A Policy of Free Exchange: An Argument Against Socialism and Socialistic Legislation

Edited by: Mackay, Thomas
(1849-1912)
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Thomas Mackay, ed.
First Pub. Date
1894
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New York: D. Appleton and Co.
Pub. Date
1894
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Collected essays, various authors.
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VIII.
The Principle of Progression in Taxation

by Bernard Mallet

VIII.1

MR. DAVID A. WELLS, the well-known free-trader, has recently published a vigorous protest against the growing abuse of the power of taxation in the United States*21. To make the occasion for the exercise of this power other than necessity, and the object anything else than the raising of money for meeting the expenditure of a government economically administered, is, he considers, 'to strike a blow, not only at good government, but also at free government,' and he finds in the policy of protection, which has long ceased in the United States to be other than a 'pretence and a cover for the promotion of private interests,' an all-sufficient instance of the abuses to which such conceptions of the function of taxation are liable. In countries where the public wealth is less enormous, and where what is called the social problem is more pressing than in the United States, a wider and more menacing extension is being given to the purpose and function of taxation—an extension of which the significance has hardly been grasped in this country, although its effects are obvious enough in the rapidly growing demands upon the public purse. It is held by the school of German economists, led by Adolf Wagner, that taxation is to be valued chiefly for the effect it can be made to produce on the distribution of wealth. Social objects are to prevail over purely fiscal objects, and taxation is to be used as the principal and most powerful means of hastening the supersession of private property by collective ownership. That these ideas are shared by the preachers of the new social gospel in England it would be easy to show; it is perhaps sufficient to quote a passage from a recent work by a writer of this school*22. '...We can adjust taxation as we please. If we take the view of rent interests and profits advanced in this chapter, we shall regard them as the natural reservoir from which wealth is to be drawn for all public purposes. That is, we should adjust taxation to fall exclusively on the surplus of industry, and not at all on "wages" in their broadest sense. Leaving the smaller incomes as free as possible, we should graduate the income tax so as to fall most heavily on those who are getting the largest share of rent interest and profits, we should find another point for the application of our principles in the death duties and (if we do not deal more drastically with the unearned increment) in the taxation of ground-rents. In this way we should make rent and interest pay for their own extinction. We should inflict no overwhelming loss on any individuals or any class of living persons, as would happen if we pitched on any one particular form of property—say, land and railways—and took them without compensation. There would be no spoliation, but readjustment of taxation on a new principle. And the ground landlord has no more right to complain when the tax-collector comes his way than I have to cry out when the Chancellor of the Exchequer puts an extra penny on my income tax.'

VIII.2

If such a theory were to become widely prevalent, its first result would be seen in a vastly increased public expenditure. Two significant signs of its growth may, indeed, already be noticed in the almost complete disappearance of the old desire for economy and, in the efforts which are being made to discover new sources of taxation, to tap to a greater extent than has so far been done the realized wealth of the community by means of taxes on capital and income. Of the various proposals now being put forward, that for the systematic incorporation into systems of taxation of the principle of progression or graduation is pre-eminently one as to which hopes and fears, both perhaps exaggerated, seem to be entertained. At the outset it is necessary to emphasize the truth that the importance of the adoption of such a principle as this depends largely on the view which is taken of the legitimate purposes of taxation. If these are held to be confined to what have hitherto been considered the practical necessities of a State economically administered, the questions covered by the euphemistic phrase, 'readjustment of public burdens,' become of comparatively little moment, for no class need then suffer from the pressure of taxation, and progression will be adopted only as a fairer and more scientific means of distributing such pressure as exists; but if the conception of the state which has given rise to what we may call the Wagnerian theory of taxation is to prevail in legislation, the insufficiency of its resources will at once become apparent, the methods indicated by Mr. Hobhouse will inevitably be resorted to, and progressive taxation, adopted in a very different spirit, will take its place as one of the most effective and formidable weapons of the new school. This serious controversy lies at the root of any discussion of taxation, its paramount importance cannot be overlooked; but it lies outside the scope of the present paper, as do the questions of the distribution of wealth and the incidence of taxation direct and indirect, the consideration of which is an essential preliminary to the application of our principle to the case of any particular society. The subject of the following observations is admittedly more abstract and more limited than these; but it may nevertheless be thought useful, with a view to the formation of public opinion on a proposal often mooted, but less often discussed, to endeavour to arrive at some conclusion—first, as to whether the principle of progression rests on any scientific basis; and, secondly, whether, in practice no less than in theory, there is ground for believing that its application for revenue purposes can, under the social conditions which have so far obtained, be successfully confined within safe limits. An affirmative answer may probably be given to both questions; but we must first revert for a moment to the theory of taxation upon which the principle of progression is based.

