Chap. VIII: Of the Extent of Taxation

One good way to discover the nature of taxes, is, to examine how far it may be possible to carry them. This is my intention in this chapter.

I have said that the object of taxes was income, and not stock. I have shewn how those of the proportional kind affect the income of stock already made, and enhance the expence of persons who enjoy large profits upon their daily industry. I have pointed out the impropriety of imposing cumulative taxes, upon such as draw nothing more from their industry than an easy subsistence; and I have given a general preference to those of the proportional kind; because they constantly imply both alienation and consumption: alienation in those who advance the taxes, consumption in those who pay them.

Could, therefore, taxes be levied upon every alienation, where consumption is implied, and that in proportion to the whole superfluity of those who are to consume, proportional taxes would be carried to their utmost extent.

I shall now analize this subject still farther, in order to discover how far this extent may reach; and by this inquiry, the principles of taxation will be the better understood.

The object of alienation comprehends all that is in commerce among men, moveable, and immoveable.

What is moveable is generally consumable, what is immoveable, is generally not so.

As consumption is a requisite, together with alienation, in order to form a proper object for proportional taxes, we see how contrary to principles it would be, to tax the alienation of lands, houses, etc. in the same proportion as consumable commodities. These are funds, not income; and the money with which they are purchased, must be considered in the light of a fund, while it is in the hands of the buyer. When once it comes into the hands of the seller of the immoveable subject, it frequently, indeed, partakes of the nature of income; that is to say, it is spent in the consumption of fruits, and of the labour of man; and then it will be properly affected by proportional taxes. This may suffice to recal to mind the principles we laid down in the 26th chapter of the second book, concerning the effects of the vibration of the balance of wealth between the members of a modern state.

The next thing we are to consider is the state of circulation. As to this, we have frequently observed, how it must be in proportion to alienation.

This proportion is not determined by the value, or denominations of the money circulating; but by this value combined with the frequency of transitions from hand to hand; as the force of a cannon ball is estimated by the weight of the ball, and the swiftness of the motion at the time it strikes.

Let us now lay aside the consideration of immoveable property altogether; and examine the nature of consumption, alienation, and sale, with respect to other things.

Consumption comprehends every thing produced by the earth, or by man; alienation is confined to that part of consumption which is exchanged between men; and sale to that part of alienation which is exchanged for an equivalent in money.

Whatever part is consumed without alienation, ought, I think, to be out of the reach of proportional taxes, unless, by some circumstance or other, it can be made to fall under the eye of the public, in a manner resembling its coming to market. Thus a tax upon malt may with propriety be levied at the malt-house, as if it were sold to the maltster, although it be made for the consumption of the grower of the barley. In like manner a tax upon corn for bread may be levied either at the mill where it is ground, or at the oven where it is baked. (9)

The worst kind of proportional taxes are those which are levied upon private manufacturing, and upon unmanufactured consumption, where no alienation takes place. An example of the first we have in the excise upon malt, cyder, candles, etc. made in private houses for private use: the last is known in Holland, where a man cannot kill his own pig, or his own calf, without paying a tax. Were taxes of this nature extended to the making of bread, cooking of victuals, &c. I apprehend they would become of a nature more burdensome than any hitherto invented, unless public cooks, &c. were established, as public ovens are in many parts of France: in such cases, taxes might be levied upon every part of consumption.

Investigations of this nature are so disagreeable, that it is with reluctance I mention them; but when in fact, such taxes are found established in different countries, it is highly proper that the nature of them should be inquired into.

Taxes in Holland are so multiplied, as to descend to this sort, in many places, as we have seen by the example just given; but even these, however oppressive they may appear to those who are not accustomed to them, are still less so than many of the cumulative kind we have mentioned, particularly the tax upon industry and the capitation in France. They approach nearer to proportional taxes and derive every alleviation of their burden from this circumstance. He who pays such taxes, sees that he can avoid them, by retrenching his consumption; and when they fall upon the necessaries of life, he may draw them back, provided he be an industrious man, and that every one who enters into competition with him for employment, be equally subjected to the same burden. But they are more burdensome than those where sale takes place; because, when a poor man, who wishes to consume, has no money, he considers himself in the same light as if the thing were not to be sold; but when he has what he has acquired by his own labour, and cannot consume it for want of money to pay for a permission, as it were, he must either starve for hunger in the midst of plenty, or be reduced, perhaps, to beggary, for having preserved his life by defrauding the tax.

