home | authors | books | about

Home -> Charles Francis Bastable -> Public Finance -> Chapter V a

Public Finance - Chapter V a

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 precise method of taxation employed will have an
important influence ; whether the duty be imposed at an
early stage or allowed to lie over till the article is ready
for the consumer, whether the measure adopted is supposed
capacity of production or actual product, are very material
circumstances in deciding the exact incidence.

The apparently simple case of taxation of commodities
thus appears to be really surrounded with complications
that need close and careful study. The same questions
would arise if the tax were levied directly from the con-
sumer ; there would be the possibility of a backward
incidence, just as there is of failure of the forward one.
In fact, as the position is sometimes explained, there is
a struggle between producer and consumer, each striving ^
to throw the loss on the other, and much will depend on
the economic strength of the parties. As a rule, producers
are a smaller and better organized class, and therefore have
the chances in their favour, though where they possess
a monopoly or any differential gain, this advantage is lost
to them. Fresh increases of taxation are more readily
passed on to the consumer than reductions are restored
to him. This element of friction has another effect. Small */
additional amounts of taxation are not easily shifted ; a
few pence on or off the gallon of spirits cannot directly
influence retail price. The initial shifting always implies
an effort, which however very readily takes place in indus-
tries accustomed to alter prices as the various expenses
of production change. Additional taxation and a rise in
the price of hops are events of exactly the same kind to
the brewer, and their final result is distributed in the same

The diffusion of the burden may be still more compli-
cated. In modern society products pass through the hands
of several distinct classes before reaching the consumer, and
the struggle of buyer and seller will be repeated at each
separate stage. The existence of monopoly or of some
form of limitation at any point may prevent the shifting
passing any further. An economically strong intermediate
group may throw a charge back to the producer, send it
forward to the consumer, or divide it between both.

The foregoing analysis of the actions and reactions that
may accompany or result from the imposition of a tax
on a commodity shows the general conditions that are
influential. They are (j) the presence or absence of mobi-
lity ; in the former case, the normal shifting to the con-
sumer will take place; in the latter, it is retarded: (2) the
law of demand, on which depends very much the extent
to which there will be a reflection of the burden either
back to the producer or to other industries : (3) the
method of taxation as affecting the preceding conditions :

(4) the organization of the industry and its division, and.

(5) the amount of taxation. In regard to this last circum-
stance, it may happen that additional taxation will increase
the force of competition. The new element may be just
the last thing wanting to break up the existing settled
conditions. This will be easily understood by considering
the effect of successive very small additions to the duty on
a given article. Each of these will tend to remain on the
the payer, but as soon as the additions are sensible or
easily distributed the shifting movement will tend to act.
The most rigid and gainful monopoly must, if taxation be
carried sufficiently far, either pass on the weight or abandon
the undertaking.

6. The comparatively easy case of a tax on goods
enables us to perceive the general character of the changes
in incidence produced by the process of shifting. We have
now to deal with the more important and interesting ques-
tion of the movements of incidence in respect to the
incomes of the different economic classes. The whole
tendency of modern Economics has been in the direction
of emphasizing the fundamental similarity between the
departments of exchange and distribution l . Rent, wages,
interest, and employers' earnings are exhibited as the prices
of the respective services of land, labour, capital, and busi-
ness ability. Might we not say that a tax on any of these
commodities would be amenable to the same reasoning as
that already applied to material goods, the consumers of
each of the factors of production being those other factors
that need its co-operation ? This mode of treatment is, we
believe, inconvenient, owing to the distinguishing pecu-
liarities of the shares in distribution. Their production is
not in the same form or subject to the same conditions
as that of ordinary commodities. Nor is the nature of
demand the same in respect to them. To reduce them to
a common heading would be an undue straining of the
analogy that undoubtedly exists. A better mode of deal-
ing with the question is rather to consider it in the light
of the theory of distribution, while availing ourselves of
whatever is applicable in the case of taxation of material

There is no need for attempting here to re-state the
economic theory of distribution. The work of Ricardo
has been filled in and placed in closer relation to actual
conditions by the ablest workers of the past and present
generations \ who have carefully elaborated the originally
fragmentary doctrines on the subject. The main conditions
affecting changes in distribution must however be noticed :
for the effect of taxation is plainly a deduction from the
total produce, i. e. so much loss to be re-distributed among
the parties concerned 2 .

