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THE SHIFTING AND INCIDENCE
OF TAXATION



COLUMBIA UNIVERSITY PRESS

Columbia University

New York



SALES AGENTS

HUMPHREY MILFORD

Amen Corner, E.C

London

EDWARD EVANS & SONS, Ltd.

30 North Szechuen Road

Shanghai



THE SHIFTING AND INCIDENCE
OF TAXATION



BY



EDWIN R. A. SELIGMAN

McViCKAR Professor of Political Economy
Columbia University



FOURTH EDITION
REVISED




COLUMBIA UNIVERSITY PRESS
1921 •

All rights reserved



91411



Copyright, 1899,
By the MACMILLAN COMPANY.

Copyright, 1910 and 1921,
By the COLUMBIA UNIVERSITY PRESS.



Third edition, revised and enlarged, January, 1910,
Fourth edition, revised, February, 1921.

Italian Translation, 1906.
Japanese Translation, 1910.
French Translation, 1917.



NoriDooIi Jpttet

J. S. Cuahing Co. — Berwick 4 Smith Co.

Norwood, Mass., U.S.A.



h






PREFACE TO THE THIRD EDITION

In the eleven years that have elapsed since the last edition
of this work, the practical problems of finance in various
countries have evoked a renewed interest in the problem of
the incidence of taxation. Advantage has been taken of the
literature that has accompanied this newer interest to bring
the discussion, as far as possible, down to date. The inclu-
sion of the new matter has necessitated a considerable addi-
tion to the bulk of the work, although it has involved no
substantial changes in the doctrine itself.

In Part One, devoted to the history of the theory, atten-
tion has been called to some interesting writers, especially
of the seventeenth and eighteenth centuries, who were over-
looked in the previous editions. It is hoped that this his-
torical part will now be found fairly complete, at all events
so far as EngHsh literature is concerned.

With reference to the substantive part of the doctrine of
incidence, the chief alterations and additions are the follow-
ing : The introduction to the whole volume has been con-
siderably enlarged and completely rewritten. An attempt
has been made to clarify the discussion of the tax on agri-
cultural land by calling attention to considerations of practi-
cal moment. The chapter on city real estate taxes has been
virtually rewritten, in view of the growing significance of
local finance. In chapter four a fuller discussion of the
mortgage tax is inserted, and in chapter seven special atten-



vi Preface to the Fourth Edition

tion is paid to the newer stock and produce-exchange taxes.
Moreover, in almost every chapter there will be found addi-
tions involving references to the more recent discussions,
and also taking up some newer points which had been
omitted in the preceding edition.

EDWIN R. A. SELIGMAN.
Columbia University,
November, 1909.



PREFACE TO THE FOURTH EDITION

Although eleven years have again rolled by, the contribu-
tions that have been made to the subject in the interval have
been so comparatively slight as to necessitate only moderate
changes in this new edition. The stirring events of the last
decade have furnished material rather for study of the general
effects of taxation than for that of incidence. Apart from
the fuller utilization of the older literature, which will be found
scattered through this edition (esp. pp. 29, 65, 6"]^ 72, jZ, 84,
88, 94, 100, 104, 175, 180, 351, and 354) the chief alterations
will be found in connection with the topics of capitalization
(pp. 183, 200, 218, 223, and 286), and the incidence of taxes
on profits and surplus (pp. 362 and 393).

E. R. A. S.
Columbia University,
February, 1921.



TABLE OF CONTENTS

INTRODUCTION



PACK



Terminology: Impact, Shifting, Incidence; Capitalization, Trans-
formation ; Pressure, Evasion, Effect I



PART I
THE HISTORY OF THE DOCTRINE OF INCIDENCE

Book I

THE EARLY THEORIES

CHAPTER I

Those who discuss the General Excise

The Origins : Hobbes, Cradock, Culpeper 19

1 . The Theory that the Excise does not rest on the Poor Consumers.

