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An Inquiry Into The Nature And Causes Of The Wealth Of Nations - Chapter 2, Part 2 continue

1. Introduction And Plan Of The Work

2. Book 1, Chapter 1

3. Chapter 2

4. Chapter 3

5. Chapter 4

6. Chapter 5

7. Chapter 6

8. Chapter 7

9. Chapter 8

10. Chapter 8 continue

11. Chapter 9

12. Chapter 10

13. Chapter 10 continue

14. Chapter 11

15. Chapter 11 continue

16. Chapter 11 continue.

17. Chapter 11 continue..

18. Chapter 11 continue...

19. Conclusion of the Chapter 11

20. Book 2 Introduction

21. Chapter 1

22. Chapter II

23. Chapter II continue

24. Chapter II continue

25. Chapter 3

26. Chapter 4

27. Chapter 5

28. Book 3, Chapter 1

29. Chapter 2

30. Chapter 3

31. Chapter 4

32. Book 4, Chapter 1

33. Chapter 1 continue

34. Chapter 2

35. Chapter 3, Part 1

36. Chapter 3, Part 2

37. Chapter 4

38. Chapter 5

39. Chapter 5 continue

40. Chapter 6

41. Chapter 7, Part 1

42. Chapter 7, Part 2

43. Chapter 7, Part 3

44. Chapter 7, Part 3 continue

45. Chapter 8

46. Chapter 9

47. Book 5, Chapter 1, Part 1

48. Chapter 1, Part 2

49. Chapter 1, Part 3

50. Chapter 1, Part 3 continue

51. Chapter 1, Part 3 continue B

52. Chapter 1, Part 4

53. Chapter 2, Part 1

54. Chapter 2, Part 2

55. Chapter 2, Part 2 continue

56. Chapter 2, Part 2 continue B

57. Chapter 2, Part 2 continue C

58. Chapter 2, Part 2 continue D

59. Chapter 3

60. Chapter 3 continue

ARTICLE II.--Taxes upon Profit, or upon the Revenue arising from Stock.

The revenue or profit arising from stock naturally divides itself into
two parts; that which pays the interest, and which belongs to the owner
of the stock; and that surplus part which is over and above what is
necessary for paying the interest.

This latter part of profit is evidently a subject not taxable directly.
It is the compensation, and, in most cases, it is no more than a very
moderate compensation for the risk and trouble of employing the
stock. The employer must have this compensation, otherwise he cannot,
consistently with his own interest, continue the employment. If he was
taxed directly, therefore, in proportion to the whole profit, he would
be obliged either to raise the rate of his profit, or to charge the tax
upon the interest of money; that is, to pay less interest. If he raised
the rate of his profit in proportion to the tax, the whole tax, though
it might be advanced by him, would be finally paid by one or other of
two different sets of people, according to the different ways in which
he might employ the stock of which he had the management. If he employed
it as a farming stock, in the cultivation of land, he could raise the
rate of his profit only by retaining a greater portion, or, what comes
to the same thing, the price of a greater portion, of the produce of the
land; and as this could be done only by a reduction of rent, the final
payment of the tax would fall upon the landlord. If he employed it as a
mercantile or manufacturing stock, he could raise the rate of his profit
only by raising the price of his goods; in which case, the final payment
of the tax would fall altogether upon the consumers of those goods. If
he did not raise the rate of his profit, he would be obliged to charge
the whole tax upon that part of it which was allotted for the interest
of money. He could afford less interest for whatever stock he borrowed,
and the whole weight of the tax would, in this case, fall ultimately
upon the interest of money. So far as he could not relieve himself from
the tax in the one way, he would be obliged to relieve himself in the

