Chap. V: Of the Inconveniences which proceed from proportional Taxes, and of the Methods of removing them

A proportional tax, as I have said, is that which is levied upon the idle consumer, at the time he buys the commodity. and while, by consuming it, the balance of wealth is turning against him, in favour of the seller. This tax is consolidated as it were with the price of the commodity, and must of necessity raise the price of it.

I say, it is levied at the time of buying, and affects the buyer, in consequence of his consumption; because we have seen, that when the commodity is not consumed by the purchaser, then upon a subsequent alienation he is refunded all he paid. I consider him therefore, in this case, not as paying, but as advancing the amount of the tax for another; and while any part of the commodity remains unconsumed, there still remains the equivalent for a proportional part of the tax in the hands of him who advanced it.

I shall now proceed, as in the former chapter, by giving some examples of such impositions; and in examining them, endeavour to shew their nature and consequences.

The most familiar to an Englishman are, excises, customs, malt-tax, stamp-duties, and the like.

To a Frenchman the gabelle, the traittes, the aides, tobacco, etc. (5)

In all kinds of this imposition we find the tax regularly reimbursed from hand to hand; it adheres so closely to the commodity, that it becomes as essentially a part of the value, as carriage, packing, and the like incident charges, enter into the prices of goods. It never can affect the industrious person who does not consume; and never can be avoided by him who does. Such taxes therefore necessarily raise the price of the commodity taxed.

Having already pointed out the principal advantages of proportional taxes, which is to throw the whole of the burden upon the rich, whom we have called the idle consumers, the better to distinguish them from the opulent class of the industrious; I must now enumerate the principal inconveniences complained of, from this mode of taxation, and trace out the principles from which they may be ascertained and removed.

The principal inconveniences alleged against proportional taxes may be reduced to three:

First, That they have the effect of raising the price of labour, and the produce of industry, and thereby prove hurtful to the prosperity of foreign trade.

Secondly, That they discourage consumption, by carrying the prices of many things too high for people of a middling rank in life.

Thirdly, That they are both expensive in the collection, and oppressive, from the many restrictions put upon liberty, in order to prevent frauds.

In analyzing every one of these inconveniences, it will be proper to inquire, how far the conclusions against those taxes are drawn from, and so far as matter of fact; how far from plausible appearances only; they are real, not imaginary, to discover the methods of removing them.

As the first inconvenience arises from the rising of the price of all kinds of labour, and consequently of manufactures, I must distinguish between the consequence of raising prices at home, and of raising them upon articles of exportation; and I must consider the one and the other relatively to the collective body of a state, and not to some few individuals in it.

High prices at home are no discouragement to the industrious, most certainly, however disagreeable they may prove to consumers; and while they stand high, it is a proof that the demand of the consumers does not diminish.

High prices upon goods to be exported, are to be judged of by the proportion they bear to those in other countries.

Now the price of a manufacturer's wages is not regulated by the price of his subsistence, but by the price at which his manufacture sells in the market. Could a weaver, for example, live upon the air, he would still sell his day's work according to the value of the manufacture produced by it, when brought to market. As long as he can prevent the effects of the competition of his neighbours, he will carry the price of his work as high as is consistent with the profits of the merchant, who buys it from him in order to bring it to market; and this he will continue to do, until the rate of the market be brought down.

It is therefore the rate of the market for labour and manufactures, and not the price of subsistence, which determines the standard of wages. Were proportional taxes to raise the price of subsistence, and by that circumstance to discourage manufactures we should see the generality of workmen living with sobriety, depriving themselves of superfluity, confining themselves to the plain but sufficient physical-necessary, working with all the assiduity a man can support, and still not be able to supply the market at the ordinary rates.

When in any country the work of manufacturers, who live luxuriously, and who can afford to be idle some days of the week, finds a ready market; this circumstance alone proves beyond all dispute, that subsistence in that country is not too dear, at least in proportion to the market prices of goods at home; and if taxes on consumption have, in fact raised the price of necessaries, beyond the former standard, this rise, cannot, in fact, discourage industry: it may discourage idleness; and idleness will not be totally rooted out, until people be forced, in one way or other, to give up both superfluity and days of recreation.

