Public Finance

§ 1. We have now examined the different classes of public receipts that can be fairly classed as ‘quasi-private’ or ‘economic’; what the practical financier would describe as ‘non-tax revenue.’ The component elements are somewhat heterogeneous, a necessary result of the variety and complexity of public administration. Some of the categories shade off indefinitely into the other great class of contributions obtained through taxation, and thus deprive the technical groupings made for practical purposes of the logical consistency needed in scientific inquiry. In another respect the nature of things presents difficulties in the way of precise classification. The ‘economic’ revenue of the State is the product of property held, or payment for services done, by it. Great masses of public property are, however, not productive of revenue in the ordinary sense. From the Houses of Parliament down to the smallest court-house—from Epping Forest to the village green—there are buildings and lands that bring in no return to be entered in any budget, local or general. They are, nevertheless, a constituent part of the public domain, the loss of which would be seriously felt even financially. They contribute not wealth in the strict sense, but utility, and the problem of determining their financial advantage is therefore a difficult one. It seems that the best mode of framing an approximately correct estimate is to take the sacrifice that their loss would impose. The destruction of the public buildings of this class in the United Kingdom would place a considerable charge on both national and local resources, and this sum gauges the value of the existing buildings. The same test applies to the land devoted to general use such as parks, commons, and roads when free from tolls.
*141 The last-mentioned case shows how revenue-yielding property can pass into the class under discussion, and the French canals previously noticed afford another instance Strictly speaking, the policy of charging fees only equivalent to, or even under, the cost of maintenance is an intermediate stage between using state possessions as a source of economic revenue and abandoning them to gratuitous use.

The extension of this ‘unproductive’ public domain is one of the remarkable features of the present century. The movement, usually described under the title of ‘State Socialism,’ has made public authorities owners of museums, picture-galleries, libraries, baths, gardens, and the other appliances of a civilised society. No materials are at present available for forming an adequate conception of the extent of the movement, but of its reality and importance there can be no question. It is not limited to any particular country, and it is as prominent in local as in central government. Though commonly placed under the head of ‘State Socialism,’ it is really ‘communistic’ rather than ‘socialistic,’ since it implies the gratuitous supply of certain advantages that may be wholly unearned by the receivers. The classes that benefit directly are not those who contribute, even in labour, to the work of society. The public domain, applied to either state or general use, also influences the financial position by the outlay that is needed to keep it in efficient working. The existence of numerous public buildings, of large areas of land devoted to the service of the community, of works directly supplying state needs, might give a very considerable sum of assets to be entered in the national ledger if an inventory of state property were taken.
*142 It must, however, be remembered that the State is in mercantile phraseology ‘a going concern.’ Its property cannot be realised without suspending the processes of political life, and so long as these continue further expenditure is unavoidable. This part of public property resembles the mansion, demesne, carriages, plate, and furniture of a rich man, which are only productive of wealth on the breaking-up of his establishment, and otherwise involve him in additional outlay.
*143 Each is, in the language of modern economists, the ‘consumers’ capital’ of the proprietor, affording utility but not revenue in the narrower sense of the word.

These various points of connexion are quite sufficient ground for noticing the unproductive possessions of the State, and their suitable position is plainly in immediate sequence to that other section of public property which does contribute to the resources of the budget. Between land earning profit and land that merely affords enjoyment there are so many intermediate gradations that we pass almost insensibly from one to the other; and the same statement is applicable to some other forms of fixed capital.

There is an evident convenience in the use of separate terms for these two classes of public property. The language of French administration describes the revenue-giving part as ‘
Domaine privé de l’état,‘ while the remainder is the ‘
Domaine public,‘ though the latter term is sometimes used in a wider sense to include all the possessions of the State. The phrase ‘
Domaine privé‘ has often a legal rather than an economical or financial meaning, and denotes the property held by the State as a juristic person. Stein has proposed the terms ‘
Domänen‘ and ‘
Staatsbesitz‘ for the ‘productive’ and ‘unproductive’ parts of the public property, and perhaps the best English equivalents would be ‘domain’ and ‘property,’ though the latter is rather too vague unless qualified by some limiting term.
*144

