§6. I ought, however, to premise that in the discussion which follows I do not propose to deal with the problem of constructing a system of taxation, as it presents itself practically to a statesman. It does not seem to me that this problem can be satisfactorily treated in a work on general economic theory; especially because, as I shall shew, the considerations that ought to influence a statesman in choosing, rejecting, or adjusting particular taxes are very various and complicated; and though we may usefully explain and classify them in a general theoretical discussion, we cannot pretend to estimate precisely their relative importance without careful ascertainment of the particular social and industrial conditions of the community to be taxed. Indeed there are very important political reasons for preferring some taxes, to others, and for seeking to realize certain ends in taxation generally, which lie beyond the scope of a strictly economic discussion. Thus the third of Adam Smith's famous canons--that ``the tax which each individual is bound to pay'' ought to be ``clear and plain to the contributor'' in respect of time, manner and quantity---is a constitutional rather than an economic principle: its primary object being, as Adam Smith explains, to protect ordinary citizens against illegitimate exactions and extortions on the part of officials. So again, in a community where representative institutions are fully developed, there is an important constitutional ground for maintaining equal diffusion of the burden of taxation; viz. that the citizens generally may be equally interested in checking superfluous governmental expenditure which special classes of persons are continually prompted by strong selfish motives to extend. Indeed the force of this consideration has led some thinkers to hold seriously that the burden of taxation ought to be as much as possible felt by those who bear it, in order that they may have the strongest possible motives for minimizing it; and perhaps in a very orderly and law-abiding and lightly-taxed community this might be desirable: but in most actual societies the dangers arising from ``ignorant impatience'' of taxation are so much graver than any which ``ignorant patience'' could cause, that it should rather be a maxim of statesmanship to avoid if possible any species of tax that is particularly disliked by the persons on whom it falls, even if the dislike seems groundless and fanciful. Further, it hardly seems within my province to deal with the very important political question, how far a statesman in constructing a scheme of taxation ought to take a cosmopolitan point of view, and not try to throw the burden of a tax on foreigners, except so far as it is fair compensation for services rendered to them, nor, in estimating injurious effects on production, consider detriment to foreign industries as indifferent or even advantageous, if they rival industries of his own country. In a previous chapter (ch. V.), however, we have had occasion to examine the manner in which a `tribute' may, under certain circumstances, be obtained from foreigners by means of import duties; and I shall refer to the subject again in a subsequent section: but for the most part I shall assume, for simplicity, that the burden of a tax is borne by the nation whose government imposes it.
In considering more particularly the mode of imposition of this burden, it will be desirable to keep in view our fundamental distinction between effects on Production, or on the aggregate wealth of the community, and effects on Distribution, or the incidence of the burden of taxation; though, as we shall see, it is impossible to separate the consideration of the one kind of effects from that of the other. Under the former head, the financier is chiefly concerned with effects which he would desire to avoid as far as possible; namely the different extra costs of different taxes---the burden they impose on the taxpayers, over and above the net gain that they bring in to the treasury. In estimating these we have to distinguish the strictly financial cost---the expense of collection---and what may be called the extra-financial cost, i.e. chiefly the loss entailed on the consumers by changes in products or modes of production caused by taxes. The discussion of the former kind of cost, and of the best methods of minimizing it, belongs to the technical side of financial administration, and I shall not enter upon it further than to notice one or two considerations, so fundamentally important in constructing a system of taxation that they can hardly be omitted: what I shall chiefly consider, under the head of ``effects on production'' are the changes in the extra-governmental organization of industry which the financial interference of government entails.
It is, however, with the problem of distribution that we are primarily concerned, when treating of taxation in the most general way. Effects on production are properly regarded in relation to particular taxes taken by themselves; since a tax that, from the point of view of production, is bad when contemplated by itself, remains no less bad when contemplated as part of a complex system of taxation; it may be eligible as the least bad among possible alternatives, but its badness cannot be neutralized by combining it with other taxes. But the case is otherwise with effects on distribution; for when a tax is defective on account of the unequal distribution of its burden, the defect can be at least roughly compensated by the imposition of some other tax with an opposite kind of inequality and, as we shall see, such rough compensation is all that the financier can practically aim at. Hence, in considering taxation in the aggregate, the question of distribution is the primary one: and, conversely, in considering the right distribution of the burden of taxation, we are concerned primarily with taxation in the aggregate, and only secondarily with particular taxes.
[Back to:][PPE, Book III, Chapter 8, Section 5] Public Finance