People are very apt to draw conclusions from what they think ought to be, according to the particular combinations they form to themselves; and for this reason it is generally thought, because taxes are higher in England than in some other countries, that foreign trade should therefore be hurt by them. But the sloth and idleness of man, and the want of ambition in the lower classes to improve their circumstances, tends more, I suspect, to lessen the productions of industry, and thus to raise their price, than any tax upon subsistence which has been hitherto imposed in this kingdom.

The whole of this doctrine is proved by experience, and is confirmed by our natural feelings. Many have been amazed to see how well the manufacturing classes live in years of scarcity, which frequently have the effect of doubling the price of the most necessary articles of subsistence. Are they not found, in bad years, more assiduous in their labour? Do they then frequent ale-houses, as in the years of plenty? Are they found idle one half of the week? Why should a tax laid on by the hand of nature prove such a spur to industry; and another, similar to it in its effect, laid on by the hand of man, produce such hurtful consequences? Were a course of bad years, I dare not say an increase of taxes, to continue long enough to bring manufacturers to a habit of sobriety and application, a return of plenty, and low prices, would throw into their coffers, what many of them dissipate in riot and prodigality.

Even this conclusion will be too general, if every circumstance be taken in. Manufacturers there are, who work hard, and live soberly six days of the week, and who at the end find little superfluity, notwithstanding the high price of labour. Alas! they have many mouths to feed, and two hands only to supply the necessaries. This is the fatal competition so much insisted on in the first book, and by which a door is opened to great distress. Either the unmarried gain what the married should do, and become extravagant, or the married gain no more than the unmarried can do, and become miserable.

The average between the two ought to determine the rate of wages in every modern society.

The remedies for this unequal competition, flowing from the happy liberty we enjoy, have been considered in another place.

The inconvenience here under examination will not be removed by an abolition of taxes; nor will it increase by the augmentation of them, as long as manufacturers, upon an average, enjoy superfluity and idle days.

Under these circumstances I conclude, that if foreign trade suffer by the high prices of commodities in our markets, the vice does not proceed from our taxes, but from our domestic luxury, which swells demand at home. Were we less luxurious, and more frugal in our management in general, all classes of the industrious, from the retailer down to the lowest manufacturer, would be satisfied with more moderate profits. Let not, therefore, a statesman regulate his conduct upon suppositions, nor conclude any thing from theory, nor from arguments à priori, drawn from the supposed effects of taxes; but let him have recourse to information and experience concerning the real state of the matter.

Let him inquire what are the prices abroad; what are the prices at home; how those who work in exportable commodities live; what superfluities they enjoy. and what days of idleness they indulge in.

If he find that goods are not exported, because of high prices, while manufacturers are enjoying superfluity, and indulging themselves in idleness, let him multiply hands, and he will reduce them all to their physical-necessary; and by thus augmenting the supply, he will also reduce the prices in his markets at home.

If he want to reduce prices still lower, in favour of exportation, but find that he has occasion for the amount of certain taxes, which enhance the value of this physical-necessary to which he has reduced his industrious classes, then let him grant a bounty upon the quantity exported, more than equivalent to compensate the rise of prices occasioned by the taxes paid by those who provide it; and let the people at home continue to pay dearer than strangers, in favour of the state. If by lowering prices you wish to promote exportation only, there will be no occasion to lower them universally, any more than there is occasion to put a large plaister over the whole body, to cure a small wound on a particular part of it.

I have said, that while the rate of the market remains the same, so will the prices of every part of labour and industry, which enters into the composition of the thing brought to market. This is consistent with reason, and experience proves the truth of it; because we do not see wages fluctuate with the price of living. If they do not fluctuate in that proportion, how can we conclude that a rise in the price of subsistence, occasioned by taxes, should raise wages more than when the price is raised by a natural scarcity. It may be answered, that the imposition of a tax gives a general alarm; the effect it must have upon prices is immediately felt; and manufacturers then insist upon an augmentation of their wages: whereas, when nature either produces the same, or even a greater effect, people submit to what they think comes from the hand of God, and content themselves with the hopes of better times. I shall allow to this argument all its force.

