The separate interests of the different States hinder the most effective forms of duty being imposed, but still more the articles to be taxed are specially important products. Spirits, beer, and sugar are all exported, and engage a good deal of the national capital and labour. Taxation is, therefore, more keenly felt, and strict supervision by the revenue officials is more injurious. The treatment of agricultural distilling is a particularly difficult matter, and one that only admits of a compromise. Fiscal presumptions, whose operation we have already noticed,*54 are employed to escape the cost and trouble of more exact determination.


The economic and social conditions have, therefore, prevented as great a development of the modern excise system in Germany as has taken place in France: the duties are less productive—the total amount from this source for 1899-1900 was just over £18,000,000—and the deficiency is noticeable in those very articles that form the mainstay of British and French finance. Tobacco and alcoholic drinks do not pay what might be expected from them, while the sugar duty has been far under its real productiveness in consequence of the expenditure on bounties. The removal of this difficulty will be one addition to the receipts, and may be taken at £5,000,000, though production may fall off somewhat under the new regulations. An increased yield from tobacco, the end most needing to be accomplished at present, is to be reached—as a monopoly seems impracticable—by more effective excise supervision. Beer might also be made to provide a larger revenue than it does at present. But even if these reforms were accomplished, it is not to be expected that the revenue could equal that of more favourably situated countries. A large revenue from taxation of commodities implies either extreme rigour in the tax-system or a high standard of comfort in the bulk of the population. Revenue may be wrung out of the subsistence fund of the nation, or it may be obtained from its comforts and luxuries. Neither condition is found in Germany, and consequently the returns of the indirect taxes are comparatively small.*55


§ 10. The tax-systems of other countries repeat with modifications and new combinations the phenomena already described. The position in Austria-Hungary is somewhat exceptional as the two parts of the Empire form a single customs-area, but each section collects its own excises. Salt and tobacco are state monopolies in both countries, and the latter is an important contributory (for 1893 the net yield on tobacco in Austria was £5,600,000, in Hungary £3,000,000).*56 The spirit and wine duties are another productive item, Austria yielding slightly more than Hungary. Beer contributed £3,000,000 in 1900 to the Austrian excise, but barely one-fourth of that in Hungary. In respect to sugar also Austria is by far the larger contributor. Other taxes not usual in European countries are the cattle tax and the duty on mineral oil. The total yield of the combined consumption taxes (the salt and tobacco monopolies excluded) in 1899 was £16,390,000 (393,395,349 crowns) and of this Austria contributed less than £12,000,000 and Hungary less than £4,500,000. Vienna, Puda-Pesth, and Trieste pay octrois to the state revenue.


The chief commodities under taxation in Russia are sugar, tobacco and, most important of all, spirits. The first mentioned has been rapidly growing owing to the increase of home production. In 1890 the duty yielded 21,600,000 roubles, in 1898 it had risen to 47,700,000 roubles, in 1899 it was 67,300,000 roubles. Tobacco has also increased in yield, but in a smaller proportion, the duty for 1890 being 27,775,000 roubles, that for 1899 38,900,000 roubles. Both are, however, insignificant in comparison with the revenue from spirits, which amounted to 268,000,000 roubles in 1890, 298,000,000 roubles in 1898, and to 310,000,000 roubles in 1899.


This immense sum shows how the existence of a particular habit may affect the revenue of a country, and how it is possible under certain conditions to tax a very poor population. The contrast with the already noticed cases of Italy and Germany is very remarkable. Mineral oil is a minor contributory.


A further point of interest is the method employed in the collection of these taxes. Tobacco, as in the United States, is taxed by requiring stamped paper for its sale. Sugar is subjected to a strict supervision at the factories. The treatment of alcohol has varied. It was subjected to a monopoly which was farmed out until, in 1862, the excise system was introduced on financial grounds, and an increase of revenue obtained. The increase of intemperance amongst the peasantry has been the ostensible reason for a return to a monopoly strictly controlled by the State, which was inaugurated as an experiment in certain provinces in 1893, and next year was extended to the whole Empire, and has been accompanied by a further increase in return.


