home | authors | books | about

Home -> Merlin Harold Hunter -> Outlines of public finance -> Chapter 9

Outlines of public finance - Chapter 9

1. Preface

2. Chapter 1

3. Chapter 1 continue

4. Chapter 2

5. Chapter 2 continue

6. Chapter 3

7. Chapter 3 continue

8. Chapter 3 continue

9. Chapter 4

10. Chapter 4 continue

11. Chapter 4 continue

12. Chapter 5

13. Chapter 5 continue

14. Chapter 5 continue

15. Chapter 6

16. Chapter 6 continue

17. Chapter 7

18. Chapter 7 continue

19. Chapter 7

20. Chapter 7 continue

21. Chapter 9

22. Chapter 9 continue

23. Chapter 10

24. Chapter 10 continue

25. Chapter 10 continue

26. Chapter 11

27. Chapter 11 continue

28. Chapter 11 continue

29. Chapter 12

30. Chapter 12 continue

31. Chapter 13

32. Chapter 13 continue

33. Chapter 13 continue

34. Chapter 14

35. Chapter 14 continue

36. Chapter 14 continue

37. Chapter 15

38. Chapter 15 continue

39. Chapter 15 continue

40. Chapter 16

41. Chapter 16 continue

42. Chapter 17

43. Chapter 17 continue

44. Chapter 17 continue

45. Chapter 18

46. Chapter 18 continue

47. Chapter 18 continue

48. Chapter 19

49. Chapter 19 continue

50. Chapter 19 continue

51. Chapter 19 continue

52. Chapter 20

53. Chapter 20 continue

54. Chapter 20 continue

55. Chapter 20 continue



101. Modern Customs Duties Apply Chiefly to Imports.
It has been indicated in a previous chapter that a cus-
tomary part of early fiscal systems was to levy duties
upon goods when they crossed a political boundary. They
were called the " customary duties/ 7 and later simply cus-
toms duties. In modern times they are usually called
tariff duties, and much is said and written on the tariff
rather than on customs duties.

Only those duties upon goods which cross a national
boundary line, or the line of some customs territory which
is a part of a nation or combination of nations, are con-
sidered as customs duties. Duties which might be levied
by a city upon goods, either coming hi or going out over
its boundary, would not come under this category.
Neither would levies made upon goods going from one
part of the country to another, as from one state or
province to another, nor would those which might be
placed upon goods passing through a country be classed
as customs duties.

In the earlier development of these duties, levies upon
goods going out of the countries were as important and
significant as the ones upon goods coming in. Permission
from the government to secure gain by trading with for-
eigners was considered a valuable privilege, and conse-
quently a charge was made. Likewise it was considered
perfectly proper to tax a foreigner who secured profits
from trading with the citizens of another country.

As nations developed, however, the relative importance


of these two classes of duties changed. The growth of the
mercantilistic sentiment had much to do with the decline
of duties on exports. Apparently one of the easiest ways
to augment the growth of the money wealth of a country
was to stimulate exports and retard imports, so duties
were generally removed from exports. Frequently gov-
ernments went further than this and gave bounties, in
one form or another, upon goods which went to another
country. The claim of mercantilism has lost much of its
strength, yet duties on exports have not regained their
early importance.

It should not be inferred that export duties find no place
in modern fiscal systems. In comparatively recent years
England used an export duty on coal, with the combined
purpose of conserving the supply and raising revenue.
Export duties still fill an important place in the fiscal
systems of Turkey, India, and a few other countries, and
are used upon a few products in some European countries.
As a general rule, however, customs duties and import
duties are practically synonymous in the programs of
most important countries.

1 02. Various Motives May Prompt the Levy of Customs
Duties. The two most important motives which prompt
governmental authorities to levy customs duties are to
secure revenue, and to protect home industries from for-
eign competition. These duties are known, respectively,
as revenue duties and protective duties, or tariff for
revenue only, and protective tariff. Other motives some-
times prompt the levy of tariffs, but they usually sink
into insignificance when compared with these two.

Revenue Duties. The most evident tariffs for revenue
only are those placed upon goods which could not be pro-
duced Vithin the country, or which could not be produced
without great disadvantage. It might be possible to place
such a high tariff upon coffee that it would become profit-
able to build greenhouses and grow coffee in the United
States. Until such a result would begin to transpire, how-


ever, the tariff would be one for revenue only. The rates
might be raised to a point where little revenue would be
received because of the small amount of goods imported,
but still it has given no protection to the coffee industry
because it has resulted in the establishment of no coffee
industry in this country.

