The Tax System : Its Forms.
THE construction of a system of taxation, like all
works of art, is the result of a combination of materials de-
rived from different quarters. To attain success it is neces-
sary to bear in mind certain general facts respecting
the economic structure of society : the important aim
of realizing substantial justice in the apportionment of
burdens must never be lost sight of, and in addition the
financial and constitutional conditions require to be duly
considered. It is to this latter class of problems that the
present chapter will be devoted, and we shall see what form
the tax system ought to take in order to satisfy these
various requirements and be at the same time effective for
what is after all its primary function the supply of ade-
quate resources for the public service.

The facts of past and existing financial institutions, when
compared with the general principles discussed in the pre-
ceding chapters, present at first sight a curious contradic-
tion. Taxation we discovered was normally a deduction
I from the national income, and ought to be divided among
the citizens in proportion to the share of that income
possessed by each. Though some qualifications of this
statement were made 1 such was the broad general result :
from which it would seem to follow that the amount
needed should be levied from the tax-payer in a single
payment in proportion to his ascertained income. In fact
the single tax would, we might think, be the necessary de-
duction from established principles.

On turning to the facts of practical Finance the state of
things is very different. No country possesses this simple
and logical arrangement. Instead of a single tax there is
a prodigious number of imposts varying according to place
and time, and very hard to reduce to any reasonable classi-
fication. Taxes on every form of production, on nearly
every commodity, and on most of the transactions of life,
may be found in the history or statistics of Finance.

One partial explanation is that which regards the com-
plexity of the public charges as due to ignorance or love of
routine on the part of practical financiers. The beginning
of the tax system, obscured as it was by the other forms of
state receipts, was due to fiscal necessity. The extraordinary
levies of the sovereign were made on the wealth most easily
reached and owned by the feeblest members of the com-
munity. '' To raise the largest sum of money with the least
trouble'' 1 is an inadequate description of the functions of a
modern finance minister, but it was the sole aim of his
mediaeval predecessor. It may then be thought that the
immediate pressure of the public wants has led to this
undue complication in the collection of taxation.

Such, however, is not the case. There is no doubt an
element of truth in the assertion that it was want of funds
that led to the creation of so many different forms of taxa-
tion. A war period is usually a time of financial pressure, and
most new taxes owe their introduction to occasions of this
kind 2 . But when the pressure is removed and the work of
financial reform made possible, though great consolidations
of duties are effected, there is no example of recourse to
that simple method that appears so natural and appropriate
in the light of some elementary principles. It is, therefore,
necessary to examine the grounds on which a multiple
system of taxation is retained notwithstanding the apparent
advantages of the single tax system.

2. In the face of the general, indeed universal, policy of
employing diverse forms of taxation, there has been at
times a strong disposition on the part of students of Finance
to propose some particular kind that should tend to super-
sede all others and be the principal resource of the Ex-
chequer. Prominent among these plans is that promul-
gated by the famous engineer Vauban in his Dime Roy ale.
He does not, as has been sometimes supposed, advocate the
complete abolition of all other charges. Among the duties
to be retained were a moderate salt duty, the customs, and
some of the taxes on acts : but the tattle, the capitation, the
aides (internal duties chiefly on drinks), the provincial
customs and the miscellaneous sources of revenue classed as
'' extraordinary '' were to give place to a single tax the
'' Royal tithe '' imposed on the product of land, industry
and, in short, all revenue, its amount to be five per cent, or
ten per cent, according to necessity 1 . His contemporary
Boisguillebert, with whom he had so close an intellectual
affinity, put forward the same idea of a single tax of one-
tenth of the product of land and industry.

