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

Public Finance - Chapter IV

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

Taxes On Property And Income.

1. AT the opposite extreme to capitation or personal
taxes are those that are imposed on property. The anti-
thesis between ' persons ' and ' things ' or, in economic
language, between services and commodities, is apparent in
the earliest stages of society. When the' period of con-
tributions in kind is passed, the first objects of taxation
are the persons and property of the subjects. The pro-
perty tax is probably older than the separate charges on
the yield of land, or capital, or even labour ; the sum of
existing wealth is an easier, though not so fair an object
for imposition. Oxen, land, slaves and household goods
the res mancipi of Roman law are the commodities that
first fall under, taxation : they are on the spot, easily
estimated, and in most cases proportioned to the land
under cultivation. As society advances and new forms
of wealth come into existence, the injustice of the old
system becomes evident, and taxation is extended to
movable property, either by special taxes, or more gener-
ally by including it in the category of taxable objects.
The difficulties in the way turn out to be too strong :
personal property gradually escaped from the duty of
contributing l . Such seems to have been the fate of the property tax wherever it has been tried ; in ancient Rome,
in the various attempts in England, as also with the French
Taille and the later Dixttmes and Vingtttmes of the 1 8th

This very general tendency to disintegration in the
property tax is partly due to its economical defects,
partly to technical difficulties in its administration. As
regards the former there can be no doubt that, speaking
generally, the property tax is merely a form of assessment,
the payment being really made out of income. Taxation
that falls on capital in the strict sense must diminish the
sum of the community's wealth, a process that cannot
continue indefinitely. In using property as the basis for
taxation there is always a danger of trenching on the
accumulated resources of the society. A second obstacle
lies in the fact that property is not really a fair gauge of
taxable capacity. Some forms of wealth give a lower
return than others, and in special cases may even involve
outlay. If, as we saw x , income or revenue is on the whole
a satisfactory standard for taxation, a property tax, unless
carefully balanced by other charges, is unjustifiable. It is
the result of a confused idea as to the true measure of

The technical difficulties result from the nature of
property. In many cases it is only an abstraction obtained
by capitalizing revenue. This is preeminently true of the
great mass of property that the modern stock exchange
deals in. Shares of companies and public debts are only
of value in consequence of their revenue, and their capital
value is reached by a process of estimation ; it is besides
constantly varying in a way that does not allow of precise
measurement. Income is a definite receipt during any
given period, and is therefore a better object for charge.
The difficulty of reaching the multifarious forms of per-
sonal property is a further objection. To arrive at the amount of taxable wealth and to assess it fairly is quite
impossible. The 'slipping away' that always takes place
leads to grave inequalities and injustice. The owners of
certain forms of wealth are unduly burdened by having
to pay the share of those who have evaded their duty.
These are sufficient grounds to justify the very general
abandonment of the property tax as a leading source
of revenue. Taxes on produce (Ertragssteuern\ such as
those discussed in preceding chapters of this book, take its
place or survive it, while they in turn tend to develop into
the income tax.

2. The property tax has, however, maintained its
ground in two countries. Switzerland still possesses,
though in most instances with great modifications, this
ancient method. The central government does not avail
itself of the property tax except in the charge for
military exemption but all the cantons employ it. The
usual title ' tax on property and income ' is, however,
significant ; it marks the connexion between the sum of
wealth and its annual return, and it explains the object
aimed at, viz. the higher taxation of large and per-
manent incomes, as well as the assessment of ' enjoyment
capital.' The systems adopted are varied, complex, and
often changed 1 . Their characteristics will be best under-
stood by taking a single canton and examining its system.
That used in Zurich divides property-holders into classes.
The lowest, those under ;8oo, pay on one-half only ; the
second, those between 800 and 2000, pay on one-half of
800, and on three-fifths of the excess. Between 2000
and 4000 taxation is imposed on seven-tenths of the
excess over 2000 ; between 4000 and 8000 on four-
fifths of the excess. For property under 16,000 only
nine-tenths of the excess over 8000 is charged, while any amount over 1 6,000 is charged at its full value 1 .
Under such a scale the smaller properties escape very
easily. The Zurich method is modified in other cantons.
In Graubiinden the lowest class is charged at the ' simple '
rate ; in the next class 10 per cent, additional is placed
on the entire property; in the third 20 per cent., and so
on till in the eleventh class the rate is double. The more
primitive canton of Uri has a higher rate of progression :
from -gV of I P er cent, on property under 1200, it rises
to z\ of i per cent, on properties over 16,000. The town
canton of Bale makes but three classes ; ^ of i per cent.
is paid by estates under 4000 ; / between 4000 and 8000, and ^ of i per cent, on those
over 8000. In some cantons there is no progression, all
properties being taxed at the same rate. Communal
taxation is also in many cases levied on property, but it is
rarely progressive (e. g. in Zurich communes are forbidden
to impose a progressive rate), and generally moderate in