If the maximum amount of revenue be desired, concern
must be had as to how much an increase in duties will
cause a decrease in the amount of goods imported. If the
duties were placed upon a good which could not be pro-
duced at home, and for which the demand were absolutely
inelastic, there would be no limit to the tax that could be
placed with an ever-increasing return.

Goods only possess the above characteristics in degree,
however, and some to only a very small degree. Increase
in prices, then, to recover the increase in duties, will
sooner or later drive the marginal consumer to go without
the taxed goods, or to use substitutes, either of which will
lessen the demand for the goods, hence lessen the imports
and the amount of revenue. The problem of levying a
tariff so as to get the highest revenue is much the same as
the problem of monopoly price, for exactly the same
principles must be considered.

Revenue Tariff and Industry. While a tariff for rev-
enue only is not calculated to affect industry, it cannot
escape doing it to a greater or less degree. Consider again
the example of coffee. It has been coming into the coun-
try without duty; there was a certain demand, and a
price established. If the duty is increased, and the price
raised to meet it, the marginal coffee drinkers will begin
to drink tea, postum, or cocoa. This creates a demand
for products of another industry the duty in effect is
protecting it from the former competition of the coffee

The above situation would be different if the demand
for coffee were inelastic or nearly so. As the price of coffee
would rise, more of the consumer's purchasing power


would be needed to supply his want for coffee, and he
would have a smaller remainder with which to buy wool-
ens, cottons, and other goods. These industries would
suffer because of a revenue tax on coffee. It is easily seen,
then, that no matter how purely a tariff is for revenue it
must have some indirect effect upon industry through the
action of the laws of price.

Protective Duties. The levy of a protective duty is
motivated, primarily, by its anticipated effect upon in-
dustry, rather than by any considerations of revenue.
The purpose is to lessen the importation of foreign goods,
cause a rise in prices, and thereby stimulate the develop-
ment of such an industry at home. It is expected to
drive industry into fields which would be unattractive if
no such duty existed.

The diversification of industry secured by a protective
tariff comes at the expense of other industries. As the
price which must be paid for the protected product goes
up, the consumer has a smaller remainder with which to
purchase other commodities. At the same time the tend-
ency will be to raise wages in these other industries by
taking away a part of their supply of labor to work in the
new industry. The direct effect of a protective tariff is
easily seen it produces a new industry in the country.
The indirect effects, however, are just as certain, yet not
so easily seen, while they are often impossible to calculate.
It is a safe assertion, moreover, that a protective tariff is
not an institution which gives something for nothing.

Protective and Revenue Duties. In most modern tariff
duties the ideas of revenue and protection are not entirely
separated. A duty may bring a large amount of revenue
and give a small amount of protection, or give a large
amount of protection and continue to produce some
revenue. The more protection a duty gives, however, the
less will be the revenue received, while a duty which would
give absolute protection, by eliminating the importation
of goods, would destroy revenues.


Suppose that woolen cloth of a certain grade, produced
under competitive conditions in England, can be sold in
this country for fifty cents a yard in a sufficient amount
to supply the need. A small amount could be produced
by the mosr favored producer here at seventy-five cents
a yard, and enough to supply the need at ninety cents a
yard. To simplify calculations, assume an absolutely
inelastic demand for the cloth. With no tariff whatever,
it is evident that no cloth will be produced here, but will
be imported, and sell for fifty cents a yard. The fiscal
authorities decide that some revenue should be obtained
from the importation of this commodity, and levy a duty
of twenty cents a yard. This is purely a revenue tariff,
because the increase in price that is likely to follow is not
sufficient to allow production at home.

If the duty is raised to thirty cents a yard it becomes
partially protective, for it allows the most favored pro-
ducer to market his small amount of cloth. Upon this,
however, the government receives no revenue, since it is
not imported. The buyer of the cloth is paying the higher
price caused by the duty, but to the home producer rather
than to the government. Now assume a wholly protective
duty, say of forty-five cents a yard. The English pro-
ducers cannot now compete with the home producers,
who can supply the desired quantity at ninety cents a
yard. The government gets no revenue, since importa-
tion has ceased. The buyers of cloth pay forty cents more
a yard for the cloth, but to the new industry rather than
to the government.

It is sometimes pointed out that the government does
not wholly destroy the possibility of revenue by granting
an absolutely protective tariff, because the patrimony of
the state is increased to the extent of the protected indus-
try, upon which the government can draw for support.
This is true only when the protected industry is given a
start, and can soon stand on its own feet. As long as an
artificial price is maintained by protection, however, the


patrimony represented by the new industry simply repre-
sents a patrimony subtracted from other industries.

