The Principles Of Local Taxation.

1. BESIDES the system of taxation intended for the
support of the central government, and therefore usually
described as ' general/ or * imperial,' the compulsory
revenue needed for the due maintenance of local authorities
requires to be considered. This latter class of charges is
just as much entitled to the name of taxation, and in many
respects exhibits the same features as the imperial tax
revenue. Local and central government are simply different
forms of the state organization and show this fundamental
resemblance in Finance as in other respects. The need of
revenue, the general characteristics of that revenue in
respect to its origin, and the influence that it exerts on
individual and national wealth are the same in the case of
central and local bodies. It might almost seem that no
necessity existed for a separate treatment of the tax receipts
of those smaller units that historical circumstances or the
needs of social life have called into being.

But, notwithstanding this general similarity, there are
certain peculiarities in the methods of local Finance that
make it desirable to consider the forms of taxation used by
it in a separate chapter. Without in the slightest abandon-
ing the conception of the unity of all taxation, we may
examine those aspects of local taxation that give it in some
degree a distinct and common character, and enable us
to contrast with advantage the two categories of revenue
belonging respectively to the supreme and the subordinate
political bodies.

One very obvious, though rather superficial reason is found
in the great magnitude of each class. The English Imperial
revenue for 1886-7 was, in round figures, 90,000,000, that
for local purposes was 66,750,000. In other countries
there is the same possibility of opposing the two sets of
charges without finding any such difference as to warrant
us in regarding one as entirely insignificant. When we add
that local charges are on the whole increasing more rapidly,
it is easy to understand the interest that has been excited
respecting them.

There are other and deeper reasons. Local institutions
have a special function as representing the interest of
particular districts ; they are confined to a somewhat narrow
range of duties and as a consequence their revenue system
is simpler and less involved than that of the State. A rural
commune must have a comparatively primitive form of
financial organization, and even in the case of the largest
sub-divisions the absence of military and naval expenditure
and the large portion of other public duties discharged by
the agents of the central government keep down their
requirements. The expenditure of a great municipality, or
a large American State is no doubt considerable and for
very varied objects, but cannot compare in extent or in
comprehensiveness with any national budget. Moreover,
the restraint imposed on their financial action, either by-
legislation, or (in federal States) by constitutional limitations,
is a serious check on the power of local bodies l .

Another reason may also be assigned : the subjects with
which local administration has to deal are mainly of an
economic character and very often admit of rather definite
measurement. Water-supply, lighting, drainage, and the
care of roads are instances. The conduct of such matters,
if it has some resemblance to the duties of the national
government, has others no less strong to the management
of an industrial company. The propositions that ' contri-
butions should be proportional to advantage received,' and
that * political power should depend on the amount con-
tributed ' are much more plausible when applied to local
than to general government. The extent of this resem-
blance will, of course, depend on the special character of the
sub-division. A rural parish, or commune^ is in this respect
very different from London or Paris, but the prominence of
economic interests in the widest sense is traceable in all
forms of subordinate governments.

2. The history of local institutions has already been
briefly noticed in connexion with expenditure l , and it
throws light equally on their receipts. One prominent
class of these bodies is really a ' survival ' of what were
orginally sovereign powers. The ' States ' of Germany
and America, and the 'cantons' of Switzerland are well-
known examples. Lower down in the scale the commune
is the primitive political 'unit' whose importance has also
decayed with the growth of the State. In all of them the
taxing power has been limited by the pressure and com-
petition of the national government, and in the earlier
forms by the slow development of taxation. /The manor }
or ' village community,' depended on economic revenue,
not on taxation in the modern sense. /One striking feature
in state development has been the absorption of the more
productive forms of compulsory revenue by the central
financial system./ It was only natural that the monarchical
State with its hostility to feudalism and to local privileges
and immunities of all kinds should endeavour to take into
its own hands the customary taxes of districts and munici-
palities. The centralizing movement of the sixteenth and
seventeenth centuries was specially noticeable in respect to
taxation.

Motives of convenience assisted in promoting this change.
Some of the principal forms of revenue were manifestly
unsuitable for small territorial divisions. The taxation of
commodities or of income was far better fitted for the
control of the central government. Thus, both political
and economic reasons existed for the breakdown of the
older tax revenue of towns and localities.