The interest of money seems, at first sight, a subject equally capable
of being taxed directly as the rent of land. Like the rent of land,
it is a neat produce, which remains, after completely compensating the
whole risk and trouble of employing the stock. As a tax upon the rent of
land cannot raise rents, because the neat produce which remains, after
replacing the stock of the farmer, together with his reasonable profit,
cannot be greater after the tax than before it, so, for the same reason,
a tax upon the interest of money could not raise the rate of interest;
the quantity of stock or money in the country, like the quantity of
land, being supposed to remain the same after the tax as before it.
The ordinary rate of profit, it has been shewn, in the first book,
is everywhere regulated by the quantity of stock to be employed, in
proportion to the quantity of the employment, or of the business which
must be done by it. But the quantity of the employment, or of the
business to be done by stock, could neither be increased nor diminished
by any tax upon the interest of money. If the quantity of the stock to
be employed, therefore, was neither increased nor diminished by it,
the ordinary rate of profit would necessarily remain the same. But the
portion of this profit, necessary for compensating the risk and trouble
of the employer, would likewise remain the same; that risk and trouble
being in no respect altered. The residue, therefore, that portion which
belongs to the owner of the stock, and which pays the interest of money,
would necessarily remain the same too. At first sight, therefore, the
interest of money seems to be a subject as fit to be taxed directly as
the rent of land.

There are, however, two different circumstances, which render the
interest of money a much less proper subject of direct taxation than the
rent of land.

First, the quantity and value of the land which any man possesses, can
never be a secret, and can always be ascertained with great exactness.
But the whole amount of the capital stock which he possesses is almost
always a secret, and can scarce ever be ascertained with tolerable
exactness. It is liable, besides, to almost continual variations. A year
seldom passes away, frequently not a month, sometimes scarce a single
day, in which it does not rise or fall more or less. An inquisition into
every man's private circumstances, and an inquisition which, in order
to accommodate the tax to them, watched over all the fluctuations of his
fortune, would be a source of such continual and endless vexation as no
person could support.

Secondly, land is a subject which cannot be removed; whereas stock
easily may. The proprietor of land is necessarily a citizen of the
particular country in which his estate lies. The proprietor of stock is
properly a citizen of the world, and is not necessarily attached to any
particular country. He would be apt to abandon the country in which he
was exposed to a vexatious inquisition, in order to be assessed to a
burdensome tax; and would remove his stock to some other country, where
he could either carry on his business, or enjoy his fortune more at his
ease. By removing his stock, he would put an end to all the industry
which it had maintained in the country which he left. Stock cultivates
land; stock employs labour. A tax which tended to drive away stock from
any particular country, would so far tend to dry up every source of
revenue, both to the sovereign and to the society. Not only the
profits of stock, but the rent of land, and the wages of labour, would
necessarily be more or less diminished by its removal.

The nations, accordingly, who have attempted to tax the revenue arising
from stock, instead of any severe inquisition of this kind, have been
obliged to content themselves with some very loose, and, therefore, more
or less arbitrary estimation. The extreme inequality and uncertainty of
a tax assessed in this manner, can be compensated only by its extreme
moderation; in consequence of which, every man finds himself rated
so very much below his real revenue, that he gives himself little
disturbance though his neighbour should be rated somewhat lower.

By what is called the land tax in England, it was intended that the
stock should be taxed in the same proportion as land. When the tax upon
land was at four shillings in the pound, or at one-fifth of the supposed
rent, it was intended that stock should be taxed at one-fifth of the
supposed interest. When the present annual land tax was first imposed,
the legal rate of interest was six per cent. Every hundred pounds stock,
accordingly, was supposed to be taxed at twenty-four shillings, the
fifth part of six pounds. Since the legal rate of interest has been
reduced to five per cent. every hundred pounds stock is supposed to be
taxed at twenty shillings only. The sum to be raised, by what is called
the land tax, was divided between the country and the principal towns.
The greater part of it was laid upon the country; and of what was laid
upon the towns, the greater part was assessed upon the houses. What
remained to be assessed upon the stock or trade of the towns (for the
stock upon the land was not meant to be taxed) was very much below the
real value of that stock or trade. Whatever inequalities, therefore,
there might be in the original assessment, gave little disturbance.
Every parish and district still continues to be rated for its land, its
houses, and its stock, according to the original assessment; and the
almost universal prosperity of the country, which, in most places, has
raised very much the value of all these, has rendered those inequalities
of still less importance now. The rate, too, upon each district,
continuing always the same, the uncertainty of this tax, so far as it
might he assessed upon the stock of any individual, has been very much
diminished, as well as rendered of much less consequence. If the greater
part of the lands of England are not rated to the land tax at half their
actual value, the greater part of the stock of England is, perhaps,
scarce rated at the fiftieth part of its actual value. In some towns,
the whole land tax is assessed upon houses; as in Westminster, where
stock and trade are free. It is otherwise in London.

