Chap. XII: Miscellaneous Questions relating to Taxes

Quest. 3. What is meant by income, relatively to individuals, or to a state, and what is the nature of the expence which must diminish it, when it is considered as the object of taxation?

The great intricacy of this question proceeds from hence, that what is really an expence to one is the income of another: so that without applying our reasoning to every particular fact, no general explanation can be rendered intelligible. My reason for proposing it in this place is, that in commenting upon some passages of Davenant, in his discourses upon the revenues of England, I may have an opportunity of illustrating some things which have been already examined.

Davenant was an admirable writer; he had a remarkable genius for political theory, and his sentiments upon many things are very generally adopted. My intention here is not to refute his opinions, but to avail myself of his combinations, in order to explain my own ideas.

In his first discourse upon revenues, we find the following passage.

'The number of the people leads us to know what the yearly income may be from land, and what from mines, houses, and homesteads, rivers, lakes, meers, ponds, and what from trade, labour, industry, arts and sciences: for where a nation contains so many acres of arable land, so many of pasture and meadow, such a quantity of wood and coppices, forests, parks and commons, heaths, moors, mountains, roads, ways, and barren and waste land; and where the different value of this is computed, by proper mediums, it is rational to conclude, that such a part of the people's expence is maintained from land, &c. and such a part from mines, houses, &c. and that such a part is maintained from trade, labour, &c. and the poor exceeding so much the rich in numbers, the common people are the proper medium by which we may judge of this expence.'

'There is a certain sum requisite to every one for food, raiment, and other necessaries; as for example, between 7 and 8 l. per annum; but some expending less, and some more, it may not be improper to compute, that the mass of mankind, in England, expend, one with another, near 8 l. per annum: from whence it may be concluded, that an annual income of so many millions is needful for the nourishment of such and such a number of people.'

The reasoning here takes a wrong turn. It is of no consequence to compute the value of things consumed without alienation. It is of no use to know that the value of the physical-necessary of an Englishman is 8 l. a year; because if this sum be supposed to be an exact quantity of income, not one farthing of tax can come out of it. So that imposing, for example, 5 per cent upon this article would be raising only the physical-necessary to 8 l. 8s. which 8s. must be paid, not by the physical-necessarian, but by somebody having superfluity who employs him: and if there were not superfluity enough in England to answer to 8s. a head, such a tax could not be levied.

He afterwards supposes that the income of this class may amount to about twenty millions a year, which at 8 l. each, answers two millions and a half of people. He states the income of lands at fourteen millions, and the income of trade at ten millions, in all at forty-four millions a year: and hence he concludes, that taxes ought to be imposed in some proportion to this total.

Now if he suppose the first article of twenty millions, arising from the income of those who are employed in arts and manufactures, according to the former calculation of 8 l. a head, to be as ready a fund for taxation as the land-rents, we must examine, by the principles we have deduced, whether there be any ground for such a supposition.

Let me suppose one of this great class to work a whole day for his victuals only. Here is an alienation of work for food. It is impossible, however, to raise a tax in money upon this alienation; because it may easily be supposed that neither party has a farthing. The only method therefore, for imposing a tax in such a case, would be, either to oblige the workman to set apart a portion of his day's work for one who would pay the public for the value of it; or to oblige the person who gives him his food, to pay the public for the privilege of employing him in his service. The one and the other are examples of proportional taxes. But this method of taxation is absolutely unknown. In this example there is an alienation, which, I have said, constantly implies a superfluity of one kind or other. The labour of the person working is, here, superfluous to himself; therefore a part of it may be applied towards the public. But the bread he receives is in no part superfluous, and therefore cannot be laid under taxation as to him. But then the bread given for the labour is superfluous to the person who gives it; and as this implies that he has a superfluity of bread, the state may demand a share of this superfluity.

By this exposition of the matter it appears, that in order to raise a tax, in whatever way it be done, some kind of superfluity must be supposed. It also points out how it should be laid on: for if by mistaking the proper object, a part of the bread should be taken from the workman, instead of being taken from the man who employs him, the tax would affect the physical-necessary of the labourer, instead of affecting the superfluity of the employer.