VIII.3

The chaos of speculation and of practice in which the art of taxation remains is not a little remarkable when it is remembered that the raising of money has been in all ages the first care and the most essential function of government; but two rival theories clearly emerge from the discussion which has of late years been almost entirely abandoned to foreign economists—the one being that the citizen should be taxed according to the benefits or protection he enjoys from the State, the other that he should be taxed according to his ability to pay. It is the last-named which modern economists agree in considering, in respect of imperial as opposed to local taxation, the most applicable to present conditions; and it was stated by Mill in the following terms:

VIII.4

'The subjects of a State ought to contribute as nearly as possible in proportion to their respective abilities, i.e. in proportion to the resources which they respectively enjoy under the protection of the State. In other words, equality of taxation means equality of sacrifice. It means apportioning the contribution of each person towards the expenses of government, so that he shall feel neither more nor less inconvenience from his share of the payment than every other person does from his.'

VIII.5

It will be noticed at once that this seemingly clear statement of the ideal to be aimed at leaves us completely in the dark as to how it is to be attained. Every man will place his own interpretation on the formula 'equality of sacrifice.' It rests, in fact, rather on sentiment than on reason, on the prevailing idea of justice than on any abstract economical principle. The standard varies with every generation. In this country, for instance, at the time when Adam Smith wrote, the labouring classes, owing to the system of indirect taxation, undoubtedly paid a far larger proportion of the revenue than they do now. It has been gradually recognized that what has been described as 'the old idea of taxation according to ability contained for centuries in laws and constitutions,' was not realized under a system which taxed the necessaries of life. The total exemption of these, and the taxation of articles of luxury, although to a certain extent a recognition of the principle of progression, was soon found inadequate to the needs of a modern State; and a system of property and income taxes was accordingly devised to bring under contribution the different sources of wealth.

VIII.6

The convenient principle of equality of sacrifice was next invoked to give sanction to proposals for a system of progressive taxation, proposals to which several circumstances have combined for the first time to give importance in this country.

VIII.7

It is characteristic of English methods that the principle of graduation should have found its way into legislation before it has been accepted by theory. It is hardly necessary to state that the actual fiscal system of this country contains in every part an indirect recognition of the idea of progression, which, however, though often quoted by the socialistic press as a direct sanction, has hitherto been defended on quite other grounds as being merely one of the devices to remedy the obvious unfairness of the pressure of indirect taxation on the poorer classes. Students of politics will not need to be reminded that we are probably destined to witness further experiments in the same direction.

VIII.8

But more important than any possible official patronage of the idea is its prevalence and popularity for other than purely fiscal reasons among the masses of the people, in whom political power is now so largely vested, and who are naturally desirous of placing still further upon the wealthier but less powerful classes the chief burden of taxation. Besides the fiscal, political or social reasons in favour of the proposal, there is a widespread feeling that it is only in accordance with justice that wealth should contribute more largely to the common needs than it has done in the past. The question how much the individual should be asked to contribute to the collective wants of society is indeed a complex one, and no one would deny that the existing hand-to-mouth systems are far from reaching any ideal standard. We need not endorse a recent dictum, studiously indefinite as it is, 'that society should take of the realized riches of those who benefit by the advantages of civilization such a share as the best of the wealthy classes already give of their own accord for the benefit of the victims of our social system;' but there can be little question that the public opinion of a generation, sensitively alive to the evils of poverty and to the inequalities in the distribution of wealth, is favourable to the idea that wealth has obligations towards society which it is well able to fulfil without imposing upon itself an undue burden, and that something more than the exact proportion may be demanded from its possessors, without imposing a penalty on people for having worked harder and saved more than their neighbours. How far such a sentiment is based upon reason, and how far it may be just and politic to meet it, are questions which must be faced by practical men, and the following observations upon one proposed method of doing so may at least serve to bring out a few of the points which will have to be kept in view in further controversies.

VIII.9

Mill, whose position as a philosopher and economist has of late years been so fiercely, and in some respects so successfully, assailed, has yet had so great a practical influence in shaping ideas and legislation in this country that his remarks on the question we are considering are worth quoting, especially as they clearly state the issue.

VIII.10

He begins by inquiring whether an equal sacrifice is demanded from all by making each contribute the same percentage on his pecuniary means. 'Many persons,' he says, 'maintain the negative, saying that a tenth part taken from a small income is a heavier burden than the same fraction deducted from one much larger; and on this is grounded the very popular scheme of what is called a graduated property tax, in which the percentage rises with the amount of the income.'