Mun, Waterhouse, Fauquier ....... 25

2. The Theory that the Excise rests on Consumers in general.

Petty, Burnaby, De Foe, Sheridan, Nickolls, Brooks, .Manley,
Houghton, Temple, De Witt, Tucker, Young, Temple, Child,
Cary, Nugent, Vanderlint, Postlethwayt, Forster . . 30

3. The Theory that the Excise is shifted to the Landowners.

Anonymous writers, Pulteney, Amhurst ..... 62

4. The Theory that the Excise rests on the Traders.

Anonymous writers, Roberts, Ashley, American writers . . 66

CHAPTER II

Those who favor a Single Tax on Luxuries

Chamberlayne, Parker, Downes, Richardson, Tucker, Nickolls, Forster 79



viii Table of Contents

CHAPTER III

Those who favor a Single Tax on Houses

Decker, Postlethwayt, Fauquier, Horsley ; Massie, Young . . 89



PAGE



CHAPTER IV

Those who favor a General Property Tax

Culpeper, De Foe, Drake, Wagstaffe 96

CHAPTER V

Those who favor a Single Tax on Land

Locke, Davenant, Asgill, Cantillon, Wood, Vanderlint . . . loi

CHAPTER VI

Those who favor a More Eclectic System

Walpole, Reynell, Nugent, Hume, Steuart, Stewart, Young . .110

Book II

THE MODERN THEORIES

CHAPTER I

The Physiocratic Theory

Quesnay, Mirabeau, Mercier de la Riviere, Du Pont de Nemours,

Baudeau, Le Trosne, Turgot ; Franklin, Hamilton . . .125

CHAPTER II

The Absolute Theory

Adam Smith, Ricardo 143



Table of Contc7its ix

CHAPTER III
The Equal-diffusion Theory

PAGE

The Optimists.

Verri, Mansfield, Dickson, Young, Hamilton ; Canard, Courcelle-
Seneuil, Cherbuliez, Prittwitz, Thiers, De Broglie, Stein ;
Montgomery, Gibbon. Wells, Sherman, Cooley, Hamilton,
Avebury . . . . . . . . . .152

The Pessimists.

Proudhon ; Bolles . . . 172

CHAPTER IV

The Capitalization Theory

Voung, Craig, Sartorius, Hoffmann, Murhard ; Passy, Wolowski,
Destutt de Tracy, Du Puynode ; Baxter, Noble ; Rau, Schaffle,
Pierson 174

CHAPTER V

The Eclectic Theory

J.-B. Say, Sismondi, Gamier, Parieu, Du Puynode, Vignes, Leroy-
Beaulieu ; v. Thiinen, Rau, v. Hock, Prince-Smith ; Jones,
Buchanan, J. Mill, Senior, McCulloch, J. S. Mill, Fawcett,
Cliffe-Leslie ; Bastable, Graziani. De Roosendaele, Purdy, Natoli,
Tivaroui 184

CHAPTER VI

The Agnostic Theory

Held, Hamilton, Murray, Avebury 201

CHAPTER VII

The Socialistic Theory

Lassalle, Shearman .......... 203

CHAPTER VIII

The Quantitative ok Mathematical Theory

Cournot, Fauveau, Jenkin, Pantah^oni. Walras, Wicksell. Conigliani,

Barone ; Marshall, Edgeworlli 205



X Table of Contents

PART II

THE DOCTRINE OF INCIDENCE

CHAPTER I

General Principles

PAGE

General considerations . . . . . . . . .219

Is the commodity durable or perishable? 221

Is the commodity subject to the Inn- of monopoly or to that

of competition? ......... 226

Is the tax general or exclusive ? . . . . . . . 227

Is there complete mobility of capital ? 227

Is the demand for the commodity elastic? . .... 228
To what extent do differential advantages of production affect the