§ 2. All the sources of revenue described in the present book possess one common feature that differentiates them from the tax receipts. Their amount has no essential connexion with the public wants. No matter what may be the demands on the public treasury, the various parts of the national domain will continue to give the returns that the economic conditions establish. State lands will afford rent, state investments interest, and state industries profit under the normal form of those divisions of income. They will not increase in times of pressure, nor will they diminish when funds are abundant, and they therefore deserve the epithet ‘mechanical’ as opposed to ‘organic’ which has been given to them.
*145 This feature of itself makes recourse to taxation a necessity in times of increasing expenditure. Even on the supposition that England had sufficient returns from its economic revenues to meet the expenditure of 1790, the French wars would have disturbed the balance, and it would never since have been restored. It might appear that the proposition just stated is not strictly exact. Fresh state wants might lead to more judicious management of the domain. Rents might be brought nearer to the economic limit. State industries might be worked with a closer eye to profit, and fees, notably, might be made higher. This qualification is only apparent. The previous low receipts were either the result of bad management or of a particular line of policy, and if the former, could have been rectified apart from the new needs, if the latter, would involve the loss of the object previously aimed at. Increased rents may retard agricultural advance, higher railway charges injuriously affect commerce, and increased fees tend to limit the transactions on which they are charged. Assuming then that pre-existing receipts have been arranged on correct principles, no increase can be obtained without a corresponding loss to the community, and in many instances it will be really taxation, as may easily happen with regard to any economic source of income. It is further probable that new demands will act injuriously on the economic revenues,
e.g. war with its accompanying expenditure retards social progress.

The antithesis between ‘mechanical’ and ‘organic’ revenue is thus shown to be based on the natural conditions of the two classes, and to indicate the place of each in a developed financial system.

§ 3. The division of the mechanical sources between central and local authorities is in general determined by the history and situation of each particular country. Land may, it would seem, be held either by the State as representing the sovereign of mediæval times, or by the parish or
commune, which is the descendant of the old village community, but peculiarities in legal development have influenced the actual position. The English parish is very different from the French
commune with its juristic personality and separate property.
*146 The
commune and the State are in most European countries the only public powers that have had enough continuity of existence to acquire the ownership of land. The Crown and Church possessions have passed to the latter, the ‘waste’ of the district to the former.

Intermediate bodies under unified governments,
e.g. the English ‘County’ and the French ‘Department,’ have little economic receipts, and what they possess is of recent origin. Federation naturally supplies the principal subdivisions with larger possessions, or rather it leaves them the wealth which they held before union, though in certain cases the tendency is towards placing land, and especially forests, under the central government.
*147

With regard to industrial undertakings the general rule, confirmed by practice, is in favour of placing them in charge of the State. Local bodies cannot be expected to deal wisely with the complicated and involved questions that must arise. The principle of ‘particular interest’ is the reason for a class of exceptions. Just as those public functions that principally concern a town or district should, generally speaking, be entrusted to its authorities, so should the industries connected with those functions or services. It is on this ground that municipal gas and waterworks, main drainage systems, and tramways are to be justified. Such undertakings are most prominent in urban districts, but, if needed, rural bodies may fitly carry them out. Local railway lines (
e.g. the
Chemins de Fer d’intérêt local of French finance) may be, and sometimes are, owned by the appropriate local body. The railways possessed by the various German States would probably be more successful if they were in the hands of the imperial administration, and such was the original design of the promoters of state purchase, only defeated by the jealousy of the smaller States.

Postal and telegraphic administration and industries monopolised for the purpose of special taxation are best suited for administration by the general government. As regards the various receipts capable of capitalisation no general rule obtains. When they are received by local bodies supervision by state officials is desirable in order to prevent maladministration or redemption for insufficient value, but there seems to be no reason for depriving a town or district of any resources of the kind that it may possess. Its taxation is so far reduced, and the nation as a whole has no claim to the funds.

