Henry Carter Adams.

The science of finance : an investigation of public expenditures and public revenues online

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Our conclusion, then, respecting the incidence of taxes
is as follows :

An income tax is a direct tax.

A land tax is a direct or an indirect tax according to the
manner in which it is levied.

A business tax is indirect for all industries and occupa-
tions subject to competitive control, but for industries carried
on as monopolies it is partly direct and partly indirect, the
adjustment varying with the elasticity of demand for the goods
in question.

64. The Industrial Results of Taxes. — Having eliminated


from the discussion the question of tax payment, we are now
prepared to consider the broader question of the manner in
which taxes work. There is nothing peculiar in the influence
of tax payment as such upon the industrial activities of the

(i) General Results Working through Consump-
tion. — Tax payments form an item of expense to the
citizen, and the only way in which they can touch general in-
dustries is through curtailment of demand or encouragement
of supply of those services or commodities furnished by pri-
vate enterprise. Should the payment be a constant amount
from year to year, or a constant proportion of social income,
industries would adjust themselves to established fiscal con-
ditions and would continue without any conscious apprecia-
tion of the government's demand for money. Whether or
not this would be an advantage depends upon the pecuHar
needs of the people ^t the period under consideration. It is
only when some radical reform is made in the tax policy,
either in changing the amount demanded by old taxes or in
levying taxes in some new form, that the influence of tax
payments upon industries becomes apparent.

The nature of this influence has already been referred to
in tracing the incidence of taxes, and is familiar to the student
of economy. It may be illustrated by reference to an ordinary
commercial transaction. Should rents for dwelling-houses
rise or fall from an assumed standard, incomes meanwhile re-
maining stationary, the fact that a higher per cent of ordinary
expenditure takes the form of rental payments would quickly
be reflected in general industrial organization. Forms of con-
sumption previously indulged in would be curtailed, and the
consequent reduction in demand would necessitate reorgani-
zation in the order of industry. Now, a tax is like rent in
this particular, that it is a fixed charge upon a given standard
of comfort. What is spent in the support of the State cannot
be spent in the support of private enterprises, and inasmuch
as the State fixes the amount of its expenditure in an arbi-
trary manner, it follows that the general industries of the
country must content themselves with a development that
can be supported by what is left of the income of the people
after public demands have been satisfied.

In all this there is nothing peculiar. The industrial effect


of any radical modification in the taxing system would be
similar to that sure to follow should a change in fashion, or
the development of a new taste, disturb the established rela-
tion of demand and supply, especially if this change were of
such a sort as to shift demand from one class of producers
to another. The appearance of the bicycle presents an il-
lustration which will make clear the analogy. This machine
provides a new pleasure to a very considerable class in the
community, and has disturbed accustomed expenditures.
Piano-makers, tobacco manufacturers, theatre companies, and
the producers of other analogous pleasures complain that
their business is curtailed on account of the expansion of the
bicycle trade. The industrial disturbance resulting therefrom
is very considerable and must be followed by a readjustment
of investments and occupations. In the same way a modi-
fication of the tax policy by which the income of one class
is relieved at the expense of another class will be followed
by important industrial consequences. Capital will be dis-
charged from the service of those upon whom are imposed
the new demands and pass to the service of those who are
relieved of payment. The transfer of capital implies the trans-
fer of labour, and thus a certain number of employers and
employes will be obliged to learn a new business as a result
BT the changed tax. This leads to a most important con-
clusion. The burden of a new tax, or cSf a modification of an
old one, cannot be measured by tracing the payments which
they occasion ; the true burden is borne by those who must
readjust their business to conform to the new commercial
conditions resulting from the tax. It is similar in kind to
the burden resulting from a new invention, though unfortu-
nately it cannot be subjected to the severe commercial ordeal
by which the desirability of a labour-saving machine, as com-
pared with old methods, may be determined.

The practical lesson to be learned from the above is that
a taxing system to which the industries of the country have
adjusted themselves has logically the right to urge the argu-
ment of presumption. Under ordinary circumstances the fact
that it is in possession of the field should be final against inno-
vation. Nothing can be worse than continuous meddling
with tax laws. The time comes in the life of every nation
when reforms are necessary, but in judging of those reforms


no statesman will fail to weigh the industrial burden imposed
by the necessity of industrial readjustments.

(2) Three Special Cases. — It will be observed that the
above line of reasoning assumes a stationary social income
and an established distribution of income among the several
classes. It assumes also a uniform rate of profit and a con-
stant amount of capital. But these assumptions may not be
correct, and, as matters are observed to work among energetic
peoples, probably will prove to be incorrect. The industrial
public is not devoid of will or of purpose. It is essential, there-
fore, that our analysis take into consideration the conscious
efforts of men to lighten the burden of tax payments. There are
several ways in which the levy of taxes may affect industrial
conditions so as to modify in part the rigour of the foregoing
conclusions. Three of these will be mentioned.