A similar tendency is shown in Sir M. Decker''s plan (re-
ferred to and criticised by Adam Smith) of a license for the
consumption of commodities as a substitute for the excise
and customs, a scheme which, in spite of its obvious diffi-
culties, has been reproduced in a modified form in later
times 2 . The popularity of duties on consumption favoured
the growth of plans like this. Still more significant was
Vanderlint''s scheme for a single tax on land and its pro-
ducts, perhaps suggested by some remarks of Locke. The
pamphlet, in which Vanderlint stated his plan, is a distinct
anticipation of the physiocratic idea as to the true syste
of taxation 1 .

3. The proposals already described came from individual
thinkers, and had little or no influence on competent opinion
or on financial practice. But in the circle of economists,
who regarded Quesnay as their master, the dogma of a
single tax the Impot unique became an accepted article
of belief. This doctrine was the natural result of their
theory as to the limits of net produce. The rent of land
was, they thought, the only '' source '' of taxation, and it
was therefore convenient that it should be its only c object.''
Vauban''s idea of a Royal tithe was good so far as simplicity
went, but it was unequal 2 , inasmuch as it fell on capital
employed in cultivation which, in the physiocratic dialect,
was not ( disposable.'' In the application of their principles
the Physiocrats were more inclined than is sometimes
believed to admit modifications. The elder Mirabeau was
prepared to raise two-thirds of the requisite revenue by an
income tax, leaving only one-third for the land tax, and
Turgot frankly concedes that the time had not come for
an abolition of octrois*.

Besides the plan of a single tax on land rent, which has
recently received support on different ground from that of
its originators, other forms of single taxation have been
suggested in the present century. One is the general
income tax, which would directly attack the normal source
of taxation, and secure whatever adjustment seemed de-
sirable to the legislator. In the form suggested by some
economists it would be proportional to receipts, and might
be so framed as to cover acquisitions by gift or inheritance 1 .
Radical democrats would prefer that the single tax on
incomes should be more or less rapidly progressive.

The plan of a single tax on '' realized property '' has also
received much support. It would be confined to property
not engaged in production '' as land, the public funds, money
lent on mortgage, and shares, in joint-stock com-
panies '' 2 , and was believed by its advocates to escape the
inequalities of the income tax, and to present greater
facilities for collection, since the objects of assessment would
be definite and open to observation.

Of rather wider scope is the plan for a single tax on capi-
tal, put forward by De Girardin and Menier, and approved
by M. Guyot. Under it taxation is to ''be imposed on
'' fixed '' capital, i. e. on '' all such utilities as yield their pro-
ducts without changing their nature,'' to wit, * land, mines,
buildings, machinery, implements, ships, carriages, animals
employed productively, furniture, and works of art V Raw
materials and goods for sale would be exempt from charge.
The basis of assessment proposed is the selling value of the
taxable capital, one per cent, of which was believed by
Menier to be sufficient in the case of France to meet the
public expenditure.

4. These several plans have certain elements in common
and appeal to the very natural desire to secure a simple and
inexpensive form of taxation. Were there no obstacles in
the way it is plain that direct imposition on .the source of
taxation would be preferable to the complicated methods
actually employed. The cost of collection would be
materially diminished, and the immediate incidence on the
several individuals and classes precisely determined. More-
over, the society, as distinct from the State, would gain by
the removal of restraints on industry, and it could measure
definitely the cost of the public services.