Assuming competition, the main circumstances on which
the amount of rent depends are the position of the margin of
cultivation, and the several qualities of land that lie above
it. Change either the worst land in cultivation, or the rela-
tion to it of the superior soils and the quantity of rent will
be altered 3 . In estimating the incidence of a tax on rent,
its effect on these conditions is the first consideration.
The usual way of showing that a tax on rent cannot be
shifted is to point out that it does not affect that particular
land that pays no rent, and consequently leaves the deter^
mination of the total amount, including the tax, as before.]
Ricardo and some of his nearest disciples differed as to the
incidence of tithes or proportional taxes on the raw
produce of land. The former maintained that such a tax
must fall on the consumer, since in the case of products
from the worst land in cultivation there was no rent on
which it could be placed, and it was the production from this
laud that determined price ; as the cultivator would need
his average profit, the shifting to the consumer was neces-
sary. Senior and McCulloch held that the rise of price
would cheek demand, and therefore by changing the posi-
tion of the margin in an upward direction would reduce
rent *. Without discussing the special point^a^jssue, which
belongs to the group of land taxes 2 , we see that the criterion
used by both is the effect on the general condition of
agricultural industry. That on the hypothesis of perfect
competition a tax on rent must remain on the payers is an
indisputable truth, but for the cases of actual taxation it is
important to bear in mind that economic rent is mixed up
with other elements. The investment of capital in land
yields a return in many instances indistinguishable from
economic rent, but at the same time it is ' really the profits
of the landlord's stock V So far as no discrimination can
be made between these components, the incidence of a tax
will fall to some extent on the return to capital, and, if
sufficient to discourage its investment, will tend to be passed
on to the consumers of agricultural products, since land of
inferior natural quality must be cultivated in order to
supply the required quantity.

The opposite case of taxes imposed elsewhere falling on
rent is much more probable. The class of differential gains
of which rent is one very conspicuous instance is peculiarly
liable to be affected by taxation. The influence of com-
petition is, speaking generally, effective in distributing special
burdens on a particular industry ; but where special gains
have been obtained an equivalent tax is the restoration not
the destruction of equality. This is the kernel of truth in
the Physiocrats' belief, and on it their exaggerated doctrine
was based, v No kind of actual tax can be imagined which
might not under certain conditions diminish the fund that
goes to the landowner. Wages, interest, employers' receipts,
duties on goods, or on acts, all supply such examples, and
they all accomplish their effect by operating on the margin
of cultivation in the widest sense. The complicated work-
ing of the tax system is very well shown by this circum-
stance. It is, as we discovered, very difficult to single out
differential gains for exclusive or extra taxation, but the
ordinary agencies of economic life are tending to that
object, though of course in a very limited and imperfect
way. They strike as well the earned and the unearned
increment, the investment profitable through the foresight
of the prudent employer and the lucky chance of the rash
speculator, the rents of careful and improving as well as of
inattentive and tyrannical landlords.

