Public Finance

The facts of past and existing financial institutions, when compared with the general principles discussed in the preceding chapters, present at first sight a curious contradiction. Taxation, we discovered, was normally a deduction from the national income, and ought to be divided among the citizens in proportion to the share of that income possessed by each. Though some qualifications of this statement were made,
*1 such was the broad general result: from which it would seem to follow that the amount needed should be levied from the taxpayer in a single payment in proportion to his ascertained income. In fact, the single tax would, we might think, be the necessary deduction from established principles.

On turning to the facts of practical finance the state of things is very different. No country possesses this simple and logical arrangement. Instead of a single tax we find a considerable number of imposts varying according to place and time, and very hard to reduce to any reasonable classification. Taxes on every form of production, on nearly every commodity, and on most of the transactions of life, may be found in the history or statistics of finance.

One partial explanation is that which attributes the complexity of the public charges to ignorance or love of routine on the part of practical financiers. The beginning of the tax system, obscured as it was by the other forms of state receipts, was due to fiscal necessity. Extraordinary levies were made by the sovereign on the wealth most easily reached and owned by the feeblest members of the community. ‘To raise the largest sum of money with the least trouble’
*2 is an inadequate description of the functions of a modern finance minister, but it was the chief aim of his mediæval predecessor.
*3 It may then be thought that the immediate pressure of the public wants has been the cause of the undue complication in the methods of taxation.

Such, however, is not the case. There is no doubt an element of truth in the assertion that it was want of funds that led to the creation of so many different forms of taxation. A war period is usually a time of financial pressure, and most new taxes owe their introduction to occasions of this kind.
*4 But when the pressure is removed and the work of financial reform made possible, though great consolidations of duties are effected, there is no example of recourse to that simple method that appears so natural and appropriate in the light of some elementary principles. It is, therefore, necessary to examine the grounds on which a multiple system of taxation is retained, notwithstanding the apparent advantages of the single tax system.

§ 2. In the face of the general, indeed universal, policy of employing diverse forms of taxation, there has been at times a strong disposition on the part of students of finance to propose some particular kind of impost that should tend to supersede all others and be the principal resource of the Exchequer. Prominent amongst such plans is that promulgated by the famous engineer Vauban in his
Dîme Royale. He does not, as has been sometimes supposed, advocate the complete abolition of all other charges. Among the duties to be retained were a moderate salt duty, the customs, and some of the taxes on acts: but the
taille, the capitation, the
aides (internal duties chiefly on drinks), the provincial customs, and the miscellaneous sources of revenue classed as ‘extraordinary’ were to give place to a single tax—the ‘Royal tithe’—imposed on the product of land, industry, and, in short, all revenue, its amount to be five per cent. or ten per cent. according to necessity.
*5 His contemporary Boisguillebert, with whom he had so close an intellectual affinity, put forward the same idea of a single tax of one-tenth of the product of land and industry.

A similar tendency is shown in Sir M. Decker’s plan
*6 (referred to and criticised by Adam Smith) of a licence for the consumption of luxuries as a substitute for the excise and customs, a scheme which, in spite of its obvious difficulties, has been reproduced in a modified form in later times.
*7 The popularity of duties on consumption favoured the growth of plans like this. Still more significant was Vanderlint’s scheme for a single tax on land and its products, perhaps suggested by some remarks of Locke. The pamphlet in which Vanderlint stated his plan is a distinct anticipation of the physiocratic idea as to the true system of taxation.
*8

§ 3. The proposals already described came from individual thinkers, and had little or no influence on competent opinion or on financial practice. But in the circle of economists who regarded Quesnay as their master the dogma of a single tax—the
Impôt unique—became an accepted article of belief. This doctrine was the natural result of their theory as to the limits of net produce. The rent of land was, they thought, the only ‘source’ of taxation, and it was therefore convenient that it should be its only ‘object.’ Vauban’s idea of a Royal tithe was good so far as simplicity went, but it was unequal,
*9 inasmuch as it fell on capital employed in cultivation, which, in the physiocratic dialect, was not ‘disposable.’ In the application of their principles the Physiocrats were more inclined than is sometimes believed to admit modifications. The elder Mirabeau was prepared to raise two-thirds of the requisite revenue by an income tax, leaving only one-third for the land tax, and Turgot frankly concedes that the time had not come for an abolition of
octrois.*10