supply? ^-S-h

What is the ratio of product to cost? 24.0

Is the tax imposed on margin or on surplus ? . . . . 249

Is the tax large or small? 250

Is the tax proportional or progressive ? 251

Is the commodity a final good? . ...... 252

Conclusions 253

CHAPTER II
Taxes on Agricultural Land

General considerations . . . . . . • . -255

Taxes on economic rent . . . . . . . -257

Uniform taxes according to the quantity or the quality of the

land 259

Taxes on gross product ........ 261

Taxes on agricultural profits ....... 262

Taxes on property or selling value ...... 262

Taxes on rental value . 271

CHAPTER III
Taxes on Urban Real Estate

General considerations ......... 277

Taxes on the ground owners . . . . . . . 28 1

Taxes on the value of the house ...... 287



Table of Contents



XI



Taxes on the owners of house and ground
Taxes on house rentals

Hypothetical cases

Actual cases ....

House owner and landlord .

Demand for house accommodation

Friction .....

Differential rates

" Onerous " and " beneficial " rates
Conclusion



294
298
304
307
310
312

315

320
324



CHAPTER IV
Taxes on Personal Property and Capital

Uniform taxes on capital ......... 326

Unequal taxes on capital ......... 328

1. Incidence as between the original owner and the new pur-

chaser 328

2. Incidence as between the lender and the borrower . . 329

Taxes on mortgages ........ 333

3. Incidence as between the producer and the consumer . . 337

CHAPTER V
Taxes on Profits

Taxes on gross product . . . . . • . . . . 339

Taxes on competitive enterprises 340

Taxes on monopolies ........ 342

Ultimate effects 348

Excess-of-tax -above-price doctrine 350

Taxes on gross receipts . . . . . . . . -355

Under competitive conditions . . . . . . -356

Under monopoly conditions ....... 357

Taxes on net receipts 358

Taxes of fixed amount ......... 363

Application 365



CHAPTER VI
Taxes on Wages



Taxes on professional earnings
Taxes on ordinary wages .



367
368



xii Table of Co7i tents



CHAPTER VII
Other Taxes

FAGB

Poll taxes 371

Inheritance taxes .......... 371

Excise taxes ........... 372

Import and export duties 373

Stamp taxes ........... 379

Taxes on stock and produce-exchange transactions . . . 383

Income taxes 385

CHAPTER VIII
Conclusion

Optimism and Pessimism 389

General tendencies .......... 390

Advice to legislators 394

BIBLIOGRAPHY

Works prior to Adam Smith 399

Works since Adam Smith . . . . . . . -417

Index of Authors 425



INTRODUCTION

The problem of the incidence of taxation is one of the
most neglected, as it is one of the most complicated, subjects
in economic science. It has indeed been treated by many
writers ; but its discussion in scientific literature, as well as
in everyday life, has frequently been marked by what Parieu
calls the " simplicity of ignorance." Yet no topic in public
finance is more important ; for, in every system of taxation,
the cardinal point is its influence on the community. With-
out a correct analysis of the incidence of a tax, no proper
opinion can be formed as to its actual effect or its justice. It
is, therefore, time for an attempt to be made not only to pass
in review the theories hitherto advanced, but to contribute
to the solution of some of the theoretic problems while pay-
ing special attention to the practical aspects of the discussion.
^» A word first as to the terminology. In the process of tax-
ing, we must distinguish three conceptions. First, a tax may
be imposed on some person ; secondly, it may be transferred
by him to a second person ; thirdly, it may be ultimately
borne by this second person or transferred to others by whom
it is finally assumed. Thus the person who originally pays
the tax may not be the one who bears its burden in last
instance. The_process of the transfer of a tax is known as
the sJiifting of the tax, while the settlement of the burden on
the ultimate taxpayer is called the incidence of the tax. The
incidence of the tax is therefore the result of the shifting,
and the real economic problem lies in the nature of the
shiftings.