What has been said, is, I think, sufficient to shew the hardships which occur, when taxes are imposed upon bare consumption, where no alienation takes place: they must, in every respect, be ranged under those of the proportional kind, although some principal requisites be wanting to engage any one to approve of their institution.

It appears still more difficult to establish a proportional tax upon barter, or the exchange of commodities one for another, unless sale be understood. This would be the case were a private person, not subject to the excise upon beer made in his own house, to pay in that commodity. He would not there escape the imputation of fraud; and might, with propriety, be considered as a retailer. I do not, however, doubt but examples of taxes upon barter might be found; some even occur to myself; but they are too trifling to mention. (10)

The last and principal requisite, to render proportional taxes easy and light, is sale. There the burden must be proportional to the buyer's purse; and if it prevent the consumption of the thing taxed, the defect will manifest itself.

Of these taxes we may say, that they are in proportion to circulation; and accordingly, we see how difficult it was to raise them, as long as circulation remained confined to the small quantity of coin in the country. As money increased, both by the increase of trade and alienations, they became more productive; and were the nature of them rightly understood, and were they properly imposed, they would soon be more generally adopted.

In treating of public credit, I have said that it is the duty of a statesman to augment the quantity of money, in proportion as he intends to multiply taxes on his people. I shall now, before I conclude this chapter, explain the meaning of what was there thrown out relatively to another subject.

The money of a country, we have said, bears no determinate proportion to circulation; it is the money circulating, multiplied by the number of transitions from hand to hand. Again, we have said that the prices of all things are determined by demand and competition. The meaning of this, as it concerns the present question, is, that in proportion to the competition of those who appear with money, in order to acquire what comes to market, a larger or a smaller sum is brought into circulation.

Now, according to the principles laid down in the first chapter of this book, we saw how the full value of the industrious seller's expence and profit, were made up to him in the sale of his work; and if he had advanced any tax upon any part of his work or consumption, that even this was refunded to him by the buyer, who, if he consumed in the light of an idle man, paid for the whole.

Farther, when a proportional tax is imposed, we said it was, in a manner, as if the state interposed at the time of alienation, and exacted of the purchaser a certain value in money, in proportion to the commodity, as the price of the permission to acquire what his own industry had not produced. From this I draw the following consequence, that in proportion to the tax, an additional sum of money is drawn into circulation, which would otherwise have remained in the pocket of the purchaser; consequently, on imposing proportional taxes, they cannot, at first, exceed that proportion of money which is found in the pockets of the consumers, over and above what they used to pay for what they consumed.

The truth of this proposition is established upon many facts. First, in countries where people keep their money locked up, proportional taxes are very well paid. Hence the great amount of the alcavala and cientos in Spain, which amount together to 14 per cent upon every consecutive alienation of the commodities which they affect, chiefly indeed for the consumption of the rich.

Secondly, When excises were augmented in England, in the reign of king William, Davenant tells us, that the goods excised fell in their price.

Thirdly, When a war has lasted any time in France, taxes cease to be so productive.

Are not all these, and many other appearances, resolved upon the same principle, viz. that taxes must come out of that money which exceeds what was necessary for carrying on alienation before they were imposed?

In Spain such taxes draw money from the chests of the hoarders, and increase circulation for a while.

In England, during King William's wars, the quantity of money being very small, and trade being very low, the tax upon malt could come out of no other fund than the price usually given for barley.

In France people are better acquainted with taxes, and the great bulk of excises are administered by the farmers, who never lower their price; so that the diminution of the mass of coin must diminish consumption.

But when methods can be fallen upon to increase money according to the uses found for it, taxes will continue to produce, consumption will not diminish, and circulation will keep pace with them.

Could we suppose, that before the imposition of taxes, every person in a state had laid it down as a rule, to spend the whole of his income, but none of his treasure, in the consumption of what is brought to market, it is plain, that in a luxuriouS nation, taxes might be carried so high as to draw the last farthing of the treasure into circulation, even though it were supposed to exceed the value which demand had fixed for all that was formerly brought to market. But without a luxurious turn this would not be the case. There are countries abounding with coin, which it is impossible to come at by proportional taxes. The reason is plain: the value which demand fixes upon the total of the articles of consumption exposed to sale in the country, bears but a trifling proportion to the coin which remains locked up. This was the case in ancient Greece. In this case, proportional taxes never can exhaust the treasure; because were they to be made high upon articles of the first necessity, all the poor would starve; if upon articles of superfluity, demand would stop.