Besides the plan of a single tax on land rent, which has recently received support on different grounds from that of its originators, other forms of single taxation have been suggested in the nineteenth century. One is the general income tax, which would directly attack the normal source of taxation, and secure whatever distribution seemed desirable to the legislator. In the form suggested by some economists it would be proportional to receipts, and might be so framed as to cover acquisitions by gift or inheritance.
*11 Radical democrats would prefer that the single tax on incomes should be more or less rapidly progressive.

The plan of a single tax on ‘realised property’ has also received much support. It would be confined to property not engaged in production, ‘as land, the public funds, money lent on mortgage, and shares … in joint-stock companies,’
*12 and was believed by its advocates to escape the inequalities of the income tax, and to present greater facilities for collection, since the objects of assessment would be definite and open to observation.

Of rather wider scope is the plan for a single tax on capital, put forward by De Girardin and Menier, and approved by M. Guyot. Under it taxation is to be imposed on ‘fixed’ capital—
i.e. on ‘all such utilities as yield their products without changing their nature,’ to wit, ‘land, mines, buildings, machinery, implements, ships, carriages, animals employed productively, furniture, and works of art.’
*13 Raw materials and goods for sale would be exempt from charge. The basis of assessment proposed is the selling value of the taxable capital, one per cent. of which would, it was believed by Menier, be sufficient in the case of France to meet the public expenditure.

§ 4. These several plans have certain elements in common, and appeal to the very natural desire to secure a simple and inexpensive form of taxation. Were there no obstacles in the way, it is plain that direct imposition on the source of taxation would be preferable to the complicated methods actually employed. The cost of collection would be materially diminished, and the immediate incidence on the several individuals and classes precisely determined. Moreover, the community, as distinct from the State, would gain by the removal of restraints on industry, and it could measure definitely the cost of the public services.

Against such plain and obvious advantages there are weighty considerations to be set, which militate against the adoption of a single tax in any form. (1) The danger of a single tax, no matter how skilfully estimated, not being duly proportioned to revenue is a serious one to which any other proposed base,
e.g. capital or expenditure, is equally open. With a combination of different taxes the errors in any one case will be small, and probably compensated by the operation of other taxes, but with a single tax there is no possible room for correction. Experience shows that what is in appearance a perfectly fair tax may be practically very unequal in its operation. Evasions and false returns may destroy the proportionality of the best arranged income tax. (2) The pressure of taxation in most modern States is by no means a slight one. On the average it exceeds ten per cent. of the national revenue. Now it is evident that ‘the ignorant impatience of taxation’ would prevent this amount being raised without much irritation through any single tax. To disguise the burden is, so far as sacrifice is concerned, to reduce it, and the breaking up of the system into several distinct forms undoubtedly has this advantage. (3) The use of a single tax would remove the advantage that is obtained at present by reaching the different forms of taxable capacity. Consumption, income as returned or assessed, property inherited, are all so many indications of the capacity arising from the possession of revenue, which, when duly considered, enable a better proportional rate of taxation to be maintained. Besides, in certain cases it is, as we saw, necessary to separate the tax-payer’s contributions, and treat some as given for special service, or to assign the total amount between different countries and districts. A single tax would fail altogether in this respect. (4) It is, moreover, important to note that a so-called single tax is not necessarily a simple one. Thus a general income tax is often a combination of several special taxes, and may often prove just as troublesome and complex. A tax on fixed capital would be in fact a tax on land, mines, factories, furniture, works of art, &c., which would be so many separate categories for distinct assessment. A general tax on consumption or expenditure would be even more involved. The simplicity of such plans is therefore often only apparent, and covers a real complexity. (5) The results of the shifting of taxation increase the force of the preceding argument. A proportional tax in assessment may in the ultimate incidence be a very one-sided charge. Taxation in the simplest shape introduces a complicating element into the economic system, the effects of which are hard to follow and often very far removed from what first appearances would suggest.