Fees have to be distributed according to their source. Local administration is fairly entitled to what may be called its ‘incidental earnings.’ On the other hand, all administrative revenue that is gained by agents of the central government is justly due to it. By this simple rule much confusion is avoided, and there is the best chance of effective control.

A like consideration ought to guide the division of unproductive property. Whatever land or buildings subserve the wants of local administration should belong to the authority so administering; the general government should retain the remainder. Thus buildings for the local courts parks, or baths for a town are best put under local control National museums or libraries, or the principal courts of justice, belong rightly to the State.

§ 4. The necessity or advantage of general rules on the subject of division is, however, much reduced by two circumstances viz. first, the variety of conditions in different countries, and the numerous modifications in the structure of local government. Much more depends on the character of the particular people, or even the particular body, than is usually the case in finance. Thus the devolution with benefit of powers to the Corporation or to the County Council of London is no argument for a similar course with the municipality of Paris. Nor can inferences be safely drawn from both these bodies to the proper position of the Corporation of New York. At present the duty of the inquirer is rather to note the actual phenomena, avoiding hasty generalisation. The other qualifying circumstance is the interaction of the central and local bodies in respect to finance. Not to touch as yet on taxation, we can, even at present, see that land belonging to the
communes may for financial reasons be managed by the State, and the receipts paid over to the owners. Again, local bodies may for convenience or economy take charge of public property which is essentially that of the State. So also general fees may be received by local officials, or
vice versa. The consequence is that the two agencies, or rather the two sides, of the public power are so interlocked that systematic distribution of revenue cannot be made without a comprehensive survey of the whole position, and full allowance for the many influencing conditions.

§ 5. A final question now presents itself, viz. what is the proportion of revenue contributed by the ‘mechanical’ sources? Or, in other words, how much is left to be supplied by taxation? The answer, it need not be said, will vary according to the time and the country to which it applies. In some German States, at the end of the Middle Ages, taxation did not exist save as an exceptional resource. The present English or French revenue is almost wholly made up from this ‘extraordinary’ aid, as it was anciently called. And many intermediate positions are to be found.

Before entering on these particulars we must recall a distinction noticed already for another purpose, viz. that between gross and net revenue. Modern finance has accepted as correct the policy of bringing all sums received and expended into account, so that the budget shall reveal any defect in the operations carried on. For scientific analysis it is just as necessary to eliminate certain elements from each side of the accounts. To take the nearest example. In the English accounts for the year 1900-1, Posts and Telegraphs figure on the revenue side for £17,250,000, and form over 13 per cent. of the receipts. The expenditure was, however, taken as £12,700,000, and this, deducted from the former sum, leaves the more modest item of £3,550,000, or less than 3 per cent. If all the component parts of revenue were equally affected by this diminution there would be no difficulty in comparing amounts; but the nature of the quasi-private State revenue makes the gross largely exceed the net receipts, while in respect to taxation the existence of any remarkable difference between the two is of itself a strong objection to the particular form so affected as showing undue cost in collection. Nor are these differences confined to the tax as opposed to the non-tax receipts; within the latter class the relation of net and gross revenue is not in every, perhaps hardly in any, case exactly the same. The Indian land revenue gives a very high proportion of net return. In 1899-1900, about £14,500,000 out of £17,200,000. The Prussian mines, on the contrary, give very little net receipts, and some purely industrial enterprises have often a balance on the wrong side.

What is most important at present is to recognise that in estimating the financial merits of the various sources net revenue is the only sound basis of calculation. No matter what are the gross incomings, if there are equal outgoings the exchequer does not benefit. Taking this view, we are led to reduce very much the importance of the economic receipts. Except in the case of rent the net returns are small. Even the Prussian state railways, the most profitable of public undertakings, do not produce much revenue when compared with the total net receipts of the budget. Besides, the intrusion of the tax element tends to deprive some of the most important public industries of their purely economic character.

§ 6. The intermixture of economic and tax revenues as well as the complications of net and gross receipts, and the involved relations of capital and revenue accounts, prevent a precise and definite answer regarding the proportion of public expenditure defrayed out of taxation. It is, however, possible to give approximate results that are not without value. In the English financial year 1901-2, the receipts from taxation were £121,893,000. The cost of collection was £2,970,000, leaving a net return of £118,923,000. Non-tax receipts came to £21,105,000, expenditure to £13,300,000, and the net receipts to £7,805,000.

