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The Pamphlet Collection of Sir Robert Stout: Volume 81

Chapter X. — The Remedy.—The Canons of Taxation

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Chapter X.

The Remedy.—The Canons of Taxation.

Thus far the analysis has conducted us to two conclusion: the folly of attempting amelioration of social conditions by contracting productivity; and the undeviating tendency of that agent of production, land, to absorb an ever-increasing proportion of the fruits of industry. The attention directed to the laws of distribution have revealed the cause—or, at any rate, a cause—of the poverty of Labour and of the widening gulf between rich and poor. As a parasite cannot exist by reason of its own energy, but flourishes only by robbing another of vitality and vigour, so rent, the parasite of economics, grows, and grows only, at the expense of Labour and Capital. Carlyle has expressed the truth in his usual illuminating and forcible fashion. He is examining the cause which led to that uprising of the peasants known as the French Revolution: "Consider it, look at it! The widow is gathering nettles for her children's dinner; a perfumed seigneur, delicately lounging in the Œil-de-Bœuf, has an alchemy whereby he will extract from her the third nettle, and name it rent and law; such as arrangement must end." The great philosopher seemed to discover some moral blame attachable to the landlord. But the law of rent is a law of Nature, and as inexorable as the law of gravitation. Rent is not the exaction of an idle and selfish class. So long as land is limited and human wants are illimitable, land will acquire value, and rent is but the income of such value. Whether land be the subject of private or State ownership, economic rent will exist. It is not a burden on Labour which philanthropy can shift. Nevertheless it can be lifted ultimately, and may be lightened immediately by the sovereign remedy of taxation. This question must now occupy us.

The principles of taxation require close inspection. is any chapter of classical political economy which ought to be rewritten it is preeminently that one which deals with this subject. There is almost unanimity among the old writers that the only end of taxation is the provision of revenue for transacting the affairs of State. Modern thought, as expressed in Radical politics, finds in taxation an instrument for redressing social inequalities and bringing the distribution of the products of industry into alignment with justice. Its power of levelling the industrious poor up, and the idle rich down, is rising above the horizon with promise of a new and brighter era for Labour. There is in it potentialities for page 85 contending with unearned increments which, so far, have been hidden as the chicken in the egg. It is no longer an expedient merely for meeting the necessities of government.

In the beginning of economic science, Adam Smith laid down four canons to which every sound system of taxation, he conceived, must conform:—
1.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,
2.The tax which each 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 to be clear and plain to the contributor. The system in vogue in Turkey and other backward countries, whereby taxes are farmed out and subject to aggravation or mitigation according to the capricious will of the men who sit at the receipt of custom, cannot be the subject of denunciation too strong.
3.Every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay it.
4.Every tax ought to be so contrived as both to take out and to 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. The less there is of the proceeds of the tax eaten up in expense of collection, the better the tax.

More than a century and a-quarter has passed since these principles were enunciated for the guidance of statesmen, and age has not withered them or robbed them of their worth. Their truth does not vary with changing conditions or environment. No economist would dream of superseding them. Nevertheless, many, conscious of their insufficiency, advise supplementing them. A deeper knowledge of economic truths, the emergence in modern times of the far-reaching doctrine of the varying utility of money to different classes of the community, and the emphasis which the amazing prosperity of the last hundred years has put upon unearned increments, has rendered the revision and amplification of the theory of taxation a matter of the utmost urgency.

Without withdrawing anything from the value of Adam Smith's statement, the writer would suggest the following canons as indispensable to a just system of taxation:—
1.No one should be called upon to contribute to the revenue of the State until he has first satisfied the primary needs of existence. The food necessary to sustain the body, the page 86 clothes necessary to keep it warm, the shelter necessary to protect it from the storm, should be free from the weight of any
2.The incidence of taxation ought to be so adjusted as not to multiply obstacles to industry, or discmirage the expenditure of productive effort.
3.Wherever possible, the States revenue should be fan from unearned, in preference to earned, increments, Wealthy idleness is more justly an object of taxation than wealthy industry
4.In proportion to the services rendered by the activity of the State should be the contributions to the expenses of the State.
5.Increments of wealth, arising in a special way from the general activity and enterprise of the community, are specially suited to bear the burden of the administration of public affairs.

Let a few words of elucidation be offered on each.