Let us next suppose a workman able to do no more than what is requisite to dig the ground for roots to eat, instead of digging it to procure bread from a man who has bread to spare; still there will be no alienation; consequently, no possibility of establishing a tax: for if you either take a part of his labour, or of his food, you deprive him equally of his physical-necessary. Yet the work of this man, and his food, may be valued at so much money; and thus may enter, in one sense, into Davenant's general article of income or expence; but it does not follow that any tax can be raised upon such an income.

To estimate, therefore, the total value of what is the object of taxation, we must go another way to work. The first article must be the annual income of all funds. By funds, here, I understand the capital wealth already made, in opposition to the produce of industry, which may be considered as the materials of which such funds are composed. The fund therefore is the accumulation of savings, which, not having been spent by the industrious, form a capital of a nature to produce an income, either from land, or from any other valuable thing. Thus land-rents, annuities, interest of money, emoluments of offices, salaries, even wages of servants, in short, every fixed income, I range in this first article, which I call annual income, produced from a capital already formed, either real or supposed.

This may be laid under taxation by a pound-rate or otherwise, and forms that kind of tax which I call cumulative and arbitrary; because a man who has any sort of visible revenue, comes under this general rate, let him have ever so many necessary deductions out of it, ever so many debts and incumbrances. From such circumstances, cumulative taxes frequently turn out extremely burdensome.

The second object of taxation is upon alienations made for money. Whenever we come to dispose of money in the purchase of any thing, the state has an opportunity of exacting a part of it as a tax; but while it remains hid, it can neither be come at, or laid under contribution, without extortion or violence.

All branches of expence may be laid under taxation by excises, which I call proportional taxes; because a man is never subjected to them, but in proportion to his expence; and his expence ought naturally to proceed from his income.

As for trade, I do not clearly see how the profits of it can be regularly taxed. In France, indeed, they are taxed under the first head, and are considered as an income. Such an imposition is not well judged; because there the materials for making the fund are taxed as if they were the income of a fund already made. The savings only out of the profits upon trade, placed so as to produce a permanent revenue are, what can properly be considered as a fund: the income therefore of these savings and not the savings themselves, should come under this branch of taxation.

Customs are improperly called taxes upon trade. When ill imposed they may stop trade, or render it less profitable by diminishing the demand for the goods so taxed; but they can take nothing from the profits already made.

In a trading nation, the great branches of commerce produce a certain determinate profit, subject, I allow, to augmentations and diminutions, from accidents and circumstances impossible to be foreseen: and the customs imposed upon exportation and importation differ from excises more in the method of levying them than in any thing else.

Davenant, in my opinion, would have given a better idea of the sum which taxes might have produced in England, had he examined the amount of all the branches of revenue, and of all the species of sale, than in the manner he has done. These two points known, it would be expedient next to inquire, in what manner the several articles could be made subject either to cumulative, or proportional taxes.

I must now take notice of another passage of Davenant, where he explains himself upon the question before us: it is in his fifth discourse upon revenues, where he says,

'By annual income, we mean the whole that arises in any country from land and its product, from foreign trade, and domestic business, as arts, manufactures, &c. and by annual expence we understand what is of necessity consumed to clothe and feed the people, or what is necessary for their defence in time of war, or for their ornament in time of peace: and where the annual income exceeds the expence there is superlucration arising, which may be called wealth or national stock. The revenue of a government is part of this annual income, as likewise a part of its expence, and where it bears too large a proportion with the whole, as in France, the common people must be miserable and burdened with heavy taxes.'

I must comment a little upon this passage.

I have no objection to this exposition of the matter; the ideas are intelligible and clear: but I object against the application of his doctrine to taxes; because it would lead to error. Here are my reasons:

First, Income is called the whole of the earth's productions: this I may admit to be just, except when we consider income as an object of taxation. But if we retain the same definition to express the income of one, for example, who labours the soil for his own subsistence, as well as of another who labours it as a trade, the difference in paying their taxes out of it will be very great. He who draws nothing from the ground but his physical-necessary, can be laid under no taxation; because he has no superfluity. And if he be obliged either to give a part of his crop in tax, or to sell any part of it for money to be paid to the public, this diminishes his physical-necessary, and forces him to starve: whereas the other, who exercises agriculture as a trade, may be obliged to pay a part of his surplus by way of tax or rent; and still his physical necessary may remain untouched.

It is for this reason, that in treating of these matters, I am always at the greatest pains to point out, that nothing can be the object of taxation, except what is over and above the physical-necessary of every one.