VIII.11

His answer is in the following words: 'On the best consideration that I am able to give to this question, it appears to me that the portion of truth which the doctrine contains arises principally from the difference between a tax which can be saved from luxuries and one which trenches, in ever so small a degree, upon the necessaries of life.' He therefore proceeds to advocate the method of adjusting these inequalities of pressure recommended by Bentham and adopted in our income tax, viz. of leaving a certain minimum of income sufficient to provide the necessaries of life untaxed. I shall return to this subject in a later part of this paper.

VIII.12

Mill further combats the idea of mitigating the inequalities of wealth by means of graduation by saying: 'To tax the larger incomes at a higher percentage than the smaller is to lay a tax on industry and economy, to impose a penalty on people for having worked harder and saved more than their neighbours. It is not the fortunes which are earned, but those which are unearned, that it is for the public good to place under limitation.'

VIII.13

It may be at once observed that a scientific view of the case will not support either the distinction between luxuries and necessaries, or the unearned increment theory, Mill's advocacy of which has probably given a more powerful impulse to socialistic ideas than an advocacy even of a `penal' income tax which he so emphatically condemns, certainly more than a well grounded and carefully argued defence of the principle of the 'impôt progressif' would have done.

VIII.14

But Mill does not attempt seriously to argue the question in the foregoing passages; and it is impossible not to feel that his objection to taxing the larger incomes at a higher percentage than the smaller ones does not go to the root of the matter. We may therefore proceed to a more fruitful manner of approaching the problem, and inquire how far a justification of the principle of progression may be found in Jevons' theory of value. For the sake of clearness it will be necessary to give the argument at some length, quoting as far as possible the economist's own language*23.

VIII.15

(i) The foundation of this theory lies in the distinction between utility and value—Adam Smith's 'value in use' and 'value in exchange,' or, as we shall see, Jevons with greater clearness describes it, 'total utility' and 'final utility.'

VIII.16

(ii) 'Utility for the purpose of economics must be considered,' he says, 'as measured by, or even as actually identified with, the addition made to a person's happiness.' 'It is a convenient term for the aggregate of the favourable balance of feeling produced—the sum of the pleasure created, and the pain prevented*24.'

VIII.17

(iii) 'Utility is not proportioned to commodity. A quart of water per day has the high utility of saving a person from dying in a most distressing manner. Several gallons a day may possess much utility for such purposes as cooking and washing; but after an adequate supply is secured for these uses, every additional quantity is, or may in fact become, negative; further supplies may even become inconvenient and hurtful (e.g. in case of a flood).'*25

VIII.18

(iv) Jevons endeavours to show*26, by dividing into ten parts a quantity of food consumed by a person in twenty-four hours, that each of the one-tenth parts or increments is less and less necessary or possesses less utility than the preceding one. He then distinguishes between the 'total utility of any commodity and the degree of utility of the commodity at any point.'...'For the purposes of the theory, it is not necessary to consider the degree of utility except as regards the last increment which has been consumed, or, what comes to the same thing, the next increment which is about to be consumed*27.' He therefore adopts the expression 'final degree of utility' as meaning 'the degree of utility of the last addition or the next possible addition of a very small or infinitely small quantity to the existing stock.'

VIII.19

(v) The variation of the function expressing the final degree of utility is the all-important point in economic problems. 'We may,' he says, 'state as a general law that the degree of utility varies with the quantity of commodity, and ultimately decreases as that quantity increases*28.' We cannot live without water, and yet in ordinary times we set no value upon it—why is this? Simply because we usually have so much of it that its final degree of utility is reduced to nearly zero. Let the supply run short by drought and we begin to feel the higher degrees of utility, of which we think but little at other times. 'No commodity can be named, which we continue to desire with the same force, whatever be the quantity already in use or possession.'

VIII.20

(vi) It is with the final degree of utility that exchange is concerned.

VIII.21

'The value of a divisible commodity is measured, not indeed by its total utility, but by its final degree of utility, i.e. by the intensity of the need we have for more of it*29.' But the power of exchanging one commodity for another greatly extends the range of utility. We are no longer limited to considering the degree of utility of a commodity as regards the wants of its immediate possessor, for it may have a higher usefulness to some other person, and can be transferred to that person in exchange for some commodity of a higher degree of utility to the purchaser.

VIII.22

(vii) We have now arrived at the definition of value as a ratio of exchange. Jevons sets out mathematically the condition of exchange in the form of equations, and shows how the laws of supply and demand are the result of the true theory of value or exchange. It is not necessary for our purpose to enter into this. It remains to apply these considerations, especially those stated in (v), to the case of income and money.