But I must observe, that when manufacturers can thus capitulate with their employers, and can insist upon an augmentation of their wages, the demand of the market must be greater than the supply from their work. This is the circumstance which raises the price of labour. Let the demand of the market fall, the prices of labour will fall, in spite of all the reasons which ought naturally to make them rise. The workmen will then enter into a hurtful competition, and starve one another, as has been often observed. Let the demand of the market rise, manufacturers may raise their wages in proportion to the rise of the market; they may, in the cheapest years, enjoy the highest wages; drink one half of the week, and laugh at their employer, when he expects they should work for less, in order to swell his profits in the rising market.

I have endeavoured to throw this question into different shapes, the better to apply different principles to it; and upon the whole, I must determine that proportional taxes will,

First, Undoubtedly raise the price of every commodity upon which they are properly and immediately imposed; and if they be laid upon bread, and other articles of nourishment, they will directly raise the price of these articles in proportion; but the price of labour will be raised consequently only, and according to circumstances.

That if taxes be laid upon the day's labour of a man, they will raise the price of that day's labour. What I mean by this, is, that if every one who employs a man for a day, were obliged to pay a penny to the state, for a permission to employ him, the employer would charge a penny more at least upon the day's work performed by the labourer. Were a tax equivalent to it laid on the labourer by the year, it would be of a cumulative and arbitrary nature, and would not raise the price of his wages in proportion; but were it laid upon the workman at a penny a day, and levied daily, in this case, he might raise his wages in proportion. But this is not the practice any where.

Secondly, The price of subsistence, whether it be influenced or not by the imposition of taxes, does not determine the price of labour. This is regulated by the demand for the work, and the competition among the workmen to be employed in producing it.

Thirdly, If wages rise beyond the physical-necessary of the workman, they may be brought down by multiplying hands, but never by lowering the price of necessaries; because every man will make a profit of the low price, but will regulate his gain by the rate of demand for his labour.

Fourthly, If, therefore, the price of his physical-necessary be raised upon him by the effect of taxes, he must work the harder to make it up.

Fifthly, If hands increase, after he is reduced to his physical-necessary, the whole class of the manufacturers will be forced to starve.

Sixthly, The increase of hands means no more than the augmentation of the quantity of work produced. If, therefore, the same hands work more than formerly, it is the same thing as if their numbers were increased.

From these positions it seems to result, that when ever it is found that manufacturers enjoy wages more than in proportion to their physical-necessary through the year, reckoned upon the general average of married men and batchelors, the method for reducing them to the proper standard, is either to multiply hands, if you want to reduce prices in your own market, or to augment the price of their physical-necessary, if you would have them remain the same. When the hands employed are really diligent, and prices still too high, then it may be expedient to increase their numbers, provided they enjoy considerable profits. This will cut off consolidated profits, and lower the price of commodities; because it will augment the supply.

When the hands employed are not diligent, the best expedient is to raise the price of their subsistence, by taxing it. By this you never will raise their wages, until the market can afford to give a better price for their work. If, when they are brought to be fully employed, you would have the price of labour to sink universally, you must take off some of the impositions which affect subsistence, and at the same time gradually throw in fresh hands, in order to promote competition, which alone will force them to lower their prices in proportion. The whole delicacy of this operation is to prevent competition among the industrious from taking place after they are reduced to moderate profits; and to promote competition among them, or to raise the price of their subsistence, until they be brought to the proper standard. Having insisted so fully upon these principles in the xviiith chapter of the second book, I here refer to it.

I have said, that the price of work is not regulated by the price of subsistence, but by the price of the market for the work. Now I say, that the price of the market may in a great measure be influenced by the price of subsistence. This is a new combination.

