Public Finance

Bastable, Charles F.
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§ 1. When considering the system of taxation, we recognised that, in addition to the primary taxes levied on the income of the contributors and those secondary imposts affecting the consumption of commodities, there remained a large group of charges not to be placed under either category. Communications, transfers of property, inheritances and legal transactions have all been made to supply a part of the State's revenue.*1 The principles on which this part of the tax-system should be based, and the justification for its employment, have also been briefly noticed; but there can be no doubt that very different elements have assisted in its establishment. There is, first, the close resemblance of some of the objects taxed to commodities. A charge on transport is very like a duty on goods transported, and the same close connexion exists in such cases as the advertisement and newspaper taxes: they might be called 'taxes on quasi-commodities.' Another contributing agency is the 'fee' system. Some of the taxes on acts are but extensions of fees paid for services rendered. Land transfers and other judicial acts require the intervention of state officials, for whose services a charge may fairly be made, and these payments are easily developed into taxes. In like manner, the economic receipts from public industry or possessions may, through the use of monopoly, be carried to a point at which they become in part taxation. Older perhaps than any of the foregoing is the effect of the sovereign's prerogative rights. The general power over the subject's property, whether expressed in the feudal forms, or in the older idea of dominium eminens, issued in duties on the transmission of possessions from the dead to the living, as well as in the case of transfers inter vivos. The fact that all these elements have contributed towards the creation of the taxes under consideration, and supply the historical interpretation of their existence, does not in the least affect the positions that at present the true legal ground of such charges is to be found in the legislative power of the State, and that their financial justification depends on the place they hold in the tax-system. A valid defence can be only based on their being conducive to the ends of economy, equity, and productiveness, and it was in that light that we admitted their legitimacy under present conditions.


§ 2. The first of the sub-classes in this part of the tax system is that levied on communications and transport. The most conspicuous part of the revenue derived by the State from this source has been already considered in connexion with the industrial domain. Post offices and railways are apparently contributors to the economic rather than to the tax revenue. Nevertheless, it is possible to find in some cases a tax element in such receipts. The net earnings of the English Post Office are declared to be for 1901-2 £3,999,000, and of this amount, the far greater part, perhaps the whole, is obtained from correspondence. The rates for circulars and newspapers are not fixed on a profitable scale. It therefore follows that the excess of postal revenue over expenditure is a tax on ordinary and commercial letter-writers, but one of a very moderate nature, though it is not easy to estimate the check that a penny, as against a halfpenny, rate gives to trade.*2 Regarded as a tax diffused over the community, it is on the whole defensible, though the tendency to insist that the postal profits shall be devoted to improving the service is already becoming more pronounced. That England, with its dense population and high industrial development, is very favourably situated for cheap postal working is undoubtedly true. Other countries have very little postal surplus to deal with; their difficulty rather consists in keeping up sufficient receipts to balance expenditure.


The Prussian state railways have been in an analogous position to the English Post Office. Such high net receipts as they have obtained could hardly be due to superior management: they rather suggest unduly high rates or inefficient railway service, and in the latter respect there appears to be reason for complaint.*3 A slight reduction in train service or delay in delivery of goods may reduce the cost of working, but proves very expensive and inconvenient for traders. For reasons stated before,*4 it is not likely that taxation of this kind will continue. The railway service, when under public management, will usually tend to be worked at such rates as will simply cover its cost.


In countries where the railway system is left to private enterprise the question of taxation takes a different form. The companies appear as the possessors of land, buildings, and rolling stock, as well as the recipients of income, and they (i.e. their shareholders) will naturally be taxed for both general and local purposes. Thus the English local rates and the income tax apply to them. Many American States employ a special corporation tax on railroads. But these charges can hardly be regarded as falling on transport, though the last mentioned has in some degree that effect. Nearer to our present subject are the English passenger duty and the French taxes on the transport of goods and passengers. The former, which is a kind of descendant of the duty on stage coaches, used to consist of five per cent. of the gross receipts from passengers, but by a series of abatements and exemptions its yield has been lowered from £810,000 to £330,000, or more than half. The French taxes imposed after the war of 1871 have been removed from goods of slow carriage, but are still levied on express goods at five per cent., and on passengers at a very high rate (over twenty-three per cent.). For 1901 the receipts came to £2,486,000, or about seven times the English ones.*5 Several of the American state taxes on railways are based either on the net or gross earnings of the lines; the latter is plainly the English passenger tax in a more comprehensive form.