7. Taxation of the capitalist's share of the national
income gives rise to more difficult problems than those
connected with rent. Between the doctrine of Turgot that
a tax on profits is always, and that of Ricardo that it is
never shifted 1 , we have to take an intermediate position.
A general tax on interest as it affects all employments
equally would appear certain to remain on the payers.
The mobility of capital cannot here, so long as we con-
fine our attention to a single country, have any effect.
Where the tax does not extend to capital invested abroad
it is evident that it would discourage home investments
. and lead to the emigration of wealth to other places. ' The
proprietor of stock,' as Adam Smith tells us, * is properly a
citizen of the world, and is not necessarily attached to any
particular country 2 '. Even within a limited area another
feature of capital will affect the incidence of special taxes
imposed on it. Unlike land, it can be indefinitely increased
by human foresight and providence, having as a chief
inducement the return to be obtained by investment. Taxa-
tion on interest lowers that return and is therefore a direct
discouragement to saving. So far as it is effectual, the diminu-
tion in the supply of available capital tends to raise the rate
of interest and transfer the incidence to the consumers of
capital, i. e. the other factors in distribution, and as rent is
not likely to be much affected, in reality to the producers,
including both employers and labourers. How far the
check to production will show itself in a higher cost of
production and therefore fall on the consumer is not easily
determinable ; if there were to be a substantial check to the
investment of capital this would be a probable result,
causing a diffusion of the incidence, some of it return-
ing to the capitalist in his capacity of consumer.

. For most purposes of economic reasoning there is an ad-
vantage in neglecting the differences between the different
forms of capital and dealing solely with the characteristics
common to all. But in handling the problem of incidence
it is necessary to see that there are two broad classes of
reproductive wealth, the one free and capable of being
turned in any direction ; the other fixed in some particular
industry. It is primarily to the former that the arguments
from the mobility of capital apply. Once invested, the
difficulties of withdrawal place the possessor for the time
in the same position as the landlord. A tax on fixed
capital would then seem to resemble in its effects a tax on
rent, and to be equally untransferable. One instance
that of land improvements has been already discussed,
and in considering it we saw that the mode of relief to the
capitalist was simply by reducing future investments. The
single tax on fixed capital in the sense used by Menier
and his followers would be at first a heavy burden on
the owners of those forms of wealth, that would later
on show itself in reduced investment and retarded pro-

Free capital, if separately taxed, has much readier modes
of escape. Employment outside the particular tax area
makes it very difficult, even if the law enacts it, to enforce
collection, consequently the chance of placing a tax on
movable capital is much reduced by both economical and
technical circumstances.

The chief condition then on which the incidence of a tax
on interest depends is the effect on the accumulation and
investment of capital, including the action on the saving
propensities of the inhabitants and their disposition to move
their wealth to escape taxation. If the rate of interest is
determined by what Jevons calls the * final utility ' of capital,
it is plain that the possibility of shifting the tax will depend
on the effect produced on this margin of investment. If it
is forced up the weight will be transferred from the reci-
pients of interest to that indeterminate class who gain by
the cheapness of capital 1 . A tax on the returns of fixed
capital will at first rest on the payers, and only be trans-
ferred with difficulty, but it will ultimately, when the old
supply is sufficiently contracted, come under the same

Mixed up with the interest of capital in Ricardo's treat-
ment of taxes is that element of profit variously described
as ' wages of superintendence;' ' earnings of management,'
or ' employers' gain.' It has, however, strong claims to
separate treatment. The profit of the entrepreneur has
some points of resemblance with wages as it has others
with rent, and we must therefore be .prepared to find that
the movement of taxation is different in its case from that
of ordinary interest. The analogy of rent would lead us to
believe that a tax on the gains of the employer would not
be transferred, since there would be no opportunity for
escape on the part of the immediate bearers. A tax on
this very indeterminate element of the gross profit of busi-
ness would, however, be certain in practice to trench on the
other constituents. Limited as the gains of employers are
by the competition of inferior rivals the effect of a tax in
driving out the weakest of those engaged in the business
would help to shift a part at least of the weight from the
survivors. Taxation of this kind would operate somewhat
as taxation of commodities. The objection may occur that
when the gains of all industries are taxed there is no motive
for the weaker employers giving up business. They can,
however, pass on to the class of labourers as others by
taxation may be hindered from leaving it 2 . (The position
of the marginal employer appears as the condition deter-
mining the shifting of taxes on the employer's gain. )