The English fiscal language is somewhat deficient in its
nomenclature. While incidence conveys to the mind the
notion of the ultimate result of the shifting, we have no
word in common use to express the immediate result of the



i



Shifting and Incidence of Taxation

original imposition of the tax. " Assessment " of the tax
looks upon the process from above downward ; but what we
need is a term to characterize the process as seen from below
upward. The French and the Italians have the words per-
cussion, pcrcjissione, to express this idea of the primary result
of the assessment. They, therefore, logically term the shift-
ing of the tax the repercussion ^ of taxation, the ultimate result
of which is the \nc\dtnce.{inci device, ijicidcnsa).

The English term which best expresses this idea is "impact."
We occasionally speak of a tax "impinging" on somebody or
something, so that the " impact " of a tax would denote the
act of impinging. Moreover, we ordinarily refer to the im-
pact of a projectile in this very sense. The impact of a tax
is therefore the immediate result of the imposition of a tax
on the person who pays it in first instance. It corresponds
to what is often, but erroneously, called the " original inci-
dence " or the " primary incidence " of a tax. There is but
one kind of incidence, namely the ultimate incidence, which
emerges only when the tax finally settles, or comes to rest,
on the person who bears it. We thus have the three distinct
conceptions — the impact, the shifting, and the incidence of
a tax, which correspond respectively to the imposition, the
transfer, and the settling, or coming to rest, of the tax. The
impact is the initial phenomenon, the shifting is the inter-
mediate process, the incidence is the result. To confuse the
impact with the incidence is as reprehensible as to confound
the incidence with the shifting.

Strictly speaking, the impact of a tax includes not only
the immediate result of the original imposition, but also the
subsequent impinging of a tax on a person who is not the
tax-bearer. Thus if a tax is imposed on A, shifted to B, and
then again shifted to C, who finally bears the tax, we can
properly speak of the impact of the tax first on A and then on
B. The impact is transferred or repeated. It is only when

^ They also use the words translation, traslazione, which are the same as our
"transference" or "shifting." The French also speak of taxes being " rejetes,"
our " thrown off " or " shifted."



Introduction 3

the taxpayer is at the same time the tax-bearer that the im-
pact is immediately followed by, or converted into, the inci-
dence. For a similar reason, when the initial taxpayer is
also the tax-bearer, the impact of the tax is at once followed
by the incidence, without any intermediate process of shifting.
But in all cases incidence signifies the result, while shifting,
if there is any, denotes the process.

The point to be emphasized is that through the process of
shifting, the taxpayer escapes the burden of the tax. There
are, however, other methods of escape, which must not be
confused with shifting. It is here that both the analysis and
the nomenclature of the subject have been exceedingly de-
fective.^ Let us endeavor to clear up the matter and to
suggest what may possibly be deemed worthy of acceptance
as the definitive nomenclature.

Whenever there is a shifting of taxation, the tax may be
shifted forward or backward. Thus'a producer, upon whom
a tax has been assessed, may shift it to the consumer, or a
seller may shift it to the purchaser. The tax is shifted for-
ward to the consumer or the purchaser respectively. On the
other hand, the tax may be imposed in first instance on the
consumer or the purchaser, and may be shifted by him to
the producer or the vendor respectively. In this case the
tax is shifted backward. " Finally, when the tax is shifted
from the seller to an intermediate purchaser, who then sells
to another person, and so on until the tax finally settles on
the ultimate purchaser or consumer, we speak of the tax
being shifted onward. Taxes, therefore, may be shifted for-
ward, backward, or onward.'^

1 The English and the French writers have done virtually nothing to clear
up the confusion. The Germans have done a little, but only a little. More has
been accomplished by the Italians, especially by Maffeo Pantaleoni, Teoria della
Traslazione dei Tributi, 1882, and more recently by Fabrizio Natoli, Stiuh stt gli
Effetti Economici delP Imposta, 1909. But their analysis also is, as we shall see,
not entirely free from objection.