1. The first one affirms the desirability of exempting the necessaries of life from taxation. The hare statement of this canon is sufficient to win approval. It has the convicting force and self-evidence of a maxim. Nevertheless, it is a governing principle of not a single civilised nation. When wheat, sugar, tea, woollens, etc., are taxed, those verging on destitution are made to contribute. The costs of administration should not be defrayed at the expense of the efficient existence of the people. Britain has been asked by Mr Chamberlain to consent to a tax on foodstuffs, that the colonies might be more securely held to the Empire. To tax a commodity is to increase its price. This is the almost universal experience. Now, the tax on foodstuffs, increasing their price, would increase the difficulties of living to the millions in Great Britain who are on the line of bare subsistence. Until the superfluities of a people are drained to supply the needs of government, no entrenchment should be made upon their necessaries. We are sometimes told that everyone should be taxed, that he may be affected with a due sense of responsibility as a citizen. But it is in few modem communities that the poor man contributes anything directly to the revenue of the State. The poor man's contributions are made through Customs duties, and are hidden in the price of the goods he purchases. He is scarcely sensible of paying any taxes, and of the amount he is certainly ignorant. Such being the case, the sense of responsibility can hardly exist. Nothing can be urged in defence of the system of levying tribute upon the goods commonly needed to sustain life. Yet its attractiveness to Governments has been uniformly irresistible. With them, the page 87 the best tax is that which best disguises its nature. The burden of indirect taxation is real and heavy, but being concealed in the price of the commodity, the consumer is scarcely conscious of it Bismarck frankly gave as the reason, for changing the policy of Germany from direct to indirect taxation in 1879 that by such taxation the money of the people could be taken without their knowing it. Long ago, it was well said by Pitt, that you could tax the clothes off a man's back without encountering a complaint so long as the incidence was indirect. No wonder Customs duties have found such favour with needy Governments. They choose the line of least resistance. Indirect taxation would lose much of its popularity were retailers to print, alongside the selling price of their articles, the sum by which the duty enhanced the price.

Moreover, Customs duties violate Adam Smith's canon of economy. They take a great deal more out of the pockets of the consumer than they put into the Public Treasury. The cost of collection is heavy, requiring an army of officials at every port, and, the most elaborate precaution against against fraud. In Victoria from 1882 to 1893 the cost of collecting the Customs duties was 3 per cent.; that of collecting the Land Tax only 1 per cent. And an increase in the Income or Land Tax does not occasion an appreciable increase in the cost of collection; the machinery which will collect a light tax will collect a heavy tax; whereas Customs duties, ranging over an increased number of articles, always involve a substantial increase in the cost. Further, the retailer, in assessing the selling price of his articles, calculates the amount of the duty as part of their cost, upon which he charges the ordinary percentage of profit. So that the consumer pays the duty and the retailer's profit upon the duty. It thus appears that the taxation of the necessaries of life not only infringes that fundamental principle of an enlightened and humane democracy, that the hungry man shall not have his hunger accentuated by taxes, but also impoverishes the consumer in a much greater degree than it enriches the State.

2. Our first canon asserts the urgency of what is known in the phraseology of the hustings as "a free breakfast table." The second puts forth a claim almost as strong for free industry. No useful labour should be hampered by taxation. The policy of the State should be to supply every incentive and to remove every discouragement to industry. Again and again insistence has been laid on the wisdom of multiplying aids to productiveness. A country can't produce too much whilst human wants! possess their present range and elasticity. The world will require to be peopled with Carnegies before satiety is reached. What madness, then, to put shackles upon industry, to beset its path with difficulties and load its back with burdens. One of the most pressing of the needs of modern society is the relieving of its industries from weights and page 88 restrictions. Unfetter them, give them freedom of play, and they will bound forward into an unwonted prosperity. But our statecraft is so purblind that, while it encourages industry on the one hand, it depresses it on the other. In how many countries are the fruits of labour exempt from taxation? The most common system of raising revenue for municipal purpose is to rate upon the capital value of property. This means that the more a man improves his land the more heavily he is rated. Two men live in adjoining cottages; one has put his energy into his garden and effected many improvements; the other is an idler. The first man finds his rates rise in proportion to his industry; the second man finds his rates fall as his property depreciates. Two men own adjoining sections: one builds a factory on his; the other holds his vacant as a speculation. The former finds that taxation rises with industry; the latter that he is practically exempt so long as he puts forth no effort. Surely this is the height of folly. To tax the fruits of industry is always to discourage their production. Tax an industry heavily enough and you will tax it out of existence An illustration will serve to bring out prominently the evil alluded to.