The Swiss system of property taxation suggests several
points of financial interest. Though a long-established
form, it has been gradually adjusted in accordance with
modern ideas, and is used to supply gaps in the other
kinds of taxation. The aim of taxing permanent incomes
at a higher rate is accomplished by a tax that does not
touch pure earnings. Non-revenue yielding wealth is also
reached, and the democratic ideal of reducing the burden
on the smaller incomes is in some degree realized. But
notwithstanding this tendency, the rates are so moderate

1 The following table will show the rates of charge
Property. Sum chargeable.

& &

400 200

800 400

1 200 640, i. e. ^ of 800 and f of 400

2000 1 1 20, i.e. ,, ,, of 1200

4000 2520, i.e. 3^ of the extra 2000

8000 57 2 > r I oi the extra 4000

16,000 12,920, or ^ for the extra 8000

20,000 16,920, the extra 4000 being all charged.
that the effect on capital is hardly perceptible. Evasion
perhaps accounts for a good deal of this indifference on the
part of the wealthy, and shows that the administrative
system is far from perfect. Again, the very narrow areas
within which the several systems are applied, and the
small populations affected, make the operation of the taxes
more difficult to use for generalization l . They are, in fact,
a remarkable form of local taxation, and should be so re-

3. One of the many points of likeness between the
American States or * Commonwealths ' and the Swiss Can-
tons is their use of the general tax on property. But on
closer examination the special differences are more im-
portant than the general resemblance. The American tax
is not in any case progressive, and is rarely accompanied
by anything resembling an income tax. Another feature
of difference is the apportionment system adopted in the
United States. A given sum has to be divided over the
several counties of a state in proportion to their assess-
ment, and the valuation of property is in consequence put
at the lowest figure admissible by the county officials.
The system adopted in Ohio may serve as an illustration
of the general methods. By a constitutional provision all
property (with some insignificant exceptions) must be taxed.
To carry out this law real property is valued once in ten
years by assessors appointed for the purpose, who are to
take each plot 'at its true value in money.' As the
assessors in each county compare results they are probably
uniform, but as between different counties there is often
great difference, which is corrected, though imperfectly, by
a board of equalization. For personal property an elaborate series of queries is issued to each adult, who is bound
to answer them, and to swear to the truth of his return.
The numbers of cattle, watches, pianos, merchandise, money,
stocks, lands, &c., have to be declared, and their selling
value stated J . Nothing could apparently be more search-
ing and effective. Other states possess tax laws quite as
rigorous. In Georgia both land and personalty are in-
cluded in the queries issued, which moreover contain a
question as to evasion. Unfortunately the universal ex-
perience is that the greater part of personal property is not
returned. Assessors' reports, Governors' messages, and
reports of tax commissions all dwell on this fact. The
New York report of Mr. Wells in 1871 is quite in agree-
ment with the Maryland report of Professor Ely in 1886,
while Professor Seligman declares emphatically that ' the
general property tax as actually administered to-day is
beyond all peradventure the worst tax known in the
civilized world V The reasons for this general condem-
nation are not far to seek. They are due first of all to
lax administration. Officials elected for short terms can-
not be expected to scrutinize very closely the answers of
their constituents. Palpably inadequate returns are ac-
cepted with little question, and the wealthiest get off best.
* A second cause is the local nature of the property tax, as
compared with the national, or even universal movement
of the finer forms of personal property. Bonds and shares
are easily moved outside a state during the time of assess-
ment, and more obvious forms of capital have to be
leniently treated to avoid their emigration. Mr. Wells
has pointed out very forcibly the discouragement to capital
that the New York system gave 3 , in contrast with those of
Pennsylvania and other adjoining states; but in practice the
pressure is very slight. One fact suffices to establish the
defectiveness of the property assessments. It is the decline
in the declared value of personal property during a period
in which wealth has beyond question increased enormously.
The personal property in New York state in 1 869 was as-
sessed at $434,000,000, in 1875 it had fallen to $407,000,000,
and in 1 885 to $332,000,000, i. e. a decline of over 20,000,000
in the commercial centre of the Union. The similar figures
for real property are, for 1869 $1,532,000,000, for 1875
$1,960,000,000, and for 1885 $2,762,000,000, or an increase
of nearly 130,000,000 !