The questions connected with the incidence of this kind of taxation are somewhat complex. At first it might appear that the tax would simply be added to the passenger fares or goods rates, and would therefore fall on the travellers, or in the case of goods on the dealers, and finally through them on the consumers. On the other hand, it has been pointed out that railway rates and fares are not fixed by cost of service, but, on the principle of all monopolies, so as to get the maximum net return. Consequently, the rates being already at their highest profitable point will not bear any further increase, and a tax on transport will be really a tax on railway dividends.*6 The latter view, however, assumes too easily the absolute monopoly of railway business, and also that rates are in all cases placed at the point of maximum profit. The legal, and still more the moral, limits on the power of railway managers cannot be ignored, and they would compel at least the sharing with the users of the service of any gain obtained by the railways, as they would permit an increase in cases of new taxation. In countries where railway construction is still active, a tax as heavy as that in France would tend to check the opening of fresh lines, and therefore, in the shape of diminished railway accommodation, fall on the community. Everywhere the hindrance to fresh outlay would have the same effect, but in a less degree. Thus there is no reason to doubt that, with the high guaranteed dividends of the French railway companies, the tax on transport is shifted from them to the passengers and senders of goods, and in all cases an indeterminate portion falls on them. Such a form of taxation is very undesirable: like a charge on correspondence, it acts in restraint of trade, both with respect to goods and to business passengers. Even in the case of travellers for pleasure it is an impost on one of the most effective means of improvement. If railway earnings are to be taxed, it is better that they should be dealt with directly, either by requiring a price for the concession or a portion of the dividends. To trust to the uncertain action of shifting is not advisable where commercial interests may be seriously affected.*7


The same conclusion may be extended to the treatment of telegrams and parcels. Unless on the ground of financial necessity, the effort to raise revenue from these factors of trade cannot be justified. The defence of letter-post taxation is to be found in its general diffusion, and in the fact that it is hardly perceived.


The treatment of the press and advertising agencies in respect of taxation may be next considered. Arising partly out of the system of control adopted by governments with respect to news, the taxation of newspapers by means of stamps was employed in England, France, and Prussia. Both the issues of newspapers and the advertisements in them were taxed. This impost was first established in England in 1712, at a moderate rate, but raised by degrees till, in 1815, it came to 4d. per sheet, while the duty for each advertisement was 3s. 6d. The latter was abolished in 1853, and the newspaper duty in 1855.*8 The Prussian tax was repealed in 1874, and the French one three years earlier. Austria, however, has retained the duty on newspapers.


The objections to such taxation are plain enough. To tax the press is to limit the diffusion of information and one of the means of popular education. It has the further defect of being very unequal in its pressure, and at the same time being very likely to become uneconomical, as a tax on journals reduces their sale and lowers their quality.*9 The advertisement duty was a direct check to trade, and prevented the growth of businesses relying on the custom of a large and scattered body of persons. These considerations, together with the small revenue from the duties—£500,000 at the highest (1815)—has made their repeal imperative, unless in countries where political reasons make the control of the press desired.


§ 3. We have more than once had occasion to refer to the employment of stamps as a part of the mechanism of taxation. A great many fees, the postal revenue, the Russian and American tobacco taxes, and the newspaper duty in England are or were collected in this manner. It is, however, in connexion with the taxes on acts that the stamp form becomes particularly prominent. So much is this the case that 'stamps' in England and the 'timbre' in France are actually treated as distinct heads of revenue.*10 It is therefore important to state plainly that there is no separate stamp tax as such. The term merely denotes that the mode of collecting the taxes is by the use of stamps. This particular fiscal contrivance—first introduced in Holland in 1624—is peculiarly suited for levying taxes on acts or commercial dealings, and is on that account regarded as being their special feature. Modern European taxation uses it extensively, and sometimes combines it with the older method of registration at a public office. The great convenience of the stamp system results from the facilities that it gives for proportioning taxation to value. By grading the prices of the necessary stamps, the tax on any act or transfer can be adjusted to the amount dealt in, and the formalities are made easier and less cumbersome.