The levy of taxes may result in raising the income of the
purchasing puWic.

The levy of taxes may result in reducing the cost of pro-

The levy of taxes may result in reducing the level of aver-
age profits.

(a) Taxes may Increase Income. — ^The amount of income
which a nation enjoys is very largely a question of motive and
of opportunity. A tax cannot, of course, originate motive,
nor can it create opportunity; for motives lie deep in the
character of the nation, and opportunity depends on physio-
graphic and commercial conditions. A new tax, however,
may incite to greater activity on the part of the people arid
consequently serve as the occasion of an increase in income,
provided it be levied in such a manner as to stimulate indus-
trial enterprise. It must be remembered that a tax is always
levied in the presence of an established standard of living,
and an increased demand on the part of the State presents
to the citizen the alternative of suflfering deprivation of ac-
customed comforts, or of employing greater skill or increased
labour in industry. It is no argument against this clairti
to say that a man mrst always choose between unsatisfied
wants and increased exertion, and that consequently the levy
of a tax makes no chaiige in the conditions under which the
motive to industry presents itself. McCulloch very truly as-
serts that " man is not influenced solely by hope, he is power-


fully operated on by fear. Taxation brings the latter principle
into the field, and to the desire of rising in the world implanted
in the breast of every individual the increase of taxation
superadds the fear of being cast down to a lower station, of
being deprived of conveniences and gratifications which habit
has rendered all but indispensable; and the combined in-
fluence of the two principles produces results that could not
be produced by the unassisted agency of either." *

The fact that a tax levy may energize industrial activity
is no justification of the levy of taxes, nor can a tax on this
account be regarded as in itself a blessing. Activity is only
reasonable when it results in some definite advantage, and
should the State have no need of the money, it would, under
ordinary conditions, be fooHsh to demand it for the sake of
inciting citizens to work harder than they otherwise would

(fc) Taxes may Cheapen Production. — A tax may, in the
second place, result in cheaper methods of production by in-
citing producers to invention and more profitable organiza-
tion. The fund from which the tax is paid is in this case
created by the reduction in the ' cost of manufacture.
It seems of the highest importance to the manager of an
industry to maintain his accustomed sales. With pro-
ducers as with consumers fear is a stronger stimulus
to exertion than hope, and for that reason one is per-
mitted to say that an industrial undertaker will put
forth greater effort to hold a market once gained than to
gain a more extended market. It must also be remembered
that the adoption of new machinery or the introduction of
new methods of production is not infrequently the result of
some unusual occurrence in the conditions under which the
industry is carried on. Notwithstanding commercial com-
petition the sentiment is strong among the business men of
letting well enough alone. It is probable that every manager
of an important industry knows ways by which production
might be cheapened, but hesitates, in the absence of any com-
pelling reason, to undertake the experiment. Especially is
this true of large enterprises where the routine of administra-
tion engages to the full the ordinary energy of the manager.
How frequently does it occur that a strike among labourers,

* McCulloch, Tiixation and the Funding System, p. 10.


by which the orderly procedure of the business is for the
time broken up, is made the occasion for putting new ma-
chinery into use ! In the same way any unusual occurrence
is capable of serving as a stimulus to industrial economy, from
which it follows that a tax may result in raising the plane
of industrial efficiency.

The above reasoning follows the spirit of McCulloch's
argument, differing in it only in that fear is recognised as a
stronger industrial native, during the limited time during
which it acts, than hope. This being the case, it is appro-
priate to quote from McCuUoch the limits under which the
principle should be appHed.

" But we must be on our guard against the abuse of this
doctrine, and must not suppose that because it holds in certain
cases and under certain conditions, it will therefore hold in
all cases and under all conditions. To render an increase of
taxation productive of greater exertion, economy, and inven-
tion, it should be slow and gradual ; and it should never be
carried to such a height as to incapacitate individuals from
meeting the sacrifices it imposes by such additional exertions
and economy as it may be in their power to make without
requiring any very sudden or violent change in their habits.
The increase of taxation should never be so. great as to make
it impracticable to overcome its influence, or to induce the
belief that it is impracticable. Difficulties that are seen to
be surmountable sharpen the inventive powers, and are readily
and vigorously grappled with ; but an apparently insurmount-
able difficulty, or such an increase of taxation as it was
deemed impossible to defray, would not stimulate but destroy
exertion. Whenever taxation becomes so heavy that the
wealth it takes from individuals can no longer be replaced
by fresh efforts, these efforts uniformly cease to be made;
industry is paralyzed, and the country declines. Oppression,
it has been said, either raises men into heroes or sinks them
into slaves ; and taxation, according to its magnitude and the
mode in which it is imposed, either makes men industrious,
enterprising, and wealthy, or indolent, dispirited, and im-
poverished." *

