By Charles F. Bastable
In preparing this edition (which has been seriously delayed owing to pressure of other work) it has been my aim, while preserving the general character of the book, to give due place to the various recent contributions to financial theory and to the latest developments of fiscal policy in the leading countries of the world…. [From the Preface to the Third Edition]
First Pub. Date
London: Macmillan and Co., Limited
The text of this edition is in the public domain
THE CANONS OF TAXATION
BOOK III, CHAPTER VII
§ 1. In the general survey of the problems of taxation contained in the preceding chapters of the present book, we have implicity given the rules that should govern the management of this part of state revenue. The mere statement of a general maxim is of little use unless its real bearing and its actual value are realised by acquaintance with the facts of taxation as shown by history and present fiscal practice. It may even reduce to a dead formula what should be rather a matter of vivid experience. But it must at the same time be allowed that the condensation of results into the precise shape of general canons may prove of service to the theoretic student by enabling him to estimate exactly the effect to be ascribed to the conclusions that critical examination of the revenue system has tended to establish. And such a course, we may add, has been almost invariably followed by writers on finance, who have devoted their best efforts to the framing of rules which should be regarded as imperatively binding on the statesman and administrator. High support may therefore be claimed for an attempt to exhibit in a stricter form the results that emerged from our previous inquiry, even though no special authority can be ascribed to the particular shape in which generally recognised principles will be formulated.
§ 2. When finance was regarded as purely a matter of practice, it was natural that those concerned with the collection and disbursement of the public revenue should have felt the advisability of framing general rules by which to guide their mode of procedure. Unfortunately the limited view taken by the earlier administrators as to their proper function, which led them to consider almost exclusively the immediate returns obtained, the prevalent ignorance of economic principles, and the immature condition of the state economy, all combined to hinder the establishment of even sound empirical rules. The most famous financiers of so relatively modern a period as the seventeenth century—Sully and Colbert—have left little material of this kind. It is rather by theorists or officials of speculative tastes that the earliest canons of taxation have been produced.
*125 The students of economics and finance in the eighteenth century supplied the first really meritorious collection of general rules. In Germany, Italy, and France we find instances of very varying merit, but all affording evidence that the time for the enunciation of maxims had come.
Amongst the more remarkable rules are those propounded by Vauban, Justi, and Verri, partly on account of the reputation of their authors, but also for their indication of the really important points. Nevertheless they can at present only lay claim to importance on historical grounds.
*126 The physiocratic maxims were vitiated by the undue prominence given in their system to the rent of land as the sole net product, and therefore the only source of taxation. This fundamental error prevented the great French school from leaving a durable heritage in this respect to their successors.
§ 3. Very different is the position occupied by Adam Smith. The maxims inseparably associated with his name
*128 were in his own day accepted by theorists and statesmen, and have by constant repetition become an indispensable part of any exposition of finance. Though fully in harmony with the spirit of the 18th century, they have not been found inapplicable to modern conditions, and in spite of much hostile criticism bid fair to hold their ground in the future.
These famous maxims—to once more repeat them—are four in number, and run as follows:
(1) ‘The subjects of every State ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities—that is, in proportion to the revenue which they respectively enjoy under the protection of the State.’
(2) ‘The tax which each individual is bound to pay ought to be certain and not arbitrary. The form of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person.’
(3) ‘Every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay it.’
(4) ‘Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the State.’
One obvious comment on these rules is that which notes a difference between the first canon and the remaining ones. The former is a rule of taxation; the latter are rules respecting taxes. The first canon is therefore applicable only to the tax-system, as a whole, while the second, third, and fourth should be observed in the case of each separate tax. Mill, therefore, has some justification when he declares that they belong to ‘the discussion of particular taxes,’
*131 since every tax must be separately tested by them, though of course this circumstance does not remove them from the category of general rules.