The defects of the property tax are, it would appear,
beyond remedy, and therefore it may be anticipated that
it will in the future be transformed into a land tax with
additional charges on other selected receipts, and perhaps
finally into an income tax. We may, however, conjecture
that a system of state income taxes will also fail owing to
the difficulty of localizing income. The conclusion already
reached l that the income tax is best suited for the national
government applies fully to the United States. The most
promising sources of state revenue seem to be the real
property and license taxes. But whatever new forms be
adopted the property tax is decisively condemned 2 .

4. The failure of property taxes in so many separate
cases, and the clearer comprehension of income as the true
normal source of taxation have made the plan of a general
tax on revenue or income appear advisable. We have
noticed the imperfections and dangers of the single income
tax : it is now rather as the constituent of a general
system of taxation that we have to estimate it. In this
aspect we find that the income tax is a distinctly modern
product, and one that is likely to grow in importance. A
well-balancecl financial system will derive a large part of
its receipts from direct taxation, as otherwise an approach to just distribution would hardly be possible. Among the
objects of these direct charges the produce of land, capital,
and labour must take their place, and when they have each
come under contribution the elements of the income tax
are present. The close analogy between the four direct
contributions in France and the five schedules of the
English income tax is evident, and this resemblance ex-
tends to the German ' produce taxes.' There is, however,
one very important difference ; the taxes on the several
elements of wealth are far less elastic in yield. Thus the
French, Prussian, and Italian land taxes have a fixity that
is not found in the income tax; and the other produce
taxes, though possessing more expansive power, are yet not
at all as effective as is desirable ; the Patente expands more
slowly than Schedule D. There are besides various gaps
in the most developed of the continental * produce taxes/
State creditors in France escape taxation, while the Eng-
lish and Italian fundholders pay on that part of their
revenue. Mortgage loan and other forms of loanable capital
also manage to avoid their proper share, which would be
impossible with the income tax. The actual institution of
a tax on income is not due to refined consideration of
justice : like most imposts, it is the child of necessity.
When other contributions have been carried to their pro-
ductive limit the financier has perforce to fall back on the
direct taxation of income. This method is the more neces-
sary in a country where taxation of the several parts of
income is absent or inadequate. Both conditions were com-
bined in the case of the first English Income tax (ijgS) 1 , and
were also present in a great degree in Italy in 1864.

The result of this originating cause is seen in the use of
the income tax as a complementary receipt, to be employed
in cases of pressure and to meet what would otherwise
be a temporary deficit. The aim of keeping a correct
balance of expenditure and receipts can be best realized
by having a varying income tax adjusted to suit the
special circumstances of each Budget. Thus in England
the rate has varied from is. ^d. (if we include the earlier
income tax from 2s.), to id. per pound. Italy has been
unable to follow the same course, as the highest rate is in
her case requisite in order to procure funds, but the desira-
bility of having a movable tax of the kind is indisputable.

Another advantage of the tax on income is the oppor-
tunity that it offers for fairly distributing the burden
yof taxation. Indirect taxation, and particularly that on
consumption, is heaviest on the smaller incomes, and lets
the rich pass too easily. An income tax with a suitable
scale of exemption goes far to correct this inequality, which
duties on acts and inheritances also aid in remedying.
Both on financial and equitable grounds there is a strong
case for the use of the income tax, not as the sole source
of compulsory revenue, but in due proportion with other
receipts, and with close attention to the special circum-
stances of the country.