§ 11. Except in the crisis of war the internal taxation of the United States has always been very restricted. Hamilton's attempt to tax whisky (1791) had led to a rebellion, and the duty was given up, to be again tried during the war with England (1812-14), and abandoned at its close. From that time till the outbreak of the Civil War (1861) there were no duties on domestic goods, not even on spirits. The war requirements of the Federal Government compelled recourse to heavy taxation; in addition to the income tax and the customs, an extensive system of internal taxation was formed. 'Raw cotton was taxed at the rate of 2 cents per pound..... Salt was taxed at the rate of 6 cents per 100 pounds tobacco from 15 to 35 cents per pound; cigars from 3 dollars to 40 dollars per 1,000; sugar from 2 to 3½ cents per pound. Distilled spirits were first taxed in 1863 at the rate of 20 cents per gallon; the next year 60 cents; then 1 dollar 50 cents and subsequently 2 dollars.'*57 Most manufactured articles were also taxed, sometimes both in the raw material and the finished products, without any attention to the conditions of justice or productiveness. This very rigorous and on the whole effective application of taxation did not long survive the close of the war. By a series of enactments during the next five years all the duties, except those on tobacco and spirits, were repealed. The former, which is carried out by means of a stamp imposed on the tobacco as manufactured, varied between £5,000,000 and £9,000,000 during the twenty-five years ending in 1898. In 1897-8 its amount was £7,250,000.*58 The duty on spirits, which underwent several changes, being reduced to 50 cents in 1868, and raised to 70 cents, and then to 90 cents, and lastly in 1894 to $1.10 per gallon, was far more productive. The amount realised in 1897-8 was over £18,500,000.


In consequence of the war with Spain the duties on beer and tobacco were increased from July 1st, 1898. The beer duty was doubled, and by this means its yield was increased from $39,515,000 in 1897-8 to $75,669,000 in 1900-1. Tobacco likewise gave a return of $62,482,000 in 1900-1 against $36,230,000 in 1897-8. The speedy conclusion of the conflict has permitted the partial removal of the extra duties in 1901, and their complete repeal in 1902. The return from the spirit duties also has been higher ($116,000,000 in 1900-1). In its simplicity and absence of interference with industry the United States excise system closely resembles the English.


In the Indian system excise taxation is on a limited scale. The principal objects of duty are salt and spirits. The former article, which is, next to land, the most important contributory, is taxed in different ways, partly by the method of monopoly, partly by excise duties. Previous to 1879 the methods of taxation were complicated and oppressive, but that year Sir J. Strachey succeeded in reforming the system by introducing a uniform scale of duty. The proper balance between the different forms of production in India and the product imported from Cheshire is difficult to determine. The salt duty has yielded about 80,000,000 rupees annually for a long period. Spirits are taxed either at central distilleries or by farming out at auction. Opium and Indian hemp also come under taxation. The yield from spirits and drugs (which form the excise receipts proper) was estimated for 1899-1900 at £3,860,000 (or nearly 58,000,000 rupees). The excise duty of 3½ per cent. on cotton is attached to the customs.


§ 12. We are now in a better position for examining some general features of the taxation of goods. Certain points have been impressed by repetition. One is the great prominence of drink duties. England, France, Russia, and the United States regard them as the principal resource of the revenue. Improvements in the methods of German taxation will probably bring about the same result there. This circumstance suggests some important considerations. The moral difficulty of basing the financial prosperity of the State on the growing consumption of what is useless, and in many instances injurious, will be more and more felt in the future. The advocates of temperance can hardly remain contented with the present state of things in which the revenue from drink so far exceeds other receipts. But the possibility of sweeping restrictive legislation, extending perhaps to prohibition, raises the further question of the effect of such measures on the State's income. A reduction of fifty per cent. in the duties on spirits and beer would mean a great deficit in the English Budget, hardly to be replaced by any readily available substitutes. A much higher rate of income tax or the introduction of a property tax would probably have to be tried, perhaps combined with higher customs duties on tea and sugar. The difficulties surrounding any of these courses need not be dwelt on; the limits of productiveness are reached sooner in the case of other indirect taxes, while an extension of taxation on income or property would involve a shifting of its present distribution that would need the greatest caution before it could be justly applied.


Connected in certain respects with the drink duties is the tobacco tax, which is so important a resource in France and Italy, and—as a branch of the customs—in England. This impost has the advantage of falling on a luxury and affording a means of taxing the poorer classes who cannot well be made to contribute directly, but it is also open, though in a less degree, to the danger of shrinkage through a change of habits, and is, besides, in common with the drink duties, hard to levy in countries where the production is extensively carried on, as a high rate inevitably leads to illicit traffic.