This system of stamp duties—as following English usage we may call it—covers a very wide field and is growing in favour. Extensions to fresh business forms, particularly in connexion with Stock Exchange transactions, have been carried out both in England and Germany, and higher rates are probable in the future. The chief groups into which the system may be divided are:—(1) Taxes on law proceedings and juridical acts; (2) those on the ordinary commercial instruments, on stocks, shares, etc.; (3) taxes on the sale of property, especially immovables; and (4) taxes on gratuitous transfers, including the large and important body of duties on successions after death. This arrangement is in some respects open to criticism, for commercial transactions involve transfers of property, and succession duties have certain points of difference from gifts, but it is convenient as supplying an outline of the classes of objects taxed, and need not be regarded as logically exact.


§ 4. The taxation of law proceedings is a development of the fees charged for judicial services. So far as the charge is merely a recompense for the actual expense that the proceedings cause, it may best be looked on as a fee, but if it is raised to a higher point in order to cover some of the general expenses of justice, it is rather special taxation levied on the class of litigants for the extra advantages it enjoys. Certain classes of the community make greater use of the tribunals, and such taxation compels them to contribute a part of the expense incurred for their use. More careful consideration shows the error of applying the rule of particular interest in this way. The administration of justice is a general interest that affects rich and poor, litigants and non-litigants alike. A tax on legal process is a hindrance to the use of the tribunals, i.e. an obstacle to obtaining legal remedies. The arguments of Bentham on this point have never been refuted,*11 and it seems that the true course is to reduce the necessary fees to the lowest point, unless in the exceptional case of commercial courts, where a small contribution towards the permanent expense may perhaps be allowable. Nevertheless, most legal systems do, in effect, tax litigants. The English charges, so far as direct receipts are concerned, hardly exceed the level of fees, but there is a good deal of unnecessary cost in the methods of procedure that is burdensome to the parties and not productive of revenue to the State. France is in somewhat the same position; its strictly tax receipts are probably somewhat less than those obtained in England.*12 The German fees from the courts of justice also contain a tax element. The Prussian net receipts from this source were about £1,750,000 in 1868; £2,300,000 in 1894-5, and over £2,500,000 in 1897-8, though the part inclusion of non-contentious fees makes precise statement difficult. The intrusion of taxation into this part of administration should be carefully watched, which is most effectively done by revising the scale of fees at short intervals.


Taxation of juridical acts is open to objection, as in most cases they are necessary for the assertion of claims or rights, and graduation in proportion to value is hardly possible. It is, besides, unwise to put pressure on the poorer classes in connexion with what is so conspicuous a part of state action. The fee principle is the one really applicable to such cases, unless a measure of value can be found, when a proportional scale at a moderate rate may be used, if financial necessities require it. The method of stamps enables this policy to be carried out at the lowest cost, and with on the whole the least evasion.


The duties on juridical acts are not quite clearly separated from those on what we have called commercial transactions. The simplest relation between parties has its legal side; the giving of a receipt or the transfer of a share may be said to be an act of law, but in the great majority of cases this aspect of the transaction passes without notice, and the economic process attracts chief attention. Dealings in bills of exchange, bills of lading, shares, or stock, in the various forms that the modern money market presents, may be regarded as equally suitable objects for taxation with ordinary income, or the use of commodities. They have also the advantage, as it is thought, of falling on the circulation of wealth, and therefore corresponding to and supplementing the duties on the other departments of the economic process. Some recent advocates have discovered another useful function in that they are mainly levied on the gains from speculation (Conjuncturgewinn), which, as being 'unearned,' are evidently a fit subject for taxation; while, finally, they present to the practical financier the pleasing prospect of a tolerable revenue without the social and technical difficulties that the taxation of income and commodities gives rise to.