Other Tariffs. Tariffs are sometimes levied to retaliate
for the duties laid by another country, are sometimes
modified to reciprocate for favors shown by another coun-
try, and are sometimes used to attempt to equalize the
costs of production between countries. Many of the
European duties which are levied against American goods
are to retaliate for the high tariffs levied by this country.
The proposed reciprocity treaty with Canada a few years
ago was an attempt to make concessions between the two
countries. An agreement was not reached because of the
strong protectionist sentiment.

The French tariff represents a system based upon the
reciprocity principle. It is known as a maximum-mini-
mum tariff that is, a certain maximum tariff is levied
from which concessions are made to countries which grant
favors to France. A somewhat similar provision is found
in our tariff law of 1909, except that it partakes more of
the nature of a retaliatory measure. Certain minimum
tariffs are levied, which are increased against those coun-
tries which have tariff legislation unfavorable to the
United States.

When a tariff to equalize costs is used, it is expected
that neither home nor foreign producer will have any
advantage over the other, and that healthy competition
can continue between the two. In the example of woolen
cloth used above, a forty cents a yard duty would be
such a tariff. In actual practice, however, because of the
continual changing aspects of industry, the maintenance
of such a scheme is next to impossible.

Another attempt to use the tariff as an equalizer of
costs is the adoption of what is sometimes called the com-
pensating tariff. This occurs when an increase is granted
in the duties levied on manufactured products sufficient
to offset any duties which have been levied on the raw
materials used by the. industry which m^kes the manu-


factured products in question. Tariffs of this nature
have been particularly applicable in the case of woolens.
With every increase in the duty on raw wool, the manu-
facturers felt they must have a proportionate increase in
the duties on manufactured cloth to compensate for their
increased costs occasioned by the tariff on raw wool.
Such tariffs may also be used to compensate for the use
of excise taxes. When an excise tax is placed upon goods
produced within a country, a tariff of the same amount
is placed upon goods imported into the country.

In most countries a relatively greater amount of atten-
tion is being paid to the revenue features of tariffs than to
the protective issues. Two reasons can be seen for this.
First, the need for increased funds has grown rapidly, and
second, the avenues open to central governments for rais-
ing funds have been limited.

103. The Incidence of Customs Duties Is Important.
The principle of shifting and incidence has no more im-
portant application to any part of a revenue system than
to customs duties. To the uninformed it has appeared
that the importer has simply added the amount of the
duty to the former price, and that the consumer conse-
quently has borne the burden. The problem of shifting,
however, does not permit of such a simple solution. The
underlying principles of shifting and incidence, discussed
in the preceding chapter, apply as much to customs duties
as to any other form of revenue.

Elasticity of Demand and Supply. The two controlling
factors in the shifting of a customs duty, then, are the
elasticity of demand, and the elasticity of supply. If the
demand were absolutely inelastic, then the importer could
continue to import as many goods as before, and sell them
at a price, increased by the amount of the duty. Such a
situation, however, would rarely exist, and the direction
which the shifting will take will depend upon the relative
elasticity of demand and supply. More frequently than
has been supposed, a part of the burden at least will rest


upon the importer. This happens when the price is either
not raised at all or raised by an amount equal to only a
part of the tax. Consideration will be given to the possi-
bility of shifting import duties in only a few assumed

Influence of Extended Market. It is seldom true that
any one country is the sole market for an imported good.
The laws of trade will have so worked themselves out,
under existing conditions, that the seller will be receiving
approximately the same net return from the sales in the
various countries. If, now, one of these countries levies
an additional tax, it will be more profitable to send some
of the goods to other countries until the diminished supply
would so raise the price as to bring about again an equi-
librium of profits. This would come about before the
price had raised by quite the amount of the tax, because
the increased supply to the other countries would lower
the price there. In this case the larger part of the tax is
shifted to the consumer, while only a minor part is felt by
the producer.