It is in great part owing to a recognition of these complications that the method of monopoly has been so much employed. To place the manufacture of an article in the hands of the State is a strong measure, to be justified only by very cogent reasons; but where the need of revenue is great, this sacrifice of a particular business to secure complete freedom for the others may be desirable. It cannot be disposed of by an appeal to the principle of noninterference as a rule peremptorily binding on the State. The real point to be aimed at is to secure the needed revenue with the smallest amount of restriction, a result sometimes best attained through monopoly. This, among other considerations, has led to the proposals for a state monopoly of alcohol, which have been brought forward both in Germany and France, but which have not proved acceptable in either country. The reasons advanced in favour of such a measure are weakened by the great extent of the industry and the elaborate appliances needed for its proper working. That a state department could with financial profit undertake the production or sale of spirits is not likely, though it was confidently believed that this result could have been reached in Germany.*59 A rigid excise system appears to be, on the whole, better both for the industry and the State. The progress of invention is certainly retarded by the routine that state management sets up, and therefore, where it is desirable to secure the continual development of new processes, production should be left to private initiative, and as far as possible released from surveillance. But whatever be the form adopted, intoxicating drinks and tobacco must in the immediate future be the principal resource—so far as indirect taxation is concerned.


Among the other dutiable articles sugar holds a high place, and if revenue be needed, it is one of the most eligible objects for taxation, much more so than a necessary commodity like salt.*60 The latter, again, is a preferable object to either corn or meat. A fiscal system that includes all these duties reaches a high degree of harshness, the addition of duties on raw materials being all that is necessary to make it attain the maximum in this respect.


The technical operations connected with the levying of duties deserve some notice. Modern appliances have made it far easier to gauge the exact product in most taxed industries; the strength of spirits or the sweetness of sugar can be ascertained with great precision by the use of special instruments, and in other cases similar aids are more or less available. As a means of checking fraud and stopping that 'leakage' and waste that has been so prevalent in the earlier attempts at taxation, they may be regarded as valuable contributions to finance. In another way the progress of invention has hampered the administration of both the excise and customs. For every product substitutes are now devised which cannot easily be brought under control. The application of a duty to a particular article involves the inclusion of perhaps forty or fifty different items with a carefully calculated scale of rates in order to avoid unfair preference or encouragement to evasion. This is, indeed, one great barrier to an extension of the excise system. The best-devised duty from a purely economic point of view may fail in consequence of technical obstacles. In fact, the application of taxation is always dependent on a careful observance of these special circumstances. All the details of a duty are important in this connexion. Thus, the rate to be imposed must be regulated with reference to the intensity of the demand for the article, the gradations of the several qualities, and the effective power of testing that exists. The reasons for the repeal of the English paper and sugar duties were partly founded on the difficulties of discrimination: the adjustment of the American spirit duties, in order to meet the risks of illicit distilling and secure the highest return, has been shown by Mr. Wells to rest on similar grounds. The treatment of the several forms of spirits and beer in Germany has been largely conditioned by consideration of the effects produced by different methods of levying duties on the development of the industries and on the receipts of the State.


Nor is it merely the conditions that exist within the particular country that have to be considered. With the modern agencies of transport no community can be regarded as an isolated unit. Its method of taxing commodities will be influenced by the economic and fiscal systems of other countries. Due adjustment ought to be reached between excise and customs, and the trade relations with outside producers and consumers should be carefully studied. The greatest prospect of advance in financial arrangements probably lies in this direction.*61 To expect uniform taxation in all European countries would be Utopian, but there is room for approximation in the selection of the articles to be taxed, and in the rates of duty imposed. Thus, the treatment of alcohol and tobacco might possibly be made the same in a good many nations, and thereby the obstruction to industry and risk of contraband traffic in great measure avoided. Even at present the monopoly system, as regards the latter article, is in force in France, Austria, Italy, Spain, and some smaller States, and may possibly be introduced into Germany. The rule of imposing higher duties on the more intoxicating spirits is now very generally adopted, though there is room for more complete agreement in both the mode of taxation and the rates fixed.


Finally, then, while it is evident that the forms and extent of internal taxes on commodities must depend on the financial necessities and the particular conditions of each country, it is also beyond doubt that what is vaguely called 'the progress of society' must lead to greater uniformity in both respects, though it would be premature to conjecture what will be the exact form of that common system.