The objections are, however, not to be lightly treated. All such duties are, it must be said, to some extent obstructive of trade. A tax on the formation of companies is so far a check to their establishment. Duties on the transfer of shares tend to keep capital from that particular form of investment, and to make these evidences of ownership less mobile. Even a small tax on cheques is a limit to the extension of banking, and a receipt duty is a charge on the evidence of an important class of transactions in which everybody is sure to be concerned. High rates are in fact an inducement to evasion, or to entire neglect of the requisite formalities, and therefore often cause injustice where claims are disputed. The problem raised by this part of the tax-system is, on the one hand, to avoid undue pressure on the circulation and transference of wealth, and, on the other, to derive sufficient revenue to make the maintenance of the duties justifiable. From this point of view the English method seems the best—viz. that which raises a large revenue from low duties, and escapes unnecessary discrimination and complication by uniform rates, or at most a small number of scales. Great elaboration and minute distinctions between different classes of acts are productive of far more inconvenience to the taxpayers than of revenue to the State. Where, however, ad valorem rates can be easily applied, it is possible to combine simplicity and proportionality to value.*13


One particular class of duties, that on the transfer of property, and especially on land and fixed capital, or, in legal language, 'immovables,' gives rise to still greater doubt and question. Heavy taxation on transfer has the effect of lowering the value of the articles subject to it, and prevents their ready passage from one owner to another. In the case of such important commodities as land and buildings, any result of the kind is detrimental to economic progress. One of the agents of production is hindered from reaching the possession of those who could best use it, and the total production of the country is less than it would otherwise be. High duties on land transfer are therefore forbidden by the strongest financial and economic reasons, viz. the injury they inflict on the national wealth, and by consequence on the public revenue. Fees sufficient to cover the cost of the legal machinery needed for transfer are legitimate, and where revenue is urgently required, a moderate transfer duty may be employed, just as, under like conditions, raw materials may be subject to excise or customs duties.


On the whole, then, it seems that the place of taxation on acts, whether by stamps or other machinery, is a subordinate one. It cannot wisely be used to collect as large a revenue as either the primary taxes on income and property or the duties on consumption. A very wealthy community with large commercial transactions may be able to bear the levying of a toll on them, provided that it is kept within due bounds. The yield of the penny duties in England may be taken as an illustration, but it must at the same time be remembered that any injudiciousness in the imposition will cause a loss to the trading community, not easily perceived, but none the less present and real.*14


§ 5. The regular history of the English stamp duties commences after the Revolution. By the Stamp Act (1694), duties varying from 1d. to 40s. were imposed on legal instruments, which were grouped in six classes, and each sheet of a document was separately taxed. Twenty years later some of the rates were graded in proportion to the value affected, and the duties were increased. Several other increases were made as financial necessities demanded, and the yield of the duties was larger.*15 Bills of exchange and promissory notes were brought under taxation in 1782, and receipts in the next year. Fresh increases followed in the time of the great war, and a great many complicated rates were established, until in 1815 the total yield was £2,800,000, of which £1,100,000 came from bills, notes, and receipts. Some reductions and improvements were made in 1850, and the penny receipt duty was introduced by Mr. Gladstone in 1853. The further progress consisted in a wider use of the system of low duties, a closer approximation to ad valorem charges in the variable duties, and an extension to the new forms of documents and transactions that modern commerce had developed. The last-mentioned movement is hardly concluded, though recent legislation has left little to be done in the future, except in the task of removing anomalies. The yield from these different forms is now £7,500,000 annually, of which about £700,000 is received from bills and promissory notes, nearly £1,500,000 from the penny duties,*16 and about £3,600,000 from the taxes on deeds, sales, and securities.


The French system is older than the corresponding English one. The duties at present known as enregistrement and timbre can be traced back to a series of dues existing under the monarchy.*17 This was one of the forms of taxation that were in substance preserved by the Constituent Assembly, for though it abolished the old names, it retained the regulations under the new title 'enregistrement,' and dealt with the two comprehensive classes of 'acts' and 'transfers of property,' including under these heads gifts and successions after death. Parallel with it were the stamp duties—first used in France in 1665—which were reformed in 1791. The field covered by this system is even more comprehensive than the English one. Transactions of all kinds are brought within the net of taxation by elaborate and complicated regulations. The legislation of the revolutionary period, which at first was ineffective, owing to bad administration, became more productive as settled conditions were restored. The duties of registration were separated into 'fixed' and 'proportional,' to which, since 1872, an intermediate class known as 'graduated' duties has been added. These groups, as their several designations show, consist respectively of uniform, of ad valorem, and of classified rates. In the corresponding stamp system, the charges depend, either on the size of the document (timbre de dimension), or on the value dealt with, and for the former a scale is prescribed. Cheques, receipts, insurance policies, and other negotiable instruments of very varied kinds are brought under this charge.