§ 5. The foregoing considerations and actual fiscal practice have given countenance to the directly opposite doctrine, which has been perhaps most precisely enunciated by Arthur Young. ‘The mere circumstance of taxes being very numerous, in order to raise a given sum, is a considerable step towards equality in the burden falling on the people; if I were to define a good system of taxation, it should be that of bearing lightly on an infinite number of points, heavily on none. In other words, that simplicity in taxation is the greatest additional weight that can be given to taxes, and ought in every country to be most sedulously avoided.’
*14 This passage has at least the merit of placing the issue in a clear and definite form. To attain equality in distribution there ought on this theory to be an almost universal system of taxation touching the people at every point. Property, income, consumption, transactions, inheritance should all be moderately taxed in order to make the burden as even and as light as possible. Young’s views were, beyond question, produced by repulsion from those of the Physiocrats, and went even farther in the opposite extreme, but they do not inaccurately describe the characteristic feature of the finance of the eighteenth century. As a standard for modern times they are evidently inapplicable and opposed to the most important and valuable reforms of the nineteenth century. To secure the placing of pressure ‘on an infinite number of points’ would require the interference of the revenue authorities in most of the industrial processes and the private life of the community. Taxes on all commodities, on transfers of goods, and on the different forms of production would be extremely prejudicial to the development of industry, irksome and inconvenient to the payers, and very costly in collection. Financial history affords abundant examples of these evils. The
Alcavala, a duty levied on all sales, has been regarded by Adam Smith as the cause of the ruin of agriculture and manufactures in Spain.
*15 The English customs before the first reforms of Huskisson exemplified the evils of undue multiplicity in one branch of taxation, and the United States revenue system during the Civil War was an even more striking instance of the same defect.
*16 To properly arrange and combine a great number of duties is too difficult a task to impose on administrators, who are sure, even with the utmost care, to inflict much injustice and cause heavy losses.

§ 6. The defects of the opposed systems of single and of multiple taxation tend to countenance what may be called ‘plural taxation,’ in which the revenue is not on the one hand collected by a single form of duty, nor, on the other, divided into a great number of trifling charges. Under the existing conditions of society this is the course that has most in its favour as being at once most productive, least inconvenient, and on the whole approaching nearest to justice. But it is necessary to remark that this conclusion is limited to present circumstances. It does not follow that it may not be possible at some future time to adopt a single tax system, or at least a very close approach to it. Among the arguments urged against the single tax is that of the actual weight of taxation and the risk of exciting discontent by raising the required sum in a single payment. Suppose, however, that public expenditure were greatly reduced, so that, instead of eight, ten, or fifteen per cent. of national revenue, only three or four per cent. were required; it might well be that the relief to industry and the facility of collection would make an income tax advisable as the sole agent for raising revenue. So large a reduction of expenditure is hardly to be expected. When dealing with that part of our subject we saw that the tendency was towards increase, but it is not difficult to conceive how a very different state of things might have come into being. Let us suppose that England had never engaged in the Revolutionary and Napoleonic wars, and that her foreign policy had been for the past century that of rigid ‘nonintervention.’ Were such the case the financial results would certainly be (1) the entire absence of the national debt with its charge of £23,000,000 and whatever surplus may actually exist; and (2) the reduction of the army and navy estimates to probably one-quarter of their normal figure. Moderate reductions in the Civil Service would allow of further curtailment of expenditure, with the result that not more than in round numbers £25,000,000 would have to be provided by taxation. An income tax of 8
d. in the pound (including as it should the smaller incomes now exempt) would be the most direct mode of procuring that sum. The position of the United States, if the Civil War had been obviated by prudent statesmanship, would be even more favourable. A very moderate income tax would have met all the expenditure of the years 1850-1860, as the low customs duties actually did.
*17

It thus appears that the form of taxation depends in a great degree on the amount of expenditure. With moderation in outlay it is possible to have simplicity in taxation, and the difficulties of the problem of expenditure, already hard enough, are increased by the need of weighing the greater difficulties of heavy taxation. It is eminently true that wise policy is essential for sound finance.
*18