§ 13. To complete our account of internal taxation it is necessary to notice its position in local finance. The United Kingdom and the American Union are very markedly distinguished from other countries by their freedom from indirect taxes for local purposes. There have been some cases of 'ingate' tolls in English and Irish towns, and the London wine and coal dues were a more important instance, but with these exceptions internal trade has been altogether relieved of duties. This freedom of commerce was according to Adam Smith one of the reasons for the greater prosperity of the country. The Constitution of the United States, enforced by the resolute action of the courts, secured internal free trade over the whole area of the Union*62 and prevented the establishment of any local barriers.


In continental countries a very different state of things has prevailed. Everywhere, in one form or another, duties have been levied on goods entering into cities. These taxes, which may be traced back to the dues (portoria) imposed by the cities under the Roman Empire, were adopted by the communes as a ready means of acquiring funds. So early as the thirteenth century we find them in force in France, and their development continued till in the seventeenth century nearly every town possessed them. The ministers of Louis XIV. saw in this form of tax a valuable resource for the hard-pressed finances of the kingdom, and accordingly a part of the octrois was appropriated for the use of the State, a system that continued down to the Revolution. Other countries had the same system; the German towns levied duties on the commodities entering within their walls, and both the empire and the territory of Brandenburg derived revenue for their general purposes through the town taxes.*63


The abolition of the octrois by the Constituent Assembly, and their reintroduction a few years later, have been already mentioned.*64 In other countries the same popular sentiments and the same pressure of actual facts have made their influence felt. No form of taxation is more oppressive on the artisan and small trading classes, and it has, besides, an indirect effect on the rural producers. On the other hand, where direct taxation is extensively employed by the general government, it is hard for local authorities to devise any less inconvenient form of duty that will supply an equal revenue. The opposed forces are seen in operation in the history of octrois in the present century. There has been a disposition to, as far as possible, get rid of these troublesome imposts, while at the same time they continue in several countries as a source of local, and even of general revenue.


§ 14. France in particular possesses a carefully arranged system. Municipal councils are empowered, and in certain cases compelled, to establish an octroi, which is distinctly recognised as a tax on consumption. The objects to be taxed may be food, drinks, fuel, fodder, and materials, but the power of taxing is limited by restrictions, which exclude articles already heavily taxed by the State or monopolised by it. Octrois on intoxicating drinks are specially regulated so as to bear a proportion to the general taxation of those objects.*65


The system applies to 1,504 communes, or about one in twenty-four of the entire number; but as it includes all the large towns, its operation directly affects one-third of the population (13,434,000). The greater number of communes (864) raise the duties themselves. State officials manage 291, and 349 are farmed out at a rent. The city of Paris has a special régime, which extends to the outlying communes, and is administered by the Préfet of the Seine. A considerable revenue is obtained from this source. In 1900 it amounted to £14,200,000, one-half of which was raised in Paris. This amount is an increase over earlier years. From less than £2,500,000 in 1823 it has risen to £3,800,000 in 1853, to nearly £8,000,000 in 1872, and to almost £13,000,000 in 1895. This growth is due to the larger population of the towns and their improved condition.*66


The Italian octroi duties in their present rigorous form only date from 1864; some of the smaller States had used them, but Sardinia and Tuscany were comparatively free.*67 Since the first measure on the subject several further orders and decrees have extended the system, until it has come to be productive of a large revenue as well as extremely oppressive. Without again considering that part of the duties which goes to the general revenue,*68 it appears that in addition to further charges on the articles already taxed by the State octroi, there are duties on a large number of goods arranged in the same categories as in France, with an extra division for colonial produce. The result is that, in contrast with the French duties, foreign goods already submitted to customs taxation are taxed over again on their entry within the 'closed' communes, and that both the cost of living and the distribution of industry are injuriously affected. The duties vary according to the population of the town, and are levied on sales in the 'open' or rural districts. The revenue received by the Italian communes from these taxes in 1897 was £6,300,000, which taken together with the part that goes to the central government, represents a much heavier burden than that imposed in France by the same class of duties. A complete separation between the tax systems of the general and local governments would seem desirable, and might be accomplished either by the exchange of the state octrois for local direct taxes, or better still by a complete reform of the methods of indirect taxation.*69