5. The development of the English Income tax throws
light on many of the problems connected with its general
use. Its history is divided into two periods, (i) that of the
war Income tax (1798-1816), and (2) that of the peace tax
(1842-7). The former, preceded by { the triple assessment,'
consisted at first of a tax on the sum of income to be
ascertained by the taxpayer's declaration. A lengthy
form of return was required, and a number of deductions
were allowed ; for repairs, support of children, insurance pre-
miums, &c. The yield was about 6,000,000 1 , at the rate
of 10 percent, on the national income, estimated by Pitt at
102,000,000. Repealed at the Peace of Amiens in 1802,
it was reimposed in 1803, with the important change of
substituting 'particular returns of particular sources of

1 1799 . . 6,000,000

1800 . . 6,250,000

1801 . . 5,600,000.

income* for the previous general return. Thus arose the
well-known five schedules, and inquiry as to the total
amount of .income was avoided 1 . The rate was is. per
pound ; incomes under 60 were exempt, and those under
150 taxed at a lower rate. The yield for the first year
was over .5,000,000. In 1 806 the rate was raised to 2 s. in
the pound, and several changes in the regulations were in-
troduced. The exemption limit was lowered to 50, and
the allowance for children withdrawn, also that for repairs
in Schedule A. The method of stoppage at the Bank was
applied to Schedule C. With the high rate of charge the
yield was at first 12,000,000; in 1815 it had risen to
15,642,000. On the conclusion of peace the Government
desired to continue the tax at half the existing rate, but
they were defeated and had to abandon it.

The difficulties of English Finance during the succeeding
quarter of a century were largely due to this mistaken
step. The retention of the income tax would have allowed
reforms in other branches to have been carried out with
comparative ease. Accordingly competent opinion as ex-
pressed by Sir H. Parnell and Sayer advised its reintro-
duction 2 . This prudent counsel was adopted by Peel in
1842. His measure really the old system with unim-
portant modifications was enacted for only three years,
and the rate was fixed at *jd. per pound (or under 3 per
cent.). The yield in the first year was over 5,600,000,
the same as at the rate of 10 per cent, in 1801. At its
expiry there was an extension to 1848, and again to 1851.
It was voted for one year in 1852; in 1853 it was
extended to Ireland, and fixed for seven years by Mr.
Gladstone, who held out the prospect of its ' relinquish-
ment ' at the end of that term. The Crimean war, during
which the rate rose to is. ^d. per pound, prevented this
result, and since 1860 it has been continued as an annual
tax at varying rates, and it may now be regarded as a
permanent part of our financial system 1 .

In studying the English Income tax the first noticeable
point is its composite character. It is, in Mr. Gladstone's
words, ' rather a code or system of taxation 2 ' than a single
tax. The five schedules may well be regarded as so many
distinct taxes, since they deal with separate kinds of revenue.
The connexion between them comes out only in cases of
exemption or abatement. Inequalities are, however, re-
moved by the comprehensiveness of the tax. Mortgage loan
pay under Schedule A by deduction ; but there is no
inducement to capitalists to put their wealth into the
forms included by B. C, or D. as there also they will have
to pay on their receipts. Another important part of the
system is the extensive use of stoppage at the source. The
result is that a large body of taxpayers never receive the
sums due by them to the state. The public funds, dividends,
mortgage loan, are all treated thus, and evasion and fraud are
thereby reduced to a minimum. The separate sources of
income are tapped, and supervision is' made much easier.

Thirdly, we may bear in., mind the very large yield of
the tax. At its commencement it contributed 6,000,000
in a time of great pressure, whi^ at present at half the
rate it supplies close on 14,000,000 for the public revenue.
The yield derived from the penny per pound is in fact an
indication of national progress ; from 700,000 in 1842 it
has swelled to $2,300,000 in 1891 3 .

1 The last time that its existence was endangered was by Mr. Gladstone's
proposal of abolition in 1874.

2 Financial Statements > 20.

3 The following figures of income assessed are instructive

Pitt's estimate, 1798 . . . ^102,000,000

Amount assessed, 1842 . . . 204,000,000

Ditto, 1878-9 . . 578,000,000

Ditto, 1888-9 . . 645,000,000.

This productiveness accounts for its great services both
in war and peace. It supplied the means for carrying on
the struggle against Napoleon, and it rendered possible the
reforms of Peel, besides saving the country from deficits *.

The extension of exemptions and abatements is a further
interesting point. The original limit of exemption (60),
was soon reduced to .50, in order to include the large
class who returned their incomes at 59 ios., and 200
was the point at which the full charge was enforced ; this
also came down to 150 in 1803.

