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Home -> Charles Francis Bastable -> Public Finance -> Chapter III

Public Finance - Chapter III

1. Preface

2. Chapter I

3. Chapter I a

4. Chapter II

5. Chapter II a

6. Chapter III

7. Chapter IV

8. Chapter V

9. Chapter VI

10. Chapter VII

11. Chapter VII a

12. Chapter VIII

13. Chapter VIII a

14. Book II Chapter I

15. Chapter II

16. Chapter II a

17. Chapter III

18. Chapter III a

19. Chapter III b

20. Chapter IV

21. Chapter V

22. Book III Chapter I

23. Book III Chapter I a

24. Chapter II

25. Chapter III

26. Chapter III a

27. Chapter III b

28. Chapter IV

29. Chapter V

30. Chapter V a

31. Chapter VI

32. Book IV Chapter I

33. Chapter II

34. Chapter III

35. Chapter IV

36. Chapter V

37. Chapter VI

38. Chapter VI a

39. Book V Chapter I

40. Chapter II

41. Chapter III

42. Chapter IV

43. Chapter IV a

44. Chapter V

45. Chapter Va

46. Chapter VI

47. Chapter VIa

48. Chapter VII

49. Chapter VIIa

50. Chapter VIII

51. Chapter VIIIa

The Distribution Of Taxation.

FROM an examination of the general, and what may
almost be called the necessary features of the tax system,
conditions that are beyond the direct influence of human
agency, we have now to pass to a problem of a very
different character, viz. the determination of the proper
distribution of that burden inevitable in the levy of taxa-
tion among the persons or 'subjects' liable to it. Instead
of studying ' what is,' we ask ' what ought to be.' The
distribution of taxation may be said with far more justice
than the distribution of wealth in general to be ' a matter
of human institution solely l '. Like all questions, into
which the conception of ' ought ' or Tightness enters, it is
an ethical one ; but its correct solution is so bound up with
economic and financial considerations, that it must remain
within the field of financial inquiry. Without a knowledge
of the surrounding conditions, and the effects of any given
tax system, the attempt to form a judgment respecting its
justice is hopeless. Moreover, the, at least approximately,
correct answer to the question is of great importance to
the practical financier. Any error, wilful or otherwise, on
the subject is apt to show itself in political difficulties, that
may in some cases reach an acute point. Nor is it sufficient
that a tax system shall be substantially just : it ought to
be generally recognised as such. The prevalence of even
an unfounded belief that the public burdens are not fairly
divided among the different classes and individual members
of a society, is a seriously disturbing force. Finance touches
on the domain of general politics, and no method of fiscal
administration, however successful in other respects, can be
worthy of approval, unless it seeks, so far as existing con-
ditions allow, to realize the idea of an equitable division of
the public charges.

The establishment of general principles on this point for
the guidance of financial policy and their recognition by
the people in general, is, then, eminently desirable, so that
the investigation of the grounds on which taxation should
be distributed is a work of utility in the narrowest practical

The difficulties of the inquiry are increased by several
distinct circumstances. First, they are due to the changing
nature of the public economy. The city state of Greece or
Italy, the mediaeval kingdom on a feudal basis, and the
nation of modern times, have so many points of contrast,
their several functions are in outward appearance so different,
that it seems impossible to assign a single law of distribu-
tion that can include them all, and yet be more than a
truism. Will it not be necessary to take each stage of
political evolution and deal with it separately ? Next, even
confining our attention to a single type of State, it is not
easy to bring the numerous public charges, and the equally
numerous functions whose cost they defray, to the test of a
common calculation. It is not clear on the surface that all
citizens should bear all charges in an equal degree, or that
all expenditure should fall on a common and indivisible
fund. The text-book writers have, it must be said, created
a third difficulty that is an illustration of the preceding
ones. They, in too many cases, have supplied us with
formulas that allow of a convenient laxity of interpretation,
and give an appearance of information without the reality.

