In practice the difficulty is not so great ; the distribution
of burdens can never be accomplished with mathematical
precision. The avoidance of real and serious grievances is
all that can be expected, and the actual working of the
financial system meets these in a tolerably satisfactory
manner. Necessity compels recourse to loans whenever
there is any large extraordinary outlay, and thus the
particular holders of incomes from labour do in fact escape.
Again the two categories are not so sharply divided as is
supposed ; they shade into each other at many points ; and,
moreover, the return on property (as distinct from ' unearned
increment ') is itself the result of saving and entitled to as
liberal treatment as any other form of revenue. The
technical difficulties that any attempts to differentiate
incomes would lead to belong to a later part of our
inquiry l .

The foregoing considerations help us to meet a very
different proposal also aiming at a departure from the rule
of taxation in proportion to income, viz. that which asserts
that expenditure alone should be taxed, what is saved
being entirely exempt. The reasons given for this privilege
are (i) that saving is not enjoyment, but a useful social
process that deserves encouragement ; and (2) that unless
exempted savings would pay twice over, viz. first at their
origin, and again when they yield a further return after
investment. It may be freely allowed that to encourage
providence is desirable, but it does not follow that exemp-
tion from taxation is the proper mode for so doing. If
income be the normal fund from which taxation comes,
and if it is on its amount that the measurement of the
burden is to be taken, an arbitrary separation of a certain
part is obviously objectionable. The line between saving
and expenditure is besides a thin one ; the true distinction
should rather be between productive and unproductive
expenditure, i. e. the result of outlay ought to be the test, a
plainly impossible course in practice. Further it may be
said that many forms of productive outlay are just as
enjoyable as any non-productive one, and some forms of
the latter are sociably preferable to others. There is in
reality no reason for a sharp division into two classes,
whether we take enjoyment or social advantage as the
basis. Practical Finance could not deal with such shades
of difference as would be the apparently fair course. The
same consideration may be applied to the case of tempo-
rary and durable incomes, the former of which are very
variable in character.

To the plea of double taxation it may be replied that
taxation is imposed on income as such, that the wealth
which is taxed as income is not identical with the extra
produce that is the result of its application, and the charge
on each is distinct. The income out of which savings are
made cannot be the same as the subsequent income pro-
duced by those savings 1 .

There is it should also be noticed a direct opposition
between the proposal to relieve temporary incomes, and
that to exempt savings from taxation. What is the net
advantage of getting a premium to save only to discover
that the earnings which result from that saving will be
subject to heavier payments? The broad and simple
principle of taxing all incomes alike and of taxing all that
is income (allowance being made for the action of taxes on
consumption in the case of the smaller incomes) appears to
attain the result of just distribution quite as well as the
more refined discriminations so often suggested. Should
any further adjustment seem necessary in a particular
system it may be reached by a nominal property tax 2 or
by duties on inheritance.

12. The principal theories and contentions on the
subject of the just division of taxation have now been
considered, and it remains to state the general results
which seem to be warranted. The attempt to measure
taxation by service rendered has been recognised as hope-
less and due to an erroneous theory of the State's nature,
but it contains a small element of truth. Where specific
and measurable advantages are rendered to individuals or
groups direct payment for those services ought to be
obtained, either in the course of exchange or by the pay-
ment of fees or, if either method cannot be employed, by a
special tax. Cases of the latter are very rare in general,
but they hold a more prominent place in local Finance.
Indeed, as we shall see, the division between local and
general taxation is itself a case of making those interested
pay for special services, and in the detailed division of local
charges the same principle can often be carried out.

The use of ' ability ' or ' faculty ' as a measure is en-
cumbered by the necessity of defining its true meaning.
We have seen reason, chiefly on practical grounds, for
rejecting that interpretation which issues in the system of
'progressive' taxation. Its fiscal productiveness is slight
while its economical effects are likely to be injurious.
Between the system of payment as recompense for state
services which would naturally lead to regressive taxation
and the system of progression resting _pn th^ -uteatiiat
sacrifice should be equalized, the intermediate method of
taxation in proportion to income is on the whole the best
standard for regulation. Its true foundation needs to be
carefully appreciated. It cannot claim to be a realization
of exact distributive justice ; it is rather to be accepted as a
convenient and fairly definite working rule of Finance, or at
the utmost as supplying a measure of what may be called
the objective side of ability. Income, when the lower
grades are passed, is, we may hold, a fairly good mark of
power to contribute, provided we make abstraction of in-
dividual circumstances.

In the same spirit we can solve the problem raised by
the existence of incomes at the minimum. Financial con-
venience combines with economic conditions to make it
desirable to exempt the smaller revenues from direct taxa-
tion where the duties on articles of common consumption
are productive. Where it is possible to relieve necessaries
from taxation the minimum of existence is in fact free ;
where the needs of the Exchequer prevent this being done
the pressure placed on the lowest class is of a kind not
much felt by them unless the rate of taxation is excessive.
To tax the very poorest is a sad necessity, but where the
want of revenue is urgent, not inconsistent with justice :
there is a real advance when national wealth has reached
so high a point that the lowest class are called on to con-
tribute only through their luxuries, but the highest stage is
that in which the improvement of society is such that all
classes are in a position to pay their share as citizens for
the common services of the State.