Against such plain and obvious advantages there are\\
weighty considerations to be set, which militate against the
adoption of the single tax in any form, (i) The danger of a
single tax, no matter how skilfully estimated not being duly
proportioned to revenue is a serious one to which any other
proposed base, e. g. capital or expenditure, is equally open.
With a combination of different taxes the errors in any one
case will be small, and probably compensated by the opera-
tion of other taxes, but with a single tax there is no pos-
sible room for correction. Experience shows that what is
in appearance a perfectly fair tax may be practically very
unequal in its operation. Evasions and false returns destroy
the proportionality of the best arranged income tax. (2)
The pressure of taxation in most modern States is by no
means a slight one. On the average it exceeds ten per
cent, of the national revenue. Now it is evident that '' the
ignorant impatience of taxation '' would prevent this amount
being raised without much irritation through any single tax.
To disguise the burden is, so far as sacrifice is concerned, to
reduce it, and the breaking up of the system into several
distinct forms undoubtedly has this advantage. (3) The
use of a single tax would remove the advantage that is
obtained at present by reaching the different forms of
taxable capacity. Consumption, income as stated, property
inherited are all so many indications of the capacity arising
from the possession of revenue, which, when duly considered
enable a better proportional rate of taxation to be main-
tained. Besides, in certain cases it is, as we saw, necessary
to separate the tax-payer''s contributions and treat some as
given for special service, or to assign the total amount
between different countries and districts. A single tax
would fail altogether in this respect. (4) It is, moreover, im-
portant to note that a so-called single tax is not so in reality.
Thus a general income tax is nothing but a combination of
several special taxes, and may often prove just as trouble-
some and complex. A tax on fixed capital would be in
fact a tax on land, mines, factories, furniture, works of art,
&c., which would be so many separate categories for dis-
tinct assessment. A general tax on consumption or ex-
penditure would be even more involved. The simplicity of
such plans is therefore often only apparent, and covers a
real complexity. (5) The results of the shifting of taxation
increase the force of the preceding argument. A propor-
tional tax in assessment may, in the ultimate incidence,
be a very one-sided charge. Taxation in the simplest shape
introduces a complicating element into the economic system
the effects of which are hard to follow and often very far
removed from what first appearances would suggest.

5. The foregoing considerations and actual fiscal practice
have given countenance to the directly opposite doctrine
which has been perhaps most precisely enunciated by
Arthur Young. ''The mere circumstance of taxes being
very numerous, in order to raise a given sum, is a con-
siderable step towards equality in the burden falling on the
people ; if I was to define a good system of taxation, it
should be that of bearing lightly on an infinite number of
points, heavily on none. In other words that simplicity in
taxation is the greatest additional weight that can be given
to taxes, and ought in every country to be most sedulously
avoided V This passage has at least the merit of placing
the issue in a clear and definite form. To attain equality
in distribution there ought on this theory to be an almost
universal system of taxation touching the people at every
point. Property, income, consumption, transactions, in-
heritance should all be moderately taxed to make the
burden as even and as light as possible. Young''s views
were, beyond question, produced by repulsion from those
of the Physiocrats, and went even farther in the opposite
extreme, but they do not inaccurately describe the cha-
racteristic feature of the Finance of the eighteenth century.
As a standard for modern times they are evidently inappli-
cable and opposed to the most important and valuable,
reforms of the present century. To secure the placing of
pressure '' on an infinite number of points '' would require the
interference of the revenue authorities in most of the indus-
trial processes and the private life of the community. Taxes
on all commodities, on transfers of goods, and on the
different forms of production would be extremely pre-
judicial to the development of industry, irksome and incon-
venient to the payers, and very costly in collection.
Financial history affords abundant examples of these evils.
The Alcavala, or duty on all sales, has been regarded by
Adam Smith as the cause of the ruin of agriculture and
manufactures in Spain 2 . The English customs before the
first reforms of Huskisson exemplified the evils of undue
multiplicity in one branch of taxation, and the United
States revenue system during the Civil War was an even
more striking instance of the same defect 2 . To properly
arrange and combine a great number of duties is too diffi-
cult a task to impose on administrators, who are sure even
with the utmost care to inflict much injustice and cause
heavy losses.