Under such circumstances it will be expedient to examine
the various rules of distribution, and to note their historical
application. While thus engaged we shall see how mis-
understanding has often arisen from neglect of changes in
public economy, and of the gradual development of the
State, as well as from attempts to stretch a particular rule
beyond its legitimate limits.

2. The first and, in one sense, the simplest principle
for the distribution of taxation is that which would treat it
as a payment for public services. We have already seen
reason for rejecting this mode of explaining the nature of
taxation \ and thereby implicitly its value as a measure of
its amount. There was, however, much in the mediaeval
economic system that tended to foster the belief. Private
economies admittedly sold their services, but the royal
economy was nothing but the largest of private economies.
The King lived by his domain and by the fees that he
obtained for the performance of duties. The whole feudal
system was based on the idea of contract. Defence against
enemies was the payment for the vassal's homage and dues.
Justice was bought, and so were the few economic services
rendered by the sovereign. Under such conditions the
doctrine that taxation should be measured by service sup-
plied was but the formal expression of an existing fact.
The growth of the state economy made this no longer true,
and the doctrine thus became a survival from earlier times.
It is still more important to note that the method of specific
payment for public services was never a realization of
justice in the distribution of burdens. Neither in respect
to national defence, nor to legal administration, nor finally
to general economic activity, is it possible to distribute the
advantages among individuals, and to charge in proportion.
The introduction of general taxation was in part a result of
the defects of the older mode, and it was undoubtedly a
step in advance, particularly in the direction of securing a
fairer allocation of the expenses of the public powers.

The theory that taxation is the price of the State's
services, and finds its measure for each citizen in the
amount of benefit received is, as regards the latter part,
quite unsupported by history. The system of direct pur-
chase applied to the State's tasks was so far from being
equitable, that justice was only made possible by its

The plausibility of this view of the measure of taxation
arises from the apparent support that it gives to the indi-
vidualistic theory of the State. If the services of govern-
ment are the standard by which to regulate taxation, there
appears to be no essential difference between the payment
of taxes and the purchase of commodities. The assimila-
tion of the two forms is in reality a forced one. In the
case of taxation the advantage given is indefinite, and the
payment for it is compulsory ; the modern upholders of
the doctrine are consequently forced to have recourse to
some other standard, which, they declare, brings about a
substantial equality between the benefits received and the />
taxes paid 1 . That usually suggested is the rule of taxation \r
in proportion to revenue. It is, however, quite impossible
to establish any such connexion. Limiting state functions
to the minimum, viz. the protection of person and property,
there can be no doubt that the former would in general
require equal payment from all. It costs quite as much.
' perhaps on the whole more,' to protect a poor man's person
as it does to perform the same service for a rich man.
Again, as regards property, there is little ground for the
belief that the cost of guarding it varies directly as its value.
If security is to be sold like tea or sugar, there ought on
the strictest commercial principles to be some allowance
made to the purchaser of a large quantity ! The natural
conclusion therefore appears to be that the rate of taxation
should, on the theory of purchase and sale, be lower on
large than on small incomes ; but even this result does not
rest on very solid ground since any change in the quality
or quantity of state services would alter the relations of the
parties concerned.

3. The evident weakness of the theory just discussed,
makes the adoption of some other and more precise criterion
necessary. Retaining the idea that taxation should be
equal, but giving up as hopeless the attempt to measure
the respective services performed for each person by the
State, we might conceivably abandon all efforts at differen-
tiation between individuals, and hold that equality was
realized by taxing all persons (or all families) at the same
rate. Such a method might be admissible in a primitive
community. All are dependent on the State for certain
essential conditions of social life. Why should not all pay
equally for these advantages ? Military service is rendered
by all alike, and the same principle might seem as applic-
able to the contribution of commodities as to that of
services. Civilized societies have, however, almost for-
gotten the existence of a state of things in which such an
arrangement would be feasible. The annual tax revenue
of the United Kingdom may be put roughly at 75,000,000,
and the population at 37,500,000. Under a system of
equal contribution the rate per head would be 2, or 10
for a family of five. The labourer's family, with a weekly
income of i y would be taxed about 20 per cent. ; a middle
class family, with 500 per annum, would be taxed z per
cent. ; where the family income was 50,000 per annum the
charge would be an insignificant fraction. The method of
equal contributions per head would be impossible politically,
besides being extremely unjust.