In all countries where a land-tax, steuer, taille, or by whatever name it goes, is established, care must be taken to prevent the husbandmen from confining their labour to such a small spot of ground as is barely sufficient to produce their own physical-necessary, unless when they have a trade to assist them in paying what the public demands of them.

From this circumstance, and this only, it happens, that the land-tax in England is so little burdensome, comparatively to what it is in many nations of Europe. Lands in England are let in large portions: nobody will let a farm so small as to be proportioned to the supplying of the mere physical wants of the farmer. But in other countries, where the oeconomy is different; where inheritances in land are constantly divided, as moveables, among all the children; the lots become so small, that the proprietor can draw no more from them than his own subsistence; and then when a land-tax is imposed, this poor little portion being valued in proportion to what it can produce, as well as the greatest estate in land, the husbandman is starved, although the tax demanded of him be laid on in the exact proportion to the produce of his land, while he that has a surplus is quite easy.

I would therefore recommend, in countries where this minute subdivision of lands has taken place, that for the future no lot under a certain extent or value should be suffered to be divided among the children, but ordered to be sold, and the price divided among them; and that the same regulation should be observed upon the death of such proprietors whose lands are not sufficient to produce three times the physical-necessary of the labourers. This would engage a people to exercise agriculture as a trade, and to give over that trifling husbandry which produces no surplus, and which involves so many poor people in the oppression of land-taxes. This regulation never can be recommended in a plan to be executed all at once: it must be done by degrees, and in proportion to the progress of industry. The principle is so evident, that I never found any one who did not immediately agree to the justness of my observation; although in imposing land-taxes I have nowhere found it properly attended to.

Here then is the use of theory; it directs us in practice to avoid difficulties, which might otherwise be judged unsurmountable.

Secondly, I farther observe, that it is a more hurtful error still to mistake the produce of industry for the taxable income arising from it, than to mistake the gross produce of land for the rent: because the profits upon industry bear frequently a smaller proportion to its produce, than the rents of lands do to their full fruits.

The best method of raising money upon the lower classes of the industrious is rightly to lay their consumption under proportional taxes, which they may easily draw back; because they will raise the price of their work proportionally.

From this we may conclude, contrary to the common opinion, that the test of well imposed taxes is to raise prices in proportion. When they are rightly imposed, every one who sells a commodity which has paid a tax, will draw it back, whether he be industrious or not. If he consume it, he cannot draw it back, but by raising the price of his work; which again he cannot do, unless the tax be made so general as to affect all his competitors; and unless the consumption he had made be unavoidable to every one of them.

When we reflect upon the large quantities of exciseable goods which are consumed as superfluities, we must conclude that the rise of prices, daily complained of, proceeds more from our manners than from the taxes we pay.

Thirdly, the expence of a people is not merely what is sufficient to subsist them; but what they consume, either in fruits or manufactures. Had indeed Davenant computed the value of this necessary quantity, and deducted it from the income, according to his acceptation of income, the remainder would have been a tolerably good representation of what I mean by income, or taxable fund; because whatever a people consume beyond the necessary, I consider as a superfluity which may be laid under taxation.

Fourthly, I must also differ from him in his idea concerning superlucration, wealth, or national stock.

According to him, this is the quantity of income remaining after the following deductions: First, What is necessary to clothe and feed the people. Secondly, What is necessary for their defence in time of war, and ornament in time of peace. But according to my notions, I must also deduct all which is consumed in superfluities; for what is consumed, whether necessarily or superfluously, never can make an article of superlucration, wealth, or national stock.

The superlucration then of a nation consists in the augmentations made upon her stock of every kind, capable of producing a proportional income: it is the converting into something durable the well employed time of the inhabitants. In this sense the new pavement of London, the roads, buildings, ships, etc. in England, are all articles of superlucration, as well as the improvement of the lands, and consolidation of the balance of her trade, which has created that part of the public funds belonging to natives.

Every one who has written concerning taxes has endeavoured to contract the object of them as much as possible: more, I imagine with a view to ease the public than the people. I have followed another course. I have been for multiplying the objects of taxation as much as possible, and for making them more in proportion to expence than to property or income. But that I may conform myself in some measure to the ideas of those who have examined the same subject, I shall propose a tax, which would fill up the place of every other; and could it be levied, would be the best perhaps ever thought of.

It is a tax, at so much per cent upon the sale of every commodity.