VIII.23

'The final decree of utility of money, or that supply of commodity which governs a man's income, is measured by that of any of the other commodities which he consumes. What, for instance, is the utility of one penny to a family earning £50 a year? As a penny is an inconsiderable part of their income, it may represent one of infinitely small increments, and its utility is equal to the quantity of bread, tea, sugar, or other articles which they could purchase with it, this utility depending on the extent to which they were already provided with these articles. To a family possessing £1,000 a year the utility of a penny may be measured in an exactly similar manner; but it will be much less, because their want of any given commodity will be satiated or satisfied to a much greater extent, so that the urgency or need for a penny worth more of any article is much reduced*30.'

VIII.24

Again, 'The degree of utility to a very rich man will be governed by its degree of utility in that branch of expenditure in which he continues to feel the need of further possession.'

VIII.25

A question whether this rule would apply to the higher satisfactions as well as to the purely physical needs appears to be raised in one sentence. After stating the law that the degree of utility varies with the quantity of the commodity and ultimately decreases as that quantity increases, he says: 'All our appetites are capable of satisfaction sooner or later*31.' 'It does not follow, indeed, that the degree of utility will always sink to zero. This may be the case with some things, especially the simple animal requirements, such as food, air, water, &c. But the more refined and intellectual our needs become, the less are they capable of satiety. To the desire for articles of taste, science or curiosity, when once excited, there is hardly a limit.'

VIII.26

We thus arrive at what appears to be a justification of the principle of progression up to a certain point. The Dutch economists, says Professor Seligman, 'admit that the number of wants increases as their intensity diminishes. After a certain point the differences between the intensity (and final utility) of wants diminishes with the increase of their number and area, until, finally, when we come to the very large incomes, the possibility of satisfying almost all wants becomes equal. Hence, while taxation should be progressive, the rate of progression should itself diminish till the tax becomes proportional.'

VIII.27

A variety of considerations, however, partly theoretical and partly practical, must be mentioned before we are in a position to see how far the admission of the principle, if it be admitted*32, carries us, and within what limits the application of it may be attempted. And, in the first place, it will be necessary to lay stress upon the part which human wants and their satisfaction play in the social economy. Bastiat has well summed up the theory of consumption in the following words: 'Besoins, Efforts, Satisfactions, voilà l'homme au point de vue économique.' Even the meanest necessities, like those of eating and clothing, are subject to the influence of circumstances and habits, age and sex. No one would pretend that a man accustomed to the physical luxuries of an English artisan would be able to support existence on the diet of an Indian ryot or a Russian peasant. One man in a certain state of life would find life intolerable without books and newspapers, while another in a different situation would not be able to read. 'For some men the privation of certain enjoyments is intolerable whose loss is not even felt by others. Some, again, sacrifice all that others hold dear for the gratification of longings and aspirations that are incomprehensible to their neighbours*33.' The luxuries of one age become the necessaries of another; a man would have been thought a madman who, in the sixteenth century, expected to be able to travel at forty miles an hour, or send a message from Paris to London in half an hour.

VIII.28

It is unnecessary to multiply instances to prove the truth of this assertion, which is, indeed, a commonplace of economic science. It is no less clear that the satisfaction of a primary want creates or intensifies the sense of more than one secondary privation; and the maxim that the 'satisfaction of every lower want in the scale creates a desire of a higher character' is self-evident.'

VIII.29

Further, it is the action of this fundamental law which causes and determines what we know as progress and civilization. It is this which stimulates the invention of labour-saving apparatus and of machinery, and necessitates the application of human intellect to the arts of life. By the natural operation of supply and demand, it is daily placing within the reach of millions what was formerly the privilege of the great ones of the earth. By the action of free competition it is bringing about the real millennium, the ideal of the Socialists, and removing necessary after necessary and luxury after luxury from the region of 'value' to that of 'utility,' from the domain of exchange and political economy to that of common property*34. For no less clearly established than the rise in the rate of wages under this system is the fall certainly now in progress in the rate of interest on capital, which the increase of security in business, the increase of capital by accumulation, and the lessened productivity of freshly accumulated capital in old-established societies have all contributed to bring about. The competition for employment of capital with capital is a fact which, if it could only be recognized, would be seen to overshadow the competition of labour with labour or the strife between labour and capital. The rate of interest declines because the storedup wealth of the world is increasing, and this wealth, as a necessary consequence, is being diffused throughout the community in the shape of higher wages and lower prices. This process tends towards the equalization of conditions in this further way, that a decline in the rate of interest is equivalent to a gradual loss by the class of capitalists and 'rentiers' of part of their advantage over the rest of the community. If this is the case—and facts as well as theory confirm it—what sense, it will be asked, can there be in endeavouring to bring about by clumsy and unjust legislative expedients the conditions of the stationary state of society towards which economic causes may appear to be leading us? A stationary state reached by the gradual process above described might conceivably be one of material comfort, for it could only be so reached when human labour and effort in the satisfaction of desires was reduced to a minimum; reached by socialistic attacks on wealth, if, indeed, such attacks succeeded in doing anything beyond checking accumulation and its beneficent effects, it could only be one of general misery.