The first proposition is undeniable. The price of the market at all times regulates the price of work; because it regularly makes it fluctuate, in proportion to its own fluctuations. The price, again, of subsistence influences it only; because two circumstances may destroy its effect. A high demand for work will raise the price of wages in years of plenty; a low demand will sink the price of wages in years of scarcity. When therefore it is said, that the price of subsistence influences the rate of markets, we only mean, that the average price of subsistence, when good and bad years are taken together, have a certain influence in regulating prices. But this average price of subsistence cannot every where regulate the value of work, as the average price of a ship's cargo can regulate the price of every part of it; because the variations in the price of subsistence have not efficacy sufficient to overbalance the variations in the state of demand.

Could a plan be concerted, either to preserve the price of grain at one uniform standard, or within the limits of 15 or perhaps 20 per cent at all times; and were this to be executed by the assistance of a tax at one time, and a bounty as it were at another; it would certainly have an admirable effect in every industrious nation. It would in a manner take away the difference between good and bad years. The industrious finding themselves subsisted at all times nearly at the same expence, would not feel those alternate motives to be idle and extravagant at one time, and diligent and sober at another.

I have enlarged so much upon the nature of this first inconvenience proceeding from proportional taxes, that I have left myself very little to say as to the second, which is,

Secondly, That they discourage consumption, by raising prices too high for people of a middling rank in life.

In answer to this, I must observe, that all the amount of proportional taxes is refunded to the industrious consumer, so far as they are raised on articles necessary for his subsistence; and when he is either idle, or consumes a superfluity, he is classed along with the idle and rich. Now if the rate of market prices be high, relatively to the income of certain individuals, it can only be because the supply of the things they want to consume is not above the proportion of the demand of those who are richer.

If, therefore, the rate of the market afford such profits to manufacturers as to render them idle and luxurious, how can the augmentation of these profits, by the abolition of taxes, and consequent diminution of the price of subsistence, ever diminish the competition of the rich, unless the supply be augmented?

But if the high prices of our own markets cut off the demand of strangers, then every principle laid down in the 1oth and 18th chapters of the second book, must be applied to bring them down: and as far as taxes, which are imposed either to supply the exigencies of the state, or to cut off consolidated profits, enjoyed by manufacturers in consequence of our own extravagance, have contributed either to raise them, or to support them when raised, above the foreign standard, a full equivalent, in the way of bounty, must be given for them, in order to bring the exportation price of goods below the level of foreign competition.

I come now to the last inconvenience alleged against proportional taxes, to wit, the expence of collecting them, and the oppression which is a consequence of the many restrictions laid upon liberty, in order to prevent frauds.

As to the expence of collection, it is entirely in proportion to the disposition of the people to defraud the public.

In France, the collecting of the branches of cumulative taxes, such as the general receipts, comprehending the taille, poll-tax, &c. costs the state no less than 10 per cent or two sols in the livre, which is superadded to those impositions, in order to defray that expence. Whereas in England the expence of collecting the excise administered by commissioners, who act for the public, not by farmers who act for themselves, does not cost above 5 l. 12s. 6d. in the 100 l.

This matter of fact is sufficient to prove, that excises, when under a proper administration, are not so very expensive in the collection as is generally imagined; and they would still be attended with less expence, were some proper alterations made in the present method of imposing them. This will appear as we go along.

The oppression of levying excises does not, in any proportion, so much affect those who really pay them, as those who advance them only for the consumers.

This distinction which we have already made, will appear well founded, upon examining the complaints which are commonly made against the collectors of this duty.

We have seen how in the taxes upon salt and tobacco in France, there are no duties collected upon the people; the farmers of the salt have all the salt marshes and salt pits assigned to them by the King; no person, not privileged, is allowed to make salt for the consumption of those provinces which are subjected to the Gabelle.

