Taxation and Government Expenditure, General Principles of Taxation and Finance.

We cannot do better than preface the subjects of this chapter by stating a few general principles of taxation and finance; they are principally taken from Adam Smith and Dr. Hamilton, and for the most part are so self-evident that it is superfluous to adduce any argument in their support or elucidation; and the others may be inferred by a very obvious train of reasoning. Yet measures inconsistent with them have not only been advanced by men of reputed abilities, but have been acted on by successive administrations, annually supported in parliament, and extolled in political publications. This may create a necessity for a few explanatory observations, and which we shall subjoin in a separate paragraph immediately after each consecutive proposition.

I. The annual income of a nation consists of the united produce of its agriculture, manufactures, commerce, and industry. This income is the source from which the inhabitants derive the necessaries, comforts, and luxuries of life; distributed, according to their stations, in various proportions, and from which the public revenue, necessary for civil government and external administration, is derived.

In every nation a part of the annual income must be withdrawn from the inhabitants for the support of the army and navy, the administration of justice, and other public purposes. The sum thus withdrawn, however reasonable and necessary, is abstracted from the funds which supply the wants of the people, and, consequently, lessens their means of enjoyment. Taxation, therefore, though necessary, is a positive evil, and it is a poor set-off to allege against this evil that it may, when gradually augmented, operate as a motive to greater industry and economy in the people. The natural desire of advancement in life and to participate in its pleasures, are sufficient inducements to frugality and industry without the artificial goad of the tax-gatherer. But taxes have not only encroached on luxuries, but on the comforts and necessaries of the productive classes, and it is mere sophistry to allege that they are either harmless or beneficial; that they either return by other channels, or are a spur to industry. That which is taken and consumed can never be returned by any channel; and that can never form a spur to industry, which lessens the rewards by which industry is excited and put in motion.

II. The portion of national income, which can be appropriated to public purposes, and the possible amount of taxation, are limited; and we are apparently advanced to that limit.

That the amount of taxation is limited, and that we have reached that limit, is pretty evident from the generally low rate of profits and wages. The burthens which peculiarly press on productive industry have been enumerated (p. 279). “When,” says Mr. M‘Culloch, “the taxes which affect the industrious classes are increased, such increase must either immediately fall wholly on profits or wages, or partly on the one and partly on the other. If it fall on profits, it makes, of course, an equivalent deduction from them; and if it fall on wages, it proportionally depresses the condition of the great body of the people.” We have arrived at the anomalous state in finance when two and two do not make four. Were additional taxes imposed, instead of increasing, they would probably diminish the total amount by impairing the sources from which they would be derived. The effect of augmented taxes beyond national ability was finely exemplified in the case of Ireland. The revenue of Ireland, in 1807, amounted to £4,378,000. Between that year and the conclusion of the war taxes were imposed, which, according to the calculations of chancellors of the exchequer, were to produce £3,400,000, or to augment the revenue to the extent of £7,700,000. What was the result? Why, that in the year 1821, when that amount ought to have been paid into the Treasury, the whole revenue of Ireland amounted only to £3,844,000, being £553,000 less than in 1807, previously to one farthing of these additional taxes having been imposed. Take another example of the effect of a seasonable reduction of taxes in the United Kingdom. Between the years 1823 and 1827 taxes were repealed to the amount of £9,182,571, but the nett loss sustained by the revenue was only to the amount of £3,308,316: the enormous difference of £5,874,255 being made up by increased consumption. The Whig ministry repealed duties to the amount of £4,477,000 in 1831, but the depression in all the great branches of national industry has prevented the loss sustained by the revenue from being supplied by increased consumption in the proportion experienced by their predecessors.

III. The subjects of every state ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to individuals is like the expense of management to the joint tenants of an estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observance or neglect of this maxim consists what is called the equality or inequality of taxation.

IV. The tax which every individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person. When it is otherwise, the tax-payer is put more or less in the power of the tax-gatherer, who can either aggravate the tax on any obnoxious contributor, or extort, by the terror of such aggravation, some perquisite or advantage to himself.

The Assessed Taxes, especially the inhabited house duty, and most duties of Excise, contravene this principle.

V. Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state. A tax may either take out or keep out of the pockets of the people a great deal more than it brings into the public treasury in the four following ways:—First, the levying of it may require a greater number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose perquisites may impose another additional tax upon the people. Secondly, it may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so. Thirdly, by the forfeitures and penalties which those individuals incur who attempt unsuccessfully to evade the tax, it may frequently ruin them, and thereby put an end to the benefit which the community might have received from the employment of their capitals. Fourthly, by subjecting the people to the frequent visits and odious examination of the tax-gatherers, it may expose them to much unnecessary trouble, vexation, and oppression; and though vexation is not, strictly speaking, expense, it is certainly equivalent to the expense at which every man would be willing to redeem himself from it.

