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men in all ages. Some of the methods taken to raise money
for current expenses without taxation are sufficiently curious.
Down to quite recent times lotteries have been thus made use of
on both sides of the Atlantic, — the people greedily buying a
" ticket," each acting in the hope that one of the great prizes
will fall to him. This plan is now justly discredited as lowering
the tone of social morality by giving a legal sanction to gambling,
and fostering thriftless and reckless habits.

Monopolies have been another device of state-craft. The
notion that the state possessed exclusive control of certain trades,
and of various branches of commerce, was general in the middle
a^es. Even where no fee was exacted, it was usual to require a
charter from the king for every trade-guild, and this was after-
ward made a source of revenue to the government. James I.



DIRECT AND INDIRECT TAXES. 193

of England made himself especially odious to the mercantile
classes by granting monopolies of trade in great numbers to his
court favorites, and to those who would pay roundly for them.
This system was in some cases not without its merits as a
promoter of enterprise, apart from its relation to national
revenue. In some cases great undertakings would not have been
begun without the grant of a temporary monopoly like that
given to the East India company, and to the companies that
effected the first Euglish settlements in America. Monopolies
of the tobacco trade exist in France; of salt in British India.
The licenses to auctioneers, pawnbrokers, pedlars, and to those
who sell tea and tobacco given in England, and the licenses
required in most countries to sell spirituous liquors, are some-
thing of the same nature.

The income from the ro} T al demesnes were in early times a
chief source of revenue. But these have been so largely re-
duced by alienation, and are so small in proportion to the revenue
now required, that they play little or no part in national finance.
The sale of public lands once brought a very considerable
revenue to the United States, but through the preemption and
homestead laws this source of revenue is now almost closed.

§ 189. Taxation, direct or indirect, is now the chief source
of revenue. The former is levied either (1) upon the people
according to numbers, or (2) on their property, real and personal,
according to its value, or (3) on articles of luxury in use and
possession, or (4) on the annual income of the people. The
latter is levied on articles produced, usually those that are not
of prime necessity, or on imported goods, usually such as are
luxuries, or can be made at home.

The comparative merits of direct and indirect taxation have
been much disputed. Both forms exist in this country, the
former being that chiefly employed by the state and municipal
governments, while since the repeal of the income tax the
revenues of the United States are mostly derived from indirect
taxes.

§ 190. Indirect taxes are so called because they are not paid
. 13



10-4 SOCIAL SCIENCE AND NATIONAL ECONOMY.

into the treasury by the person who really bears the burden. The
payer adds the amount of the tax to the price of the commodity
taxed, and thus the taxation is concealed under the increased
price of some article of luxury or convenience. The distribution
of such taxation by the payer among his customers is not so
easy a matter as is supposed. English economists, applying
their formula, " all things find their level," have treated this
distribution as a thing of course. But experience shows that the
incidence of taxation is not determined by laws as rigid as those
of hydraulics. A tax is often paid directly and finally by the
person on whom the law imposes it, and makes no change in
prices. Were it otherwise direct taxation would be impossible,
and the rich man, when assessed upon land, luxuries or income,
would pass the burden on to his dependent neighbors.

It is claimed as a merit of indirect taxation that vast sums
may be thus raised without exciting dissatisfaction, or even
attracting attention ; that duties which bring the government
forty or fifty millions cost each consumer but a few cents a week,
and are paid in almost daily instalments. As Theodore Parker —
arguing against this method — puts it: "The people must pay and
not know it; must be deceived a little, or they would not pay
after this fashion." The expediency of the method is all the more
questionable in view of this fact. In a free country, where
public opinion is the force that directs and controls national
policy, it is eminently desirable that the people should feel that
they are taxed, and that every appropriation of the legislature
comes out of their pockets. " A free people ought to know
what they pay for their freedom, and pay it joyfully ; and they
should as truly scorn to be cheated into the support of their
government as into the support of their children. In the next
place, a large revenue is no blessing. ... A revenue rigorously
proportioned to the wants of a people is as much as can safely be
trusted to men in power" (Dr. Channing).