Proportional taxes, therefore, can be raised in proportion only to the desire of spending money; and as this desire depends upon the spirit of the people, so must the extent of taxes.

Let me now trace a little the progress of money brought into circulation by proportional taxes in a luxurious nation. I shall call the value, fixed by demand, for all that comes to market (Y). The sum levied in consequence of the alienation of it, or in other words, the sum of the proportional taxes (X). And the whole money of the country (Z). This premised, it will follow, from what has been said, that as soon as all the money of the country is brought into circulation, then (Z) will be exactly equal to the sum of (Y) and (X).

Let us next suppose the whole alienation to be made at once. Will not (Z) then immediately appear divided into (Y) and (X)? What then will become of those two sums which we suppose to enter into circulation at the same time? I answer, that (Y) will go entirely free to the industrious seller: that it is, or should be, nearly equal to the former value of what came to market before taxes were imposed: and that (X) is an additional sum drawn from the idle consumers, who live upon an income already made. But suppose (X) to be augmented, until it exceeds the quantity of money formerly superfluous for carrying on alienation: then I say, that either taxes will become proportionally less productive, or consumers must melt down the capital of their funds into paper money, to the amount of the deficiency of (X); and this will supply circulation with the additional sum required in consequence of the imposition of taxes.

Now, I think, it is a lucky circumstance, that the additional sum of taxes should be paid by those very people who are the best able to borrow it upon their funds.

Let us proceed to examine the progress of (Y) and (X) as they continue in circulation. (Y) is no sooner come into the hands of the industrious seller, but he has occasion to go to market: that moment I consider him as one of the rich; and the money which, at the time he sold, had acquired the denomination of (Y), now resumes that of (Z). When he comes to buy a commodity with what was formerly his (Y), there is immediately a part of it converted into a new (X), and the remainder keeps the denomination of (Y) in the hands of him from whom he buys. By this progress it is plain, that after a certain number of alienations, or transitions from hand to hand, the whole quantity (Y) will be converted into (X).

Experience shews this to be the fact; because the amount of taxes in a short time, far exceeds the value of all the money of a country.

Let us next follow the progress of (X).

Upon the first alienation of any part of what comes to market for the consumption of the proprietors of (Z), a proportional part of (Z) is transformed into (X), and is carried into the public coffers. Were it there to be locked up, and not thrown back into circulation, it is plain, that in a short time the whole of (Z) would be converted into (X), and would be shut up in the exchequer.

When the amount of taxes, therefore, instead of being shut up in the exchequer is sent out of the country, as in time of war, must not this produce a similar effect? Has not the exportation of this amount the same effect as locking it up, since the one and the other equally take it out of circulation? Does it not then follow, that if more money be not obtained, either by borrowing it back from strangers, or by melting down more solid property, that selling must stop, and (Y) disappear as well as (X)? The rich, therefore, must give over buying, and the proprietors of all that comes to market must deal by barter with one another.

How naturally do all these consequences follow one upon the other! and how exactly do they correspond to the principles which run through that part of the last book where we treated of banks and public credit!

Taxes are not raised, in our days to remain in treasures, but to answer the exigencies of the state. The moment, therefore, that the money arising from them comes out of the public coffers, it loses the character of (X) and resumes that of (Z), in the same manner as (Y) was transformed into (Z), by being brought to market in order to buy a commodity. This new (Z), as we may call it, no sooner returns into circulation, than it becomes again converted into (Y) and (X), with this difference, however, that what came from the exchequer, so far as it is converted into (X), returns directly into it again.

Hence it follows, that states commonly pay their servants the full of their salaries, and make them refund a part in consequence of cumulative taxes, instead of proportionally diminishing what is due to them. And when the salaries themselves are intended to be 1aid under poundage, which in fact is an actual diminution of them, they choose that the tax should appear to be a deduction out of what is supposed due; because it seems less arbitrary to impose a tax, than to diminish a salary, without assigning any reason for it; but indeed, besides this reason, it commonly happens, that the particular appropriations and administration of the revenue render this method easier.

With respect to proportional taxes they affect the expences of the state in the same manner as those of individuals; with this difference, as we have said, that the part (X) returns into the exchequer; but the part (Y) is fairly spent by the state, as by the idle consumer.