6. The defects of the opposed systems of single and of
multiple taxation tend to countenance what has been called
'' plural taxation,'' in which the revenue is not on the one
hand collected by a single form of duty, nor, on the other,
divided into a great number of trifling charges. Under the
existing conditions of society this is the course that has most
in its favour as being at once the most productive, least in-
convenient, and on the whole approaching nearest to justice.
But it is necessary to remark that this conclusion is limited
to present circumstances. It does not follow that it may not
be possible at some future time to adopt a single tax system,
or at least a very close approach to it. Among the argu-
ments urged against the single tax is the actual wejgkt of
taxation and the risk of exciting discontent by raising the
required sum in a single payment. Suppose, however, that
public expenditure were greatly reduced, so that instead of
eight, ten, or fifteen per cent, of national revenue, only
three or four per cent, were required ; it might well be that
the relief to industry and the facility of collection would
make an income tax advisable as the sole agent for raising
revenue. So large a reduction of expenditure is not to be
expected. When dealing with that part of our subject we
saw that the tendency was towards increase, but it is not
difficult to conceive how a very different state of things
might have come into being. Let us suppose that Eng-
land had never engaged in the Revolutionary and Napo-
leonic wars, and that her foreign policy had been for the
past century that of rigid '' non-intervention,'' the financial
results would certainly be (i) the entire removal of the
credit card debt with its charge of 25,000,000 and whatever
surplus may actually exist ; and (2) the reduction of the
army and navy estimates to less than one half of their
present figure. Moderate reductions in the Civil Service
would allow of a curtailment of expenditure to the amount of
at least 50,000,000, leaving in round numbers 25,000,000
to be provided by taxation. An income tax of gd. in the
pound (including as it should the smaller incomes now
exempt) would be the most direct mode of procuring that
sum. The position of the United States, if the Civil War
had been obviated by prudent statesmanship, would be
even more favourable. A very moderate income tax would
have met all the expenditure of the years 1850-1860, as the
low customs duties actually did 1 .

It thus appears that the form of taxation depends in a
great degree on the amount of expenditure. With modera-
tion in outlay it is possible to have simplicity in taxation,
and the difficulties of the problem of expenditure, already
hard enough, are increased by the need of weighing the^
greater difficulties of heavy taxation. It is eminently true
that wise policy is essential for sound Finance l .

7. Financial necessity makes the retention of different
forms of taxation, if not an absolute necessity, at all events
advisable both in the interests of the State and of the
payers. And this being so we have next to examine the
comparative merits of the different forms in use. The first
broad distinction that between direct and indirect taxes
has some connexion with the controversy as to single against
multiple taxation. The most popular forms of the single tax
are direct, while most of the charges in .a multiple system
are indirect. There has been accordingly a not unnatural
tendency to confuse the two separate issues by identifying
single with direct and multiple with indirect taxation. The
confusion is helped by the fact that the great advocates of
the single land tax laid particular stress on its being direct.
The essential form of taxation,'' says De La Riviere, * con-
sists in taking taxation directly where it is, and not wishing
to take it where it is not. . . . To change that direct form of
taxation in order to give it an indirect one is to reverse a
natural order from which we cannot depart without the
greatest inconvenience '' 2 . The idea that taxation should
not lead to shifting and repercussion was one of the strong
points of his school. The original conception of direct
taxation as being that which is imposed immediately on the
ultimate source from which it comes was, as we saw, altered
for administrative convenience, and applied to cases where
recurring payments were made and lists of tax-payers
kept 3 . But this use of the term, whatever its technical
advantages, obscures the broad line of division that the
older meaning gave, and which really possesses so much
scientific importance. Whether a duty is assessed directly
on the ultimate bearer or is passed through various inter-
mediaries before reaching him, may not be capable of being
precisely known in all cases. There are no hard and fast
lines in fact, and the instances on the margin may be
numerous, but if we take the terms, not as giving a com-
plete classification of taxes, but as marking the presence or
absence of a certain characteristic, they may be employed
with advantage, but rather to suggest reasons for dis-
crimination than to definitely settle results A .

The expressions * direct '' and '' indirect '' have received a
further alteration which makes it more difficult to employ
them without careful explanation. Taxes on property and
income form a very large part of the direct taxes ; those
on commodities collected from the producer or dealer an
equally large part of the indirect ones. These are, besides,
the special forms of the two kinds of taxation that are
usually selected as types in discussions about them, so that
it is not difficult to understand how the comparisons
between direct and indirect taxation have become for the
most part an inquiry into the relative merits of taxes on
income and property as against taxes on commodities.