The various German States have gradually reduced their indirect local taxation. Some German towns retain the octrois as a supplemental resource. In Bavaria this method is adopted, but the list of articles is not at all so extensive as either in France or Italy. North Germany is for the most part free from octrois, though a beer duty is levied, as e.g. in Berlin. In any case this form of taxation is of minor importance for the German cities. Austria and Hungary use the octroi system more extensively; some of the funds obtained in this way are taken for the central government, and the local taxes appear as additions to these state charges.*70


More radical measures have been applied in some other countries. Belgium, as we saw,*71 abolished these taxes in 1860, and was followed by Holland in 1866, and by Spain in 1868, though the last-named country had soon to return to the old method. Denmark and Switzerland are practically without octrois, which are also of little importance in Portugal and Sweden.*72


§ 15. When considering the general principles of indirect taxation, we concluded that its employment in local finance was objectionable, and certain to disappear under the influence of sounder ideas on the subject of taxation. The fact that so many countries can successfully manage their municipal administration without recourse to indirect taxes is of itself a strong point against their continuance. They have the unfortunate peculiarity of combining the defects of customs and excise duties; for they hinder trade between town and country and impose heavy pressure on urban industries and consumers. Thus the materials for house-building are taxed both in France and Italy; the ordinary articles of the labourer's consumption are compelled to pay toll before they reach him, and so are many of the materials on which he works. Inequality of distribution is another glaring defect in the octroi system, which varies in its incidence from place to place and between different classes. The one valid argument in its defence is the plea of necessity. To surrender £13,000,000 of the French communal revenue would be a hazardous step until an assured equivalent was provided. This is the problem that reformers have to face, and the usual proposal has been the introduction of direct local taxes as a substitute. The difficulty of this plan lies in the resistance that most of the communes would offer to it. M. Léon Say's more fundamental method would alter the existing relations of the general and local governments, and place the direct taxes at the disposal of the latter, giving them at the same time increased functions.*73 Another and, perhaps, more feasible proceeding would be to follow the Belgian precedent, and pay over a part of the general indirect taxation to the communes in lieu of octrois. One important consideration indicated by M. Say is the distinction between the sixty towns having over 30,000 inhabitants, whose net revenue from this source is £10,400,000, and the remaining 1,444 communes that gain only £2,600,000. It is obvious that the latter class might easily replace their indirect taxes by additions to the contributions directes. Even the remaining towns—when Paris with its net receipt of £6,460,000 is deducted—ought to be able to furnish the £4,000,000 that would be needed by a development of the general taxation of spirits.


The case of Italy is a harder one; though the burden of the duties is greater, so is also the need of revenue: and thus for the present it seems that reform, rather than abolition, is advisable. Exemption of the materials of industry, low rates on articles of necessary consumption, together with greater uniformity in the different tariffs, might be carried out with advantage to the revenue.


The first step in this direction has been taken by the law of January 1902, which provides for the gradual abolition of the octrois on cereals, and arranges for a subvention from the State for 70 or 80 per cent. of the revenue sacrificed. Further adjustments of local taxation, e.g. increased charges on real property, are specified, but this is evidently transitional and intended to lead to a more thorough reform.


§ 16. The last question that has to be discussed is that of the incidence of taxes on consumption. Everyone is familiar with the proposition that they fall on the consumer, and are intended to be a deduction from his income when he comes to employ it. It, however, appeared that the process by which taxes are shifted is not so simple or uniform as this statement assumes.*74 That ultimately and 'in the long run' the bulk of the taxation of commodities falls on the general body of consumers is undoubtedly true, but this is in fact the case with a general income tax, which arrests the funds previously to their expenditure. But before we assert that a tax on a particular commodity comes out of the pockets of the consumers of that commodity, we must be satisfied of three things—viz. (1) that none of the burden remains on the producer who pays the tax immediately, (2) that none of it is thrown back on other producers or owners of land or capital who contribute to the production, and (3) that the consumer has no way of passing on the burden to another set of persons. But these conditions are not always to be found. In some cases the producer has a complete or qualified monopoly, or more accurately a differential advantage, and, when this is so, he bears the burden in whole or part. Again, the limitation of demand caused by taxation leads to a lower value of land, or fixed capital, or specialised labour suited for the industry, in which case some of the loss falls on the particular agent so affected. Finally, and this fact has been even exaggerated in the 'orthodox' theory of incidence, the additional cost of living may lead to a higher rate of wages, which must inevitably lower interest or employers' gain, unless indeed it is limited to certain groups of workers, when the consumers of their products may bear the burden.