Dismissing then the idea of equal taxation of persons as
utterly impracticable, we come to what is the best known
and most widely accepted doctrine, viz. that which takes
'faculty' or 'ability' as the measure for taxation. This
view, which is found as early as Bodin 3 , has been em-
bodied by Adam Smith in the first of his classical maxims ;
' The subjects of every State ought to contribute towards
the support of the government, as nearly as possible, in
proportion to their respective abilities V For the last
twenty years it has been the doctrine accepted by the
majority of German financiers. One reason for the readi-
ness with which ' ability ' has been adopted as the measure
of taxation, is perhaps its convenient vagueness. The mere
statement that taxation should be proportioned to ' ability,'
does not afford much practical guidance. A measure of
' ability ' is further wanted, and in fact different criteria
have been put forward with equal sincerity and equal con-
fidence. Property, revenue, net revenue, have each been
selected as the test of the tax-payer's ability.

All of these are more or less measurable, and present, so
to speak, objective standards, but the measure of ' ability '
has sometimes been transformed into that of 'sacrifice,'
and this test has been widely approved of. ' Equality of
taxation,' says Mill, ' as a maxim of politics means equality
of sacrifice 2 .' It is apparent that the rule of equality of
sacrifice is but another mode of stating the rule of equality
as to ability. Equal ability implies equal capacity for
bearing sacrifice. An equal charge will impose equal
sacrifice on persons of equal ' faculty,' and where abilities
are unequal a corresponding inequality in the amount of
taxation will realize the aim of equality of sacrifice. There
is, however, a shade of difference in -the two terms. Ability
suggests the positive element of power to contribute ;
sacrifice the negative one of loss by contribution : the
former is most naturally measured by some objective
standard ; the latter refers primarily to the sentiments
of the people concerned, and is, therefore, rather sub-
jective. The use of sacrifice incurred as the measure of
taxation is probably due to a disposition to place weight
on the element of privation felt by those who are taxed,
instead of the external marks that evidence ability
to pay.

But whether 'ability' or 'sacrifice' be taken as the
standard, it is possible to reach very different practical re-
sults according to the amount of weight assigned to the
different elements. We accordingly meet with three differ-
ent forms of distribution, all avowedly based on the criterion
of ability, and all claiming to realize true equality. These
are : (i) pure proportional taxation, in which income is
taken as the standard, and the amount of public burdens
regulated by it ; (2) qualified proportional taxation, where
income is still the test, but is subjected to certain modifica-
tions, either by deduction of necessary expenses or by
analysis of its component parts ; (3) ' progressive ' or
graduated taxation, which places a heavier rate of charge
on large than on small incomes since the ability of the
' subject ' is supposed to increase in a more rapid ratio than
the increase of his income.

4. The rule of proportional taxation has been un-
doubtedly the doctrine of the classical political economy.
Connected on its political side with the liberalizing move-
ments of the 1 8th century, its representatives protested
against all exemptions and privileges, and against none
more than those granted in respect of taxation. The asser-
tion of the justice of taxing in proportion to revenue carried
with it a condemnation of the very common freedom from
all personal taxation enjoyed by the privileged classes of
the Continent. * There is,' says Vauban, ' a natural obliga-
tion on the subjects of all conditions to contribute in
proportion to their revenue or their industry. . . Every
privilege that tends to exemption from that contribution is
unjust and abusive V If taxation should be proportional
it follows necessarily that it must also be general. The
French Revolution, and the changes that it led to else-
where, so completely abolished the objectionable privileges
that this side of the doctrine is often ignored, and its refer-
ence to the income possessed alone considered. Adam
Smith completes his statement that taxation should be
adjusted to the abilities of the subjects by adding 'that is
in proportion to the revenue which they respectively enjoy
under the protection of the State V And since his time
the rule has been quoted and adopted by most of his Eng-
lish and French successors 2 . At first put forward as a
protest against the injustice of the old system of privilege,
the maxim of proportional taxation is now employed as a
weapon against the newer Radical socialism 3 .