This employment of the terms is supported by the
distinct origin of the two forms. '' Taxes '' on property and
persons (Steuern) present a marked contrast to the '' duties ''
on goods and commerce (Abgaben und Auflagen\\ and
especially in the fact that the former were direct, the latter
indirect. A feeling of this original separation is at the
root of much of the discussions on the merits of the two
classes and helps to make the issue more obscure 1 .

Still the contrast between the two groups of taxes that
are usually regarded as being direct and indirect, quite\\
apart from the question of incidence, has a sufficient value
to make it convenient in estimating the merits of a given
system. The peculiarities of the separate taxes that a
more scientific arrangement exhibits may fitly be treated
in dealing with particular taxation, but the broad general
separation that is so familiar in financial discussion serves
better for the purpose of showing the requisite conditions
of taxation as a whole.

8. Starting, then, with the conception of direct taxes
as those levied immediately on the '' subjects,'' and therefore
embracing taxes on income and property, or on their com-
ponent parts, in opposition to duties on commodities and
on exchange, where there is a shifting of the burden from
the immediate payer to the subject which justifies the name
of '' indirect,'' we have to consider the merits and defects
of each class, and the most desirable mode of combining
them.

At the outset the advantages of direct taxation seem to
predominate. As income is the ultimate source of taxation
its immediate imposition is the most obvious and rational
way of claiming a share in the produce for the State. The
taxes on the different components of income have the same
merit. Rent, interest, and earnings, are the natural objects
on which to place the charges of the State. Where it is
thought desirable on grounds of justice to tax property,, the
direct mode of doing so seems the simplest and least in-
volved. As a single tax appears better than a multiple
system so does direct taxation seem superior to indirect,
and for much the same reasons. There is the greater
facility and lower cost of collection, and the power of
knowing the exact amount paid by each person liable.
The drawbacks are also of the same kind. The greater
dislike to direct levies of taxation is notorious ; the demand
for payment is more disagreeable than the fact of paying,
as it brings home the existence of the charge without any
possibility of escaping notice. Formerly financiers were
too anxious to escape popular resentment to have recourse
to this form unless in extremities, and in modern days
taxation must be suited to the taste of the voters. Another
difficulty is the necessity of assessment in all direct
taxes. If imposed on income, on property, or on any
separate part of produce, there must be a valuation of
the object which is charged, affording opportunities for
evasion and for arbitrary official action. It is true that the
progress of society may be expected to reduce these
objections. As acquaintance with the operation of taxation
becomes greater the payers form a juster estimate of the
amount that they pay, and will feel that direct levy is really
no worse than taxation through the enhanced price of
commodities.

Moral progress may also diminish the disposition to
evade payment by creating a higher standard of social duty,
and the better organization of the financial service will
limit the risk of undue official pressure. Still these evils
actually exist, and the extent to which they are likely to
occur must limit the employment of direct taxation 1 .
Again, under a system of pure direct taxation it is very diffi-
cult to obtain their due proportion from the poorer members
of society. The attempt to carry the income tax at a high
rate down to the lower incomes now exempt would be both
costly and irritating, and the only produce tax that would
much affect them that on wages would be still more
obnoxious. No doubt with moderate expenditure and an
improved standard of social morals the difficulty would be-
come manageable, but we cannot assume the existence of
these favouring conditions without adequate proof 2 .
It is moreover alleged that direct taxation is inexpansive,
in that it does not grow in proportion to the increase of
national wealth. This, however, is not altogether correct, and
so far as it is true can be accounted for without difficulty^
The growth of so important a direct tax as the English
income tax since its re-establishment in 1842 has been very
remarkable. The yield per penny for the first year was only
730,000 ; in 1890-91 it reached 2,200,000, or a three-
fold increase 1 in less than fifty years. Indeed the only
explanation that can be given of a lower increase in an
income tax than in income is that of evasion by the
payers, an objection already considered. But in fact there
are special reasons for the slow growth of certain direct
taxes. A tax on rent will not increase in proportion to
the growth of income, as it is generally fixed for a period of
some length. The French land tax cannot increase since
it is apportioned and therefore fixed in amount, and in all
cases of valuation it is not easy to keep the assessments up
to the actual gains 2 . The counter-advantage that, in a
progressive society, these taxes tend to become lighter
while yielding a definite amount ought not to be over-
looked. It is a benefit to have one part of the revenue
that can be depended on, even in times of crisis. Taking
the defects and merits together we may believe that direct
taxation ought to be a part of every modern financial
system, and that the extent to which it can be carried will
depend on the particular conditions.