Under Peel's measure the exemption limit was placed
at 150, and, though subsequently lowered to 100, it has
since returned to the higher figure. In 1863 a deduction
of 60 was allowed from all incomes under .200 ; in 1873
this was increased to 80 from incomes under ^300 ; and
in 1876 to 120 from incomes under 400.

6. The Italian tax on ' movable wealth ' has strong
points of resemblance to the English Income tax, and has
been much affected by its example. It commenced in 1864,
when a sum of 30,000,000 lire (1, 200,000) was appor-
tioned among the several provinces, and raised by a tax
on revenue (that from land excepted). In 1865 the
amount was more than doubled (66,000,000 lire], and in
1 866 the tax was changed from an * apportioned ' to a
* rated ' one, and the rate fixed at 8 per cent. In 1870
it was advanced to 12 per cent, which, with the additional
tenth, levied since 1868, made the total 13-20 per cent.
Many changes have been made in the methods of levy
and assessment. The original law of 1864 has been
amended in nearly every succeeding year, until in 1877 a
new and comprehensive measure was passed dealing with
the whole subject. After the English pattern, the con-
tributors are grouped under several schedules, but the
arrangement is different, and used for a different purpose.
Class A includes, permanent revenue, which is assessed

1 On the Income tax see Dowell, iii. 92-120. Chailley, Impfit sur le
Revenu, 89-218, gives a full and lucid account of the English system.
at its full value. Class B contains what are called e mixed '
revenues, or those in the production of which capital and
labour cooperate: these escape with payment on six-eighths
of their amount. Class C contains revenue from labour,
assessed at five-eighths of its total. The incomes of public
officials are placed in Class D, and pay only on four-eighths
of their amount. To these four classes should be added
the Metayers as forming a fifth. A complicated scale of
allowances for small incomes is also part of the system.
Incomes under 400 lire in classes B, C, D are exempt,
and up to 800 lire the taxable sum is reduced. The
declaration of the contributor is the basis of charge, but
is tested by inquiry, and, as far as possible, the tax is
collected by stoppage.

Notwithstanding the very elaborate provisions of the law,
it is found impossible to reach a great deal of the national
revenue. Incomes in classes B and C are very generally
returned at much below their true amount. Like the pro-
perty tax in the United States, the Italian income tax is
ineffective through evasion. Thus, though the method of
stoppage is only applied to a limited set of cases, its
receipts are nearly as large as those from direct collection.
Again, the proportion paid by companies is about 40 per
cent, of the whole, a ratio quite inconsistent with all other
available statistics. An analysis of the actual returns of
revenue leads to the same conclusion. In 1874 only 639,302
persons made returns, and out of this number only 986, or
i out of 640, admitted incomes of more than ^1000 per
annum. Even though the wealth of Italy is much less than
that of England or France, these figures are quite inadmis-
sible and prove the existence of fraud on a large scale.

One cause of such widespread evasion is the very high
rate of taxation. The 13-20 per cent, is equivalent to
25. 7\d. per pound 1 , and so high an income tax would
even in England lead to much dissimulation of income.

1 I.e. on permanent income; the other groups pay at the lower figures
mentioned in the text.

The most obvious remedy is a diminution of the tax rate,
combined with greater powers of assessment, more par-
ticularly in respect to professional and industrial incomes.
The differentiation of the classes of income, which origin-
ated in an attempt to apply certain theories very popular
at one time in England l , also tends to make the returns
inaccurate and to embarrass the officials.

These drawbacks notwithstanding, Italian Finance has
found a powerful resource in this form of taxation. The
original 1.200,000 of 1865 has increased to 7,000,000 in
1875, to over 8,000,000 in 1885, and to over 9,000,000
in 1890. It must besides be remembered that owners of
land are excluded from the operation of the tax, since
they come under the land tax discussed in a preceding
chapter 2 .