§ 7. Financial pressure makes the retention of different forms of taxation, if not an absolute necessity, at all events highly advisable in the interests both of the State and of the payers. And this being so, we have next to examine the comparative merits of the different forms in use. The first broad distinction—that between direct and indirect taxes—has some connexion with the controversy as to single against multiple taxation. The most popular forms of the single tax are direct, while most of the charges in a multiple system are indirect. There has been accordingly a not unnatural tendency to confuse two separate issues by identifying singlewith direct and multiple with indirect taxation. This confusion is increased by the fact that the great advocates of the single land tax laid particular stress on its being direct. ‘The essential form of taxation,’ says De La Rivière, ‘consists in taking taxation
directly where it is, and not wishing to take it where it is not…. To change that
direct form of taxation in order to give it an
indirect one is to reverse a natural order from which we cannot depart without the greatest inconvenience.’
*19 The idea that taxation should not lead to shifting and repercussion was one of the strong points of his school. The original conception of direct taxation as being that which is imposed immediately on the ultimate source from which it comes was, as we saw, altered for administrative convenience, and applied to cases where recurring payments were made and lists of tax-payers kept.
*20 But this use of the term, whatever its technical advantages, obscures the broad line of division that the older meaning gave, and which really possesses so much scientific importance. Whether a duty is assessed directly on the ultimate bearer or is passed through various intermediaries before reaching him, may not be capable of being precisely determined in all cases. There are no hard and fast lines in fact, and the instances on the margin may be numerous, but if we take the terms, not as giving a complete classification of taxes, but as marking the presence or absence of a certain characteristic, they may be employed with advantage, but rather to suggest reasons for discrimination than to definitely settle results.
*21

The expressions ‘direct’ and ‘indirect’ have received a further alteration which makes it more difficult to employ them without careful explanation. Taxes on property and income form a very large part of the direct taxes; those on commodities, collected from the producer or dealer, an equally large part of the indirect ones. These are, besides, the special forms of the two kinds of taxation that are usually selected as types in discussions about them, so that it is not difficult to understand how the comparisons between direct and indirect taxation have become for the most part an inquiry into the relative merits of taxes on income and property as against taxes on commodities.
*22

This employment of the terms is supported by the distinct origin of the two forms. ‘Taxes’ on property and persons (
Steuern) present a marked contrast to the ‘duties’ on goods and commerce (
Abgaben und Auflagen), in the fact that the former were direct, the latter indirect. A feeling of this original separation is at the root of much of the discussions on the merits of the two classes, and helps to make the issue more obscure.
*23

Still, the contrasts between the two groups of taxes that are usually regarded as being direct and indirect, quite apart from the question of incidence, has a sufficient value to make it convenient in estimating the merits of a given system. The peculiarities of the separate taxes that a more scientific arrangement exhibits may fitly be treated in dealing with particular taxation, but the broad general separation that is so familiar in financial discussion serves better for the purpose of showing the requisite conditions of taxation as a whole.

§ 8. Starting, then, with the conception of direct taxes as those levied immediately on the ‘subjects,’ or ultimate bearers of the charge, and therefore embracing taxes on income and property, or on their component parts, in opposition to duties on commodities and on exchange, where there is a shifting of the burden from the immediate payer to the ‘subject’ which justifies the name of ‘indirect,’ we have to consider the merits and defects of each class, and the most desirable mode of combining them.

At the outset the advantages of direct taxation seem to predominate. As income is the ultimate source of taxation, its immediate imposition is the most obvious and rational way of claiming a share in the produce for the State. The taxes on the different components of income have the same merit. Rent, interest, and earnings are the natural objects on which to place the charges of the State. Where it is thought desirable on grounds of justice to tax property, the direct mode of doing so seems the simplest and least involved. As a single tax appears better than a multiple system, so does direct taxation seem superior to indirect, and for much the same reasons. There is the greater facility and lower cost of collection, and the power of knowing the exact amount paid by each person liable. The drawbacks are also of the same kind. The greater dislike to direct levies of taxation is notorious; the demand for payment is more disagreeable than the fact of paying, as it brings home the existence of the charge without any possibility of escaping notice. Formerly financiers were too anxious to avert popular resentment to have recourse to this form, unless in extremities, and in modern days taxation must be suited to the taste of the voters. Another difficulty is the necessity of assessment in all direct taxes. If imposed on income, on property, or on any separate part of produce, there must be a valuation of the object which is charged, affording opportunities for evasion and for arbitrary official action. It is true that the progress of society may be expected to reduce these objections. As acquaintance with the operation of taxation becomes greater the payers form a more accurate estimate of the amount that they pay, and will feel that direct levy is really no worse than taxation through the enhanced price of commodities.