In all countries, a severe inquisition into the circumstances of private
persons has been carefully avoided.

At Hamburg, {Memoires concernant les Droits, tom. i, p.74} every
inhabitant is obliged to pay to the state one fourth per cent. of all
that he possesses; and as the wealth of the people of Hamburg consists
principally in stock, this tax maybe considered as a tax upon stock.
Every man assesses himself, and, in the presence of the magistrate,
puts annually into the public coffer a certain sum of money, which he
declares upon oath, to be one fourth per cent. of all that he possesses,
but without declaring what it amounts to, or being liable to any
examination upon that subject. This tax is generally supposed to be paid
with great fidelity. In a small republic, where the people have entire
confidence in their magistrates, are convinced of the necessity of the
tax for the support of the state, and believe that it will be faithfully
applied to that purpose, such conscientious and voluntary payment may
sometimes be expected. It is not peculiar to the people of Hamburg.

The canton of Underwald, in Switzerland, is frequently ravaged by storms
and inundations, and it is thereby exposed to extraordinary expenses.
Upon such occasions the people assemble, and every one is said to
declare with the greatest frankness what he is worth, in order to
be taxed accordingly. At Zurich, the law orders, that in cases of
necessity, every one should be taxed in proportion to his revenue;
the amount of which he is obliged to declare upon oath. They have no
suspicion, it is said, that any of their fellow citizens will deceive
them. At Basil, the principal revenue of the state arises from a small
custom upon goods exported. All the citizens make oath, that they will
pay every three months all the taxes imposed by law. All merchants, and
even all inn-keepers, are trusted with keeping themselves the account
of the goods which they sell, either within or without the territory. At
the end of every three months, they send this account to the treasurer,
with the amount of the tax computed at the bottom of it. It is not
suspected that the revenue suffers by this confidence. {Memoires
concernant les Droits, tom. i p. 163, 167,171.}

To oblige every citizen to declare publicly upon oath, the amount of
his fortune, must not, it seems, in those Swiss cantons, be reckoned
a hardship. At Hamburg it would be reckoned the greatest. Merchants
engaged in the hazardous projects of trade, all tremble at the thoughts
of being obliged, at all times, to expose the real state of their
circumstances. The ruin of their credit, and the miscarriage of their
projects, they foresee, would too often be the consequence. A sober and
parsimonious people, who are strangers to all such projects, do not feel
that they have occasion for any such concealment.

In Holland, soon after the exaltation of the late prince of Orange to
the stadtholdership, a tax of two per cent. or the fiftieth penny, as it
was called, was imposed upon the whole substance of every citizen. Every
citizen assesed himself, and paid his tax, in the same manner as at
Hamburg, and it was in general supposed to have been paid with great
fidelity. The people had at that time the greatest affection for
their new government, which they had just established by a general
insurrection. The tax was to be paid but once, in order to relieve
the state in a particular exigency. It was, indeed, too heavy to be
permanent. In a country where the market rate of interest seldom exceeds
three per cent., a tax of two per cent. amounts to thirteen shillings
and four pence in the pound, upon the highest neat revenue which is
commonly drawn from stock. It is a tax which very few people could pay,
without encroaching more or less upon their capitals. In a particular
exigency, the people may, from great public zeal, make a great effort,
and give up even a part of their capital, in order to relieve the
state. But it is impossible that they should continue to do so for any
considerable time; and if they did, the tax would soon ruin them so
completely, as to render them altogether incapable of supporting the

The tax upon stock, imposed by the land tax bill in England, though it
is proportioned to the capital, is not intended to diminish or, take
away any part of that capital. It is meant only to be a tax upon the
interest of money, proportioned to that upon the rent of land; so that
when the latter is at four shillings in the pound, the former may be at
four shillings in the pound too. The tax at Hamburg, and the still more
moderate taxes of Underwald and Zurich, are meant, in the same manner,
to be taxes, not upon the capital, but upon the interest or neat revenue
of stock. That of Holland was meant to be a tax upon the capital.