Another feature that has been often noticed is the mixture of different classes of considerations. Thus they have been described as ‘partly ethical … and partly economical in the strict sense’;
*132 and it seems unquestionable that the second has chiefly a constitutional significance, as prescribing the taxpayer’s immunity from arbitrary exactions, but more generally the three last may be regarded with Wagner as administrative precepts.’
This attempt to separate the Smithian rules according to their character, though in appearance plausible, tends to obscure their really compound basis. The first maxim is, it may be said, undoubtedly ethical, since it refers to the justice of taxation. Granting this, it should also be remembered that inequality in taxation diminishes its productiveness and impairs industrial energy; and so viewed, the canon is an economic one. Violations of the rule of equal treatment are, again, offences against constitutional liberty quite as much as absence of certainty. In like manner each of the remaining rules has an economic side; the certainty, the convenience, and the economy of taxation, like its equality, are highly promotive of a well-filled treasury and a prosperous industrial system. The true point of view for understanding these maxims is to regard them not as economic, ethical, or constitutional, but as essentially financial; they therefore rightly combine the different elements that must enter into problems connected with that subject.
With reference to the first maxim, it is plain that Adam Smith regarded revenue as the index of ability to contribute, and it may be conjectured that the words ‘under the protection of the State,’ regarded by Walker as either irrelevant or inconsistent, refer to the case of persons having property in different countries, and therefore imply a prohibition of double taxation.
*134 For it must be remembered that international problems were much more prominent in the thought of Adam Smith and his contemporaries than is usually supposed.
§ 4. One natural consequence of the lofty position given to the Smithian canons is the depreciation of rules formulated by other writers. Variations of, or additions to, the four established maxims were regarded as peculiarities or vagaries of the propounder, which, if noticed at all, were rightly to be placed in a very subordinate situation. Nor, indeed, was there anything very novel in the formal contributions made by the successors of Adam Smith. Perhaps the most noticeable exception is that of the eminent historian Sismondi, who, beginning his career as a rigidly orthodox economist, showed in his latter work tendencies of a very different character.
*136 But his revolt did not extend to the subject of finance. Like, and probably in imitation of, Adam Smith, he prescribes four rules dealing with other points than those already covered by the accepted maxims. He asserts (1) that every tax should fall on revenue, not on capital; (2) that in the assessment of taxation gross produce should not be confounded with revenue; (3) that taxation should never touch what is necessary for the existence of the contributor; and (4), that taxation should not put to flight the wealth which it strikes.
The mere statement of these rules suffices to show their substantial accordance with the ideas of Bentham and Ricardo.
*137 They are evidently intended to carry out the principles of saving capital from taxation, of confining the area of imposition to net revenue, and of relieving those who only possess the physical minimum of existence. Though not as fundamental as the rules given by Adam Smith, they yet, taken together, make no inconsiderable addition to the prescriptions of practical finance, even if, as we have seen, it is not always possible to secure their complete observance.
Other expositions may be passed over with still slighter notice. Of French writers Garnier, with a formidable list of sixteen rules—twelve general and four special—is the most elaborate,
*139 and also probably the most confused. Among the Germans of the older school Von Hock of, the later writers Held and Wagner, are most important.
*140 The last-named in his elaborate examination groups his canons under different heads according to what he regards as their primary character, a course which, whatever be its disadvantages, enables him to lay special emphasis on the purely financial element.
*141 But in truth the whole tendency of modern German financial study has been rather towards description and analysis than the formulation of rules of supposed universal validity. Thus Wagner, while stating his elaborate canons (
Grundsätze), takes the utmost pains to insist on the need for careful discrimination in each particular case.