The existing systems of local administration have, in
many cases, a quite different origin ; instead of being older
than the State they are its direct creation. In France, for
example, the whole tax system of the l departments ' and
' communes ' rests on legislation not a century old, and
though English institutions have a longer history, they are
equally the expression of the State's will *. Thus local
institutions are not always survivals, or even revivals, of the
past ; they are often entirely new formations, so arranged
as to satisfy the needs for which devolution of authority
has been deemed expedient.

In such instances their power of taxing is a concession
strictly limited by the terms of the grant. The adoption
of new expedients is precluded so that very often it is
merely the amount of one particular tax that has to be
settled and that only within definitely fixed limits. Local
taxation becomes, in fact, a kind of supplement to the
general system admitting of little independent movement.
The two opposing tendencies that affect local administration
are also in operation here. On the one hand, there is the
desire of skilled financiers to keep the errors and mistakes
of the smaller bodies under supervision. Party spirit and
class- interest are intensified when confined to a small area
and are but too ready to employ taxation as an engine of
oppression : even when no injustice is intended the ignorance
of the real working of taxation that is so common among
local administrators would, if unchecked, prove disastrous
to the national interest. Hence the limitations on the
form and amount of taxation as well as on its application.
The citizen who is unfairly burdened by his local taxes has
as legitimate a claim to relief as if the general charges were
too heavy in proportion to his income.

Side by side with this idea of more careful control there
is the disposition to extend the sphere of action of local

/ authorities. It is felt that political education is promoted
by inducing citizens to manage their common affairs in an
independent manner. To awaken or to strengthen the
feeling of responsibility is impossible, unless power to act
is also bestowed. A local body cannot be expected to feel
any great interest in its work if all the important parts of
the system are determined beforehand. To secure a vigor-
ous municipal life there must be a good deal of latitude
given to the corporations engaged in its management.
Wider taxing powers and new forms of local revenue are,
therefore, often suggested as indispensable steps in reform.
To understand the position of the question we must bear
in mind the existence of these apparently contradictory
sentiments both, in some cases, vehemently urged by the
same persons.

3. The first step in an examination of the principles of

\ local taxation is the determination of the proper line of
division from the general state revenue. We have seen
that the distribution of duties between central and local
administration conforms on the whole to certain general
principles 1 , and the most natural course would be to
apportion the charges on a similar system, but, in fact, there
is no real correlation between the two : the division of
duties is quite independent of the division of taxes, just as
both are distinct from the distribution of public property
and quasi-private receipts. The partition of taxes between
the two classes must depend on, or at least be guided by,
financial and economic considerations.

Some important taxes are at once^erf sound principles
shut out from use as local resources. The customs are only
levied at the national frontier, any attempt to restore the
provincial customs-boundaries that hampered the trade of
France before the Revolution, and in the present century
that of the German and Italian States, would be a retro-
grade, as well as an unpopular, step in Finance. The taxation
of commodities in transitu is only legitimate, when exercised
in a way calculated to cause the smallest amount of delay
and inconvenience. To regulate trade between small areas
for fiscal purposes would be at once costly and unproductive,
and therefore uneconomical. The earliest step towards
federation between independent States has been the abolition
of custom houses at their frontiers, and there is no proba-
bility that a reversal of this salutary process will be witnessed.
The octrois are an exception, but admit of explanation.
They are confined to towns and, therefore, are regulated
with comparative ease, having, in fact, some resemblance
to the market dues once so common in British towns. They
make as near an approach to direct taxes on local con-
sumption as can well be devised, with some additional in-
cidence on the surrounding country through their effect on
demand. Besides, they are unquestionably a decaying
form. France and Italy are the only countries where they
are in full force, and even in these they are looked on as a
necessary evil. It is almost certain that in the progress of
reform they will before long disappear. On the same
grounds local excise taxes are practically prohibited. To
impose a duty on an article without having the power of
levying an equivalent customs duty would mean the sacrifice
of local producers, unless they had a strict monopoly up to
the amount of the tax ; such a tax would be easily evaded
by moving outside the boundary. Thus the two great
forms of indirect taxation on commodities are withdrawn
from local resources. Direct duties on consumption might
be used, but, as will appear, they are objectionable in
either general or local Finance owing to the difficulties of
estimation 1 .