Importer Bears Burden of Duty. In some cases, though
rarely, a large share of the tax burden may rest upon the
producer or importer. In case the demand could be easily
supplied by home producers at a slightly higher price,
while this market is necessary for the disposition of the
foreign product, the foreigner may bear the whole burden
of the tax rather than allow the potential home producer
to occupy the field. The situation would be temporary
if he expected to dispose of only an existing stock of goods
which would otherwise be lost, but which could not con-
tinue to be produced with the added expense of the tax.
If, however, the former margin between cost and selling
price had been sufficient to allow the payment of the tax
and still continue to produce, the situation would be

It may be possible, moreover, that a particular country
constitutes practically the entire market for products. If


the demand for these be strongly elastic, the producer
will bear the tax until he can change the nature of his
production. He may lose by bearing the burden, but he
would lose more by the immediate curtailment in demand
through an increased price. If the commodity of impor-
tation is one which is largely used as a substitute for
another, which can be obtained at small increase in price,
or if it be one for which a satisfactory substitute can be
obtained at a small additional cost, it will be impossible
to increase the price perceptibly to offset duties, for by
so doing the market would be destroyed. The shifting
could be accomplished only if the price of the other
product should advance sufficiently.

Other hypothetical cases might be given to show the
varying phases of the incidence of customs duties. Enough
have been given, however, to show that the laws of price
are the determinants. In general, when the demand is
inelastic and the supply elastic, the conditions are favor-
able for the shifting of the tax, while the opposite condi-
tions make it unfavorable. The possible effect of an at-
tempted shifting upon the home production of goods is
always a modifying factor. It should not be forgotten,
moreover, that even when the price can be raised by the
full amount of the tax, some burden is felt by the pro-
ducer because of the decrease in the demand for his goods.

104. Problems Arise from the Use of Customs Duties.
The use of customs duties has developed a number of
perplexing difficulties. One of the first to develop was
that of smuggling. When a country has a large frontier
line, with many possible approaches, it is difficult to pro-
hibit some goods from getting in without the knowledge
of the officials. This is especially true of goods of small
bulk and great value, such as precious stones. The duty,
on a value basis, is likely to be high enough to make smug-
gling profitable. If such goods are not taxed, a source
which^is easily able to bear tax burdens is allowed to


Method of Levy. The method of levy is an important
problem which always confronts customs administrators.
There are two important methods, each possessing ad-
vantages and disadvantages. One class of levy is known
as ad valorem, and the other as specific. The base for the
levy of ad valorem duties, as the term suggests, is the
value of the goods. Specific duties are levied upon some
other unit than value, such as volume, length, or weight.
A specific duty would be upon each gallon, yard, or hun-
dredweight. Many objects bear both classes of duties,
while some bear only the ad valorem or specific duties.

Objections to Specific Duties. Specific duties possess
the advantage of being simple and easy to collect. Fraud
and evasion are comparatively difficult. They do not,
however, conform to theories of justice, since, in effect,
they are regressive. Heavier burdens are placed upon the
less valuable goods of a class than upon the more valuable,
since some other criterion than value is made the base of
the tax. The tax burden does not fluctuate, moreover,
whether the price to be received is high or low. The gen-
eral result is that they are taxes of increasing burden in a
period of falling prices, and the opposite when prices are
rising. Their administrative simplicity, however, gives
them their place as a part of customs duties.

Difficulties with Ad Valorem Duties. Ad valorem duties
have the advantage of falling upon value, the most just
base of levy, yet many possibilities of fraud are presented.
The duties have frequently been evaded through fictitious
invoices, especially when the goods were shipped by the
agent of an American buyer. Goods of high value have
often been placed in consignments of a lower value, and
have consequently escaped the higher duty. In some cases
goods have been artificially colored to resemble those of a
lower value, as, for example, the coloring of better grades
of sugar. Where a minute classification exists, as in our
woolen schedule, it is often difficult to accurately classify
the goods. To reduce these fraudulent practices to a


minimum, and hence secure a reasonable degree of justice,
a large amount of administrative machinery is required.

Administrative Machinery. The need for administra-
tive machinery can be illustrated by a brief review of the
method of levy in force in the United States. The importer
receives a consular invoice, which contains a description
of the merchandise, including value, discounts, charges,
etc. He then makes entry of these goods, with their proper
description, with the rates that he considers applicable,
and pays the gross amount of duty thus determined. The
inspector then issues a permit for delivery, with the ex-
ception of one package in every ten included in the im-
portation. In no case is less than one article retained
from each invoice.

These packages or articles are retained for the purpose
of appraisement. The value is determined and the rate
checked with that used by the merchant. In case the rate
which the merchant used was too low, the difference is
collected, with penalties for attempted fraud. All protests
from the merchants are heard by a board of general ap-
praisers, provided the protest is filed within ten days after
the merchant has been notified of the charges. The board
examines witnesses, calls in experts, and after a thorough
investigation renders a decision. Appeals may be made,
however, to the Circuit Court within thirty days.