Applying these general facts to existing tax-systems, it is an interesting question to consider how far the abolition of the present English excise would (a) increase the profits of brewers and distillers, as well as retail traders, (b) allow of higher prices for barley, hops, sugar, and other materials of the kind, or (c) cause a lowering of wages in consequence of the smaller outlay on drink by labourers and artisans. That each of these effects would in some degree be produced is, we believe, indisputable; but so much depends on conditions which cannot be even approximately estimated, that it would be impossible to offer a conjecture as to their relative strength. The effect on other industries through the sums set free from the purchase of drink, or the increased labour and capital required in the distilleries and breweries if the total expenditure on drink remained as before, would be a further puzzle. Now, if the remission of these duties would produce such effects, it is unquestionable that the development of the modern excise has caused, not perhaps quite the same, but quite as complex and important changes. When we take—as financiers and statisticians too readily do—the actual distribution of taxation as a guide to its real effects, we should never forget the far more intricate problems that the working of a set of taxes imposed on a complex economical system is certain to produce.


If this be true of the very simple and easily examined excise of England it holds good with still greater force of the more elaborate systems of France, Germany, and Italy. Where several articles are taxed the effects become intermixed; e.g. a duty on sugar tends to combine with duties on breweries where that article is used as a material. Especially where taxation is different in different cases we may expect complicated results; the duty on wines entering French towns is an element in the cost of living, and probably in the wages of the workmen residing in them, and hence on the price of the goods produced in such places, while this altered price may cause a redistribution of industry.


The octrois exhibit some of the best examples of the practical existence of these—at first sight far-fetched—positions. One of the arguments of the defenders of local taxation of commodities is that their incidence is not really on the consumer, who would not benefit by their abolition. It is pointed out that in many cases the reduction or removal of the town barriers has not lowered prices. The gain is reaped by the producer or trader.*75 So far as this argument has any truth it illustrates the proposition that we have already laid down, though it is hardly a good defence of the system.*76 In like manner it has been argued that the Italian octroi system has compelled manufacturers to establish their industries in agricultural districts where the cost of subsistence is not artificially enhanced.*77 But what is apparent in the limited sphere of local taxation must be equally operative, though its influence is harder to trace, in the wider field of state economy.