The thought that taxation may serve as an artificial stimu-
lus presents itself in yet another form. It sometimes

* McCuUoch, Taxation and the Funding System, p. II.


happens that nations fall into industrial lethargy, or that cer-
tain classes of workers, through ignorance or hopelessness,
fail to avail themselves of the best industrial methods. Under
such circumstances it may be well to apply the lash of taxa-
tion. The line of reasoning is the same as that followed by
Arthur Young, who advised the landlords of the last century
to raise their rents, believing that no other means remained
to induce tenants to educate themselves in better methods
of agriculture. This is undoubtedly a dangerous doctrine,
because the policy it proposes can with great difficulty be
wisely administered ; but in an analysis of the possible work-
ings of taxation it deserves mention. Taxation brings the
principle of fear into the industrial field. It is not, indeed,
a steady, constant, healthful principle like that of hope, but it
is undoubtedly true that fear of retrogression is stronger as
an industrial motive than hope of progression, and, provided
the policy be wisely administered, the financier may confi-
dently expect that a part at least of the payment demanded
by a new tax will be met by reduction in the accustomed
cost of producing goods, and not out of the economies prac-
tised in the accustomed lines of expenditure.

If taxes properly levied may be the occasion of industrial
progress, it is equally true that unjust and burdensome taxes
are followed by industrial retrogression. History offers many
illustrations of this truth. But it should be noted that the
depressing influence of taxes is for the most part due to
excessive demands and unjust methods, or to the conviction
that the interests of the taxing body are foreign to the in-
terests of the tax-payers. It does not lie in the nature of
;just taxation to depress industries.

(c) Taxes may Reduce the Level of Profit. — ^There is a third
; avenue along which the pressure of taxation may show itself
in the industrial sphere. It may result in reducing the aver-
age rate of profit, and through the influence of this modifica-
tion tend to increase the normal size and possibly the average
efficiency of industries. When considering the incidence of
indirect business taxes it was learned that the average rate
of profit in the community might be reduced through the
curtailment of sales on account of the fact that a tax attaches
itself to the income of customers. This conclusion rests upon
the assumption of an average rate of profit in a community,


and upon the idea that the reflex of a tax which curtails
the amount of income available for the purchase of goods
is uniform upon all producers. This assumption, however,
is not quite correct, for it ignores the personal element in
the problem. Some undertakers are more skilful than others
and are on that account able to secure a higher return with
the same amount of capital. For these a slight reduction in
the rate of profit would not be a serious affair ; but for those
who are conducting their business on the margin of inca-
pacity even a slight decrease in returns would occasion the
abandonment of their business. The incompetent cannot
support the addition of the tax to the cost of production, and
the efifort on the part of the more competent, who enjoy a
differential profit above the average or normal rate, to retain
their customers by paying the tax will drive the relatively
incompetent business managers to the wall. Customers, how-
ever, must be supplied, and it is evident that this supply must
come from an expansion of the business of the more success-
ful undertakers ; so that, in the long-run, they will not suffer
in income by the reduction in the rate of profit. They will
gain in increased sales what they lose in increased cost.

The burden of a tax that works in this manner rests upon
those incompetent producers who were not able to maintain
themselves under the new conditions of competition. This
burden does not express itself in money payments, but in
the fact that certain men who before were independent in-
dustrial factors have lost their independence, and have been
forced into the ranks of labourers in the employment of their
more able rivals. Industrially this is a permanent gain to
society. Financially, also, it commands approval because the
tax has so worked upon industry as to create the fund from
which it is paid ; that is to say, it has resulted in a reduction
of the cost of production not followed by a corresponding
reduction in the market price of goods sold, the difference
going to the State as a tax. The loss, if there be any loss,
shows itself in the disappearance of certain centres of com-
petition. The effect of the tax which impinges on profits
under the conditions described is the same as the effect of
trades-unions when they raise wages at the expense of a rate
of profit. Both the tax and the demand for increase in wages
succeed in taking something from the established rate of


profit, and they do this at the expense 'of the relatively in-
competent undertaker. Both intensify the tendency toward
large industries. Whether or not the result justifies the
means does not here come into controversy.