In like manner the distribution and sale of tobacco is exclusively vested in the hands of the farmers: they buy it either from Great Britain, or from the Dutch at second hand; they manufacture it themselves, and sell it over all France, at the price set upon it by the King; and we saw, that during the last war, they paid thirty millions down, for a permission to raise the price of it 10 per cent during ten years. This price fixed upon the sale of tobacco, answers exactly to what we know under the name of assize, which ought constantly to attend all excises: (6) for want of observing exactly this regulation, the publicans and victuallers in England raised the price of their strong beer one half-penny per quart, in consequence of an additional duty of three shillings per barrel imposed anno 1761, which is at the rate only of one farthing per quart. (7)

When the sale of an exciseable commodity is vested in a company who manufacture it, by exclusive privilege, the whole oppression of collection is avoided; because the company itself then pays the duty, and they draw their reimbursement from proportional profits on the sale of the goods.

This is the greatest advantage of the farm above the public management of a tax.

When excises are levied upon those who manufacture the commodity excised, the oppression of the laws falls upon the manufacturers, although they advance the tax only, and draw it back from the consumers upon the sale of the commodity.

Were people to reflect a little, they would soon discover how greatly it is for the advantage of every consumer in the kingdom, that no fraud in the collections should pass unobserved; because all the profits arising from frauds belong to the manufacturer, who in reality is the tax-gatherer, as much as the farmers in France are tax-gatherers, when they sell their salt and tobacco. But as the farmers appear in the light of King's officers when they prosecute offenders, and our collectors seem to bear hard on those with whom we live, people foolishly imagine, that were brewers, for example, more gently dealt with, beer would come the cheaper to themselves. This is a mere delusion; because no brewer whatever will sell his beer cheaper than either an assize, or the ordinary rate obliges him to do, let his profit, from frauds, be ever so great, and his address in committing them ever so successful; and the less productive the tax turns out to be in the end, the more the other impositions upon the people must be augmented, in order to make up the deficiency.

If we compare therefore the oppression of excise-laws felt by those who advance these impositions only, with the ease which the consumers find who really pay them, we may judge of the advantages which the proportional taxes have over the cumulative.

The excise, as paid by the brewer, is really of the cumulative kind. The exciseman demands money of him, at a time when no alienation takes place, and perhaps when he is not prepared to make the advance for his customers, who must refund it to him with profit: besides the hopes of being able to defraud are disappointed, and it is always disagreeable to be disappointed in what we either wish or hope for.

Were all mankind honest, the inconveniences of levying such taxes would be less; but as this is not the case, methods must be fallen upon to disappoint the intention of committing fraud. The only way to accomplish this, is, to render if difficult and dangerous: but while every individual has a liberty to manufacture an exciseable commodity in whatever place he thinks fit to enter, (that is to declare to be set apart) for that purpose; when every one has a liberty to sell liquors, which, upon retail only, are subjected to excise (as is the case in France) must not collectors be multiplied in proportion to the occupation which such policy implies? And will not these collectors oppose frauds to frauds, in order to profit by them, at the expence of the merchant or manufacturer? This will sow discord and hatred between two classes of the same society, and thereby the state is hurt. All discord hurts a state, as it does a private family.

It is out of my way to lay down plans for preventing such inconveniences. It would require an intimate knowledge of every circumstance relating to the country for which the remedy is intended.

I shall therefore endeavour only to throw out some useful hints, by mentioning the impositions where the inconveniences in levying are the least; and by comparing these with other impositions, where the oppression in levying appears to be greater, the contrast of circumstances will suggest the principles upon which a plan may be formed.

There are many more frauds and difficulties in collecting excises in the country than in cities, from the number of manufacturers employed in them. It is just so with the aides in France, from the number of retailers. There are very few frauds and little difficulty in gathering the malt-tax; because the object is unwieldy, and the places of manufacture are fewer.

The frauds upon tobacco and salt in France, do not proceed from those who manufacture them, but from those who introduce foreign goods to supply the place of those manufactured by the company. This shews that excises should be made as general as possible over a country; because local exemptions introduce, as it were, a foreign country into the center of a state.

Stamp-duties are seldom defrauded by forging the stamp; but in France, where they extend to almost every deed of alienation, the public is defrauded by private bargains.

Customs are defrauded by the liberty given to trade in every port; and from the want of convenient public magazines, to serve as a proper repository for all goods brought by sea.

