The Principles Of Taxation.
Definition And Classification Of Taxation.
THE subject of the present book is undoubtedly the
central part of modern Finance. Its importance has led
English and American writers to treat it as almost the sole
topic for discussion. Though this is not true either of
England or the United States, and is still more erroneous
when other countries are taken into account, yet the
existence of such a view proves the preponderating in-
fluence of taxation in the modern financial organization.
Another reason for the great prominence of this source of
state revenue is perhaps its close connexion with Eco-
nomics. State expenditure may be looked on as a question
of public policy to be decided by the practical judgment of
' that crafty and insidious animal vulgarly called a states-
man or politician'; the quasi-private receipts may be
treated as almost a part of private economy, but taxation
raises a series of fundamental questions which involve re-
fined ethical and economic considerations. The effect of
any given tax system is a strictly economic question re-
quiring for its solution frequent reference to the conditions
both of production and of distribution. What ought to be
the system adopted in each special case must be decided
by reference to both moral and economic conditions. As-
suming that the partition of the burden should be a 'just'
one, we must estimate its true weight and the share really
borne by each citizen before we can come to a conclusion
for or against any proposed arrangement.
The necessity of constantly appealing to the theorems of
economists has made the study of taxation almost a part
of applied political economy ; but, notwithstanding that this
is the favourite English method of treatment, it is far better
to discuss it as a part of the wider subject of Public Finance,
since its origin and growth are in this way better under-
stood, and the unquestionably close relation between the
several departments of Public Finance, can only thus receive
2. At the commencement of our examination questions
of definition and classification present themselves in em-
barrassing number. Administrative practice andveconomic
theory are both in part responsible for this difficulty.
Terms, apparently of the utmost simplicity, have been and
are used with a variety of meaning that is all the more
confusing because of the strong points of connexion between
the different uses.
Discussions as to the meaning of terms are, it need not
be said, hardly ever purely verbal : they in almost every
case turn on different conceptions of facts, or different
modes of grouping the objects under notice. The literature
of Finance, especially in Germany, is rich in examples,
and some of the best known doctrines derive a great deal
of their authority from some particular application of an
ambiguous word. To clear up our terminology, or at least
to explain the use of the terms we employ, is an indispens-
able step in the investigation.
3. First of all we have to settle the meaning of the
word * Tax.' This term, so clear and simple to the ordinary
citizen, has been very variously defined, sometimes at
astonishing length, and often with the, it may be un-
conscious, design of aiding a particular theory as to the
character of the facts denoted by it. The following defi-
nition is, we believe, correct and quite in accordance with
the realities of Finance and Politics: it has the further
advantage of not implying unfairly any special view respect-
ing the nature or justice of taxation.
f A tax is a compulsory contribution of the ivealth of a u\
\terson or body of persons for the service of the public powers.
Each term in this definition is significant, and helps to
explain the object defined. First, a tax is ' compulsory.'
This does not mean that all tax revenue is paid unwillingly,
but merely that the will of the payer is legally immaterial.
The amount, the mode and time of levying, the persons
affected are all determined by the sovereign or its delegate,
and individual preferences or dislikes are allowed no place
in the act. It thus appears that so-called voluntary taxation
is not true taxation, which is plainly the fact ; for in the
rare cases in which it has been tried, society is either in the
pre-political stage where the public economy exists only in
a rudimentary form, or the system is one of self-assessment
supported by the social rather than the legal sanction.
Gifts may indeed be made by individuals to the State, a
circumstance not without importance in the history of
Finance, but they are at present so few as hardly to need
Next, a tax is a ' contribution,' that is to say it involves
a sacrifice on the part of the contributor. It is quite
possible that some persons may gain through the operation
of a tax of which they themselves pay a part ; but it is
rather the operation of the tax than its payment by the
person affected that produces this result. Every tax ne-
cessitates a deduction from the wealth of the contributor,
even though compensation may be indirectly brought about
through its action.
Thirdly, the term 'wealth' has to be understood in a
wide sense, including * services ' as well as commodities.
Military service or forced labour for, say, repairing roads
(corve'es) is taxation quite as much as payment of money or
goods. These may be good or bad forms of taxation, but
they must be reckoned in the category of taxes.
Again, all taxation is imposed on ' persons.' This neces-
sarily follows from the circumstance that the payment of
taxation is a duty, and persons only can be liable to duties.
The proposition is apparently inconsistent with the division
of taxes into ' personal ' and ' real,' and also with the tax-
ation of commodities so often mentioned. There is, how-
ever, no opposition between the different uses. The term
' real ' taxation refers to the ' object ' of taxation ; the
owner or ultimate bearer is the 'subject' of the tax, and
he is a person. Taxation of commodities falls on the con-
sumers or other persons connected with the taxed articles,
and a similar analysis will apply to other forms of taxation.
The truth, though often forgotten, yet always holds good
that a tax must ultimately be paid by someone.
Fifthly. Taxation is levied for the ' service ' or ' benefit '
The public economy requires the supply of its wants, and
taxation is the mode of meeting whatever proportion of
those wants remains unsatisfied from other parts of the
public revenue. The produce of taxation has unfortunately
been only too often misapplied, and resulted in injury
rather than gain ; but the tax-imposing body must be
regarded as the final arbiter of the justice of its wants.
That some requirements are evil makes them none the less
requirements in the case either of individuals or of States.