In New Zealand the woollen industry is protected by a heavy duty against the importation of foreign goods. The expressed object of the duty is to promote the growth of wool manufactures. At the same time the woollen factories are heavily rated for the purposes of municipal government. Land upon which a factory is built pays much more in taxes than land upon which no improvements are effected. Thus the benefits given on the one hand are partially taken away on the other. If the maximum of productiveness is the aim of the State, what can justify the proportionment of taxation to industry or improvement? To use terms now pretty commonly understood, taxation should not be upon "improved" value of land, but upon its "unimproved value. No penalties should be imposed upon productive labour. It may be asked, if industry of no useful kind is to he taxed where is revenue to come from? That question will be answered hereafter. All that is wanted from the reader at the present time is assent to the proposition that if other sources of revenue are accessible and can he justly drawn upon, every form of productive enterprise should be absolutely free from taxation. What nations want is augmented productiveness; then away with every burden, obstacle, and discouragement.

3. We have freed the breakfast table from taxation, and we have freed, likewise, industry exerting itself in any kind of physical or mental labour. Now, since taxation consists in appropriating, for the needs of State, a portion of the products of industry, we seem to be left without any resources for meeting those needs. The third canon, however, expresses the desirability of requisitioning for public services those fruits of industry which are enjoyed by men who page 89 have not exerted the producing labour. The State or public body should not enter as a sharer of the earned products of a man's own exertion until it has absorbed the products of labour, unearned by those who possess them. In short, if there are any unearned incomes in society, they should be attached before the earned incomes are placed under contribution. The reason is found in the truth, generalised from the experience of mankind, that the prosperity and happiness of a State depend entirely upon the industry of its members. It is calamitous to feed idleness. When Rome began to throw largesses of corn to her citizens, her ascendency was arrested and her decline commenced. Soon after Queen Elizabeth began to feed "sturdy" beggars under the indiscriminating Poor Laws of her reign, the country was over-run with paupers. It should be the policy of the State not only to secure to men what they have laboured to produce, but also to prevent able-bodied men from eating what they have not laboured for. Earned incomes or increments should be jealously guarded. Increments, unearned, untoiled for, should be as jealously discouraged.

Apart then altogether from the question of finding revenue for purposes of State, incomes enjoyed by those who do not produce them should be looked upon with disfavour by Governments and dealt with accordingly. Those habits of thrift which make a nation strong require that wealth should be proportioned to effort. And since the necessities of State have to be met by some form of taxation, to tax unearned increments would serve a double purpose: the public coffers would be supplied, and consumption without labour penalised and lessened.

At this point an important question arises. Are there any unearned incomes upon which the burdens may be shifted from productive industry? To maintain the claims of earned, as against Unearned, incomes needs little advocacy. But where are the unearned increments? Can they be defined and classified? Are they sufficiently accessible to be amenable to the tax-collecting machinery of Government which can only deal with classes of men and things?

Both ancient and modern economists have defined one large I class of such increments which they have called "rent." The economic meaning of this term has already been precisely indicated. We have seen that it accrues to the landowner, not through any exertion on his part, but by the growing need of growing populations for the use of land and its products, coupled with the inability of man to increase the supply of land, and thus adjust it to the increased demand. Growing rents, we are told on unimpeachable authority, are the effects of growing scarcity of land relative to man's requirements. They represent not increasing but declining productiveness. They are the outcome of the law of diminishing, not increasing, return to labour. The holder of the city site leaves it page 90 vacant for ten years, untouched, unimproved; the city doubles its population; that site receives a large increment of value, in no sense earned by the owner's industry, but created by the general progress of the city. The English gentleman buys a station in Australia and runs sheep upon it; after twenty years, population has settled round it and the demand is keen for the land for agricultural purposes; the English gentleman, whose land has been increased in value by the demands of a growing population, is now able to demand and obtain payment for that enhanced value from the people who have created it by their industry and enterprise. But these are just isolated instances. The unimproved value of all land affords an increment unearned to its owner. In rent, then, we have an increment independent of labour, upon which the burden of government should fall to the relief of labour. If the third canon of taxation is sound. Labour should escape taxation while wealth accrues to individuals without corresponding effort.