Another objection is that nearly all indirect taxes are burden-
some checks upon societary circulation and the interchange of
services, — not the less really such because their action is not so



DIRECT AND INDIRECT TAXES. 195

easily perceived. The amount of water in the channels of busi-

- may be lowered but a few inches, but that few inches turns
shallow places into shoals, and impedes the whole current. The
poor especially suffer under this system ;. these little assessments
come upon them pretty much in proportion to their numbers,
Dot at all in proportion to their means. It is said that they can
exempt themselves by ceasing to use the commodities taxed,
uone of which are articles of prime necessity. So they would,
perhaps, if they realized how much they were paying in the
course of the year, but the " few cents a week " is taken so
quietly that it is not felt to be the burden that it really is.

It may safely be laid down that indirect taxes should be
assessed only on those articles whose consumption it is desirable to
discourage, and if it be possihle with a view to discourage them,
rather than to revenue. For this reason all internal revenue
duties, — except on spirits, tobacco and the like, — all taxes upon
the capital or dividends of corporations who have not received
a monopoly of their business, should, unless urgently required
for revenue, be wiped from the Statute Book.

Stamp duties are sometimes indirect and sometimes direct.
The stumps put upon mercantile paper, receipts, and the like,
come under the former head, and are objectionable. They re-
semble the alcavala, or tax upon every transfer of property that
did so much to blight the industry of Spain. Taxes imposed in
the same way upon inheritances and wills are not so objectionable,
being direct taxes, but they are assessed upon property that is
likewise subject to income or property taxes. They are not im-
posed in this couutry, although there are taxes upon " collateral
inheritances" in some states; but the stamp taxes on beer-kegs
and on cigar-boxes are instances of direct taxation by means of
stamps.

^ 191. Experience shows that as a rule, lighter taxes of the
indirect sort yield a larger amount of revenue than those that
are heavier. In political arithmetic two and two do not always
make four. Thus Sir Robert Peel and Mr. (Jladstone achieved
their great reputation as financiers partly through their raising a



196 SOCIAL SCIENCE AND NATIONAL ECONOMY.

larger revenue through well-adjusted but lighter taxes. Similar
to this was the immense increase in the post-office reveuue
through the lowering the rates of postage to two cents for half-
ounce letters, and the use of postal cards. In each case the
lowering of the price caused a great increase in the consumption
that more than balanced the loss of revenue on each single
amount. This fact of itself shows how much this method of
taxation interferes with the business of a country and checks
the exchange of services.

In other cases the imposition of a very high excise or im-
portation duty leads to smuggling or illicit manufacture. The
duty covers the risk of discovery and punishment, and those
who have been engaged in the manufacture or the importation
excuse themselves for defrauding the revenue by the plea that
the government is oppressing their business and waging war
upon it. In general the tone of social morality is not so high
as to prevent this plea from having some weight in the public
opinion of the country, and the detection and punishment of
the offender become difficult and expensive. Thus, under the
regime of high excise duties imposed 186-4-7, whiskey sold in
open market for a less price per gallon than the amount of
the tax per gallon upon its manufacture. In this way the
business passed for a time into the hands of illicit distillers, and
all others were obliged to stop.

§ 192. Direct taxation is paid by the person who really and
finally bears the burden. In most cases it is to a certain extent
indirect also. Thus a heavy tax on real estate will raise rents,
and a heavy tax on incomes will affect salaries. But neither the
house-owner nor those who receive salaries are able to add to
their receipts in anything like the same measure.

Of the three forms of direct taxation — capitation tax, property
tax and income tax, — the first is the most objectionable, if em-
ployed to raise a large part of the revenue. A small capitation
tax upon every citizen is not an unfair way of reminding the
voter that the government is carried on at the expense of the
people. But a heavy tax of this sort — much resorted to in



PROPERTY AND INCOME TAXES. 197

earlier times — has all the disadvantages of indirect taxation ex-
cept its popularity.