•^ The Germans, since the time of von Hock, in 1863, have been accustomed to
these conceptions, which they designate by the terms Fortiv'dhung, Ruck-wdhung,
and WeiUrwdlzung, — all of them subdivisions of shifting or Ueberwdhung.



4 Shiftmg and Incidence of Taxation

To be contrasted, in part at all events, with the shifting of
taxation is the capitalization or the amortization of taxation.
The chief feature of this phenomenon, which will be fully
discussed later,^ is the fact that under certain circumstances
the purchaser of a taxable object, by cutting down the pur-
chase price, discounts all the taxes which he may be called
upon to pay in the future. If, for instance, the ordinary re-
turn on investments in securities is fiye_per cent and a tax
of one per cent is imposed on a particular kind of corporate
bonds selling at par, the price of these bonds will fall from
par to eighty. The tax will be amortized or discounted
through a depreciation of the capital value of the bonds by a
sum equal to the capitalized value of the tax. The new pur-
chaser thus escapes the tax which he is compelled to pay to
the government by giving so much less for the bonds.

The few writers who have discussed this phenomenon gen-
erally consider capitalization to be a kind of shifting. In a
certain sense, indeed, there is a seeming justification for this
view. For the purchaser escapes the tax by throwing it off,
or shifting it backward, on the seller. In reality, however, a
distinction ought to be observed between shifting and capital-
ization. Shifting implies a process applicable to a single tax
or to a tax each time that it is imposed ; capitalization implies
a process applicable to a whole series of taxes and takes place
before any of them, with the exception of the first, is paid.
In the case of a dealer who shifts a tax on a commodity
back to the producer, the process takes place each time that
the tax is levied, and the producer reduces the selling price
each time by the amount of the tax. In the case of capitali-
zation the purchaser indeed pays the-tax, but the initial pos-
sessor or vendor reduces the price by a sum equal to all the
future taxes which the purchaser expects to be called upon to
pay. In the one case we have the shifting back of a single
tax ; in the other case we have the throwing back of a whole
series of taxes at once. For capitalization implies a change
in price equal to the capital value of all anticipated payments.

iPart II, chap, i, § i.



Introduction 5

There is, therefore, a marked distinction between shifting and
capitalization. If a tax is shifted, it cannot be capitalized ; if
a tax is capitalized, it cannot be shifted. A tax on houses, for
instance, as we shall see later, if imposed on the tenant, may pos-
sibly be shifted back to the owner, but cannot be capitalized; a
tax on land, imposed on the tenant, may be capitalized without
being shifted to the present owner. Shifting and capitaliza-
tion are in reality opposite, not complementary, conceptions.
In the case of both shifting and capitalization, however, the
taxpayer escapes the burden of the tax through the mediation
\of the process of exchange. Without the purchase and the
sale of the commodity there can be neither shifting nor cap-
italization. There is, however, a third method of escape pos-
sible, which is based not upon exchange, but upon production.
Let us take, for instance, the case of a tax imposed either
upon a finished commodity or upon the process of producing
the commodity. It is possible, under certain circumstances,
that the producer, fearing the loss of his market if he should
add the tax to the price, will pay the tax and endeavor to
recoup himself by so improving the process of production as
to succeed in turning out his units of product at a lower cost.
In such a case the loss occasioned by the tax may be offset,
or perhaps even more than offset, by the gains resulting from
the economies of production.

What shall we call such a phenomenon .'' The Germans
term it the " thro wing-off " {Abzvdlzmig), while the Italians
call it the "rejection " or the " removal " of the tax.^ All these
terms, however, are ill-chosen, because there is nothing dis.
tinctive in them. If a tax is shifted, it is also thrown off or
removed from the taxpayer. We venture, therefore, to sug-
gest for this phenomenon the term " transformation of taxa-
tion." For by virtue of its operation the loss due to the tax is,

1 The term Abwahung\% found first in von Hock, Die offentlichen Abgahen und
Schulden, 1863, although the phenomenon itself had previously been described
by Rau. Pantaleoni, op. cit., p. 28, calls it rigetto deW itnposla ; Natoli, op. cit.,
p. 22, calls it remozione delP imposta : Tenerelli, /,' Azione delle Impaste Indirette
iui consumi, 1898, p. 67, calls it rimozione deW imposta.