Passing over the various readjustments that the question of fees and the distribution of interest on capital charges might in strictness necessitate, 94 per cent. is obtained from taxation against 6 per cent. from other sources. Local finance in England and Wales for the year 1898-9 (the last available) gained by taxation £38,600,000 directly, and £11,790,000, from contributions of the central government. Gas, electric lighting, waterworks, and tramways yielded over £10,430,000, while their cost was £7,785,000. This balance of £2,645,000 has to be further reduced by the interest on debt incurred on the industries in question, or about £2,350,000, the net gain being brought down to less than £300,000. Tolls, dues, repayments, rents, and dividends came to about £9,000,000, from which the uncertain cost of collection has to be taken. The broad inference from these figures is that about two-thirds of the gross local receipts come from taxation, the remaining one-third being otherwise obtained, but that in the net receipts taxation stands to other sources in the ratio of 5 to 1.
*148

Germany shows a somewhat different position. Nearly all the German States have a good percentage of their gross receipts from economic revenue, but when the cost of gaining that revenue is taken into account there is very little surplus left. Thus the estimated net revenue for the year 1902 from the Prussian lands and forests (other than railways) is 59,600,000 marks (£2,980,000); that from mines and salt-works 30,800,000 marks (£1,540,000), the railway earnings (part of which is taxation) contributed 532 million marks (£26,600,000), or a total of about 623 million marks (or £31,150,000).
*149 The gross receipts would convey a quite different impression. They for the same year are estimated at 1,714 million marks, the corresponding outlay, net working interest on railway debt, being 1,091 million marks. As the gross receipts from all sources are taken at 2,614 million marks, while the net receipts only reach 883 million marks,
*150 we may conclude that though the domain and industrial undertakings were over 62 per cent. of the gross, they formed a smaller proportion of the net income.
*151 The inclusion of fees and administrative revenue would increase the proportion of economic receipts, but the tax element is so prominent in them (especially the law fees) that the correctness of this course is doubtful.
*152

The other German States resemble Prussia, though in their case the proportion of net receipts by taxation is probably larger, as their net income from railways and mines is lower. Austria and Hungary, too, gain much less than Prussia from the economic sources of revenue.

India is the only other country whose proportion of economic revenue is deserving of attention. One noteworthy feature of Indian finance is the contrast between its most productive sources and those of European countries, especially Great Britain. Its financial mainstay is in the rent charges on land, which, together with the parts that are truly either rent or taxation, supply close on £15,000,000 annually. Other sources of the same class are unproductive. Postal service, telegraphs, and railways lead to expenditure rather than profit. Forests produce a small surplus. The tax revenue is just as sharply contrasted with that of England. Salt and opium are the chief contributories, and fiscal monopoly is a prominent agent in the collection. The ordinary excise, customs, and stamps are comparatively unimportant; so is direct taxation, which is so effective in England. On the whole we may say that even in India less than half the net receipts are derived from quasi-private sources of revenue.

§ 7. The preceding facts sufficiently support the general proposition that the economic revenue of the State is financially inferior to that gathered by the tax-collector, and it also seems to hold good that the greater the economic development of a country, the less important is the former. Whether the statement will be applicable to the future is perhaps doubtful. Modern tendencies are in the direction of creating an industrial domain that may rival in value the agricultural domain of earlier times, but the net revenue to be obtained from it will probably be less than would at first appear likely. The cost of constructing the modern state domain and the pressure on the administration to reduce the cost of service to the lowest point that expenses of working will allow, are both hindrances to the use of state industries as an effective relief from the charge of taxation. There is no probability that in the near future the proportion of the public charges to be met by direct levies from the citizens of the State will diminish, more especially when the rapid growth of public expenditure is taken into account.

Taxation will, therefore, next claim our attention, and as the main support of the State’s economy will need fuller and more critical investigation than has been necessary with other forms of revenue.