From what has been said, we may gather the principles which lead to the most extensive establishment of proportional taxes, viz. either to draw by particular regulations, the whole real and gross produce of land and work to market; or at least to bring it under the eye of the state, in consequence of some modification or manufacture performed upon it, as was observed with respect to malt-houses, mills, and public ovens. When, by such contrivances, the whole gross produce falls under taxation, the proportional taxes must be gently laid on, and gradually raised until they begin to interrupt consumption; then they must be diminished for a while, until dissipation increase; a case which will probably happen, as it commonly keeps pace with industry.

If we suppose the rich to set out on a plan of living upon their capitals, instead of living upon their incomes, as we have hitherto supposed them to do, then indeed taxes may augment to a degree not to be estimated. This combination has already found a place in the 26th chapter of the second book, where we examined it with regard to the progress of industry. In that place it was said, that in proportion to credit and industry, it might be possible, in the compass of a year, to produce commodities to the value of the whole property of the most extended kingdom. Were this the case, to what a height might not taxes be carried?

(Y) then would represent the whole value of the country, and consequently (X) would swell in proportion, according to the competition among the inhabitants, to purchase every particular article. Subsistence and necessaries might be taxed low in proportion to the abilities of those of the lower classes; articles of luxury might be taxed in a higher proportion, in order to draw the more into the exchequer.

Were taxes thus carried to their utmost extent, still every person in the state must be left at liberty to save, or to spend the whole, or any part of his stock, or income; which is not the case when cumulative taxes are imposed. Proportional taxes, though carried to their utmost extent, will not deprive an industrious man of his physical-necessary, nor of the reward of his ingenuity, nor of that rank in wealth, to which his birth or expence entitles him. (11)

When taxes have the effect of interrupting this harmony of expence, of restraining the liberty of squandering, or of saving, or of oppressing one set of men more than another, in all such cases, they are improperly imposed; and instead of being too high, as it is commonly supposed, I think it is a demonstration that they are really lower than they need to be. The classes of men in a modern state, resemble the horses in a team. When every horse draws fairly and equally, the whole force is exerted; but if any one happen to be strained by an over-charge thrown upon him, the force of the team is greatly diminished.

When proportional taxes are carried to their full extent, I then presume every one will be obliged to pay as much as possible; I do not mean that every one will be forced to pay to the extent of his abilities, but I say, that the generality will; and therefore, were cumulative, or personal taxes, to be superadded on those who already pay all they can, they would, by affecting them unequally, deprive many of their physical-necessary, or small profits; and consequently destroy the proper balance of their competition. The setting of the lower classes free from cumulative taxes, will have the effect only of putting the growing wealth of the penurious and saving part of the industrious inhabitants out of the reach of taxation. This ought in good policy to be done, as has been shewn in another place. But, farther, we have observed, that taxes can be increased in proportion only to the spirit of dissipation in the people. To force money, therefore, out of the hands of those who do not incline to spend it, is forcing the spirit of the people; and if it be not tyranny, it is at least great severity. Besides, we shall presently shew, how impossible it is these savings should escape being taxed whenever they begin to produce an income; and allowing that they may be greatly accumulated, and thrown into trade, yet still they must in one way or other appear in alienation, and become subject to the proportional taxes. The only part, therefore, of the savings not affected by taxes, will be confined to that which is locked up. This in a prodigal nation should never be touched. The inconveniences resulting to the state from so small an inequality of taxation, is too trifling to be attended to, and too difficult to be prevented.

I come next to examine the extent of cumulative taxes.

If we suppose the proportional taxes to be carried to their full extent, there will be little place found for the cumulative, as has been said. The only objects left for them are the savings locked up, and the pure profits upon trade.

But let us suppose proportional taxes out of the question, as they must be when contrary to the spirit of a particular nation; and then inquire into the principles which regulate the imposition of cumulative taxes, in order to discover to what extent they may be carried, and what consequences may follow when they are brought to a height.

This branch has two objects; first, income, which is determinate; secondly, profits from industry, which are and must be very uncertain.

Income, I divide into two sorts; that which proceeds from every branch of solid property, capable of producing it: Land, houses, even cattle, furniture, &c. all may, in some respects, produce an income, more or less permanent according to circumstances. This sort of income is established by lease. The second sort is the interest of money, constituted by the contract of loan.

In imposing cumulative taxes upon income, it is very proper to attend to the nature of every species of it, with respect to its stability. Landed property is fixed, and cannot escape taxation, were the tax to be carried even to the extent of the full income, as has been observed. Were the same proportion to be laid on houses, they would soon fall to ruin, because the nominal proprietor would not keep them up. Like circumstances must be attended to, in taxing every other article of revenue.