§ 5. The foregoing survey of the most prominent attempts to supply a series of precepts gives sufficient material for selection. It is only necessary to place in their proper order and connect with each other the rules that seem to possess the generality and weight required for inclusion in the list. First and most important of the principles that should guide the practical financier is that which declares that ‘taxation should be productive.’ The very object for which the revenue system exists is to provide for the maintenance of the State, and therefore the minister in charge of the finances naturally estimates the merits of a tax by the amount of its yield. Other considerations will no doubt occur to him, but this is after all the one that can never be neglected. And it is on this point that the amateur in such matters is most likely to fail; he will be attracted by the equity, popularity, or some other pleasing feature of imposts which nevertheless want this primary quality. It is here, too, that the masters of finance have won their greatest triumphs. To keep steadily in view the idea of productiveness, and select the objects most suitable for that purpose, requires firmness, as well as wide and accurate information.
Next in value we should place the rule that ‘taxation should be economical’—and this, as we have seen,
*143 includes much more than mere saving in the cost of collection. Undue outlay on the official machinery of levy is but one part of the loss that taxation may inflict. It is a far greater evil to hinder the normal growth of industry and commerce, and therefore to check the growth of the fund from which future taxation is to come. Thus the rule of ‘economy’ is naturally subdivided into two parts, viz. (
a) ‘taxation should be inexpensive in collection,’ and (
b) ‘taxation should retard as little as possible the growth of wealth.’ It may also be remarked that there is a close connexion between ‘economy’ and ‘productivity,’ since the former aids in securing the latter.
Our third rule is no other than the famous one that ‘taxation should be justly distributed,’ a vague and plastic proposition, which we may further explain by the interpretation that it should be measured by the comparative abilities of the contributors, and this again may be taken in general to mean ‘taxation in proportion to income.’ The many explanations that such a maxim requires have been already given and need not be repeated.
*144 But here we may add that so far as the ‘benefits’ or ‘service’ principle is applied, it excludes the rule of taxation according to ability.
‘That the tax system should be elastic’ is a further canon, the observance of which is very desirable. It may, indeed, be regarded as the agency for realising at once ‘productivity’ and ‘economy.’ Where the public revenue does not admit of easy expansion or reduction according to the growth or decline of expenditure, there are sure to be financial troubles.
*145 For this purpose some important taxes will have to be levied at varying rates. In the British system the income tax is selected to perform this service; but some article of general consumption might be placed under a sliding scale duty for the same reason. The particular taxes chosen will vary according to circumstances, but the general principle of flexibility should be recognised and adopted.
Of high importance in earlier times, but now requiring less emphasis owing to its general observance, is the canon that ‘taxation should be certain.’ When arbitrary power was able to alter imposts at its will, the uncertainty connected with the demands of the tax-collector was a great aggravation of the evil of the heavy burdens imposed. That the citizen in his dealings with public officials should be under the rule of settled law, not of caprice, is not only a financial but an important constitutional maxim.
Regarded from a somewhat different standpoint, the rule of ‘certainty’ or ‘stability’ is one that still needs enforcement. Frequent changes in the tax system have a disturbing effect. The economic arrangements of society are adjusted to the actual state of things, and reasonable expectations are formed, which are disappointed by sudden and unforeseen changes. Hence the strong objection that business men feel to even beneficial tariff changes, though the rule of stability is of comparatively little weight in the case of taxes on commodities. But where, as in the case of a long-established charge, such as the French land tax or the English local rates, contracts for lengthened periods have been concluded in the belief that the existing arrangements are permanent, then so-called reform is often a violation of security. It is in relation to this rule of stability that the popular maxim ‘an old tax is no tax’ finds its proper application. This conception of stability, moreover, comprises the fragment of truth wrapped up in Canard’s erroneous doctrine of equal diffusion.
‘That taxation should be convenient’ is another of the accredited maxims, which almost carries its justification on its face. It includes the selection of suitable objects for taxation, and also the choice of convenient periods for requiring payment. This rule of convenience is but the expression in a special form of the general principle that the public power should as far as possible adjust its proceedings to the habits of the community, and avoid any efforts at directing the conduct of the citizens in order to facilitate its own operations. The sacrifices that inconvenient methods of fiscal administration impose may indeed be treated as violations of both economy and equity.