7. The German Income taxes are best represented by
those of Prussia and Saxony. The Prussian Einkommen-
steuer was introduced in 1851 as a development of the
older class tax. It was only applicable to incomes over
150, and dealt with them by groups. A sum was fixed
for each group amounting to 3 per cent, on the lowest
incomes in that group : thus e. g. incomes between 600
and 720 paid 18, those between 12,000 and 15,000
paid 360, and all incomes over 36,000 paid 1080, the
highest sum due. Along with the reform of the class tax
in 1873 the income tax was settled on a somewhat different
scale, but with a general rate of about 3 per cent. The
objections to this system as unequal have been so strong
as to lead to the reform of 1891, by which the class tax 3
is absorbed in the income tax, and all incomes under 60
exempted. From that point the rate rises by degrees ;
between 525 and i475 it is 3 per cent. ; on incomes over
5000, 4 per cent. The idea of progression is thus realized,
though in a very limited way. The method of assessment
is also changed. It was previously settled by official valua-
tion based on the materials possessed by the administra-
tion, but is henceforth to depend on the declaration of the

It is evident that the Prussian Income tax differs in
some important respects from those in England and Italy.
The function of supplementing the other branches of re-
ceipts is entirely absent, as the rate is fixed, not movable
from year to year. The produce taxes are not brought
under the income tax, but are continued quite separately :
the taxes on land and industry present, accordingly, ap-
parent cases of double taxation. Finally, the productive-
ness is much less. In 1864 the amount received was over
500,000, in 1876 it was nearly 1,500,000, in 1884 over
1,750,000; for 1889-90 the estimate was over 2.000,000.
Under the new system (with the class tax included) the
estimate for 1892-3 is 4,000,000 \

The Saxon Income tax is also a classified and progressive
one, but, unlike the Prussian, it is not accompanied by a
separate 'industry tax.' Its amount is about 750,000.

Austria has had a (so-called) Income tax since 1849,
which is a tax partly on industry and partly on salaries,
the former at the rate of 5 per cent, of net gain, the latter
rising from i per cent, to 10 per cent., according to amount
of income. Its yield in 1883 was about 2,000,000.

To the foregoing may be added the taxes of the Swiss
Cantons. Their property taxes already mentioned are
supplemented by income taxes, in many cases on a pro-
gressive scale. No two cantons have adopted exactly
the same system in all details, but there are, as might
be expected, general points of resemblance. The Zurich
Income tax follows the pattern of the property tax. The
smaller incomes are taxed on a part only of their amount,
and at each higher stage the excess over the preceding
one is placed under greater pressure until the point of full
liability is reached. Graubunden follows its property tax
by grouping incomes in classes and by raising the per-
centage rate as they get higher. Switzerland is in fact
the classical country of progressive income taxes, though
the moderation of the rates, and still more of their applica-
tion, weakens the conclusions that might otherwise be

8. We have deferred a discussion of some fundamental
questions relating to the constitution of an income tax
until the leading facts of its use were known. Most of
them have been already encountered in connexion with
the general principles of taxation, but they take a different
shape when the income tax is treated as but one part of
a larger system, and need to be handled specially with a
view to that fact.

One important question is that of progression in the rate
of charge. The general conclusion that we reached l as to
the inexpediency of any progressive system has to be recon-
sidered, when the income tax is used as a complementary
resource. Progression in the case of such a tax may be
necessary for true proportional taxation. If the smaller
incomes are unduly weighted by taxes on consumption,
their exemption, or milder treatment, under the income
tax appears so far justified. A variation in the rate of
charge is not open to the objection of arbitrariness, as
it is determined by reference to the amount of other
taxes. The other objections are not so readily disposed
of. Risk of evasion and unproductiveness may both be
urged against the graduation of even a moderate com-
plementary tax. Where the area is a large one, the
effect on accumulation and investment will not be serious,
as the distribution of taxation will ex hypothesi be equal,
but the existing attempts at progression are, it may be
said, hardly worth the trouble they involve. The English
method of exemption and abatement has great advantages
from the technical point of view, since it allows the sources
of income to be taxed without reference to their amount.
The treatment of each person's income as a whole compels
recourse to returns of a complicated kind, is disliked as
being inquisitorial, and gives opportunities for escape to
large masses of income. For these reasons the propor-
tional rate is, on the whole, advisable.

The answer just given helps us in deciding as to the
adoption of different rates on different kinds of income.
The proposal that life incomes and those derived from
industry should be charged at a lower rate has received
influential support, and is illustrated by Italian practice.
When considering the distribution of taxation, we noticed
the general arguments as regards the income tax in Eng-
land. It was for so long looked on as a temporary charge,
that the idea of capitalizing incomes subject to it gained a
good deal of support. The defence of the strict propor-
tional rate rested on two admitted facts: viz. (i) that no
ingenuity could avoid some injustice, and (2) that any
alterations would mean the destruction of the tax l . Its
gradual passage into a permanent charge has greatly
strengthened its position in this respect, though the cry
to remedy supposed grievances in its distribution may
gain greater support 2 .