This share of national income may also suffer through the
operation of taxes on commodities. When a duty of this
kind is not transferred to the consumer the burden is likely
to fall on the differential element in profits ; the tax has to
be paid without the compensation of a rise in price, and
there is no way of shifting the burden unless in the case of
raw materials where rent may be curtailed. It is quite in
accordance with the analogous case of rent that taxes should
be shifted to the peculiar gains of the employer. It is,
besides, possible that a tax on interest may be transferred
to profit in the limited sense. When the rate of interest is
raised, as we have seen that it may be, by taxation, the em-
ployer has to pay dearer for his borrowed capital, and, so far
as what he works with is his own, loses on one hand what he
gains with the other. On the whole we may confidently say
that the broad and simple statement that taxes on profits fall **\
on the capitalist, who can in no wise transfer them to others,
requires to be very much limited before it can be accepted
as correct. We must separate the two essentially different
elements of interest and employer's gain and recognise that
while the one is affected by changes in the point of final
'utility of capital, the other is connected with the oppor-
tunity for profitable industrial effort.

8. If the older theories on the subject of incidence
assumed too hastily that rent and profits had to bear their
own immediate burdens and under certain conditions those
of others, they made amends when dealing with wages.
The transference of taxes on this part of revenue was
asserted in the most positive manner. The landlord, the
capitalist, the consumer might all be affected by a tax on
wages, but the labourer himself was always exempt from
contributing to the requirements of the State. This immu-

reality a perpetual migration along the borders between capital and labour, as
there is also an intermediate class who individually may be regarded as
capitalists or workmen,' Leslie, Essays, 390-1.
nity extended to the higher kinds of wages and salaries
since they had a fixed relation to the ordinary rate 1 .

The historical explanation of this belief is afforded by the
evolution of the system of hired labour from the earlier con-
dition of serfdom. The slave as an instrument of produc-
tion received what was needed for his maintenance ; any
reduction in its amount would reduce his efficiency. Taxa-
tion was paid only out of his master's income, it did not
concern the living machines engaged in the creation of
wealth. This conception survived in the earlier period of
free labour, and gained support from the doctrine of a
* natural ' rate of wages common to the French and English
economists Any reduction in the rate would, it was held,
act on population, and by diminishing its number restore
the former real reward of the labourer. In spite of occa-
sional concessions such was the opinion of Turgot, of Adam
Smith, and of Ricardo 2 , and gwen the premiss the conclu-
sion was sound enough. It is also true that in the France
of the eighteenth century and the England of the Napo-
leonic war wages did seem to-. have touched the subsistence
point and to give a direct verification of the economical
doctrine. But strange to say there was no notice taken of
the fact that one of the causes of this deplorable situation
was the heavy and unequal pressure of taxation. The*
French peasant and the English labourer were the greatest
sufferers by the fiscal systems under which they lived and
financial reform was one of the means of their relief.

No account of the incidence of a tax on wages can be
satisfactory that does not fully recognise the existence of
varying standards of comfort, even among the lowest un-
skilled labourers at different times and places. Beside and
above the physical minimum there is what Mill calls a
'moral' minimum. The conditions must be exceptionally
unfortunate that do not allow the labourer something above
mere subsistence, and when that minimum point is ex-
ceeded there is something on which taxation may fall. To
judge the incidence of taxation we must know its effect on
the standard of comfort. If that is retained unaltered there
will be a transference of the tax to the capitalist or employer ;
if it is lowered the labourer bears the tax himself. This
consideration applies to each industrial grade, but it is
evident that the higher the usual scale is placed the less
the probability that it will be readjusted to suit taxation.
When a group of labourers possesses a monopoly it, in
common with all holders of differential gains, has no power
of throwing off the burdens imposed on it, and as most
skilled labourers have more or less special advantage the
shifting of taxes in their case is beset with difficulty.