Notes for this chapter

Thus in England the receipt from the Excise on commodities has been for many years, speaking broadly, 30 per cent. of the total tax receipts—£26,050,000 out of £78,665,000 in the year 1894-5—but now hardly exceeds 25 per cent.—£31,600,000 out of £121,893,000 in 1901-2. The contributions indirectes and the fiscal monopolies in France show for 1901 a gross yield of £41,800,000. Allowing for the expenses of working the tobacco monopoly, the balance remaining is over 25 per cent. of the total tax revenue. The German Imperial excise is of less importance, but still gives a substantial contribution, estimated at £15,800,000 for 1900-1. In the United States the internal revenue for 1899-1900 was $233,000,000, that for 1900-1 $238,000,000 or over 40 per cent. of the receipts from every source.
Bolles, Financial History (1861-1885), Bk. i. chs. 9. 10; Wells in Cobden Club Essays (2nd series), 479.
The first excise was created by the Long Parliament in 1643, Dowell, ii. 8 sq.; Sinclair, History of the Revenue, i. 46, 278.
Subject of course to the complicated reactions discussed in Bk. iii. ch. 5, § 5.
Bk. ii. ch. 3, §§ 6, 9.
Bk. iii. ch. 4, § 5.
The hostility of the Physiocrats to indirect taxation was shared, so far as internal taxation went, by the other sections of the liberal party. It is note-worthy that this disposition is also found in the labour parties of the present day, who resent taxation on commodities consumed by the working classes as taxation of labour. Cp. Lassalle, Die indirecte Steuer und die Lage der Arbeitenden Classen.
Bk. iii. ch. 4, § 6.
In preceding editions it was stated as an illustration that, 'With an increased expenditure of £20,000,000 per annum in Great Britain, the exemption of sugar from taxation could hardly be continued.' This has been confirmed by fact.
Cp. Bk. i. ch. 6, § 3; and for a notice of the fiscal aspect of protection, ch. 7, § 2 of the present book.
The principle stated in the text is important, but is often overlooked. Thus in the controversy on the financial relations of Ireland to Great Britain it has been argued that the imposition of the same taxes must produce equality, the different character of consumption in the two countries being neglected. On the other hand, Sir R. Giffen (Financial Relations Report, ii. 161) has suggested that the possible existence of inequality is a ground for separate financial treatment, overlooking the fact that a system of taxation may be unequal as between individuals and classes within a single country in exactly the same way. From which it follows that the true remedy for injustice in either case is reform of taxation. Provided the tax objects are properly selected there is no injustice in placing two countries under a common system.
Bk. iii. ch. 3, §7.
Wealth of Nations, 375.
For Economics this distinction has been worked out by Menger, who grades commodities in 'orders' according to their nearness to the consumer. Cp. Marshall, Principles (3rd ed.), 133-4.
Some license duties and that on the railways' receipts from passengers are placed under the excise, but they really belong to another category of taxes (see ch. 8 of the present Book).
See for the customs infra, Book iv. ch. 7, § 3.
The case of the sugar duty illustrates admirably the principle of relativity in taxation. Recognition of the fact that sugar is relatively a good object for taxation is quite consistent with the belief that the removal of the sugar duty in 1874 was highly beneficial.
The hereditary excise had the former, the temporary excise granted for the life of the King the latter object, but the distinction was purely formal.
The severity of the revenue laws was greatly increased. Hallam declared that 'our fiscal code ... is to be counted as a set-off against the advantages of the Revolution.' Constitutional History, iii. 290.
Wealth of Nations, 369.
'The revenue from inland duties had varied considerably in different years. In 1700 over a million, it was in 1702 nearly £1,400,000.' Dowell, ii. 62.
For the details of these taxes, Dowell, ii. 208-245, and vol. iv. under the several heads.
The following were the amounts yielded by the excise taxes on the above-mentioned articles at the dates of abolition—

Salt (1825) 380,000
Leather (1830) 360,000
Candles (1831) 476,500
Starch (1834) 90,000
Bottles (1834) 3,600
Glass (1845) 600,000
Bricks (1850) 456,000
Soap (1853) 1,126,000
Paper (1861) 1,350,000
Total 4,842,100

An increase of 6d. per gallon imposed in 1894 was removed in 1895, but re-imposed in 1900.
Bk. iv. ch. 2, § 8.
The prohibition at first applied to Ireland, but was removed in 1779 in consequence of the American war. It was re-imposed in 1832.
Lavoisier, the eminent chemist, was one of the sufferers. For the system of the Ancien Régime, see Stourm, chs. 11-14. For the mechanism of the Finances, cp. Bk. vi. ch. 2, also Bouchard, Système Financier de l'Ancienne Monarchie and the Dictionnaire de l'Economie Politique, s. v. 'Finances de l'Ancien Régime.' For the earlier history, Clamageran, Histoire de l'Impôt, and for the latter part of the 18th century the elaborate works of Gomel, Les Causes financières de la Révolution Française (2 vols.); Histoire Financière de l'Assemblée Constituante (2 vols.), and Histoire Financière de la Législative et de la Convention, as yet only vol. i.
Stourm, i. 295.
Introd. ch. 2, § 4.
For the re-establishment of the French finances see Stourm, Les Finances de l'Ancien Régime. For Bonaparte's place see the same writer's lately issued Les Finances du Consulat. Mollien, Mémoires d'un Ministre, 1780-1815, is full of instructive details.
Taxation and Funding, 231.
By the Law of December 1900 the duty on circulation is the only one retained for wine and cider.
See Economic Journal, i. 307-24, for a fuller account of monopoly for taxation.
That is, including the customs duty on imported salt, the excise proper yielded £385,000.
In the case of sugar also the customs and excise returns are combined, but the customs only brought in £820,000.
More accurate figures are—

Francs (000's omitted).
Year. Wine and Cider. Beer. Spirits. Total.
1895 173,715 23,546 262,145 459,406
1900 177,621 26,778 307,032 511,431
1901 74,422 13,469 324,444 412,335

See § 14, infra.
In 1897-8 the following were the receipts and expenses of the salt and tobacco monopolies—

Lire (000's omitted).
Gross receipts. Expenses. Net receipts.
Salt 72,846 11,499 61,347
Tobacco 188,120 40,251 147,869

The wealth of Italy has been estimated at £2,120,000,000, or one-fifth that of England. Pantaleoni, Giornale degli Economisti, Aug. 1890, 139 sq. Cp. Giffen, Growth of Capital, 153.
Cp. Bk. iv. ch. 3, § 2, for the 'class tax.'
114,000,000 marks out of 141,000,000 marks in 1886-7. Cohn, § 413.