The income and property taxes are as unavailable though
for a different reason. Both are essentially personal and
belong to a given individual. Now to tax a person on his
income for the service of the locality in which he resides is
open to the doublej^bjection that it is likely to bejsvaded
and is grossly unfair. Local authorities have no efficient
machinery for detecting concealed income: they are in a
worse position than the English revenue officials in regard
to foreign investments where failure is admitted. The
mere moving from the area for part of the year would upset
the arrangements. As to the unfairness Mr. Goschen's
view seems conclusive. ' It appears to be impossible to
devise an equitable local income tax, for you cannot localize
income. An attempt was made in Scotland, and it broke
down when an English Lord Chancellor, who drew his
;io,ooo a year in London, but had a small place in Scot-
land, was made to pay income tax on the whole of his
income in that country as well as in this 2 .' No real
correction could be made without exempting all income
earned outside the district, i. e. in fact, changing the income
into a partial produce tax. No matter how large the local
division may be the same objection lies. The American
States and Swiss cantons are as little suited for the appli-
cation of separate income taxes as England, Ireland and
Scotland. Owing to the variety of modern incomes and
the trouble of following them to their sources the income
tax should always be a general tax. A general property
tax is in much the same position in local taxation, though
its defects as a part of any tax system are so great that it
is doubtful whether it can be admitted even into the list of
good national taxes. It appears to have the two great
faults of injustice in distribution and liability to evasion.
On both these points the American evidence respecting the
1 Bk. iv. ch. 5. 6. 2 Local Taxation, 204.
state property taxes is overwhelming. Large categories
of property escape altogether, and others are sometimes
taxed in two different places. Personal property is either
not returned for assessment at all, or is scandalously under-
rated. Stocks, bonds, and various immaterial forms of
wealth are easily removed from the tax-collector's notice.
Efforts at reform have proved ineffectual, and com-
petent students seem agreed that the system must be
abandoned l .

The reasons for the removal of taxes on income, property
and commodities from the list of local resources are in a
great degree technical, and rest on the difficulties of their
fair or economicLapplication. But it is further plain that
there must be a large body of productive taxation reserved
to the central government. Even if all the taxes mentioned
were eminently fitted by their nature to contribute to local
revenue, they would have to be reserved for the still more
important services of the national administration. So much
depends on division of duties between the two sets of
organs and their relative cost, that it is hardly possible to
lay down any general rule on this part of the subject. We
may fairly assume that at lowest one half of the total sum , N >
collected in taxes will have to be taken by the central ;, ',
government.

4. On the other hand there is a different class of taxes
that appears well fitted for local treatment. Such are those
that are levied locally on fixed property and permanent
occuf itions carried on in the locality. First in natural
order is the landjtax. Both abstract reasoning and experi-
ence tend to show that a large proportion of local taxation
must be obtained from this important ' object.' In rural
districts there is little else to be taxed, and in the case of
towns the value of land is so much increased by the action
of social conditions, that it forms a most suitable mark for
the larger taxation that the wants of urban societies make
necessary. The theory of incidence also supports this
view. Other charges are often shifted to rent, while it can
hardly ever transfer its peculiar burdens. As a land tax
tends to become a tax on rent, and can generally be so
regulated to take that shape, it has the definiteness of inci-
dence in its favour, and its pressure falls on a form of wealth
that is likely to grow without effort on its owner's part.
The doctrine of taxation in proportion to service, though
untenable in general, has here some force. The chief gain
of local expenditure accrues to those who own property in
the district. Some advantages may be more evident in
their effects than others, but in a broad general way the
advance of a locality means an advance in the rent of its
area. There are no doubt exceptions : unfortunate pro-
prietors have sometimes had to pay for ' improvements '
that lowered the value of their land, but on the whole the
opposite effect is more common 1 .