Taxes upon the Profit of particular Employments.

In some countries, extraordinary taxes are imposed upon the profits
of stock; sometimes when employed in particular branches of trade, and
sometimes when employed in agriculture.

Of the former kind, are in England, the tax upon hawkers and pedlars,
that upon hackney-coaches and chairs, and that which the keepers of
ale-houses pay for a licence to retail ale and spiritous liquors. During
the late war, another tax of the same kind was proposed upon shops. The
war having been undertaken, it was said, in defence of the trade of the
country, the merchants, who were to profit by it, ought to contribute
towards the support of it.

A tax, however, upon the profits of stock employed in any particular
branch of trade, can never fall finally upon the dealers (who must
in all ordinary cases have their reasonable profit, and, where the
competition is free, can seldom have more than that profit), but always
upon the consumers, who must be obliged to pay in the price of the goods
the tax which the dealer advances; and generally with some overcharge.

A tax of this kind, when it is proportioned to the trade of the dealer,
is finally paid by the consumer, and occasions no oppression to the
dealer. When it is not so proportioned, but is the same upon all
dealers, though in this case, too, it is finally paid by the consumer,
yet it favours the great, and occasions some oppression to the small
dealer. The tax of five shillings a-week upon every hackney coach, and
that of ten shillings a-year upon every hackney chair, so far as it is
advanced by the different keepers of such coaches and chairs, is exactly
enough proportioned to the extent of their respective dealings. It
neither favours the great, nor oppresses the smaller dealer. The tax of
twenty shillings a-year for a licence to sell ale; of forty shillings
for a licence to sell spiritous liquors; and of forty shillings more
for a licence to sell wine, being the same upon all retailers, must
necessarily give some advantage to the great, and occasion some
oppression to the small dealers. The former must find it more easy
to get back the tax in the price of their goods than the latter.
The moderation of the tax, however, renders this inequality of less
importance; and it may to many people appear not improper to give some
discouragement to the multiplication of little ale-houses. The tax upon
shops, it was intended, should be the same upon all shops. It could not
well have been otherwise. It would have been impossible to proportion,
with tolerable exactness, the tax upon a shop to the extent of the
trade carried on in it, without such an inquisition as would have
been altogether insupportable in a free country. If the tax had been
considerable, it would have oppressed the small, and forced almost the
whole retail trade into the hands of the great dealers. The competition
of the former being taken away, the latter would have enjoyed a monopoly
of the trade; and, like all other monopolists, would soon have combined
to raise their profits much beyond what was necessary for the payment
of the tax. The final payment, instead of falling upon the shop-keeper,
would have fallen upon the consumer, with a considerable overcharge to
the profit of the shop-keeper. For these reasons, the project of a tax
upon shops was laid aside, and in the room of it was substituted the
subsidy, 1759.

What in France is called the personal taille, is perhaps, the most
important tax upon the profits of stock employed in agriculture, that is
levied in any part of Europe.

In the disorderly state of Europe, during the prevalence of the feudal
government, the sovereign was obliged to content himself with taxing
those who were too weak to refuse to pay taxes. The great lords, though
willing to assist him upon particular emergencies, refused to subject
themselves to any constant tax, and he was not strong enough to force
them. The occupiers of land all over Europe were, the greater part of
them, originally bond-men. Through the greater part of Europe, they
were gradually emancipated. Some of them acquired the property of landed
estates, which they held by some base or ignoble tenure, sometimes under
the king, and sometimes under some other great lord, like the ancient
copy-holders of England. Others, without acquiring the property,
obtained leases for terms of years, of the lands which they occupied
under their lord, and thus became less dependent upon him. The great
lords seem to have beheld the degree of prosperity and independency,
which this inferior order of men had thus come to enjoy, with a
malignant and contemptuous indignation, and willingly consented that the
sovereign should tax them. In some countries, this tax was confined to
the lands which were held in property by an ignoble tenure; and, in this
case, the taille was said to be real. The land tax established by the
late king of Sardinia, and the taille in the provinces of Languedoc,
Provence, Dauphine, and Britanny; in the generality of Montauban, and in
the elections of Agen and Condom, as well as in some other districts of
France; are taxes upon lands held in property by an ignoble tenure. In
other countries, the tax was laid upon the supposed profits of all those
who held, in farm or lease, lands belonging to other people, whatever
might be the tenure by which the proprietor held them; and in this
case, the taille was said to be personal. In the greater part of those
provinces of France, which are called the countries of elections, the
taille is of this kind. The real taille, as it is imposed only upon a
part of the lands of the country, is necessarily an unequal, but it is
not always an arbitrary tax, though it is so upon some occasions. The
personal taille, as it is intended to be proportioned to the profits of
a certain class of people, which can only be guessed at, is necessarily
both arbitrary and unequal.