4. Not only should the necessaries of existence be free, not only should industry be relieved, not only should unearned increments be loaded, but the fourth canon asserts that the contributions of the latter to the expenses of State should be proportioned the enlargement which they receive from the activity of the State. Contributions to State needs! should bear a close relation to gains from State enterprise. Everybody knows that land values rise in the wake of the steam engine. In New Zealand public money spent liberally on railways and roads. The benefits of these highways of commerce are registered in the enhanced value of land in their vicinity. Land speculation always accompanies a vigorous public works "policy. New Zealand spends some £2,000,000 a year on intersecting the country with railroads, and supplying back-blot settlers with means of transportation and facilities of communication, and the unimproved value of New Zealand's land has risen for the past ten years at the rate of some £4,000,000 a year. It is not all due to the expenditure of public money. It is accounted for in part by the extension of the British market for New Zealand produce, and by the general activity of New Zealand people. Yet it is safe to say there is no class of incomes which receives such large accretions from public expenditure as that derived from land. In the Australasian colonies, where State and municipal enterprise is so varied and Socialistic, the faculty of land to absorb the maximum gain is very marked. "As a matter of fact." writes Thorold Rogers, in his work "Six Centuries of Work and Wages." "the owner contributes nothing to local taxation. Everything's heaped on the occupier. The land would be worthless without roads, and the occupier has to construct, widen, and repair them. It could not be inhabited without proper drainage, and the occupier is constrained to construct and pay for the works, which give an initial value to the ground rent, and, after the outlay, enhance it. It could not be occupied without a proper supply of water and the cost of this supply is levied on the occupier also. In return for page 91 the enormous expenditure paid by the tenant for those permanent improvements, he has his rent raised on his improvements, and his taxes increased by them." With the certainty and regularity of instinct, land mounts in value with every improvement which venders it more accessible or serviceable. Therefore, the economic or unimproved value of land is specially fitted according to this fourth canon to be the subject of taxation.

5. This peculiar fitness is emphasised when we discover the conformity of land taxation to the fifth canon. Not only are land values unearned by those who possess them, not only do they gain in a special way from national and municipal activity, but they are essentially created by the community. So far we have spoken of value as an unearned increment to land; but this is true in a limited sense only. Value is not given to land by the labour of its owner, but it is the indirect outcome of the labour of the community. Labour gives rise to it, but not the labour of the person who enjoys it. The owner appropriates the Jesuit of the industry of the people as a whole. You can't start a factory in a town without increasing the value of the laud, not only in the immediate neighbourhood, but throughout. You can't increase a town's commerce, you can't increase its population, without bringing about the same effect. Concomitantly with progress advance land values. They are thus the result of the community's enterprise and activity intensifying the need of the use of land, and as such may well be ascribed to the creation of the community. Now since taxation is always levied for national, municipal, public, or communal purposes, a community-created value seems specially fitted for the burden.

Little need be said of the canons of taxation enunciated by Adam Smith. It were a work of supererogation to show that the holders of unearned increments satisfy the requirement as to ability to pay. The advantage of direct taxation on the point of economy has already been noticed. Indirect taxation surpasses direct taxation in one respect only—that of narrow expediency. Customs duties would have been abolished long ago, in every civilised community, were they not so apt in eluding observation by concealment in the price of the commodity.

This chapter may well be brought to a conclusion by a statement of the opinion on this question of land taxation by two such classics as John Stuart Mill and Adam Smith. In the fifth book of his "Political Economy," Mill, speaking of the house tax, says: "It is only in exceptional eases like that of favourite situations in large towns that the predominant element in the rent is the ground rent; and among the very few kinds of income which are fit subjects for taxation these ground rents hold the principal place, being the most gigantic example extant of enormous accession of riches acquired rapidly, and in many cases unexpectedly, by a few families from the mere accident of their possessing certain tracts of land with- page 92 out their having themselves aided in the acquisition by the smallest exertion, outlay, or risk. So far, therefore, as a house tax falls on the ground landlord it is liable to no valid objection."

Adam Smith, whose canons of taxation we have been elaborating, says in "Wealth of Nations," Book V.:—"Both ground rent and the ordinary rent of land are a species of revenue, which the owner in many cases enjoys without care or attention of his own. Though a part of this revenue should be taken from him in order to defray the expenses of the State, no discouragement will thereby be given to any sort of industry. The annual produce of the land and labour of society, the real wealth and revenue of the great body of people, might be the same after such a tax as before. Ground rents and the ordinary rent of land are therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed on them. Ground rents (economic rent) seem in this respect a more proper subject of peculiar taxation than even the ordinary rent of land (rent in the popular sense including rent of improvements)."

There is nothing new, therefore, in the advocacy of land taxation. It has the sanction of the highest authorities.