VIII.30

This fascinating subject, however, must not detain us, for one instance of the function of capital such as that given by Mr. Atkinson*35 is worth much speculation. 'The late Cornelius Vanderbilt may be taken as an example of a communist in the true sense. He was the greatest communist of his age. He consolidated and perfected the railroad service in such a way that a year's supply of bread and meat can be moved one thousand miles from the Western prairies to the Eastern workshops at the measure of cost of a single day's wages of a mechanic or artisan in Massachusetts....The work is not that of the labourer in the sense in which that word is used by so-called labour reformers...yet it is an effort of the human mind of such a quality, that except capital had then come under the control of these men, all the efforts of labourers would have utterly failed to promote the general welfare. The farmers of the West would have smothered in their own grease, and would have continued to burn their Indian corn for fuel, while the workmen of the East might have starved.'

VIII.31

'The true function of capital and of the capitalists is of the utmost beneficence. It cannot be exerted in the present condition of the world, except by way of ownership of land and capital, subject to the limitation and to the duties which are implied by existing laws*36.' The able American statist goes on to say, in words which must have caused a shock of surprise to 'social reformers,' that the fortunes which the great directors of industry have made for themselves bear but the proportion of a small fraction to the labour which they have saved their fellow-men.

VIII.32

The bearing of the above observations upon the immediate question before us is easily indicated. Those who look to freedom and equal rights as the only means of ensuring the supreme object of the largest possible production, an increasingly larger share of which goes under such a system to labour, will be unable to regard taxation as anything but a drag on the wheels of the social machine, and they will seek to confine it within the narrowest limits. They will endeavour to meet any unfair incidence of indirect taxation upon the poor by abolishing or reducing such taxation, and they will be inclined to put up with rough-and-ready methods so long as no class can complain of actual oppression, rather than have recourse to expedients like graduation. They are not however on principle justified in condemning an attempt to equalize the burden upon individuals and classes of such taxation as exists, and it is impossible for them to shut their eyes to the deplorable fact that in European states, with their debts and armaments, not to speak of social demands, the pressure of taxation is severely and increasingly felt, and that finance ministers cannot afford to neglect any promising sources of revenue. They may, therefore, without abandoning their view of the economic organization of society as it now exists (and, it may be added, will continue to exist until collectivism can supply a different motive for labour than those which now animate mankind), perhaps admit that the argument tells, not indeed against a moderate application of the principle for revenue purposes, but against a progression, which would end, as progression logically must on the socialistic theory of rent interest and profits, in the confiscation of all income above a certain point. If human wants were a limited and stationary quantity, any surplus income (if one may for a moment assume that in these circumstances such a surplus could come into being) beyond the amount necessary to satisfy those wants, would obviously be superfluous, and might be confiscated without hurting the owner. Above a certain ascertainable limit, he would not feel the abstraction by the state of all his wealth, for he would have no use for it. But when we bear in mind the progressive character of human desires, which is the keystone of civilization, we shall at once see the doubtfulness of any such assumption. The larger the individual income, the larger will be the accumulations of capital, with all their beneficent effects upon the general level of social well-being. Further, on the supposition on which this argument proceeds—that a system of private property, with its necessary accompaniment of free exchange, is favourable and indeed essential to human progress—we find at once a necessary limit to the application of the principle at the point at which it begins to check accumulation, and thus hinder production*37. Where that point lies in any particular community is a question which can only be solved by inquiry, discussion and experiment.

VIII.33

If, then, by adopting a plan of degressive taxation (i.e. a uniform rate being fixed for large incomes, but gradually lessened for the smaller, and a minimum being wholly exempted), the danger thus indicated may be met, is it possible to meet the further difficulty of fixing an equitable rate of graduation? The first step, the exemption of a minimum income, finds an easy defence on the economic ground above sketched out. It is obvious that all wants or sets of wants are not equally imperious. May it not, therefore, be possible and defensible to mark off a certain limit of desires of the elementary kind, such as those for food, shelter and clothing, which are common to all men, the satisfaction of which is necessary to keep human beings alive, and to supply a lever for the creation of higher wants? Humanity forbids us to allow our fellowcreatures to perish; and society may legitimately, in its own interest, do what it safely can to give a lift up to an indigent class by affording it the chance of conceiving aspirations after a higher level of comfort. This is, indeed, the only real basis and justification from the 'free exchange' point of view for the so-called socialistic legislation of the present day. For this purpose, then, and to some such extent, human wants may be treated as a fixed quantity, and incomes above the amount necessary to satisfy these wants may be held to be alone, or in larger proportion, liable to taxation.