The working of the Italian tax does not support the
system of different rates. The lower scales for profits
and salaries are confusing, and account for much of the
loss through concealment of incomes. The single general
rate would prove advantageous from a fiscal point of view,
and with stricter assessment could be effectually carried
out. The attempt to group incomes into 'permanent,'
6 mixed ' and ' temporary ' is, moreover, too rough to give
satisfaction or to realize justice.

1 ' The real tendency of all these exemptions,' said Mr. Gladstone, ' is the
breaking up and destruction of the tax,' Financial Statements, 45.

a A new period of assault on the alleged inequalities of the Income tax
seems to be approaching.

Allowance for necessary expenditure and repairs is one
of the practical difficulties in the administration of the
income tax. On principle, as the tax is one on income,
not on gross produce, deduction of the expenses of pro-
duction of the income taxed should be allowed. Where
much fixed capital is employed, this is very hard to
determine, and we can understand the preference of
French administrators for the self-acting rules of the
Patente. In respect to land the English rule fails to
recognise the cost of repairs ; it, therefore, treats this
class of revenue with unusual harshness, and gives some
support to the view that Schedule A should be regarded
as a distinct land tax. The exceptional treatment of
farmers' profits is another fact that points in the same
direction ; but it may be hoped that this anomaly will
be gradually removed.

The exemption of savings has been already dis-
cussed, but one method that of life insurance appears
to be a case of capitalization ; it is in fact turning a life
income into a smaller permanent one, just as the purchase
of an annuity is the opposite process. Up to a certain
limit one-sixth of the income the English system allows
exemption of insurance premiums, a privilege not extended
to savings in general. Though the desirability of en-
couraging providence may be granted, it would seem that
an exemption from duty on transfer after death would be
a more fitting mode of bestowing the favour. It cannot be
contended that an insurance premium is not a part of in-
come, and the principal created by its use will not con-
tribute to the payer's income in the future. The case is,
as Mill puts it *, one of concession to * human feeling,'
rather than a sound deduction from general principles.

The problem of assessment is anotiier of the difficulties
to be faced : between the Scylla of the contributor's evasion
under self-declaration, and the Charybdis of official inquisi-

tion, it is hard to take an intermediate course ; but the
dealing with each separate part of income, the combina-
tion of declaration and official control, and above all the use
wherever possible of taxation at the source of revenue, so
characteristic of the English method, are undoubtedly the
best. The direct contact of the citizen and the tax-
collector is the most delicate part of the fiscal machine,
needing care and use of the results of experience to
prevent friction. Allowing for the inevitable margin of
error, the results of the English income tax are eminently

9. Any notice of the question of incidence may seem
unnecessary in respect to a tax which falls on all the
constituents of revenue. On whom can income receivers
in general shift their burdens ? Some of the suggested
objects are certainly not available. Thus the vulgar idea
alluded to by Mill, that the income tax falls on the poor
by checking the expenditure of the rich, has no foundation
in fact. Nor is there much force in the contention that in
so far as the tax is paid out of capital it falls on the
labourers 1 , as this is no peculiar quality of the income tax,
but one common to all taxation. The state must obtain
revenue, and unless the income tax were specially obstruc-
tive to saving, it would produce no peculiar effect. Looking
at the subject in a rather different way we obtain a better
result. The income tax is composed of taxes on rent,
interest, profits, and the higher forms of wages, therefore
it may be said that the incidence of these several parts
of the tax will, taken together, give the incidence of the
whole. This, however, brings us back in a large degree
to its non-transferability ; for taxes on rent, on the higher
kinds of wages, or on employers' gains, are not easily
shifted. Even in the^case of interest, unless the growth of
capital is checked, a tax tends to remain on the payer.
Therefore, speaking broadly, we may say that the shifting
of an income tax is not to be expected, and in the rare
cases where it does happen is brought about, either by a
check in the growth of capital through diminished interest,
or by disturbances in the relations of the several industries
and trades through its action. A progressive income tax
will of course have a stronger tendency to cause the former

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