(3) Taxation and Valuation. — We 'cannot close this
discussion upon the industrial results of taxation without call-
ing attention to the effect of taxes on the value of income-
bearing property that may be bought or sold. Land is such
a property, as also stocks of an industrial corporation, or
the franchise upon which a corporation operates. In all these
cases the commercial value of the property is equal to the
capitalization of the accepted income at the assumed rate of
interest. Land, for example, which pays a rental of two dol-
lars per acre is worth twenty dollars per acre if interest is
ten per cent. Now, it is evident if the value of property
is equal to the capitalization of the income arising from
it, that any reduction of the income will tend to reduce the
value of property by an amount equal to the capitalization of
the reduction. The purchaser of such property recognises
that it is imposed with a permanent charge, and, in calculating
what he can give, will capitalize only that portion of the
amount left to him after the charge is paidv Suppose, for
example, interest being ten per cent, that land worth
twenty dollars per acre without a tax be imposed
with a tax of twenty-five cents per acre; it will then
give to the purchaser a free income of one dollar and
seventy-five cents, and not of two dollars, as would have
been the case before the tax was imposed, and the purchaser
will consequently bid no more than the capitalization of this
amount, or seventeen dollars and fifty cents per acre for the
land. This line of reasoning applies to all income-bearing
property that may be bought and sold, and, taken- in con-
nection with what has been said respecting the influence of
taxes upon profit, leads to a generalization of universal ap-
plication. Inasmuch as taxes are paid out of income, or out
of funds which independently of a tax would be counted an
income, it follows that industrially they will affect either a
reduction in the market price of the income-bearing property
or a reduction in the rate of profit or interest. It thus be-
comes evident that the financier is obliged, in tracing the
industrial results of a tax, to consider its influence upon com-


mercial values as well as upon the demand for commercial

The fact that a tax may be capitalized and reflected in
values has been made the basis of that strange theory of in-
cidence known as the capitalization or amortization of taxes.*
According to this idea he pays the tax who owns the property
in question at the time the tax is imposed. To revert to
the illustration given above, the tax of twenty-five cents per
acre on land, which reduced the value of land from twenty
dollars to seventeen dollars and fifty cents per acre, was paid
in lump by the original proprietor of the soil at the time the
tax was imposed; that is to say, the tax of twenty-five cents
per acre was capitalized at two dollars and'fifty cents, and to
this extent the government became a joint owner in the land.
The student will not be misled by this line of reasoning if
he holds in mind the interpretation placed by this treatise
upon the phrase " payment of a tax." It is true that the
purchaser of property under the conditions assumed takes it
subject to the duty of paying the tax. It is also true that he
who owns property at the time a new tax is imposed must
suffer a readjustment, either in its value or in the rate of in-
terest at which its -value is calculated; but the purchaser of
such property is not excused from an annual payment out of
the commercial income which his ownership in such property
brings him. This effect upon values is nothing peculiar.
Any new tax causes a readjustment in the industrial order —
a readjustment which shows itself either in the demand for
goods, by which general industries are brought to conform
their production to the revised domestic budgets ; in the rate
of profit, in which case relatively incompetent undertakers
are forced to the wall ; or in the readjustment of values of in-
come-bearing property. To admit that the capitalization of
a rent charge demanded by the State in the form of a tax
frees subsequent purchasers from a tax imposed on land
values would be equivalent to the admission of all that is
claimed by the advocates of the single land tax. The com-
mercial workings of a tax must not be confounded with the
annual payment of a tax..

65. Relation of Taxation to Occupation and Invest-
ment. — It may be accepted as a general principle that men
• Seligman, On the Shifting and Incidence of Taxation, p. sa.


choose the occupation offering the greatest return for the least
effort. All things being taken into the consideration, it fol-
lows from this that a system of taxation so far as it is capable
of shaping the industrial structure does so by opposing ob-
stacles to success in certain occupations, or by offering un-
usual encouragement in others. To understand how a tax
may become a condition in the choice of investment or of
occupation the thought that commodities are competitors
for the expenditure of the free social income, and that the
relative price at which they may be offered is important as an
element of success in this competition, must be fully appre-
ciated. In case the tax adds to the current price of one
article and not to that of another the public will demand
somewhat less of the taxed article and somewhat more of
the article untaxed. This is inevitable if the articles in ques-
tion are interchangeable in their use, as, for example, gold
and silver, beef and mutton, cotton and woollens; and it is
also true, but in a less marked degree, when goods do not
compete directly for ministry to the same want. To under-
stand, on the other hand, how a tax may encourage the in-
vestment of capital in a chosen industry it is only necessary
to call to mind the protective system of import duties, which
in one form or another has been practised by statesmen
wherever communities or states have recognised the impor-
tance of commerce to political power or to national strength.

With regard to the relation of taxes and occupations it is
sometimes asserted that a just regime of taxation should leave
industries relatively to each other in the same situation as
before the tax was imposed. Could this be done the tax
would have no social results, except such as might arise from
the diversion of a part of the social income to the support of
public administration. The important question is, however,
can this be done ? Is it possible for a system of taxation to
be neutral as between the varying commercial interests ? On
this point there are two opinions.

By some it is urged that all industries should be taxed
in a uniform manner. Universality of taxation and unifor-

Online LibraryHenry Carter AdamsThe science of finance : an investigation of public expenditures and public revenues → online text (page 40 of 56)