Moral progress may also diminish the disposition to evade payment by creating a higher standard of social duty, and the better organisation of the financial service will reduce the risk of undue official pressure. Still, these evils actually exist, and the extent to which they are likely to occur must limit the employment of direct taxation.
*24 Again, under a system of pure direct taxation it is very difficult to obtain their due proportion from the poorer members of society. The attempt to carry the income tax at a high rate down to the smaller incomes now exempt would be both costly and irritating, and the only produce tax that would much affect them—that on wages—would be still more obnoxious. No doubt with moderate expenditure and an improved standard of social morality the difficulty would become manageable, but we cannot assume the existence of these favouring conditions without adequate proof.
*25

It is, moreover, alleged that direct taxation is inexpansive, that it does not grow in proportion to the increase of national wealth. This, however, is not altogether correct, and so far as it is true can be accounted for without difficulty. The growth of so important a direct tax as the English income tax since its re-establishment in 1842 has been very remarkable. The yield per penny for the first year was only £730,000; in 1901-2 it passed £2,500,000, or far more than a threefold increase
*26 in sixty years. Indeed, the only explanation that can be given of a slower increase in an income tax than in income is that of evasion by the payers, an objection already considered. But in fact there are special reasons for the slow growth of certain direct taxes. A tax on rent will not increase in proportion to the growth of income, as it is generally fixed for a period of some length. The French land tax cannot increase, since it is apportioned and therefore fixed in amount, and in all cases of valuation it is not easy to keep the assessments up to the actual gains.
*27 The counter-advantage that, in a progressive society, these taxes tend to become lighter while yielding a definite amount ought not to be overlooked. It is a benefit to have one part of the revenue that can be depended on even in times of crisis. Taking the defects and merits together, we believe that direct taxation ought to be a part of every modern financial system, and that the extent to which it can be carried will depend on the particular conditions.

§ 9. The weak points of direct taxation are the strong ones of the opposed form. Indirect taxes are not felt by the payer in the same degree, and therefore cause him less annoyance. A tax mixed up in the price of wine, tea, or tobacco is not brought so clearly to his mind: it seems to be a part of the expenses of production, and to be due to purely economic causes. If ‘the best tax is that whose forms most effectually disguise its nature’
*28 there can be no doubt of the superior merit of indirect ones. A second advantage is the facility that they supply for taxing the smaller contributors. Duties on articles of general consumption touch all classes, though if necessaries are exempt they leave the minimum of subsistence unaffected, but only on the condition that the minimum revenue is expended for that object. Thirdly, they are both productive and in times of prosperity elastic without undue pressure. The growth of the English excise and customs, in spite of great reductions, has been remarkable. Again, it has been often pointed out that taxes on commodities are collected at a convenient time, since the contributor ‘pays them by little and little as he has occasion to buy the goods…. he is at liberty, too, to buy or not to buy, as he pleases.’
*29 This remark of Adam Smith’s has been extended to the assertion that indirect taxation is preferable as being ‘voluntary.’ There is no necessity to pay unless the contributor is willing. This, if true, would be a disadvantage, but, as Mill has shown,
*30 it is untrue. A citizen can, indeed, escape a wine duty by not consuming wine. That course, however, has the double disadvantage of depriving the State of revenue and of diminishing his own enjoyment. In the case of a direct tax of equal amount the same saving would be made by giving up the use of wine, and the revenue would not suffer.
*31 The possibility of checking consumption is a bad rather than a good feature in taxes on commodities. Other defects are easily discoverable. The rule of equality appears to be frequently violated. Articles of general consumption are used in much larger proportion by the poor than by the rich, so that in any modern fiscal system the pressure of indirect taxation comes chiefly on the working classes. Expedients may be suggested to diminish this evil. Articles of luxury may be subjected to heavy taxation, and the rates of duty may be fixed according to the quality of the articles taxed. Such measures, however, give rise to further difficulties. Articles of luxury are easily smuggled, and
ad valorem duties lead to evasion. In spite of any possible alleviations, the remaining inequality must be considerable. The elasticity of indirect taxes has its unfavourable side. At times of depression their yield cannot be relied on; as they grow in prosperous years so do they shrink in bad ones. Nor are they easily extended. Increased duties may possibly give stationary or even diminished receipts.
*32 Reliance on indirect taxation alone will therefore sooner or later cause financial embarrassment.