9. The weak points of direct taxation are the strength
of the opposed form. Indirect taxes are not felt by the
payer in the same degree, and therefore cause him less
annoyance. A tax mixed up in the price of wine, tea or
tobacco, is not brought so clearly to his mind : it seems to
be a part of the expenses of production and to be due to
purely economic causes. If '' the best tax is that whose
forms most effectually disguise its nature '' l there can be
no doubt of the superior merit of indirect ones. A second
advantage is the facility that they supply for taxing the
smaller contributors. Duties on articles of general con-
sumption touch all classes, though if necessaries are exempt
they leave the minimum of subsistence unaffected, but only
on the condition that the minimum revenue is confined to
that object. Thirdly, they are both productive, and in
times of prosperity elastic without undue pressure. The
growth of the English excise and customs, in spite of
great reductions, has been remarkable. Again it has been
often pointed out, that taxes on commodities are collected
at a convenient time, since the contributor '' pays them by
little and little as he has occasion to buy the goods ... he
is at liberty too to buy or not to buy, as he pleases V This
remark of Adam Smith''s has been extended to the asser-
tion that indirect taxation is preferable as being ''voluntary.''
There is no necessity to pay unless the tax-payer is
willing. This, if true, would be a disadvantage, but, as
Mill h''as shown 3 , it is an obvious fallacy. A citizen can
escape a wine duty by not consuming wine. That course,
however, has the double disadvantage of depriving the State
of revenue and of diminishing his own enjoyment. In the
case of a direct tax of equal amount the same saving would
be made by giving up the use of wine, by which the
revenue would not suffer. This possibility of checking
consumption is a bad, instead of a good, feature in taxes on
commodities. Other defects are easily discoverable. The
rule of equality appears to be frequently violated. Articles
of general consumption are used in much larger proportion
by the poor than by the rich, so that in any modern fiscal
system the pressure of direct taxation comes chiefly on
the working classes. Expedients may be suggested to
diminish, this evil. Articles of luxury, may be subjected to
heavy taxation, and the rates of duty may be fixed accord-
ing to the quality of the articles taxed. Such measures,
however, give rise to further difficulties. Duties ad valorem
lead to evasion, and articles of luxury are easily smugglea\\
In spite of any possible alleviations the remaining inequality
must be considerable. The elasticity of indirect taxes has
its unfavourable side. At times of depression their yield
cannot be relied on ; as they grow in prosperous years so
do they shrink in bad ones. Nor are they easily extended.
Increased duties may possibly give stationary or even
diminished receipts x . Reliance on indirect taxation alone
will therefore sooner or later cause financial embarrassment.

Expenses of collection are probably somewhat larger in
the case of indirect taxes, though the difference is not so
great as is often asserted. The cost of collection of the
English Inland Revenue (about one-half of which is direct)
is less than that of the customs, but so much depends
on special conditions and the amount of revenue to be
raised, that a general conclusion on the subject would be
misleading.