The distinction between temporary and permanent in-
comes, as also that between expenditure and savings, may,
it appears, be disregarded as involving subtleties unsuitable
for fruitful application and to a great extent cancelling
each other. The result is therefore that on the whole,
and speaking broadly, taxation should be proportioned to
revenue, by which a fair approximation to justice and a
convenient basis of working are supplied.

13. One class of revenue is so peculiarly situated that
its position deserves further notice, viz. that which arises
from ' unearned increment ' in the widest sense of the
term, including the growth of rent from land, monopoly
profits and the gains of speculation \ The characteristics
of this class seem to have marked it out as specially
suited for taxation. The physiocratic tax on land was
not, indeed, due to this idea of it as yielding a monopoly
gain, but the practical result was just what it would have
been in that case. Adam Smith distinctly notes the fitness
\ of unearned gains for special taxation. ' Ground rents and
the ordinary rent of land are/ he holds, ' perhaps the species
of revenue which can best bear to have a peculiar tax im-
posed upon them Nothing can be more reasonable than

that a fund which owes its existence to the good goverti-
ment of the State should be taxed peculiarly Y while later
on he widens his view by declaring that ' the gains of
monopolists whenever they can be come at/ are ' certainly
of all subjects the most proper ' for taxation, a doctrine the
truth of which as a general statement can hardly be denied.
When regarded by itself unearned wealth seems, as it were,
designated to supply the public wants of the community 2 ,
and there is no reason for surprise at the popularity of any
proposals in that direction. But the imposition of taxation
must be studied not simply with regard to a single general
fact, but to the whole economic and financial constitution
of the society. The obstacles in the way of this form of
special taxation are serious enough. To begin with, it is
not always easy to say what gains are ' unearned.' The
rent of land and the receipts from pure speculation are the
first examples, but the line that separates pure rent from
profit rent is not so readily determined. As Adam Smith
remarks in this connexion, * The ordinary rent of land is
in many cases owing partly at least to the attention and
good management of the landlord 3 .' The gain from land
is in a new country profit rather than rent 4 , and as society
advances the investment of capital in land improvements
complicates the problem. In the case of commercial specu-
lation it is not pure accident that determines gain. Specu-
lation is rather, as Cohn well describes it. the struggle of
intelligence against chance 5 . To tax the profits of specu-
lation would check the operation of the economizing force
of competition. Monopoly gains are better fitted for extra
burdens, and where excessive profit is obtained through
natural or legal monopoly there is a fair case for obtain-
ing at least some of the advantage for the public. But
these cases are so few as to form but a trivial financial
resource. Railways, banks, and some other companies are
the principal examples of possible monopoly, and among
them the amount of excessive profit is not considerable.
Two further circumstances diminish still more the impor-
tance of this extra source of tax revenue, viz. (i) the exis-
tence of losses that counterbalance unearned gains. If
individuals engage in a venture, be it cultivation of land
or industrial enterprise, they can hardly be called on to
give up their surplus gains unless they are guaranteed
against possible loss. A landholder will not care to open
up his property with the certainty before him that his
accruing ' producer's surplus ' will be appropriated by the
State, while he has no security for ordinary interest on his
outlay. The like sentiment will be even stronger in indus-
try and commerce than in agriculture. Just as weighty is
(2) the fact that with a system of private ownership and
a developed economic organization the claims to these
'unearned gains' are in a constant process of transfer, and
future values are estimated in the prices given. The antici-
pated future movement of rent is registered in the price of
land. Premiums on shares measure the gain from specu-
lation or monopoly. Justice could therefore be attained
only by taxing each increase immediately on its existence
being noticed, an evidently hopeless endeavour. For these
reasons it is desirable to narrowly limit special taxation of
monopoly values to the clearest and best established cases,
and for the rest to rely on the increased productiveness that
this unearned wealth will give to the ordinary taxes. This
conclusion it may be added does not apply to any existing
land taxes -which may be plausibly regarded as reserved
rents, nor does it cover the specially interesting case of
ground rents in towns where the effect of public expendi-
ture introduces a new and difficult element, and which
strictly belongs to the domain of local Finance 1 .

14. So far we have dealt with taxation as if it were
applied to a single country or district in complete isolation,
and have sought to arrive at the rule of just distribution
among its inhabitants. Modern societies and a fortiori
limited districts are not so placed. Many of their inha-
bitants draw income from outside the particular area.
Foreigners hold property within it, and there are sure to
be complex legal relations between residents and non-
residents. Hence it is necessary to examine the difficult
class of problems usually described under the title of
* double taxation.' We have not to consider the case of
different taxes imposed by a State on the same object in
different ways. Taking the rule of taxation to be propor-
tionality to income, any taxation that attains that end is
right ; what fails to reach it is so far imperfect. Nor need
we trace the operation of the corporation tax. Juristic
persons are, for Finance, but intermediaries by which
the individual members can be reached. The taxation of
corporations is the taxation of their members, and the
pressure of the tax on them is to be taken into account
along with the other taxes in estimating the total burden.
This elimination of so many of the points usually treated 2
allows us to direct attention at once to the international
relations. These cases are three in number and may be
arranged as follows (i) Where a citizen emigrates with all
his property. Here it is plain that he is only amenable to
the laws of his adopted country ; there is no power on the
part of his native land to levy taxes on him and no justice
in doing so. (2) A citizen may reside abroad and derive
his income from his original home. In this case double
taxation may exist. The country of residence may tax
all the income and the country of birth may tax all the
property situated within it. (3) The remaining case is the
converse of the preceding. A resident native may possess
property abroad, and be taxed on it in both countries. This
too would be plainly double taxation.