Next to the land tax we may place the house tax as a
convenient form of local impost. It is, indeed, somewhat
more complicated in its operation ; its incidence, which, by
regarding houses as a particular manufactured commodity,
would appear to be on the occupier, really varies according
to local conditions, and it has the disadvantage of affecting
one of the most important elements of necessary expense 2 ,
but on the other hand it is easily collected, tolerably pro-
portional to income, and does not touch those unconnected
with the district. If houses are to be taxed the revenue
thence derived should, we believe, go to the local, not to the
general revenue. The same reasons that have been noticed
in the case of land apply, but with less force, to that of
houses. This form of property gains in value by expend i' ture, but it also deteriorates through use, and therefore the
indeterminate portion of the tax that falls on the house-
owner should be kept within moderate bounds.

A third form of local taxation is discovered in the taxes J^
on the exercise of occupations known as ' licenses.' These
are far better suited for local, than for general, taxation.
They can be collected readily, and, if properly selected, do
not hamper industry. The system of low license duties on
most trades and employments has the chief attributes of a
fair local tax. The English method of appropriating the
spirit licenses to the local bodies might with advantage be
further developed.

Very similar in outward appearance are the licenses for \ ^
direct enjoyments, and, though they differ in their essential
character, they also may without impropriety be assigned
to the several localities. Certain difficulties do indeed
arise in this connexion. A license taken out in one place
may be required for use elsewhere, or may even be exer-
cised in several different localities. In practice the right
of transfer may be allowed, or better still, such cases may
be reserved for the central revenue, leaving only the localized
privileges to the smaller bodies. As a further resource
some of the taxes on acts may be usefully employed by
localities. Thus the transfer of property, registration of
companies, and other charges on legal transactions, would
provide a fund for the payment of the expenses connected
with these administrative functions. Those taxes that
closely resemble fees will come under the same rule as to
their division *. Each administration will take for itself
what it collects.

The foregoing suggested distribution must necessarily be
modified to suit the needs of particular financial systems.
Thus the house tax forms a part of general taxation in
several countries : its complete surrender to the local
authorities when proposed in England was made contingent
on the position of imperial Finance, and has not yet been
1 Bk. ii. ch. 5. 3.
carried out 1 . We cannot imagine the Indian Government
yielding up a part of the land revenue to the provinces.
The line of division has to be varied, but it is nevertheless
well to know the general principles that should assist in
determining it.

5. But given the partition of revenue between the two
forms, we have next to see whether the rule of justice that
we accepted for general taxation can be applied without
reservation in local Finance. Taxation in proportion to
income gives a substantially just division of general burdens,
but in the case of smaller districts the burden is not a
general one. Most local services are specific, and can be >
dealt with on the rule of payment for service. A large
part of the so-called English * rates,' such as those for water
supply, lighting, cleaning, drainage, &c., may best be mea-
sured for each payer by the benefit, or rather the quantity
of the service. .The citizen in fact pays for the supply of
so many useful commodities. The local authority is per-
forming a strictly economic duty. Taxation so far l '
should be in proportion to advantage. Difficulties, how-
ever, soon arise in the attempt to apply this principle. In
addition to the direct service rendered there is a margin of
advantage accruing to the whole society, and part of the
service is not done for specified persons. The necessity of
investing capital, the repayment of which is spread over a
long period, complicates the case. To get a fair division
of the charge between owners of land, possessors of fixed
capital, including houses, and the immediate users of these
public services, is no easy task. It involves (i) a deter-
mination of the real incidence of the different modes of
taxation, and of the extent and rapidity of the process of
shifting ; (2) an estimation of the truly equitable division
between the several interests ; and (3) a full recognition of
the practical limits that any effective system must observe.
As regards the first it depends partly on the general prin-
ciples of incidence, and partly on the special incidence of
land, house and capital taxes. For convenience we may
here so far repeat and anticipate the results elsewhere
stated l .