Finally, taxation is for the * public powers,' i. e. it has to
meet the wants of both central and local governments. A
rate raised by the smallest parish is as much a tax as if it
were levied by the Imperial Parliament. All contributions
to the various organs of government are taxes in the view
of Finance, whatever be their administrative name. Special
kinds of taxation have been often denounced as being for
the benefit of classes or individuals, not for that of the State.
Protective taxes, e. g. have incurred this reproach. Such
forms of taxation are, however, imposed in the interest,
or supposed interest, of the nation, and if they yield any
revenue are so far productive of gain to the State. The
advantage obtained by the protected producers may be
regarded as equivalent to so much public expenditure in
their favour. It is generally incapable of being estimated,
but this circumstance is of practical, rather than theoreti-
cal importance. That all taxes of equal pressure are not
equally advantageous, either to the State or the community,
is too evident to need formal assertion. Otherwise there
would be no reason for the selection of any particular forms.
4. The foregoing definition, with the accompanying
explanations, conveys all that is essential in the idea of
taxation, but the numerous efforts to explain the term
deserve some further notice. Many of the ablest writers
on the subject have given definitions which substantially
agree with that stated in the preceding section. Thus De
Parieu defines taxation as ' the charge levied by the State
on the property or labour of the citizens, in order to pro-
vide for the public expenses ; ' Roscher asserts that taxes
are ' the contributions which individual economies must
pay, in consequence of their dependence, to the State
province, commune, &c., or, generally the particular col-
lective compulsory economy placed over them in order to
assist in satisfying the financial needs of the receivers.
According to Cossa, a 'tax is that part of the wealth of
private individuals which the authority of the State, pro-
vince, or municipality appropriates in order to provide for
the public expenses incurred for the advantage of the
general body of tax-payers V To these definitions it is
not here desirable to add the many others that generally
agree with them ; but we ought to consider some of the
doubtful variations in the formal statements of the nature
of taxation. One of these is suggested by the last clause
of the definition just quoted from Cossa. ' Incurred for
the advantage of the general body of tax-payers ' contains
a reminiscence of the once-established, and still generally
popular, doctrine that taxes are the price paid for the
services of the public authorities. This way of looking at
the facts was quite in harmony with the political doctrines
of the seventeenth and eighteenth centuries. Belief in a
compact between the ruler and his subjects led naturally
to the contemplation of taxation as simply a payment for
service done. The citizen received security and paid its
price in taxation. The immediate advantage of this doc-
trine, as placing a limit to arbitrary exactions and tending
to increase security is apparent, and there is accordingly
no reason for surprise when, in some form or other, the
idea of exchange is associated with the payment of taxes.
In Montesquieu's opinion ' the revenues of the State are
the portion of his property that each citizen gives in order
to have security for the remainder, or to enjoy it in com-
fort.' Here the conception of payment to escape further
demands is combined with that of return for services
rendered. The French National Assembly gives still
another variation in its reference to taxation as ' the common credit card debt of all citizens, and the price of the advantages
that society affords them.' From this it is not far to the
assertion of Proudhon that ' Taxation is an exchange in
which the State gives services and the contributor money 1 .'
Hardly distinguishable is the belief that taxation is the
insurance premium against the risks of social disorder set
forth in Mirabeau's proposition that ' Taxation is only an
advance to obtain protection for social order.' The desire
to present a ready justification of the arrangements of
society finds an illustration in these attempts to depict
taxation as a quid pro quo.
To show that this way of explaining taxation is incorrect
is not difficult. The assertion that taxes are purely a
return for services rendered is plainly untrue. We shall
see that there is no possibility of measuring precisely the
most important of the benefits rendered by the State.
Security against aggression is, literally speaking, an ' incal-
culable ' good. Social order cannot be sold by retail like
tea or sugar, and so is it with the other state functions,
even the purely economic ones. Indeed, it would be very
near the truth to say that the difficulty of applying the
normal method of purchase makes a given form of activity
suitable for state management ; if defence and justice
could be readily bought and paid for, we might trust to
private enterprise for a sufficient supply. Wherever the
benefit to the individual can be even approximately esti-
mated there is a strong presumption in favour of levying
the cost incurred from him and converting the tax into a
'fee.' Special reasons may make it desirable that this
charge should be compulsory. The citizen may be so
neglectful of his true interest as to omit obtaining the best
appliances for the purposes of health or education, but even
in these cases there is also a general interest which fur-
nishes the principal ground for the intervention of the
The opposition between free payment and taxation is a
marked one not to be evaded by the introduction of a
vague idea of exchange of services as including both, and
any definition of taxation that implies or expressly states
this combination is so far erroneous. Like the general
doctrine of the social contract its practical convenience as
a weapon on the side of liberty cannot conceal its scientific
weakness. The equivalence between the amount of taxes
paid and the benefits obtained is rather to be found in the
case of the community as a whole than of any special part
of it. Looking at the public agencies from this point of
view, it is well to consider whether the advantages of
government are a compensation for its cost, and this test
should be steadily applied in judging the merits of any
proposed expenditure. The question in truth belongs to
that department of Public Finance. Once expenditure has
been incurred the imposition of taxation in order to meet
it is a matter of course. We have accordingly considered
it in its fit connexion J . In any case, to introduce what is
at best a highly disputable doctrine into the definition of so
important a term is altogether a mistake.