As a result, the yield of the duties has been a growing one. In 1800 the total receipts were less than £2,800,000. By 1816 they came to £5,200,000, and in 1830 to £7,280,000. In 1860 they reached £14,500,000, and had in 1890 risen to over £28,000,000.*18 Their yield in 1901 exceeded £29,000,000. Out of this amount successions (which belong to the subject of the next chapter) and donations contributed £9,000,000, and the duties on land-transfer over £5,250,000.*19


So great an increase—tenfold in ninety years, and nearly twofold between 1830 and 1860, and again between the latter year and 1890—is due to three distinct causes, viz. (1) the normal growth of wealth and transactions respecting it; (2) the extension of the duties to new cases; and (3) the establishment of higher rates; and, so far as the stamp duties are concerned, the effect of each has been about equal. There seems to be little doubt that in many cases the rates are far too high and the regulations too complicated. Especially in the case of land-transfer is the first defect noticeable. The duties directly imposed on sale are nearly 7 per cent., and with the stamps and fees the total charge is over 10 per cent.—i.e. where land sells for thirty years' purchase it amounts to at least three years' income. Such a rate is open to the severest condemnation as tending to immobilise the most important form of property and thereby to reduce the productive power of the community.


The influence of French financial legislation on neighbouring countries has been considerable, and nowhere more than in Italy. The duties on transactions in that country have been formed on the same general lines as the enregistrement and timbre, and at first increased even more rapidly in their returns. From £1,400,000 in 1862 they rose to £3,600,000 in 1875, and advanced steadily until in 1887-8 they amounted to £5,500,000, at which point they have since remained, while the succession duties, which were only £280,000 in 1862, had become £1,000,000 in 1876 and £1,470,000 in 1887-8. Enlarged territory, higher rates of duty, and greater stringency in collection were the chief reasons for this growth of revenue.


Neither registration nor stamp duties have acquired as much financial importance in the German States. The transfer of land is not heavily burdened, and the methods of registration are devised for the convenience of the parties concerned. The succession duties are as yet confined to the separate States, but an imperial system of taxes on commercial affairs has been established. Bills of exchange, shares, credit instruments, and commercial transactions have thus been by degrees brought under moderate taxation, and developed by a series of measures in 1881, 1885, 1894, and lastly 1900. The stamp duty on 'exchange' yielded £500,000 in 1900. The more important 'Bourse tax' increased from £750,000 in 1885 to £1,300,000 in 1890 and to £2,700,000 in 1895. The yield in 1900 was a little less than in 1895.


The revenue obtained is very much below the English, French, or Italian receipts.


§ 6. The actual operation of the duties on transactions is not always capable of being precisely estimated, and in regard to some of the classes the question of incidence has given rise to much dispute. Very often a transaction has reference to some material commodity, and then a duty on it may plausibly be assimilated with an ordinary tax on commodities, and the same principles applied to its investigation. To levy a charge on transactions connected with production is, so far, an increase in the expenses of production that the producer and dealer will endeavour to shift to the consumer. In most of the taxes on receipts and bills the burden, falling as it does on trade as a whole, may be regarded as a tax on business gains. Whether any of it will be represented in higher prices to the consumers will depend on the extent to which the burden is unequally imposed, but under actual conditions this effect is not very likely to be experienced. The duties are too small a proportion of the total cost to have any influence on prices.


Where transfers of property are taxed the problem becomes more difficult, and there is room for doubt as to the real incidence of the charge. From one point of view it may be held that the purchaser, like the consumer of commodities, will in the long run bear the burden, and that therefore the price of land or shares would rise in proportion to the tax. Another view, represented by Adam Smith and J. S. Mill, assumes that in transactions with respect to land the seller is the more necessitous, and has, therefore, to reduce his price by the amount of the tax.*20 For a somewhat different reason this way of regarding the matter may be extended. Forms of property are purchased for the income that they yield, but the effect of a tax, so far as it is paid by the buyer, is to lower the return obtained, and besides to make the principal less saleable in the future. It might accordingly be supposed that purchasers would take all these elements into account, and place the whole weight of the present and future charges on the actual holders. The tax on transfer would in fact resemble a fixed tax on the object sold, such as the permanent land tax. There is, on the whole, good reason for believing that the incidence is divided between buyer and seller; the former gets less than he would receive if there were no tax, the latter pays more than he would on the same supposition,*21 and some persons keep out of dealing on account of the tax.