By far the most formidable objection to the indirect
taxation of commodities is the loss to the society through
disturbance of industry. The evils of both customs and
excises in this respect have been forcibly shown by Cliffe
Leslie 2 . The former close some ports altogether on the
ground that there is not trade sufficient to justify the ex-
pense of maintaining custom houses at them, and limit the
imports of taxed articles at others. Towns without bonded
warehouses are at a disadvantage in competing with those
who possess them. Industries are either prevented from
coming into being, or have their development retarded by
such regulations and restrictions. The excise system is
injurious to the industries under its supervision, as it
controls the processes to be employed, and hinders the
introduction of improvements. Routine is necessary for /
effectual regulation, but it is fatal to the spirit of enter- /
prise that is the cause of industrial advance. The various
items of this indictment are supported by specific alle-
gations 1 , and there can be no dispute as to the gravity of
the issue raised, and as to the existence of the grievances
stated. None the less are we compelled to hold that the
retention of taxation on commodities is at present a neces-
sity in most societies, and that by judicious measures it is
possible, not indeed to remove, but to reduce the evils com-
plained of. There are considerations other than those
noticed by the assailants of these duties. All taxation is,
it must be remembered, evil in its deduction of wealth and
in the restrictive measures that must be used to make it
effective. Direct taxation has its own inequalities and in-
justices, and is, besides, often vexatious and inquisitorial.
A presentation of the faults of one particular form of tax-
revenue is impressive, but should be qualified by considering
the difficulties of any alternative method. In Economics
and Finance we must be on our guard against the '' fallacy of
objections.'' Again, it is not clear that the taxation of a
small number of articles has the very serious influence
ascribed to it. Most of the instances of interference with
processes are taken from cases that no longer exist. The
duties on salt, glass, and sugar, may have hampered inven-
tion, but they are things of the past. Apart from
intoxicating drinks and tobacco the industry of the United
Kingdom may be said to be free from control for fiscal
purposes. A further point may be noticed. The customs
staff is not purely a revenue agency ; inspection and super-
vision of the shipping industry is, or is generally assumed
to be, needed for sanitary and police reasons. It is but one
part of the system described in an earlier chapter 2 , and its
whole cost should not be ascribed to the need of revenue.
So far as the duties on stimulants seek to repress consump-
tion, whatever hindrances they cause to the industry cannot
be looked on as evil, since they conduce towards the object
aimed at. The value of industrial liberty is doubtless great.
What represses or diverts the economic forces that tend to
increased production of wealth should not be allowed with-
out adequate reason, and should be carefully watched ; but
on striking a balance it seems that the advantages outweigh
the evils wherever a large revenue has to be obtained, and
where the system of indirect taxation is kept within narrow
limits.

10. On the borderland between direct and indirect taxa-
tion lies a large class, or rather several classes, of taxes such
as those on transfers of property, on ordinary contracts, on
communication and transport, and in short the numerous
charges on acts. All of them belong to the category of
indirect taxes in the administrative sense as do most of
them in any sense of the term. They stand on somewhat
different ground from duties on commodities, inasmuch as
they sometimes approximate to fees for special services
rendered, and in others are directly levied from the ulti-
mate payers. They do not so much interfere with industry
as with commerce in the strict sense, but they are open to
the same kind of objections as those urged against the
taxation of commodities. To hamper exchange is to pre-
vent the passage of productive agents into suitable hands :
a tax on communications is a check on commercial inter-
course, and duties on legal transactions, if widely extended,
prove very troublesome and annoying to the most active
and intelligent members of a community. For these reasons
it is desirable to keep taxation of this kind as a subordinate
resource applied only to 3. moderate amount, and chiefly
with the aim of completing gaps in the financial system.
The difficulty of making the pressure of these taxes at all
proportional or even of analyzing, their incidence ought of
itself to prevent their being made a principal source of
revenue. But when used partly as fees for special services,
partly as affecting forms of wealth that are very likely to
escape their due share of taxation in other ways, and finally
as affording valuable tests of the correctness of the returns
to direct taxation, they have a good claim to continue as a
subsidiary means of revenue, and as a relief to the pressure
on visible income of the purely direct taxes, and on the
general consumption of the community from taxation of
commodities. The extent of their application must be
decided with reference to the particular circumstances of
the country, and the opportunity for employing direct
taxation.