In France, the personal taille at present (1775) annually imposed upon
the twenty generalities, called the countries of elections, amounts to
40,107,239 livres, 16 sous. {Memoires concernant les Droits, etc tom.
ii, p.17.} the proportion in which this sum is assessed upon those
different provinces, varies from year to year, according to the reports
which are made to the king's council concerning the goodness or badness
of the crops, as well as other circumstances, which may either increase
or diminish their respective abilities to pay. Each generality is
divided into a certain number of elections; and the proportion in
which the sum imposed upon the whole generality is divided among those
different elections, varies likewise from year to year, according to the
reports made to the council concerning their respective abilities. It
seems impossible, that the council, with the best intentions, can ever
proportion, with tolerable exactness, either of these two assessments
to the real abilities of the province or district upon which they are
respectively laid. Ignorance and misinformation must always, more or
less, mislead the most upright council. The proportion which each parish
ought to support of what is assessed upon the whole election, and that
which each individual ought to support of what is assessed upon his
particular parish, are both in the same manner varied from year to year,
according as circumstances are supposed to require. These circumstances
are judged of, in the one case, by the officers of the election, in the
other, by those of the parish; and both the one and the other are, more
or less, under the direction and influence of the intendant. Not only
ignorance and misinformation, but friendship, party animosity, and
private resentment, are said frequently to mislead such assessors. No
man subject to such a tax, it is evident, can ever be certain, before he
is assessed, of what he is to pay. He cannot even be certain after he is
assessed. If any person has been taxed who ought to have been exempted,
or if any person has been taxed beyond his proportion, though both
must pay in the mean time, yet if they complain, and make good their
complaints, the whole parish is reimposed next year, in order to
reimburse them. If any of the contributors become bankrupt or insolvent,
the collector is obliged to advance his tax; and the whole parish
is reimposed next year, in order to reimburse the collector. If the
collector himself should become bankrupt, the parish which elects him
must answer for his conduct to the receiver-general of the election.
But, as it might be troublesome for the receiver to prosecute the whole
parish, he takes at his choice five or six of the richest contributors,
and obliges them to make good what had been lost by the insolvency of
the collector. The parish is afterwards reimposed, in order to reimburse
those five or six. Such reimpositions are always over and above the
taille of the particular year in which they are laid on.

When a tax is imposed upon the profits of stock in a particular branch
of trade, the traders are all careful to bring no more goods to market
than what they can sell at a price sufficient to reimburse them from
advancing the tax. Some of them withdraw a part of their stocks from the
trade, and the market is more sparingly supplied than before. The price
of the goods rises, and the final payment of the tax falls upon the
consumer. But when a tax is imposed upon the profits of stock employed
in agriculture, it is not the interest of the farmers to withdraw any
part of their stock from that employment. Each farmer occupies a certain
quantity of land, for which he pays rent. For the proper cultivation of
this land, a certain quantity of stock is necessary; and by withdrawing
any part of this necessary quantity, the farmer is not likely to be more
able to pay either the rent or the tax. In order to pay the tax, it
can never be his interest to diminish the quantity of his produce, nor
consequently to supply the market more sparingly than before. The tax,
therefore, will never enable him to raise the price of his produce,
so as to reimburse himself, by throwing the final payment upon the
consumer. The farmer, however, must have his reasonable profit as well
as every other dealer, otherwise he must give up the trade. After the
imposition of a tax of this kind, he can get this reasonable profit only
by paying less rent to the landlord. The more he is obliged to pay in
the way of tax, the less he can afford to pay in the way of rent. A tax
of this kind, imposed during the currency of a lease, may, no doubt,
distress or ruin the farmer. Upon the renewal of the lease, it must
always fall upon the landlord.