Expenses of collection are probably somewhat larger in the case of indirect taxes, though the difference is not so great as is often asserted. The cost of collection of the English Inland Revenue (about one-half of which is direct) is less than that of the customs, but so much depends on special conditions and the amount of revenue to be raised, that a general conclusion on the subject would be misleading.

By far the most formidable objection to the indirect taxation of commodities is the loss to the society through disturbance of industry. The evils of both customs and excises in this respect have been forcibly shown by Cliffe Leslie.
*33 The former close some ports altogether on the ground that there is not trade sufficient to justify the expense of maintaining custom-houses at them, and limit the imports of taxed articles at others. Towns without bonded warehouses are at a disadvantage in competing with those that possess them. Industries are either prevented from coming into being, or have their development retarded by such regulations and restrictions. The excise system is injurious to the industries under its supervision, as it controls the processes to be employed, and hinders the introduction of improvements. Routine is necessary for effectual regulation, but it is fatal to the spirit of enterprise that is the main cause of industrial advance. The various items of this indictment are supported by specific allegations,
*34 and there can be no dispute as to the gravity of the issue raised, nor as to the existence of the grievances stated. None the less are we compelled to hold that the retention of taxation on commodities is at present a necessity, and that by judicious measures it is possible, not indeed to remove, but to reduce the evils complained of. There are considerations other than those noticed by the assailants of these duties. All taxation is, it must be remembered, evil in its deduction of wealth and in the restrictive measures that must be used to make it effective. Direct taxation has its own inequalities and injustices, and is, besides, often vexatious and inquisitorial. A presentation of the faults of one particular form of tax-revenue is impressive, but should be qualified by considering the difficulties of any alternative method. In economics and finance we have always to be on our guard against the ‘fallacy of objections.’ Again, it is not clear that the taxation of a small number of articles has the very serious influence ascribed to it. Most of the instances of interference with industrial processes are taken from cases that no longer exist. The duties on salt, and glass, may have hampered invention, but in this country they are things of the past.
*35 Apart from intoxicating drinks and tobacco, the industry of the United Kingdom may be said to be free from control for fiscal purposes. A further point may be noticed. The customs staff is not purely a revenue agency; inspection and supervision of the shipping industry is, or is generally assumed to be, needed for sanitary and police reasons. It is but one part of the system described in an earlier chapter,
*36 and its whole cost should not be ascribed to the need of revenue. So far as the duties on stimulants seek to repress consumption, whatever hindrances they cause to the industry cannot be looked on as evil, since they conduce towards the object aimed at. The value of industrial liberty is doubtless great; whatever represses or diverts the economic forces that tend to increased production of wealth should not be allowed without adequate reason, and should be carefully watched; but on striking a balance it seems that the advantages outweigh the evils wherever a large revenue has to be obtained and where the system of indirect taxation is kept within narrow limits.