§ 6. Such are the general canons that experience seems to prescribe, and which should be observed in a well-ordered State. They are, it is true, of a rather elementary character, but general and comprehensive maxims could hardly be anything else. Besides, their simplicity has not saved them from frequent violation. Their value lies in their assertion of truths ‘plain and intelligible to common understandings,’
*147 but for that very reason too often passed over. A system of taxation which conforms to them may without hesitation be pronounced a good one. Where they are neglected and broken through, the evil consequences will be almost certainly conspicuous.
A further point deserves notice. There is at first sight a probability of conflict between the several canons. A productive tax may be inconvenient, as a convenient one may be unjust; and how, it may be asked, is a solution of the difficulty to be reached? The plain answer is, By the surrender of the less important rule. The successful administration of the State is the final object, and therefore convenience, or even equity, may have to yield to productiveness. But though opposition is possible, agreement is on the whole the ordinary case. We have seen that economy increases productiveness, but so do certainty and convenience. Elasticity aids both productiveness and economy, while growing productiveness in turn permits of better observance of all the other canons. There is thus a harmony in a properly administered financial system that tends to promote its improvement in the future.
English Trade and Finance, xviii.
Dottrine Finanziarie in Italia, 276-282.
Int. ch. 2, § 6. Those of the elder Mirabeau are to be found in his
Théorie de l’ Impôt, 201, and are also given by Roscher
ut supra, and by Garnier, 325.
Economic Interpretation, 115), but gives no evidence in support of his statement, which is clearly unfounded. On the interesting question of Smith’s relation to Turgot, see Léon Say,
Turgot, 45; Rae,
Life of Adam Smith, 203 sq. Cannan, Introduction to Adam Smith’s
Lectures, pp. xxiii-xxiv. According to Cunningham, ‘Adam Smith’s celebrated maxims about taxation are improved in form, but in substance’ are adopted from Moreau de Beaumont.
English Industry and Commerce, ii. 436 n.
Political Economy, 489. Cohn’s judgment is quite as severe. § 333.
Wealth of Nations, 418.
Political Economy, Bk. iii. ch. 8, § 6.
Political Economy, 490. See also Bk. iii. ch. 3, § 14, and the words there referred to for the discussion of double taxation.
History of Political Economy, 165 sq.; also Roscher,
Geschichte, 845; and Cohn,
Grundlegung, § 85.
Works, 87-9; Bentham,
Theory of Legislation, 107-8; also cp. Bk. iii. ch. 2, § 5, and ch. 3, § 10.
Traité (ch. 13), 156-165.
i.e. income should be taxed without reference to its source; (3) the greatest possible care of the national well-being and its increase.
oberste Grundsätze) into four classes, arranged in the order of their importance, and distinguished as (
a) financial, (
b) economic, (
c) ethical, (
d) administrative. Under (
a) come (1) taxation should be adequate to meet expenditure, (2) it should be elastic; under (
b) are placed (3) the sources of taxation should be rightly chosen, (4) the kinds of taxes should be selected with reference to their effects; class (
c) includes rules (5) taxation should be general, and (6) it should be proportional; while, finally, class (
d) contains the rules that taxation should be (7) determinate, (8) convenient, and (9) collected with the smallest cost, in fact Adam Smith’s last three maxims.
The economic rules are somewhat vaguely expressed, but (3) refers to the taxation of income and of capital, and (4) draws attention to the incidence of taxation. The sixth rule is regarded as varying according to the conception taken; from the pure financial point of view it is proportionality to income, from the politico-social one it is in proportion to capacity.
Journal of Political Economy, v. 86-9. This, however, seems as much a matter of ‘equality’ as of certainty.
Political Economy, 606. It would be possible to frame many derivative rules—as
e.g. ‘Taxation should be diversified’—but they could not lay claim to general application, and most of them belong more fitly to the treatment of special taxes (Bk. iv.).