Property taxes are assessed either upon all forms of property,
real and personal, in proportion to its value, or upon articles of
luxury included among personal property ; or upon real estate
aione. The first is the method practised in the state of New
York; the last is that in use in Pennsylvania, and is now gener-
ally thought the wiser one. So much of personal property is
now held in the form of bonds, mortgages, &c, that can be sent
out of the state as the day for making returns comes round, that
the evasion of a law taxing this sort of property is very easy.
But real estate cannot be hidden, and a tax upon it reaches all
classes, though not equally. It raises house-rent, &c. As
assessments upon real estate must be made by public officers, the
collection of the tax is expensive and it is liable to great abuses
through favoritism.

§ 193. The most modern and theoretically the fairest form of
taxation is the income tax. It seems to make every one con-
tribute to the wants of the state in proportion to the revenue
which he enjoys under its protection ; while, " by falling equally
on all, it occasions no change in the distribution of capital or in
the material direction of industry, and has no influence on
prices" (McCulloch). No other is so cheaply assessed and col-
lected ; no other brings home to the people so forcibly the fact
that it is their interest to insist on a wise economy of the national
revenue.

The first English income tax was imposed by Pitt 179S-1802,
and renewed 1803-1815. In the middle ages the feudal
tenure upon military service saved large expenses for the national
defence, and most of the domestic affairs of the kingdom were
administered by local authorities. The income of the royal
demesnes was supplemented by customary feudal fines and pay-
ments, and by a capitation or poll tax. At the outbreak of the
Civil war the first excise taxes were imposed, but with the pledge
that they would be abolished at the return of peace. The first
Parliament after the Restoration was controlled by the landed



198 SOCIAL SCIENCE AND NATIONAL ECONOMY.

interest ; it abolished all duties on the land, whether of service
or payment, and confirmed to the landowner all rights without
duties. The feudal system came to an end at once. From this
time excises and customs were multiplied by parliaments made
up of landlords. At the Revolution the Whigs came to power,
and the country gentlemen found themselves in a minority, but
still strong enough to prevent the imposition of any but the
most trifling taxes on land. The rate of these taxes was after-
wards through their influence made permanent and the prin-
cipal commutable at the pleasure of the landowner, and Mr.
Pitt was defeated in his attempts to again make the land con-
tribute its fair share. His income tax was a compromise that
assessed the landlord's permanent revenue and the trader's pre-
carious profits equally. At present the whole land-tax of Eng-
land is about one-fiftieth of the revenue, while landed property
constitutes a very large part of the whole wealth of the nation.

By 1840 the indirect system had attained the perfection
humorously described by Sidney Smith : " Taxes upon every
article which enters into the mouth, or covers the back, or is
placed under the foot, — taxes upon everything which is pleasant
to see, hear, feel, smell or taste, — taxes upon warmth, light and
locomotion, — taxes on everything on the earth and the waters
under the earth, — taxes on everything that comes from abroad
or is grown at home, — taxes on the raw material, — taxes on
every fresh value that is added to it by the industry of man, —
taxes on the sauce that pampers the rich man's appetite, and
the drug that restores him to health, — on the ermine which
decorates the judge, and the rope which hangs the criminal, —
on the poor man's salt and the rich man's spice, — on the brass
nails of the coffin, and the ribands of the bride, — at bed or
board, couchant and levant, we must pay. The schoolboy whips
his taxed top, — the beardless youth manages his taxed horse
with a taxed bridle, on a taxed road ; and the dying English-
man, pouring his medicine which has paid 7 per cent, into a
spoon that has paid 15 per cent., flings himself back upon his
chintz bed which has paid 22 per cent., and expires in the arms



peel's income tax laws. 199

of an apothecary who has paid a license of a hundred pounds
for the privilege of putting him to death. His whole property-
is then immediately taxed from two to ten per cent. Besides
the probate, large fees are demanded for burying him in the
chancel ) his virtues are handed down to posterity on taxed
marble ; and he is then gathered to his fathers to be taxed no
more."