One great advantage of the rule is its simplicity. As
M. Say puts it, ' Proportional taxation does not need de-
finition, it is the rule of three. . . When it is said of a tax
that it will be levied proportionally every one understands
it 4 .' The problem of taxation is reduced to its least com-
plex form. Given the amount that must be raised by
taxation, and given the sum of individual incomes, the
rate per cent, can be assigned, and applied to each case.
It is true that there are certain practical difficulties in the
way. The ascertainment of individual incomes is not a
perfectly easy work, and where, as is almost universally the
case, it is necessary to specialize the tax system and have
a number of duly arranged charges, it is difficult to
measure the exact amount paid by each citizen to the
public treasury. But any other principle must either meet
or evade these embarrassments besides those that are
peculiar to itself. Simplicity and easy application, though
desirable in Finance, are not the sole objects to be attained,
and, therefore, the rule of proportional taxation has been
vehemently opposed as failing to give a just distribution of
the public charges. The question has, in fact, been mainly
debated on the issue whether proportional or progressive
taxation should be the system adopted.

5. What is known to continental writers as progressive
but more familiar in England as graduated taxation
includes, as we have said, any system in which the rate of
taxation becomes higher, or progresses as income increases.
In this consists the essence of the principle ; the grades into
which incomes are divided, the initial rate of charge, and
the increases at the several stages of advance, though very
important, are yet matters of application.

The reasons that have led to the popularity of progres-
sive taxation are obvious enough. The loss of a portion of
wealth by a rich man is generally regarded as a very slight
evil or as none at all ; while to a poor one it causes curtail-
ment of real enjoyment. The deduction of 10 from an
income of 100 will in most cases prove a serious pressure,
sweeping away perhaps the savings of the period, or com-
pelling the sacrifice of all relaxation, that of 100 from
;i,ooo, though still heavy, would not trench upon the con-
ditions of a comfortable life. ;j,oco taken from 10,000
would leave a balance sufficient to support a luxurious
existence, and 10,000 from .100,000 would hardly, so
popular sentiment imagines, be perceptible by the owner.
Yet it is precisely these deductions that proportional taxa-
tion carries out, without recognition of the real gradations of
ability and capacity for bearing sacrifices. So regarded, the
levying of equal rates on all incomes has an appearance of
unfairness that has given much support to the plan of
graduating charges according to different scales.

Though the general current of economic opinion has till
recently been decidedly against the idea of progression, the
system has secured the adhesion of some eminent authorities.
A passage of Montesquieu's has been often quoted in its
favour, in which, speaking of the Athenian property tax, he
says, * it was just though not proportional ; if it did not follow
the proportion of goods, it followed the proportion of wants.
It was thought that each had equal physical necessities,
which ought not to be taxed ; that what was useful came
next and should be taxed, but not so highly as super-
fluities V Rousseau and the elder Mirabeau took the same
view. In the present century J. B. Say and Joseph
Gamier have approved of a system of moderate progres-
sion. The former * did not fear to declare that progressive
taxation was the only equitable form ' ; the latter held that
taxation ought to be progressive without spoliation^ 2 .'
Still the weight of authority was on the other side. ' Pro-
gressive taxation/ like * protection ' or ' a double standard,'
was an heretical tenet opposed to the true economic faith.
Alike in England, France, and Germany, it was rejected by
such representatives of competent opinion as J. S. Mill
and McCulloch, Levasseur and De Parieu, Gneist and
Hermann 3 .