What principle of justice should be applied to Nos. 2
and 3 ? The old protection theory would say that the
country of residence should be paid for guarding the
person, and that where the property lies for watching over
it. The more modern solution would be that where there
was a judicious arrangement of taxes the income tax should
be levied by the country of residence, the land or property
taxes by that of situation. Local rates would clearly belong
to the latter, while the former would have the benefit of the
indirect taxes on the subject's consumption. Were the
cases of conflict numerous the best solution would be found
in international agreements on the basis just indicated, and
where, as in the German States and Swiss cantons, there is
a central power it would seem that the determination of
the adjustment should be given to it. The solution for
like cases in local taxation is to be differently reached *.

15. Our judgment as to the equity of any particular
distribution of the pressure of taxation will depend on the
view that we take of the objects to be attained. Even
when taxation is limited to the supply of the public wants
the proper division of its weight may vary according to the
amount and character of the services supplied by its em-
ployment. Where state functions are confined to the nar-
rowest possible field the poorer classes may claim to bear
a smaller share than if as in many modern societies they
were largely benefited by public expenditure. But from
the difficulty of discrimination it seems better to adhere
to the general rule of distributing taxation without direct
reference to the results of expenditure on the different
classes. Injustice of this kind ought to be corrected not
by redistribution of taxation but by alteration of outlay.

There is a tendency in recent years to take a wider view
of the functions of taxation than the purely financial one.
Its agency is regarded as valuable not solely for the
resources that it brings into the State but for the effect
that it produces on the distribution of wealth. By the use
of a properly adjusted tax system the inequalities of wealth
may, it is thought, be reduced if not entirely removed, and
one of the aims of Socialism approached without revolution.
Such is Wagner's position when he declares for the ' politico-
social ' conception of taxation in opposition to the ' pure
financial ' one. This change in standpoint must of neces-
sity change the mode of estimating the justice of taxation.
What is wise and prudent when we aim simply at supply-
ing the requirements of the public powers in the fairest and
cheapest way ceases to be such when it is sought to bring
about a supposed better distribution of wealth. Propor-
tional taxation, caution in taxing unearned wealth, and
moderation in expenditure, may be admitted to be the
logical results of the ' financial ' conception : progressive
taxation with a high rate of increase, rigorous fiscal super-
vision of all gains except those from labour, and bold
attempts at improving the condition of the poorer classes
by state outlay in various directions will be the natural
outcome of the ' social ' attitude 1 . There is a change of
aim which necessitates a corresponding change in the appro-
priate methods.

The general arguments on the subject of socialistic inter-
ference do not concern us here, but the results of financial
experience are of some value in respect to the use of taxa-
tion for other than fiscal purposes. The taxing power has
been often employed to encourage industry, to improve
taste, to benefit health, or to elevate morals, but in none of
these applications has the desired success been obtained.
There is, therefore, a presumption against its use in remedy-
ing the inequalities of wealth. Its definite and universally
recognised function is the supply of adequate funds for
the public services. To mix up with one very important
object another different and perhaps incompatible one is to
run the risk of failing in both. It is within the power of
financial skill to so select the forms and rates of taxation
as to secure the requisite amount without unfair pressure
on any class, but if the ulterior effects on the distribution
of wealth have to be considered, and the adjustment made
to attain particular ends in that respect, the difficulties of
the task are enormously increased. If the socialistic regime
is to be the goal aimed at, there are more direct and more
effective modes open than the manipulation of taxation.

16. At the opposite pole to the doctrine that Finance
should aim not solely at preserving justice, but at remedy-
ing injustices already existing in the social system is that
which refuses to see anything of justice in financial problems.
For the upholders of this view the distribution of taxation
is reduced to placing the burden where it will give the least
trouble and friction in collection. McCulloch's often-quoted
statement that ' the characteristic of the best tax is not that
it is most nearly proportioned to the means of individuals,
but that it is easily assessed and collected, and is at the same
time most conducive to the public interests M is a sufficiently
clear expression of the view which is a very natural feeling
among practical administrators. An escape from the
difficult questions that the problem of justice must always
present is a pleasing prospect, though unfortunately based
on illusion, since injustice in distribution is certain sooner
or later to show itself in the difficulties that the practical
financier wishes to avoid. All the conditions of a good
system of taxation are interdependent, and the breach of
one reacts on the other. The observance of the mere tech-
nical rules at the expense of justice will not be successful
any more than the utmost straining after fairness without
regard to the other conditions which we proceed to examine
in the next chapter.