VIII.34

If we desire to apply the same argument to justify graduation above this point, we are met by the practical difficulty of deciding whether, beyond a certain point, one set of desires is more imperious than another. We may assume that a man will make a greater effort to earn the £50 a year which saves him from starvation than another man to earn £1,000 a year. But who can say whether one man will make a greater effort to earn £1,000 than another £2,000 or another £10,000? It may be, indeed, found possible to cut the knot by some such rough-and-ready scheme as that proposed by Professor Ely, who would have three rates of taxation—one for incomes, sufficient to furnish necessities; one for those sufficient to provide the useful; and one for those large enough to warrant luxuries. In these three words, however—necessities, the useful, and luxuries—what material for dispute and conflict does there not lie? Here, then, we find ourselves face to face with the great practical difficulty in the case, the arbitrary character of all such schemes. Proportional taxation carries in its very name a permanent and definite rate of assessment, yet even under this system practical financiers tell us that the difficulty of arriving at a fair distribution of the burden of taxation is well-nigh insuperable*38. How greatly is this difficulty increased with a scale of progression depending on the moderation or caprice of legislators! If however, on the other hand, proportional taxation is in itself unjust, it is clear that its greater definiteness should not save it from condemnation as an ideal to be aimed at in systems of taxation.

VIII.35

Finally, the question may be taken from another side—that of facts and experience. In this part of his remarks M. Leroy-Beaulieu (in his Science des Finances) is brilliant and suggestive, some will think conclusive. He gives exhaustively the grounds which lead him to the opinion that a light and uniform tax will produce as much, with less friction and less danger, than the most rigorously graduated tax. Those who advocate this latter expedient cannot, he thinks, have studied (as he himself has done in another admirable work, La Répartition des Richesses) the distribution of wealth among the different classes of modern societies. Few better illustrations of what this distribution means from a revenue point of view can be given than the following remarks of the late Chancellor of the Exchequer in one of his budget speeches:

VIII.36

'The Committee scarcely realizes, I think, the extent to which both the income tax and the inhabited house duty are paid by men of comparatively humble means. I thought at one time it might be reasonable to allow every income tax payer to deduct £400 from his income before paying income tax, but I was staggered to find that this would involve a loss of £4,700,000 out of a total receipt of £13,000,000. To allow every income tax payer to deduct £200 would involve a loss of £2,500,000. This shows to what an enormous extent the revenue is contributed to by people of small incomes.'

VIII.37

The same fact, which is one of vital importance, is well shown by the table on the opposite page, taken from M. Leroy-Beaulieu's work.

Proposal for a Progressive Tax on the Incomes of the Canton of Neuchâtel.
Classification of Taxpayers from the Register in 1874.
Table.  Click to enlarge in new window.

VIII.38

From this table it appears that in a highly civilized and industrial canton, out of a total income of 31 million francs five-sixths (25,628,000 fr.) was in the hands of persons with a no larger income than 3,000 fr., and that one-thirtieth only belonged to persons with incomes of over 10,000 fr. Further, that a uniform tax of 1 per cent. produces 310,020 fr.; while the progressive tax proposed produces 334,266 fr. or only 24,000 fr. or 8 per cent. more; a gain which might easily be counterbalanced by the frauds for which there would obviously be so great a temptation.

VIII.39

The progression here sketched out is considerably less than that which actually exists in many cantons, especially in the Canton de Vaud, where a very interesting experiment is in progress. In this Canton in 1890 the tax on real property yielded £43,956, and that on personal property £52,902; the population being 247,605; the increase of revenue accruing from progression being about £6,000. Its opponents, however, declare that this gain is more than counterbalanced by injury to local trade, and especially by the great depreciation (stated at 50 per cent.) in the value of landed property which it has caused. It seems probable, indeed, that the principle in this instance has been pushed too far. There are five cantons, Zurich, Vaud, Geneva, Uri and the Grisons, in which complete systems of these taxes exist, and many others in which a partial use of the principle is made; and these systems are remarkable for the care with which they have been adapted to the circumstances of the people. The insufficiency, however, of this fiscal method in the Swiss Confederation generally is shown by the marked tendency towards increased indirect taxation, which already, in 1881, amounted to 57.9 per 100*39.