Where bills of exchange and commercial instruments, as stocks and shares, are affected, another result may be found. Taxation will tend to drive away floating capital from the countries in which it is imposed. A heavy tax on transactions in the London money market would be so far an inducement to shift them to another country. On this ground it is very undesirable to tax international stocks at higher rates than exist elsewhere. The utmost care is needed in limiting this form of taxation so as to avoid injurious action on capital.

Notes for this chapter

See Bk. iii. ch. 1, §§ 11, 12; ch. 4, § 10.
See the discussion in Memoranda on Incidence [C. 9528] as to the nature of the postal revenue, and cp. supra, Book ii. ch. 3, § 9.
See Foxwell and Farrer, Express Trains, 118 sq.
Bk. ii. ch. 3, §§ 14, 19.
The tax on bicycles recently imposed in France may be regarded as a tax on transport, but it is perhaps more correct to place it under the head of licences.
Sidgwick, Pol. Ec. 574; Fawcett, Pol. Ec. 628-9. See for discussion of some theoretical varieties Edgeworth, Economic Journal, vii. 230-2.
Professor Ely advocates taxation of gross receipts in order to escape evasion. Taxation, 324. But where this danger exists a more thorough reform is wanted. Taxation of railways by American States on this basis is particularly unsuitable owing to inter-state competition. See Adams, Finance, 458-62.
Dowell, iv. 338-47.
Cp. Mill's judgment, 'A tax on newspapers is objectionable, not so much where it does fall as where it does not,' Principles, Bk. v. ch. 5, § 2. But does not a tax 'fall' where it is privative?
See the heads of revenue in the annual Statistical Abstracts, where 'stamps' take a place beside 'customs' and 'excise.'
Theory of Legislation, 140; cp. Bk. i. ch. 3, § 2.
Cp. Bk. ii. ch. 4, § 8.
Both in France and Germany popular feeling is strongly in favour of an extension of 'Bourse taxation,' as shown by the French law of 1892 and the German legislation of 1894 and 1900.
Some of the 'penny' duties devised by Mr. Gladstone erred in this respect; e.g. that on packages, justified by its author for statistical reasons. Financial Statements. 161, 295. The French statistical duties have the same defect. Leroy-Beaulieu, i. 617.
The following are the figures for selected years:—

1714 £117,000
1727 160,000
1760 290,000
1778 442,000

Dowell, iii. 290-1.

In 1881 the postage and revenue penny stamps were combined, so that the exact receipt of the latter is now a matter of calculation.
These charges were known as contrôle, insinuation, and centième denier. The stamp duty was known as the formule.
Stourm, i. 442-3, 468-9; Leroy-Beaulieu, i. 528, 533.
The following figures give the result of the enregistrement and timbre for 1901.

£ (000's omitted).
Transfers for value (movables) 2,886
" " (immovables) 5,258
Gifts 932
Successions after death 8,000
Other duties (including fees) 5,400
Stamp duties (fixed) 5,000
" (proportional) 2,000
The Bourse tax 246

From this total the succession duties have to he deducted, and allowance has to be made for the element of fees under the 'other duties.' Actes civils et administratifs amount to £3,000,000, Actes judiciaires to £960,000. Probably one-half of these sums should be regarded as 'fees,' the other half as taxation.

'Taxes upon the sales of land fall altogether upon the seller.' Wealth of Nations, 364; cp. Mill, Principles, Bk. v. ch. § 1.
Suppose, for example, that a property, which free of duty would sell for £10,000, is subject to 10 per cent. on transfer. If the whole tax fell on the seller he would only get £9,000, if it all fell on the buyer he would pay £11,000. Is it not plain that if an exchange is to take place the probability is that there will be a division of the tax? When there are many transactions the less eager buyers and sellers will withdraw, and there will be fewer dealings at a higher price, the tax included. See Böhm-Bawerk, Positive Theory of Capital (Eng. trans.), 203-13, for the theoretical basis of this position.

Book IV, Chapter IX

End of Notes

33 of 46

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