§ 194. Sir Robert Peel imposed the new income tax in 1842,
in a time of general distress, after a series of great deficits in
the annual budget. It brought in so much revenue that he and
his successors in the treasury were able to relieve the mass of
the people from the burden of some indirect taxes and to lower
others. This last step, it was found, still farther increased the
revenue, and these reductions became a settled policy in British
Finance. But the. whole British system, the income tax ex-
cepted, must still be classed among the measures of bad policy by
which the inequalities of condition are preserved and fostered.
Seven-eighths of the revenue is still raised by indirect taxation,
and the proposal to raise it all by the same means was made by
Mr. Gladstone at the last election (1874), but shared in his
general defeat. The revenue is raised by duties upon a few
articles in general use, such as sugar, tea, coffee, spirits and
wine; while articles of expensive luxury, laces, satins and
velvets, have been exempted. Cobden, Bright and some others
advocate the removal of most, if not all, the existing duties and
excises, and ask that the workingman's breakfast table be free
from all taxation.

§ 195. The objections to the income tax, however, are very
strong. (1) That it is inquisitorial. It demands of the citizen
a statement of his affairs for each current year, and this he must
make to commissioners who are his neighbors, and perhaps his
rivals in trade. This objection is hardly a sufficient one in case
the tax returns are not published. If they are, there can be no
doubt that it is a hardship for a tradesman to be obliged to in-
form the public that he has had rather a bad year of it, and
has hardly been able to make both ends meet. In many cases



200 SOCIAL SCIENCE AND NATIONAL ECONOMY.

it is well known that persons reported and paid taxes upon a
much larger income than they actually received, purchasing
thus a reputation for wealth and prosperity.

(2) Reports are more commonly dishonest in the other direction.
To escape taxation, incomes are returned as much less than the
fact. This has been frequently the case in England, where no
publication of returns is made. Income from land and houses
is indeed very easily ascertained, but that from trade and pro-
fessions must be taken on the faith of the citizen. Certain
London shopkeepers, whose stores were removed to make way
for a city railroad, made claim for compensation on the basis of
annual profits, aggregating five times as much as they had put
on their tax-papers, and a jury cut down the estimate only to
three times as much.

(3) The equal assessment upon all sorts of income is claimed to
be unfair. The lump value of two incomes of $5000 — one per-
manent as derived from real estate, and the other precarious as
depending upon the profits of a trade — is very different; but the
law taxes both equally. This may be obviated by careful legis-
lation.

The great problem to devise an income-tax law that shall en-
force honest returns without resorting to wholesale publicity, and
shall duly discriminate between different forms of income, has
not yet been solved. Till such a law is obtained, the least
objectionable form of taxation must be that assessed on per-
sonal and real estate. To make direct taxation on personal
estate effective, it should be levied on stocks through the
company in which they are held, and deducted by the com-
pany from the amount of the dividends. To assess it on divi-
dends merely would be a mistake. Many companies are so situ-
ated that they do not care to declare dividends, though they
earn them. They go on year after year turning their net profits
into principal invested, and the proprietors live on income from
other sources.

No income tax will probably be again imposed in the United
Statos for many years. But if the industry of the country



THE COLLECTION OF TAXES. 201

should ever reach such a height of development as to enable her
to furnish herself with the most of what she now imports from
Europe, the revenue from customs will then be inadequate to the
needs of the government. New revenue from some other source
will take its place. If an income tax should be again adopted,
one of the most important questions in regard to it will be
whether all incomes, whatever their amount, should pay the
same percentage. The law that Pitt devised, and all others iu
England down to 1861, made a discrimination between large and
small incomes, and taxed the former more heavily. Since that
year all incomes not exempted have been taxed equally, and the
United States law was severely censured by some British writers
for exacting a " progressive rate " of 5, 7£ and 10 per cent, for
different incomes. Now taxation should be proportioned either to
income or to ability to bear it. If the former, then the English
law is unjust in exempting incomes below £100 ; if the latter,
the American law and the earlier English laws were not unjust
in making a discrimination among taxed incomes. It would be
unjust to make the discrimination excessive, and tax all incomes
above a certain sum — 50, 75 or 100 per cent. — as some wild
theorists in France proposed. But the want of some discrimi-
nation must be reckoned among those defects of English legis-
lation that have tended to perpetuate and increase the vast dis-
crepancies in English wealth.