The method of ascertaining the value of this kind of property, is to oblige all leases to be recorded, under a sufficient penalty. This is the method in France, for the sake of the controle, which is exacted upon recording them; and this, no doubt, facilitates the arising of the twentieth penny, which operates upon all such income.

The value once ascertained, the whole income is at the mercy of the state, in proportion to the impossibility of avoiding the tax, by any change on the nature of the fund. It is from this circumstance that I have called all such taxes arbitrary impositions. And I call them also cumulative; because the reason given for imposing them, is, that it is just every one should pay a general tax, for the support of the state, in proportion to his abilities.

As these taxes cannot be carried beyond the value of the income which the proprietor cannot withdraw from under the burden, we see the impossibility of establishing them upon that income which proceeds from money. If a tax of so much per cent be imposed upon money lent at interest, the lender may immediately call in his capital from his debtor, and send it away beyond the reach of the tax. If the calling it in be prohibited, then all credit will be destroyed for the future, and no more money will be lent. If the statesman should be disposed to profit of the advantage found in securing money upon land-property; and if, trusting to the desire monied-people have of settling their capitals in that way, he should take one or more per cent. upon capitals so secured; it will still have the effect of hurting the credit of landed men, who have frequently no good security but their land to give.

It was formerly the practice to allow the landlords a retention of a part of the interest, in consideration of the tax they paid upon that part of their land, which was pledged for the security of the money borrowed; but when credit is once established, this regulation has no other effect, than to oblige landlords to borrow so much dearer than other people, who have no retention to claim. Where indeed credit is precarious, such a regulation may be considered as a premium for good security.

In general, I believe, we may safely determine, that all attempts to lay a tax upon the income of so fluctuating a property as money, where the capital is demandable, will prove unsuccessful.

The case is different, when the capital is not demandable, as has been observed in the end of the 8th chapter upon public credit; where we were suggesting a reason for taxing the interest of national debts, when grown up to the full amount of all the income of a country. But a material distinction was there made, between those debts which were supposed to be consolidated into a permanent property, and the new contracts which were to be considered as debts constituted upon that property.

We see, therefore, the extent of cumulative taxes upon possessions which produce an income. Let us next examine how they may be made to affect other articles.

We have observed how improper, and how contrary to principles it is, to impose proportional taxes upon those branches of sale, which do not change the balance of wealth between the contracting parties. Yet cumulative taxes may then take place; because there is no reason to make them general, or proportional.

When lands, for example, carry titles along with them, as is the case in many countries; and when, as with us in Scotland, they carry a right to vote for a member of parliament, a very heavy tax might be imposed upon the alienation of them. The same may be said of every other estate which requires a feudal investiture to complete the right. Thus the Lods et Vente in France, which is a proportion of the price of such lands due to the superior or lord-paramount of the fee, amounting in many cases to the sixth part of the price, is a hint for a cumulative tax to be raised upon the alienation of this kind of property.

Were cumulative taxes properly laid upon personal service, a regularity in levying them at short intervals, and according to some determinate proportion, would do a great deal towards communicating to them all the advantages of those of the proportional kind.

Thus a tax laid upon those who work by the day, may be levied in such a manner as to be tolerably easy. A penny a day (or more if necessary) paid by every industrious man, regularly, once a week, would soon enable him to raise his price in that proportion. But then deductions must be allowed for all accidental impediments; and were a plan to be concerted, many other considerations would enter into it, which it would be superfluous here to mention, and which, perhaps, may occur in another place.

The two articles which, in analizing the extent of proportional taxes, we observed had escaped that imposition, to wit, money locked up, and the pure profits on trade constantly accumulated into the stock, are equally ill adapted to bear a cumulative tax. I can see no way of taxing money locked up, any more than money lent, without opening a door to the greatest oppression. And as to the pure profits on trade, although they appear to be income, I rather consider them as stock, which, according to principles, ought not to be taxed. My reason for not considering them as income, is because we have supposed them to be accumulated by the merchant into his trading stock. They resemble the annual shoots of a tree, which augment the mass of it, but are very different from the seed or fruit which is annually produced, and is annually separated from it. If they be spent by the merchants, then they are undoubtedly income, and will be affected by proportional taxes; but as they may also not be spent, and become stock, the cumulative tax will affect them in both cases.