The following figures illustrate the relation of the sugar duty and bounties—

Marks (000's omitted).
Year (Aug. 1) Excise valuations.
Gross duty.
Bounties. Net produce of duty.
1886-7 142.4 108.8 33.6
1887-8 102.3 105.6 14.7
1888-9 111.2 80.1 31.1
1889-90 142.5 61.9 80.6
1890-1 154.2 78.4 75.8
1891-2 146.6 74.6 72.0
1892-3 86.7 34.5 52.2
1893-4 93.6 11.4 82.2
1894-5 100.7 15.0 85.7
1895-6 122.1 18.4 103.7
1896-7 112.5 25.6 86.9
1897-8 137.6 36.7 100.9
1898-9 144.1 34.9 109.2
1899-1900 160.0 33.3 126.7

This table shows the effect of changes in the laws regulating the bounties, and the growth in recent years of the net receipts. The customs duty is so small that it may be neglected.

Bk. iv. ch. 2 § 7.
For the German taxation of commodities up to 1888, see Cohn, §§ 411-23; for the later, and indeed the complete, history, Wagner, iv. 666-724.
See Wickett, 'Studien über das Österreichische Fabrikmonopol,' Finanz Archiv, xiv. 198-284.
Wells in Cobden Club Essays (2nd Series), 479.
For the tobacco tax, Olmsted in Quarterly Journal of Economics, v. 193 sq.
The Swiss alcohol monopoly has given a small profit. The receipts from September 1887 to the end of 1900 amounted to £5,836,000, the expenses to £3,604,000, showing a surplus of £3,232,000 or about £244,000 per annum. The Russian experience since 1895 is also in favour of a monopoly.
See § 4, supra.
The recent sugar convention is an indication pointing in this direction.
Constitution of the United States, Art. i, § 10.
Supra, § 9
Supra, § 6.
Vignes, i, 205-16. A law of December 1887 allows the communes to remove, and compels them to lower their octrois on the boissons hygiéniques (wine, cider, beer, and mineral waters).
The distribution of the duties among the different articles is shown by the following figures for the year 1900:—

Francs. Percentage of total.
Drinks and liquids 155,524,100 43.8
Food 97,575,313 27.6
Fuel 46,600,138 13.1
Fodder 18,694,278 5.1
Materials 31,289,646 8.8
Miscellaneous 5,725,603 1.6
Total 355,408,980 100.0

Of the total on drinks 67,000,000 francs were levied on wine, 57,500,000 francs on spirits, and 16,500,000 francs on beer. The cost of collection in 1900 came to about £1,250,000, which should be deducted from the gross receipts of £14,200,000.

Only six Tuscan communes had octrois out of 246, and only one in every ten of those in the kingdom of Sardinia. 'Report on the Octroi Duties in Italy,' Parliamentary Papers (C 6206), 1891.
Supra, § 8.
See, however, for a discussion of the modifications required, Conigliani, Tributi Locali, 232-62.
For the German octrois, see Cohn, §§ 457 sq. Cp. 'In Deutschland sind die Octrois von geringer Bedeutung, der Bieraufschlag in Bayern und einige neuere Verbrauchsabgaben Württembergs ausgenommen; Belangreicher sind sie schon in Oesterreich; Wien zieht aus den städtischen Verzerungssteuern eine ansehnliche Summe.' Schäffle, Steuerpolitik, 452.
Bk. iii. ch. 6, § 7.
Isolated octrois may be found in all these countries, e.g. that at Copenhagen.
Journal des Économistes, December 1891, 449-461.
Bk. iii. ch. 5, § 5.
This argument will reappear in connexion with the incidence of import duties.
This has been alleged of the Belgian reform and also of the partial remission of the Parisian octrois in 1848. The absence of any traceable effect on price by the abolition of the London coal dues is another instance.
Report on Octroi Duties (C. 6206), 14, 15.

Book IV, Chapter VII

End of Notes

31 of 46

Return to top