The immediate consumer, i. e. the occupier of a house or
the user of other taxed convenience, looks on local taxation
as simply a part of the price of the utilities he receives.
So far as the outlay benefits him directly, he bears it as
payment for increased advantage, and taxation is only
shifted by him when the sacrifice it imposes reduces
demand. Heavy local taxation, unaccompanied by corre-
sponding increase in utility, would tend to diminish demand
for the services so charged, and give a backward shifting
on the producers, i. e. the house-owners or other holders of
the articles. The check to these particular forms of industry
would ultimately reduce the capital and labour employed
in them, and thereby pass the pressure on to the landowners
in the shape of lowered ground rents so far as land entered
into the supply of services. Such seems to be the process
by which the ' orthodox ' views on the incidence of rates
were arrived at, the burden being ultimately distributed
between the owner of land and the consumer. In respect
to taxes on agricultural tenants the same train of reasoning
would suggest that the incidence would be ultimately on
the landlords, as outside competition would hinder any for-
ward movement to the consumer of produce 2 . It is hardly
necessary to say that this doctrine assumes a uniformity in
the course of shifting that has no real existence, since it
omits some circumstances that are essential elements in the
problem. Amongst these are : the long duration of the
arrangements between owners of land and of capital ; the
position of qualified monopoly that owners of land in towns
possess, and which with its advantages has the disadvantage
of exposing them to the action of shifting ; the slowness
with which adjustments are made, which hinders much
reliance in matters of legislation being placed on the opera-
tion of shifting in securing a proper division of the
burdens.

The second difficulty as to the true interpretation of
equity is partly the result of the complicated interests,
some present, some future, that modern society is ever
creating. In apportioning taxation between occupier,
houseowner and ground landlord, we may discover that
each of the two latter interests is divided into three or four
parts, all in equity bound to share in the burden for the
common advantage. Far more is it due to the multiple
duties of local government, some of which are merely dele-
gated for convenience, not because they are solely of local
interest. Police, prisons, poor relief, and education, may be
cited as examples. We cannot with any reason , maintain
that owners, whether of land or other property, and
ordinary householders, are alone interested in the efficient
management of these important matters. The policy of
defraying all these charges out of particular funds with the
practical exemption of others no less liable is a grave
injustice. The cost of expenditure that is in essence for
general purposes should follow the same distribution as that
of general taxation.

An opposite case is that in which outlay is incurred for
the benefit of particular owners. They may fairly be called
on to pay for this special advantage. The 'betterment'
principle has thus a foundation in justice. The community
charges for the service it has performed, but its action
requires to be carefully controlled ; the proof of benefit
bestowed must be very plain and well established, and the
indirect benefits to others must be taken into account. The
owners of building plots and houses in an improved street
gain largely, so however, in a less degree, does the general
community. The rule then of taxing according to interest
affected is not a complete and absolitfee"principle for the
distribution of local Finance. Certain forms of direct public
services can be so dealt with as well as the special im-
provements of private property. Another portion may be
fairly placed on the owners of durable property as those
who benefit most by an active and judicious local ad-
ministration. A third and not inconsiderable share may
be placed on the community generally by the agency of
local licenses and taxes on transactions, and still .more by a
tax proportional to house rent which is a good rough
measure of taxable capacity *.

6. After all these different expedients have been car-
ried as far as circumstances will allow, it may be necessary
to readjust the balance between the central and local
governments by a transfer from the funds of the former,*
or by the employment of its taxes as a base on which to
raise additional local resources.

Most systems of Finance have adopted one or both of
these expedients. To begin at home : for many years it
had been the established practice to pay local authorities
various sums for special objects to be applied in the
manner prescribed by Parliament or some branch of the
central administration. In common with other expenditure
these grants increased in amount till they reached six
millions in 1887. The result was a confusion between the
two classes of revenue and expenditure : what was outlay
in one case was income in the other, the same sums being
counted twice over. The method of assigning particular
taxes or portions of them to local authorities is plainly a
great improvement. Under the new plan introduced by
Mr. Goschen various duties have been directly marked off
for local revenue, and thereby removed from the imperial
budget l . The advantage of a distinct line being drawn,
and of making the local receipts depend on the product of
the duties, not on the pressure brought to bear on the
government, is undoubted. The same policy has been tried
elsewhere. Belgium removed the octrois in 1860, and re-
placed them by parts of several indirect taxes 2 . This
method receives an extension by making the local taxes
merely additions to the general ones. Thus the French
communes and departments draw their principal tax revenue
from the ' Centimes additionnelsl i. e. charges added to the
four direct contributions. The same plan is used in Ger-
many and Austria, though independent communal taxes
are found in various cases in the former.