11. The system of Finance best adapted for a modern
society is accordingly one in which the objects of taxation
are judiciously diversified in such a manner as to realize the
ends desired. The usual source of taxation is national in-
come, the mass of fresh production during the period under
notice, and one most desirable part of the revenue system is
that which directly receives from the shares of this fund a
contribution towards the maintenance of the State. The
rent of land, the interest on capital, the earnings of man-
agement, and the wages of labour, may all as the component
parts of income, be rightly made contributory. Whether
they should be imposable in their separate forms, or simply
as income, is in principle immaterial, but the method of
distinct taxes on each share seems to belong to a lower
stage of development than the general income tax. To
escape the difficulties, partly technical partly political, that
direct taxation by itself creates, the taxation of various
'' objects '' on which income is expended, must generally be
adopted. Instead of attacking wealth as it is acquired, its
use is made the object of charge. The method of taxing
producers and dealers, in order that they may pass on the
charge to consumers, is a recognition of the tendency of
certain taxes to shift their weight, and an effort to utilize
that tendency in facilitating the collection of revenue.

Taxation of income and of commodities are the two great
forms of revenue receipts, whose importance overshadows
all others ; but while this is apparent in every budget, it is
equally true that a certain proportion of revenue can be
obtained by the operation of other charges, that cannot
easily be brought under either of the leading categories.
Some transactions are well suited for the imposition of
moderate duties. Communications may be made to yield
no inconsiderable resource to the State, and above all the
inheritance of property is at once a means of testing the
accuracy of returns as to income, and an opportunity for
taxing masses of accumulated wealth.

These ingredients of a well ordered system require to be
combined in very different proportions at the several stages
of development. In a new country, with sparse population
and little capital, a direct income tax would be a very
defective instrument. Where there is little foreign trade,
and most commodities are produced and consumed at home,
taxation of commodities is not, and cannot be, productive.
Peculiarities of social organization have, too, considerable
influence. Taxation of inheritances is unsuited for a com-
munity where the family is the unit of society, and property
is really held by corporations, not by individuals.

How important the special circumstances of social life
may be in this respect can be better realized if we reflect
how much of existing English taxation rests on the cir-
cumstance that wine, tea, and tobacco, are not native
products 1 .

12. We thus get a well-defined system of taxation com-
prising the three departments specified in the preceding
section, and it seems beyond question that this will for a
long period be the prevailing type. So far as any general
course of development can be traced, the movement is
towards a greater use of direct taxation. The income tax
a product of the present century is on the whole in-
creasing in favour, and the imposition of higher duties
on inheritances is also probable. The great importance of
both excises and customs is nevertheless a prominent
feature. We cannot see how the existing outlay of any
modern State could be maintained without their aid. We
shall indeed discover that they are confined to one branch of
Finance, and are unfitted to be local resources \\ Still the
general conclusion is clear, that the great divisions of the
tax system are likely to remain in active use, partly no
doubt in consequence of their suitability to the existing
financial organizations, but far more on account of their
serviceable qualities.

A further advantage of this combination should be
noticed its elasticity. In modern Finance it is desirable
that the receipts shall be capable of easy adjustment to the
expenditure without undue inconvenience to the contribu-
tors. The employment of the different forms of taxation
tends to realize this object. The steady growth of the
receipts from commodities in times of prosperity, the de-
finite yield of direct taxes, and the power of altering the
rate of the income tax, taken together, provide the condi-
tions for securing a growth or contraction of receipts as may
be thought best.