The practical objections to this form of taxation make a tax
on land far less objectionable, especially in a country whose
resources are imperfectly developed and its wealth unevenly
distributed.

§ 196. Among the important points in the economy of taxa-
tion are (1) cheap collection ; (2) popular certainty as to amount
and time. Both these and every other wise principle were set
at nought by the system of farming the revenue adopted under
the Roman empire and in France before the Revolution, and
still perpetuated in some Mohammedan countries. The taxes
were sold at public auction to a class of persons who remuner-
ated themselves by wringing the utmost farthing out of the poor.



202 SOCIAL SCIENCE AND NATIONAL ECONOMY.

The popular hatred and detestation of the publican class, dis-
closed to us in the Gospels, related to this custom, and was well
deserved and universal throughout the empire. Jewish tradi-
tion records but one honest publican

The second principle is also violated by unforeseen changes in
the revenue system of a country that employs indirect taxation.
Business men lose very much by every new piece of tinkering
expended upon the tariff. They must, therefore, on the prin-
ciple of insuring themselves, put a larger profit upon all com-
modities, so that the lack of a wise and steadfast national
policy inflicts a tax upon the people that brings no return to the
treasury.

§ 197. Ordinarily the taxation of a year should at least pay
the national expenditure of the year. A nation that does not
"make both ends meet" in times of peace and of no extraordi-
nary calamity, cannot be regarded as wisely governed. But
times that call for a vast extraordinary outlay of national wealth
are incident to the history of every' nation. In periods of great
wars, for instance, the government must raise sums of money
that far exceed those that it ordinarily raises by taxation, and
national debts are incurred, to be gradually paid off on the return
of peace. These debts are of no modern invention, but the
fashion of paying them came in about the close of the seven-
teenth century. The power of one generation of a nation thus
to bind not only itself but subsequent generations is now an
accepted principle.

Are war debts really necessary ? Perhaps not ; any prosperous
and free people that unanimously undertake a just war, and are
not already encumbered by previous debts, could, by vigorous
exertion, pay their way as they go. Prussia avoids war-debts •
the wars of Frederick the Great left the country greatly de-
pressed and exhausted, but without a dollar of indebtedness.
The Hohenzollerns, it has been said, brought good business
abilities with them from Nuremberg. England's great war with
the first French Empire left the country the burden of
£600,000,000 of debt. Had she begun the war with a clear



WAR DEBTS NOT NECESSARY. 203

financial record, and assessed every year the same amount of the
total taxation raised during its continuance, she would have
come out of it with a surplus in the treasury. Could the taxa-
tion have been raised one-third higher than it actually was
during our recent civil war, and kept at that from first to last for
five years, the country would have come out of the struggle with
no indebtedness. This is the policy that all great writers on
finance, — Hume, Adam Smith, Ricardo, McCulloch, &c, —
recommend. For political reasons, good or bad, it is never
adopted. It is feared that a great increase of the immediate
public burdens will strengthen the peace-party and weaken the
government. It is thought that the people are not at first aware
of the magnitude of the sacrifices required of them, and heavy
taxes are not imposed till the war is coming near a close. For
these and the like reasons the nation conies into the money
market as a borrower. Thus, it is thought, the burden will be
so distributed as to be imperceptible and lightly borne. But all
such attempts at distribution add to its real weight and to the
injury it inflicts.

§ 198. Governments generally borrow at a great disadvantage
when great capitalists control the money market. The public
credit is at the lowest point in war times, and no patriotism
holds men back from takinsr advantage of this. In former times
this was remedied in a vigorous way; Colbert cut down the
capital of the public debt to the amount actually furnished by
each lender, and treated the surplus as an illegal because usurious
exaction. By this partial repudiation he brought up the public



Online LibraryRobert Ellis ThompsonSocial science and national economy → online text (page 18 of 38)