VIII.40

The returns of the new Prussian income tax for 1892—3, the first financial year since its introduction, do not prove much as to the efficacy of progression. There is an increase of £2,264,201, in spite of the amount levied from smaller incomes having been decreased by £350,000; but 440,218 new taxpayers have been laid under requisition, including, for the first time, joint stock companies and trading associations. The moderate graduation adopted appears to meet the sense of justice in the community, and has not had the effect of causing any withdrawal of capital from the country. An agitation, of course, exists for increasing the tax on the higher incomes. It is interesting to observe that of incomes of £4,800 and over there are 1,780, while 35 are over £45,000, 4 over £150,000, 2 over £250,000, and 1 of £350,000. The large figures are accounted for by the fact that the income of the mediatized princes have now, for the first time, been rendered amenable to taxation*40.

VIII.41

The example of the Australian Colonies is so often quoted by democratic reformers that it is well worth while to see what, in regard to graduated taxation, that example really amounts to.

VIII.42

The total revenue of the colony of Victoria*41 in 1887 was £7,607,598, of which nearly 60 per cent. was raised from sources other than taxation, viz.:

Crown Lands £ 656,627
Railways 2,741,488
Post and Telegraphs 485,533
Other Sources 653,307

£4,536,955

VIII.43

Whatever advantages such sources of revenue may possess, they cannot be defended from the point of view of taxation as being charges on wealth. The railway revenue, for instance (36 per cent. of the whole revenue), is a tax on locomotion and on transport, not on 'realized riches.'

VIII.44

There remains 40 per cent. of the revenue which is drawn from taxation (as compared with 39.99 per cent. in Switzerland and 84.25 in the United Kingdom in the same year) of this revenue 75 per cent. (or 30 per cent. of the whole) was drawn from Customs and Excise, and therefore pressed unduly on the poor. The remaining taxation, out of which alone can come any application of the principle of graduation, amounted to under 9 per cent. of the whole, and includes excise licences, stamps, succession and probate duties, property and income taxes, amounting to under £700,000. Under this head would fall the new forms of taxation directed against great estates, (1) the land tax and (2) the succession duty. The first of these is not graduated but is 'a tax with considerable exemptions, the classes of exemptions being so constructed that the tax is clearly intended to bring land into the market*42.' The whole tax fell upon under 900 persons and brought in about £124,000 a year. The succession duty which brought in a slightly larger amount was graduated on a scale varying from 2 per cent. on small estates up to 10 per cent. on estates of over £100,000.

VIII.45

We have said enough to show that, although the principle may be recognized and applied in most countries, the practice is certainly not to tax property in any undue proportion, if indeed sufficiently. It is not too much to say that in no stable civilized state has progressive taxation ever amounted to anything like confiscation of the larger incomes, such as is demanded by theoretic Socialism. Further, it does not appear by any means certain, from the experience of countries where it has been tried, that much is to be gained from a revenue point of view by a progressive income tax. Taken by itself as a fiscal instrument, it has even been said that it must either amount to confiscation or it will be useless, that it must either aim at the destruction of private capital, in which case, to quote Proudhon's picturesque phrase, 'Il aurait pour effet de refouler la richesse et de faire que le travail, comme un homme attaché à un cadavre, embrasserait la misère dans un accouplement sans fin;' or that it will be moderate, and in this case will be little more productive than uniform or proportional taxation. The dilemma, however, is probably less conclusive than it looks. It is rash to imagine that in a matter in which the habits of a people, the distribution of their wealth and the character of their government are all important factors, the example of one country can be of very great assistance to another. The same taxes, or similar methods of levying them, will not be suitable alike to tax-dodging America, frugal Switzerland and bureaucratic Prussia. But the question whether the circumstances of any particular country make it possible or desirable to adopt or develop a progressive system of taxation is one of practical finance upon which it has been no part of my design to touch, having had chiefly in view the greater question, namely, What ideal of justice should taxation endeavour to attain? Even if the comparative inutility of all existing systems of progressive taxation were established, this question would remain for solution; and, since a system of taxation will never be in its highest degree productive which does not conform to some standard of rightfulness in the heart of the taxpayer, it cannot well be neglected. The argument from Jevons' theory, if it is economically sound, has also the advantage of harmonizing with what we may take to be the rough-and-ready sense of justice of the ordinary man. It cannot, of course, be pushed too far; and if it may be held to demonstrate in a general way that, in order to equalize the burden of taxation upon individuals and classes, a higher proportion should fall upon the larger than upon the smaller incomes, it does not help us to a practical scheme of progressive rates, which has sometimes been deduced from it, and which can only be arrived at as the result of carefully guarded experiment.