6 Shifting and Incidence of Taxation

or may be, transformed into a gain : the tax is transformed
into its opposite. The attribute of removal or throwing-off
("rejection") of the tax is common to all three methods of
escape — shifting, capitalization, and transformation ; but the
attribute of the conversion of loss into gain is found only in
the case of transformation.

Whether there is any such phenomenon as the transforma-
tion of taxation has sometimes been questioned. The discus-
sion is at least as old as the time of Hume, and has usually
been associated with the query as to whether taxes can act as
a spur to industry. As a broad generalization, the assertion
is indeed open to grave doubt, for taxes on industry must
indubitably be regarded on the whole as a drag or burden on
industry, rather than as a spur to industry. But while it is
doubtless true that under a regime of free competition the
quest for profits will impel the individual to make the best
use of his opportunities, it is none the less a fact that there
have frequently been cases where the attention of the producer
was first directed to the possibility of improving the produc-
tive process by some new burden which started a whole
branch of industry out of its comparative lethargy and caused
it to forsake the old rut. Take, for instance, the familiar ex-
ample of the eighteenth-century Scotch tax on the whiskey
distillery which led to such improvements in the process that
for a time at least the distillers succeeded in transforming the
loss into a gain ; or the case of the European continental tax
on beet sugar in the nineteenth century, the burden of which
admittedly first directed the attention of the producers to the
possibility of reducing the cost of extracting the sugar from
the beets. It may be true that the improvements would prob-
ably have come about of themselves after a time ; but this
does not invalidate the accuracy of the contention that a tax
may be the occasion, even if it be not the cause, of a better-
ment in production. Whenever we find such a phenomenon,
we are in the presence of the transformation of a tax — the
transformation from loss into possible gain.

The literature of finance, however, has thus far failed to



Introduction 7

put the transformation of taxation into its proper place.
Some writers confuse transformation with shifting,^ whereas,
as we are now aware, the two conceptions are entirely distinct.
In the case of shifting, the tax is thrown off the taxpayer
and settles upon the final tax-bearer. The incidence is on
some one else than the original taxpayer. In the case of
transformation, on the contrary, the incidence is on the
original taxpayer. He escapes, not by a shifting of the tax,
but by a transformation of the tax. Transformation depends
upon incidence and is a reaction from the incidence. If there
vis no incidence, there can be no transformation. But if there
is a shifting, there can obviously be no incidence on the original
taxpayer. Transformation and shifting are hence opposites.
Others, again, confuse transformation with evasion of tax-
ation. 2 This phenomenon, however, as will be seen imme-
diately below, is something entirely different. Others finally
seek unduly to extend the sphere of transformation, and in
elude under this phenomenon not only economies through
improvements in production, but also savings through changes
in consumption,^ which, as we shall see, properly come under
a quite distinct head.

^ This is true especially of the Germans. Although von Hock was, as stated
above, the first to speak of Abwdhung, subsequent writers used this as a general
term synonymous with Ueherivalzung. So, e^., Rau, and Prince-Smith in his
essay " Ueber die Abwalzung " in the Vierteljahrschrift fiir Volks-virihsckaft und
Kulturgeschichte, vol. xiii (i866). Held, in his article " Zur Lehre von der Ueber-
walzung der Steuern " in the Zeitschrift fur die gesamte Staats^vissenschaft, 1868,
pp. 489 and 492, first called attention to the fact that transformation is really not
shifting, but he did not designate transformation by the term AhwlihiDig, which,



Online LibraryEdwin Robert Anderson SeligmanThe shifting and incidence of taxation → online text (page 1 of 41)