The complexities and uncertainties of customs duties,
especially of those in the United States, have prevented
their indorsement as an unqualified success. The laws
are cumbersome and difficult to understand. Duties are
laid upon articles with apparently no definite scheme hi
mind. The returns have been very irregular, often failing
the government when funds were needed most. With
proper legislative forethought such difficulties could be
greatly lessened, and customs duties could be made a more
satisfactory part of the fiscal system.

105. Definite Principles Should Be Followed in Levying
Customs Duties. If Adam Smith's second canon of taxa-


tion that the tax which each individual is bound to pay
ought to be certain, and not arbitrary is applicable to
any form of revenue, it should apply to the levy of customs
duties. No other form of revenue has such great possi-
bilities for influencing the industrial stability of a coun-
try. It is not so much a question of high duties or low
duties, of revenue or protective tariff, as it is a question
of being able to know what to expect.

A country can ill afford to make a political football of
its tariff policies, yet this has been true in the United
States practically from the beginning. Attempts to use
nonpartisan tariff boards have been of no avail, and in-
dustry continues to fear a change in administration be-
cause of what may happen to the tariff. Where such un-
certainty and instability exist, it is impossible to rely upon
customs duties for any definite amount of revenue, and
avenues must always be kept open through which de-
ficiencies can be supplied.

Aside from the deranging of industry, then, an indefinite
tariff policy also creates instability in the remainder of a
fiscal system. The United States would do well to follow
the example of some of the European countries in adopt-
ing and maintaining some definite policy, but the accom-
plishment of such an end seems surrounded with insur-
mountable difficulties. Because the tariff may have such
important fiscal and industrial consequences, and because
the United States is so far from any settled policy, it will
be well to review somewhat in detail the tariff struggle as
it has been waged, not only in the United States, but in a
few other important countries.

106. Early United States Tariffs Combined Fiscal and
Protective Aspects. Two attempts were made to secure
a national tariff before the adoption of the constitution in
1789, which gave Congress practically the exclusive power
to levy such duties. These attempts were made near the
end of the Revolution, when other sources of revenue
were failing to supply the needed funds. In 1781 Congress


hoped to secure the acquiescence of the states in the levy
of a duty for the purpose of raising revenue. The pro-
posal was a 5 per cent tax upon all imports except muni-
tions and certain other specified articles. All the states
reacted favorably except^Rhode Island, and no amount
of persuasion or remonstrance was able to break down the
opposition. The principal objections were that such taxa-
tion would fall more heavily upon the commercial states,
that it was introducing officials within her borders over
whom she would have no control, and besides it was open-
ing the way for an indefinite drain upon the resources of
the state by the Federal government.

The second attempt, in 1783, was no more successful
than the first. The amendment which was proposed pro-
vided for specific duties on certain classes of goods, as
liquors, tea, coffee, and molasses, and an ad valorem rate
on all other commodities. The action was to be limited to
twenty-five years and, in an attempt to make it more
attractive, the returns were not to be used to meet the
current expenses of the government, but only for the pay-
ment of interest on the pub ic debt. In order to eliminate
a previous objection of Rhode Island, the collection was
to be put in the hands of the state officials.

The spirit of commercial freedom, which at this time
had such a hold on European states, was making itself felt
on this side of the Atlantic. The great need for revenues
by the states also made some of them reluctant to allow
the Federal government to enter this field. The consent
of all the states was finally obtained except that of New
York, whose opposition could not be broken.

From the attitude which had been displayed previous
to the adoption of the Constitution, it is not surprising
that much dissatisfaction was expressed when the states
were practically prohibited from using customs duties.
It was considered to be entirely too much of an encroach-
ment on the rights of the states. It was not long after the
adoption of the Constitution, however, until Congress


began to make use of its prerogative to use the tariff.
Revenue was sorely needed, internal tax levies were abhor-
rent, direct taxes could not be laid until a census had
been taken, consequently the tariff presented the most
logical field.

Tariff of 1789. On July 4, 1789, after a debate of nearly
two months, the first tariff legislation of the new govern-
ment was enacted. The time in the debate was consumed
by attempting to fix the rates, and by attempting to agree
upon the measure of protection which should be afforded.
Much discussion has arisen over the question of whether
this first tariff act was a protective measure. The rates
were so low that little protective influence could be ex-
pected. Specific duties were placed upon some thirty
lands of goods, while ad valorem rates, which ranged from
73/2 to 15 per cent, were levied upon a few goods. A
general ad valorem tax of 5 per cent was levied upon
all commodities which were not covered by the other

© Art Branch Inc. | English Dictionary