VIII.46

Taxation indeed belongs essentially to the domain of practical administration, and a conclusion based on considerations of theory, such as those discussed in this paper, must therefore of necessity be incomplete. The judgement of the Economists appears to deprive the principle, in its practical application, of much of the importance which has been claimed for it, but it entitles us at any rate to assume that progressive taxation, in its theoretical aspect, need neither be considered in the light of a socialistic bugbear, nor ridiculed as a mere 'joujou démocratique,' and that, if it be confined within bounds, some of which have been pointed out as essential to its safe and advantageous use, and if the object of equalizing taxation be clearly kept in view and the object of equalizing incomes be as clearly repudiated, it may be found a useful adjunct to a well-balanced fiscal system.

BERNARD MALLET.


Notes for this chapter


21.
A Tariff for Revenue: What it really Means. Forum, September, 1892.
22.
The Labour Movement, p. 78. L. T. Hobhouse, 1893.
23.
It is perhaps unnecessary to say that the following application of Jevon's final utility theory to the doctrine of progression has no pretension to novelty, but it was noticed by the present writer before he had the advantage of knowing that he had been anticipated in his conclusion by the very elaborate investigations of certain Dutch economists. Professor Seligman, in his learned and exhaustive article in the Political Science Quarterly for June, 1893, summarizes their results and covers the whole ground of the discussion.
24.
Jevons' Theory of Political Economy, 2nd edition, p. 49.
25.
Ibid. p. 43.
26.
Ibid. p. 49.
27.
Ibid. p. 55.
28.
Jevons' Theory of Political Economy, 2nd edition, p. 57.
29.
Ibid. p. 148.
30.
Jevons' Theory of Political Economy, 2nd edition, p. 152.
31.
Ibid. p. 5.
32.
Mr. Charles Devas (Political Economy, p. 197) has some very pertinent criticisms on this law, directed, however, rather against the possibility of its application than against its abstract truth.
33.
Banfield; quoted by Jevons, p. 45.
34.
As Bastiat, a writer who is not answered when he is taunted with economic optimism, expresses it (Harmonies Économiques, p. 291):—

'Toute propriété est une valeur, toute valeur est une propriété;

Ce qui n'a pas de valeur est gratuit, ce qui est gratuit est commun;

Baisse de valeur, c'est approximation vers la gratuité;

Approximation vers la gratuité, c'est réalisation partielle de communauté.'

But although the domain of things common or gratuitous to all, the aggregate of utilities, is constantly increasing, that of things having exchange value, of property, does not decrease, for the horizon of human desires and possible satisfactions is always expanding and with it the field of human labour and service, production and exchanges, without which those desires cannot be satisfied. 'La propriété' is a pioneer which accomplishes its work in one sphere and then passes to another.

35.
Distribution of Products, p. 38.
36.
Distribution of Products, p. 41.
37.
It has been calculated that there is no country where the entire accumulated property would sell for enough to maintain its population on the most economical terms for more than three years, and that the world, as a whole, is always within a single year of starvation.
38.
It has been impossible in this paper to touch on a question, which yet lies at the root of all speculation on the subject of taxation, viz. its incidence on individuals and classes. The following words show the importance of the question in connexion with our present subject: 'Without going so far as some economists in thinking that wherever taxes are first imposed they are so diffused and distributed in the process of exchange as to render all elaborate attempts at a nice adjustment of them a matter of comparative unimportance, it is undeniable that under no system of taxation can any class escape a share of the burden, and, least of all, the most helpless and improvident class. It is conceivable that if a direct tax were imposed on the working classes, they might be unable to recover the whole of it by a rise in the rate of wages. It is not easily conceivable that a tax on capital would not be gradually diffused throughout the community, and ultimately affect wages, and be borne in a large proportion by the working classes.' Again, 'There can be no greater mistake than to suppose that an immense and increasing burden of taxation can be raised by any "adjustments" on what is called the property of about five million persons without a disastrous recoil on the interests of the working classes.'—Sir Louis Mallet, Free Exchange, p. 194.
39.
A fairly full account of these taxes, whether on income or capital, real or personal estate, is given in a report by Mr. Buchanan (Foreign Office, 1892; Miscellaneous Series, No. 267).
40.
Foreign Office, 1892; Misc. Series, No. 268.
41.
These figures are taken from Hayter's Victorian Year Book; and a year has been chosen before the recent check to the Colony's prosperity; since which panegyrics of Victorian State Socialism have notably diminished.
42.
Sir C. Dilke, Problems of Greater Britain, vol. i. p. 192.

Essay IX, Lyttelton

End of Notes


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