Some high authorities approve of this policy of making
local taxation a mere appendage to general taxation. * It
is rightly asserted,' says Leroy Beaulieu, ' that the French
system of movable additional charges on the existing direct
contributions, of uniform accountability, and the collection
of direct local taxes by the agents of the State, makes the
management of local Finance simpler, clearer and less costly,
and gives the taxpayers much greater security against
peculation and exaction. We do not hesitate for our part to
declare for that system V But notwithstanding this weighty
judgment we are forced to believe that there is an advantage
in having a separate system of local taxation. The aims of
the two classes are so different, and the rule of distribution
varies so much, that a decided boundary between them is
rather desirable. Both will naturally avail themselves of such
material in the shape of valuations and officials as exist,
but this does not necessitate the treatment of local taxes as
merely added percentages to established general taxes.
The success of local government depends on the energy
and vigour with which it is worked, not on restraining its
action within the narrowest limits. ' The ideal condition
of Finance in a perfect system of local self-government ' has
been described as ' one in which each local authority levies
its own taxes upon its own subjects within its own area ;
in which it has the power of applying the proceeds of these
taxes, within certain limits fixed by the general law, for the
local advantage of its own citizens ; and in which it has
power to increase or diminish its taxes, at its own discretion,
according to its means and its wants 1 .' The benefits of
fiscal autonomy may perhaps not be so great as in certain
conditions to compensate for the want of harmony and
regularity that state intervention secures ; they are, how-
ever, sufficient, in conjunction with the reasons already
given, to justify strenuous efforts for securing a distinct tax
system, and this is possible without any sacrifice of the
guarantees for good government. At the same time we
may fully recognise the convenience of supplementing local
revenue from general taxation with the double object of
securing sufficient funds and more equitable distribution
of burdens, though, while granting this, we must also insist
that the extent to which the process is applied ought to be
confined within the narrowest limits consistent with attain-
ing the end in view. The allotment of part of the taxation
available to meet the general expenditure is a measure that
always stands in need of justification ; it has a presumption
against it only capable of being rebutted by sufficient
evidence.

7. The relations of local and general Finance suggest
another closely related point, viz. the extent of the fiscal
liberty to be bestowed on the local financial powers. Be-
tween the extremes of complete regulation and almost
complete independence we may discover a series of steps
corresponding to the size of the bodies and the political
training of the people. The national government may fix
the particular taxes and their amount, or it may, as with
the French communes^ let the latter be varied if its permis-
sion is sought. Again, it may lay down the forms of
taxation and place bounds to its amount, either definitely
determined or variable. Or, finally, the duty of selecting
both the taxes and determining their amount may be given
up to the local government. The first mode means the
reduction of the local authority to impotence so far as
taxation is concerned ; it simply executes the Sovereign's
orders. The other extreme approaches closely to inde-
pendence. The taxing power is always an attribute of
sovereignty ; a body that had full taxing power would
have got very near that position. Accordingly we find that
the customs duties in all federal States come under the
control of the central government. The extent to which
the right of independent taxation has been restrained is a
mark of the progress of the State towards unity. Co-ordi-
nate fiscal authorities have to be kept within bounds by
constitutional rules, but we may safely conclude that in a
durable State the supreme power in financial matters will
sooner or later be vested in the central government.

The extent to which the liberty of experiments in taxa-
tion should be conceded to the subordinate bodies must,
we believe, be carefully limited. For the smaller units the
taxes should be absolutely laid down, and also the maxi-
mum to be raised, but the opportunity of economy should
not be denied them on the condition that they duly dis-
charge their necessary functions 1 . The larger circumscrip-
tions are fairly entitled to greater latitude. A higher
standard of intelligence may be expected from their repre-
sentatives, and their economic resources are more varied.
But even with them the need for supervision cannot be said
to be absent. They may impose taxes that press heavily on
unpopular sections in their district; they may deal unjustly
or ignorantly with important economic and social interests,
or they may go counter to the financial policy of the State.
For these reasons the unitary form of government is in its
financial aspects superior to the federal one, even though
the larger liberty of levying new varieties of taxation is a
certain advantage in the latter.