Our Excise and Custom Duties, which form the great sources of public income, are mostly a violation of this principle of Dr. Smith. The two principal objects of our aristocratic legislators have been, first, to tax necessaries, not luxuries; secondly, to tax industry, not property. Thus they have been cutting away, not at revenue, but the sources of revenue; they have been reaping the seed, not the ripened fruit, and have finally exemplified the Fable of the Goose which laid golden eggs. Those who recommend a direct tax on property are right; nothing less will enable the country to meet its pecuniary difficulties, and get rid of the waste and folly of our fiscal administration.

VI. In time of war taxes may be raised to a greater height than can be easily borne in peaceable times; and the amount of the additional taxes, together with the surplus of the peace establishment, applied for defraying the expense of the war.

It is not intended to affirm that the power of a nation to bear taxes is increased in consequence of its being engaged in war. The contrary is always the case. Labour, agriculture, commerce, and manufactures, are the sources from which all revenue is derived. Some of them may be ameliorated, but they are depressed on the whole, and do not attain the solid prosperity they would have attained, had not war intervened. But the necessity of the war, real or imaginary, has a powerful influence on the public mind, and reconciles the community to submit to privations, which, in peaceable times, would be accounted insupportable. The latter is the sense in which the proposition is intended to be understood.

VII. The expense of modern wars has been generally so great, that the revenue raised within the year has been insufficient to pay it; hence the necessity of having recourse to the system of funding, or anticipation.

Various causes may be assigned for the increased expense of modern wars: the nature of our military weapons; the entire separation of the character of the soldier from that of the citizen; the system of colonies and foreign settlements, in consequence of which a contest, that a few centuries ago would have been decided by a battle on the frontiers of the contending nations, now extends the ravages of war to every part of the globe: and, since the imaginary system of the balance of power has prevailed, large sums have been granted by states, like England, more opulent than wise, as subsidies to others, supposed to be interested in the common cause. While these causes have led to great expense, the increase of national wealth has supplied the means, and the Rulers of this nation, in particular, by artfully supporting the illusion of a Sinking Fund, and a well regulated system of transfer of stock, have been able to draw forth a larger proportion of the wealth of the people than any other government in the world.

VIII. In every year of war, where the funding system is adopted, the amount of the public debt is increased; and the total increase of debt, during the war, depends on its duration, and the annual excess of the expenditure above the revenue.

IX. In every year of peace, the excess of the revenue above the expenditure ought to be applied to the discharge of the national debt; and the amount discharged during any period of peace depends upon the length of its continuance, and the amount of the annual surplus.

X. If the periods of war, compared with those of peace, and the annual excess of the war expenditure, compared with the annual savings during the peace establishment, be so related, that more debt is contracted in every war than is discharged in the succeeding peace, the consequence is a perpetual increase of debt; and the ultimate consequence must be, its amount to a magnitude which the nation is unable to bear.

XI. The only effectual remedies to this danger are the extension of the relative lengths of the periods of peace; frugality in peace establishments; lessening the war expenses; the increase of taxes, whether permanent or levied during war.

XII. If the three former of these remedies be impracticable, the last forms the only resource. By increasing the war taxes, the sum required to be raised by loan is lessened. By increasing the taxes in time of peace, the sum applicable to the discharge of debt is increased. These measures may be followed to such an extent, that the savings, in time of peace, may be brought to an equality with the surplus expenditure in time of war, even on the supposition that the periods of their relative duration shall be the same, for centuries to come, that they have been for a century past.

The difficulty, and even impossibility, of a further increase of taxes has been considered. Every new imposition, as the limit to taxation approaches, becomes more oppressive and more unproductive; and if Government adhere to an expenditure beyond the ability of the country to support, it is impossible to escape national, or more properly government bankruptcy. So long as the practice was followed of defraying almost all the war expenses by loans, and imposing taxes only for the payment of interest, the burdens of war were so lightly felt, that the promptness of the Aristocracy to engage in war was scarcely under any restraint. Had the supplies been raised within the year, and most of them by direct taxation, the pressure would have been so great, that it would have probably stimulated the people to restrain their rulers from engaging in hostilities for remote and delusive objects. Justice to posterity required this. Every generation has its own struggles and contests. Of these and these only it ought to bear the burden; and the great evil of the Funding System is, that it enables nations to transfer the cost of present follies to succeeding generations.

XIII. When taxation is carried to such an extent that the supplies adequate to meet a war expenditure are raised within the year, the affairs of the nation will go on under the pressure of existing burdens, but without a continual accumulation of debt, which would terminate in bankruptcy. So long as taxation is below this standard, accumulation of debt advances; and it becomes more difficult to raise taxation to the proper height. If it should ever be carried beyond this standard, a gradual discharge of the existing burdens will be obtained; and these circumstances will take place in the exact degree in which taxation falls short of or exceeds the standard of average expenditure.

XIV. The excess of revenue above expenditure is the only real Sinking Fund by which public debt can be discharged. The increase of the revenue and the diminution of expense are the only means by which this Sinking Fund can be enlarged, and its operation rendered more effectual; and all schemes for discharging the National Debt, by Sinking Funds operating by compound interest, or in any other manner, unless so far as they are founded on this principle, are illusory.

Both these propositions have been sufficiently established in our exposition of the Funding System.