§ 10. On the borderland between direct and indirect taxation lies a large class, or rather several classes, of taxes, such as those on transfers of property, on ordinary contracts, on communication and transport, and in short the numerous charges on acts. All of them belong to the category of indirect taxes in the administrative sense, as do most of them in any sense of the term. They stand on somewhat different ground from duties on commodities, inasmuch as they in some cases approximate to fees for special services rendered, and in others are directly levied from the ultimate payers. They do not so much interfere with industry as with commerce in the strict sense, but they are open to the same kind of objections as those urged against the taxation of commodities. To hamper exchange is to prevent the passage of productive agents into suitable hands; a tax on communications is a check on commercial intercourse, and duties on legal transactions, if widely extended, prove very troublesome and annoying to the most active and intelligent members of a community. For these reasons it is desirable to keep taxation of this kind as a subordinate resource applied only to a moderate extent, and chiefly with the aim of completing gaps in the financial system. The difficulty of making the pressure of these taxes at all proportional, or even of analysing their incidence, ought of itself to prevent their being made a principal source of revenue. But when used partly as fees for special services, partly as affecting forms of wealth that are very likely to escape their due share of taxation in other ways, and finally as affording valuable tests of the correctness of the returns to direct taxation, they have a good claim to continue as a subsidiary means of revenue, and as a relief to the pressure on visible income of the purely direct taxes, and on the general consumption of the community from taxation of commodities. The extent of their application must be decided with reference to the particular circumstances of the country and the opportunity for employing direct taxation.

§ 11. The system of finance best adapted for a modern society is accordingly one in which the objects of taxation are judiciously diversified in such a manner as to realise the ends desired. The usual source of taxation is national income, the mass of fresh production during the period under notice, and one most desirable part of the revenue system is that which directly receives from the shares of this fund a contribution towards the maintenance of the State. The rent of land, the interest on capital, the earnings of management, and the wages of labour may all, as the component parts of income, be rightly made contributory. Whether they should be imposable in their separate forms, or simply as income, is in principle immaterial, but the method of distinct taxes on each share seems to belong to a lower stage of development than the general income tax. To escape the difficulties—partly technical, partly political—that direct taxation by itself creates, the taxation of various ‘objects’ on which income is expended must generally be adopted. Instead of attacking wealth as it is acquired, its use is made the object of charge. The method of taxing producers and dealers, in order that they may pass on the charge to consumers, is a recognition of the tendency of certain taxes to shift their weight, and an effort to utilise that tendency in facilitating the collection of revenue.

Taxation of income and of commodities are the two great forms of revenue receipts whose importance overshadows all others; but while this is apparent in every budget, it is equally true that a certain proportion of revenue can be obtained by the operation of other charges that cannot easily be brought under either of the leading categories. Some transactions are well suited for the imposition of moderate duties. Communications may be made to yield no inconsiderable resource to the State, and above all the inheritance of property is at once a means of testing the accuracy of returns as to income and an opportunity for taxing masses of accumulated wealth.

These ingredients of a well-ordered system require to be combined in very different proportions at the several stages of development. In a new country, with sparse population and little capital, a direct income tax would be a very defective instrument. Where there is little foreign trade, and most commodities are produced and consumed at home, taxation of commodities is not, and cannot be, productive. Peculiarities of social organisation have, too, considerable influence. Taxation of inheritances is unsuited for communities such as India, where the family is the unit of society and property is rather corporate than individual.

How important the special circumstances of social life may be in this respect can be better realised if we consider how much of existing English taxation rests on the circumstance that wine, tea, and tobacco are not native products.
*37

§ 12. We thus get a well-defined system of taxation comprising the three departments specified in the preceding section, and it seems beyond question that this will for a long period be the prevailing type. So far as any general course of development can be traced, the movement is towards a greater use of direct taxation. The income tax—a product of the nineteenth century—is on the whole increasing in favour, and the imposition of higher duties on inheritance is also probable.
*38 The great importance of both excises and customs is nevertheless a prominent feature. We cannot see how the existing outlay of any modern State could be maintained without their aid, though we shall indeed discover that they are confined to central finance, and are unfitted to be local resources.
*39 Still, the general conclusion is clear, that the great divisions of the tax system are likely to remain in active use, partly no doubt in consequence of their suitability to the existing financial organisations, but far more on account of their serviceable qualities.

A further advantage of this combination should be noticed—its elasticity. In modern finance it is desirable that receipts shall be capable of easy adjustment to expenditure without inflicting undue inconvenience on the contributors. The employment of different forms of taxation tends to realise this object. The steady growth of the receipts from commodities in times of prosperity, the definite yield of direct taxes, and the power of altering the rate of the income tax, taken together, provide the conditions for securing such growth or contraction of receipts as may be thought most desirable.