The recent change in opinion on this subject has been
due partly to increased popular influence over government.
The shifting in the centre of political gravity that the
growth of democracy has brought about has, as one of its
consequences, a tendency to alter the distribution of taxa-
tion in favour of the most powerful classes, i.e. the
numerical majority. This can only be accomplished by
putting a heavier burden on the wealthy. The diffusion
of socialistic ideas assists in this movement. Progressive
taxation is one of those agencies that seem likely to
facilitate the transition from the capitalist to the socialist
regime, and it consequently has the support of the various
sections of that party. Among the counts of the indict-
ment that the French economists bring against the system
one of the weightiest in their view is its socialistic character.

Modern developments of economic theory have also had
their share in the work. The members of the ' historical '
school have not been bound by any undue respect to th9
opinions of their predecessors, and their greater sympathy
with semi-socialist ideas made them inclined to favour what
seemed to be a mode of relieving the poorer classes from
the pressure of excessive taxation. Some moderate form
of progression has generally been approved of by them.

Another and apparently opposed school has tended in
the same direction. The more accurate study of the varia-
tions of utility which forms the common starting point of
the researches of Jevons, Menger, and Walras, has among
its other important effects given a new mode of measuring
the pressure of taxation. The final utility becomes the
measure of sacrifice, and if, as is plain, is. is more to the
possessor of an income of 100 than it is to one of 1,000, it
does not follow that it is exactly ten times as great. The
assumption that equal percentages of income are of equal
utility is a rough ' first approximation ' admissible, perhaps,
in the earlier stages of inquiry, but certain to give place to
the more accurate results of later investigation. It is
noticeable that Sax and Wieser, who represent the financial
studies of the Austrian school, have both declared for
progressive taxation 1 .

6. A system of progression may be realized in different
ways as, e. g. by heavy taxes on luxuries consumed by the
rich 2 , or higher duties on the finer kinds of all commodities.
The taxation of inheritances, and duties on the transfer of
property, as also on commercial transactions generally,
could be so adjusted as to reach the same end, but the
mode usually employed is that of progressive income and
property taxes. This is obviously the most direct way,
since it places the increased charges at once on the larger
incomes, and has not to trust to the less certain and calcul-
able operations of taxes on ' consumption ' or on ' acts.'
In form the tax may be on property, or on income, or on
both ; but, as in any case, it must normally be paid out of
income, the assessment on property is simply a particular
mode of fixing the rate of charge.

Whatever be the form, the policy of progressive taxation
is open to serious objections, of which the following may be
noticed as the most important.

(i) Progressive taxation is entirely arbitrary, ^he
possible scales are infinite in number, and no simple and
intelligible reason can be assigned for the selection of one
in preference to its competitors. The statement of some
suggested scales will illustrate the truth of this remark.

Professor F. W. Newman has proposed the following
system of progression. Incomes under 100 to be free ;
those between 100 and 1,000 to pay 3 per cent, on the
excess over 100 ; those between 1,000 and 2,000 to
pay 4 per cent, on the excess over 1,000 ; those between
2,000 and 3,000 to pay 5 per cent, on the excess over
incomes in the preceding class and so on, the rate increasing
i per cent, for each additional 1,000. This scale at
first sight seems moderate enough : an income of 600
would pay only 15 (i.e. 3 per cent, on 500) or i\ per
cent. ; one of 1,700 would have to pay 55 (i. e. 3 per
cent, on 900 and 4 per cent, on 700) or less than 3^ per
cent. When, however, the higher incomes are considered,
its aspect is changed. In an income of 97,000 the last
1,000 would be taxed 99 per cent., leaving but 10 to the
possessor, and any higher amount would be altogether ab-
sorbed. Therefore, the maximum income possible would
be 47,533 1

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