As in the case of rent, interest, and profit we find that
the ultimate incidence of a tax on wages will vary accord-
ing to its effect on the standard of living usual in that class
and, so far as the higher kind", of wages are concerned, the
extent to which their receivers are privileged through
natural or artificial causes. Special gains of labour are
just as much at the mercy of fresh taxation as any other
differential advantage. The process of shifting requires the
actual exertion of force to carry it out, and those forces
can only be the agencies that work through supply and
demand. If the same supply of labour of any particular
kind is forthcoming with an unchanged demand then direct
taxation of labour will not be transferred. The great diffi-
culty of adjusting the supply of labour is a reason for
believing that any shifting of taxes imposed on it must
be a slow and uncertain process.

A similar conclusion applies to the case of taxes on the
labourer's consumption. We do not find that duties on
food produce higher wages ; they only bring the starvation
point nearer, as the history of the English Corn Laws shows.
When Ricardo argues that taxes on articles of the labourer's
consumption are exactly the same as a tax on profits he
assumes far too rigid a connexion between the cost of
living and the supply of labour. A tax on the food of
animals used in production would increase cost because
the food so given is regulated to secure efficiency, but the
labourer seeks to procure the best terms for himself. The
element of free contract present in the latter case entirely
alters the position. For completeness of statement it is
desirable to add that a great deal of wages is really the
return on capital invested in the education of the workers,
but in reality this does not produce as much practical effect
as might be expected. A tax on wages unaccompanied by
an equivalent tax on the yield of material capital would
apparently discourage expenditure in the formation of
personal or immaterial capital and turn it towards the
production of goods. This check to the supply of trained
workers would tend to raise the price of their services and
shift the pressure to the consumers of the goods produced
by them or to the employers. In practice the calculations
of parents and others who make the investment in the edu-
cation of the young are not so carefully worked out as to be
influenced by the existence of a tax on the wages of the
higher employments. Still, even with the actual imperfect
estimates, some effect would probably be traceable if the tax
were a heavy one. The necessary expenses of living in a
suitable way and the cost of training are the two agencies
that give some justification for Adam Smith's doctrine of
a balance not to be disturbed by taxation between the
different employments.

9. Our examination of the general conditions that help
to determine the true incidence of taxes on the different
constituents of income though necessarily brief at least
makes it plain that the theoretical explanation of the sub-
ject is not the simple process sometimes imagined. The
movement of a given tax is not invariably in the same
direction : its course will be guided by the surrounding
circumstances. Without knowing what these are we cannot
tell the direction much less the precise extent of its inci-
dence. To pretend to say where e. g. a tax on profits will
fall without possessing further data is as vain as to seek to
determine the space traversed by a moving body whose
initial velocity and period of movement are both unknown.
The difficulty of estimating the incidence of taxation is
increased by the complementary alterations that take place
in the economic system. A change in rent implies changes
in the amount and probably in the relations of the other
shares in distribution ; a rise or fall in the price of one
article leads to other changes of price, and we may there-
fore expect that even in the most precise and determinate
cases of incidence some additional diffused effect will be

At the best and after the exercise of the utmost care,
there will remain some obscurity as to the exact extent to
which shifting takes place, owing chiefly to the difficulty of
employing statistical verification. Deduction from general
propositions cannot overcome this obstacle : special vigi-
lance is therefore necessary to avoid errors arising from the
want of a check such as the process of verification provides.
The earlier theories are so many warnings of the danger of
hasty deductions from insufficient premisses.

But, subject to these cautions, the use of the theory is
by no means slight. We may not be able to give confident
answers to general questions on the subject, but in dealing
with particular instances we shall have the advantage of
knowing what conditions we ought to notice and what
effects we may reasonably look for. So understood, the
theory of incidence is an indispensable part of financial

© Art Branch Inc. | English Dictionary