In the countries where the personal taille takes place, the farmer is
commonly assessed in proportion to the stock which he appears to employ
in cultivation. He is, upon this account, frequently afraid to have
a good team of horses or oxen, but endeavours to cultivate with the
meanest and most wretched instruments of husbandry that he can. Such
is his distrust in the justice of his assessors, that he counterfeits
poverty, and wishes to appear scarce able to pay anything, for fear of
being obliged to pay too much. By this miserable policy, he does not,
perhaps, always consult his own interest in the most effectual manner;
and he probably loses more by the diminution of his produce, than
he saves by that of his tax. Though, in consequence of this wretched
cultivation, the market is, no doubt, somewhat worse supplied; yet the
small rise of price which this may occasion, as it is not likely even to
indemnify the farmer for the diminution of his produce, it is still less
likely to enable him to pay more rent to the landlord. The public,
the farmer, the landlord, all suffer more or less by this degraded
cultivation. That the personal taille tends, in many different ways, to
discourage cultivation, and consequently to dry up the principal source
of the wealth of every great country, I have already had occasion to
observe in the third book of this Inquiry.

What are called poll-taxes in the southern provinces of North America,
and the West India islands, annual taxes of so much a-head upon every
negro, are properly taxes upon the profits of a certain species of stock
employed in agriculture. As the planters, are the greater part of them,
both farmers and landlords, the final payment of the tax falls upon them
in their quality of landlords, without any retribution.

Taxes of so much a head upon the bondmen employed in cultivation, seem
anciently to have been common all over Europe. There subsists at present
a tax of this kind in the empire of Russia. It is probably upon this
account that poll-taxes of all kinds have often been represented as
badges of slavery. Every tax, however, is, to the person who pays it, a
badge, not of slavery, but of liberty. It denotes that he is subject to
government, indeed; but that, as he has some property, he cannot himself
be the property of a master. A poll tax upon slaves is altogether
different from a poll-tax upon freemen. The latter is paid by the
persons upon whom it is imposed; the former, by a different set of
persons. The latter is either altogether arbitrary, or altogether
unequal, and, in most cases, is both the one and the other; the former,
though in some respects unequal, different slaves being of different
values, is in no respect arbitrary. Every master, who knows the number
of his own slaves, knows exactly what he has to pay. Those different
taxes, however, being called by the same name, have been considered as
of the same nature.

The taxes which in Holland are imposed upon men and maid servants, are
taxes, not upon stock, but upon expense; and so far resemble the taxes
upon consumable commodities. The tax of a guinea a-head for every
man-servant, which has lately been imposed in Great Britain, is of
the same kind. It falls heaviest upon the middling rank. A man of two
hundred a-year may keep a single man-servant. A man of ten thousand
a-year will not keep fifty. It does not affect the poor.

Taxes upon the profits of stock, in particular employments, can never
affect the interest of money. Nobody will lend his money for less
interest to those who exercise the taxed, than to those who exercise the
untaxed employments. Taxes upon the revenue arising from stock in all
employments, where the government attempts to levy them with any degree
of exactness, will, in many cases, fall upon the interest of money. The
vingtieme, or twentieth penny, in France, is a tax of the same kind with
what is called the land tax in England, and is assessed, in the same
manner, upon the revenue arising upon land, houses, and stock. So far as
it affects stock, it is assessed, though not with great rigour, yet with
much more exactness than that part of the land tax in England which is
imposed upon the same fund. It, in many cases, falls altogether upon
the interest of money. Money is frequently sunk in France, upon what
are called contracts for the constitution of a rent; that is, perpetual
annuities, redeemable at any time by the debtor, upon payment of the sum
originally advanced, but of which this redemption is not exigible by
the creditor except in particular cases. The vingtieme seems not to have
raised the rate of those annuities, though it is exactly levied upon
them all.

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