It may further be said, in general, that frauds are most frequent upon the new establishment of taxes; that those who complain most of the oppression of them, are precisely those who have the least reason for it; and that the cause of their complaint proceeds rather from the inconvenience in paying their taxes when they are not prepared, and the disappointment in defrauding, than from any real oppression arising from the laws of excise: the hardships of these laws are owing to the necessity of general rules for preventing frauds; and such rules would be unnecessary, could the liberty of committing frauds be circumscribed.

One very good method of raising proportional taxes, without great expence or oppression, when the situation of a country will admit of it, is to levy no such duties, but at the gates of towns and villages, which in this light appear to be political inclosures. At these gates every produce of the lands, and every manufacture not made in the town, might pay a tax upon coming in; every manufacture made in the town, might pay a tax on going out: all fruits consumed in the country might be free; all manufactures made and consumed in the towns might be free also. If we consider the quantity of exchange between the inhabitants of towns and those of the country, and between town and town; this regulation, I believe, will be found sufficient to raise more money by proportional taxes than what is raised in any country in Europe.

A second method of diminishing the expence, and also the burden of proportional taxes, is to exact nothing of the manufacturers of exciseable goods, but to prohibit the delivery of them to any one who does not present a permit from the excise office, signifying that the tax has been paid. This is the method observed in the Austrian low countries, where excises are carried to a very great height. There the transporters or carriers of exciseable goods, are formed into a corporation, and none else dare to transport them.

Whoever has seen the execution of these regulations will not be very fond of them; but the inconveniences which occur proceed from the political situation of all these towns, the public debts of which are so enormous, that to pay the interest of them excises have been carried so high as to banish manufacturers into the country, where few excises are levied. It is from the country and many considerable villages, which have not the privilege of running in debt, that the manufactures of that country are carried on. No industrious man can afford to live in the towns of the Austrian Netherlands, except he who supplies their consumption; and in no place, I know of, is work so dear as there.

Were great excises levied there upon the furnishers of the exciseable goods, as is the case in Great Britain, and were as little restraint laid upon their frauds, those duties would not produce what they do; and the oppression would be intolerable; whereas by the policy established, nothing but the high price of goods is complained of. A third method of avoiding both expence and oppression in levying proportional taxes, would be to confine the fabrication of all articles charged with them to certain places properly enclosed. Were those undertakings few and large, were spacious magazines of all sorts prepared, at the public expence, in all sea-port towns, and surrounded with walls, an entire liberty might be allowed within the inclosures, and no questions would be asked, but on going in and coming out. Under such regulations a state would reap great benefit. First, There would be considerable savings in collecting. Secondly, There would be great savings on the number of hands employed in manufacturing: forty men, in a large brew-house, make more beer than an hundred disposed as they are in country villages. This resembles the introduction of machines into manufactures.

The objection from the infringement of liberty is more a pretext, in order to facilitate fraud, than any thing else. Are not those who manufacture exciseable commodities, the servants of the state? Are they not even the collectors of the public revenue? With what face then can they pretend to be indulged in the means of defrauding their customers of those taxes which they wish to put into their own pockets, by withholding them from the public. Has liberty any other meaning, but an entire permission to do whatever is not forbid by general and wholesome laws, calculated for the universal good of the society; and shall this class of men, who are enriching themselves as much by the profits they have in advancing the taxes, as by their industry, be considered in as favourable a light as another who is paying a cumulative tax out of his income, one farthing of which he never can draw back?

If any one should misinterpret the doctrine of this chapter, I must put them in mind of my original plan, which was to keep constantly in view those virtuous statesmen who think of nothing but the good of their subjects. Taxes and impositions in their hands, are the wealth of the father of the family; who therewith feeds, clothes, provides for, and defends every one within his house. The increase of taxes on this supposition is national oeconomy, as shall be afterwards shewn; frauds are the thefts of servants impairing the public good, and particularly the means of self-defence against the incroachments of ambitious neighbours.

As it is the duty of every statesman to make his people happy and flourishing, perhaps the speculations of one whose only interest in throwing them upon paper is to fill up his leisure agreeably, may some time or other tend to promote so glorious a purpose.