§7. On what principles then are we to distribute the burden of taxation in the narrower sense? that is, the burden that remains to be allotted, when the principle of payment in proportion to services received has been applied as far as is reasonable? The first point to settle is whether we should make taxation a means of redressing the inequalities of income that would exist apart from governmental interference. There is a weighty economic objection to this on account of the danger of diminishing the inducements to accumulation of capital, or driving it abroad,---a danger much greater here than in the case of the partially distributional interferences noticed at the close of the preceding chapter, because if the principle of redressing inequalities is applied at all, any limit to its application seems quite arbitrary; if the burden of the rich is to be twice as great as that of the poor, there seems no clear reason why it should not be three times as great, and so on. I hold therefore that the general aim of a statesman in distributing taxation should be to impose, as nearly as possible, equal sacrifices upon all. But this rule requires some very important qualifications. In the first place, I think it must be interpreted so as not to conflict with the generally accepted principle that the community ought to protect its members from starvation: from which it seems to follow that, if possible, no one's income should be reduced by taxation below what is required to furnish him with the bare necessaries of life. For if Government is to risk a serious installment of the evils of communism in order to secure all members of the community from starvation, it hardly ought to aggravate its inroad on the motives that normally prompt the poor to energetic industry, by taking from those who remain independent a part of what it would actually have to give them if they sought its aid. And if on this ground we exempt altogether from taxation incomes below a certain low limit, it would be obviously unreasonable to exact a full quota of payment from those just above this minimum; for this would lead to the absurd result that persons who could only earn a very little more than the minimum would lose the whole of such extra earnings. I conclude therefore that we ought to treat as taxable only that portion of any individual's income which is not required to provide necessaries either for himself or for those dependent on him. Even apart from any question of poor-relief, I think that taxation proportional to what, in the widest sense, may be called superfluous consumption would tend to equalize sacrifices more nearly than the rule of proportioning taxation to total income; since deprivation of the necessaries of life is an evil so indefinitely greater -than deprivation of luxuries that the two may be fairly treated as incommensurable; and we may assume generally that if poor and rich alike are deprived of a certain proportion of their resources available for non-necessary expenditure, the loss thus incurred of purchaseable satisfaction will be at least as great to the poorest class that will be taxed at all, as it will be to any other class. The question, I think, is rather whether even this principle is not oppressive to the poor; and whether in order to equalize the real burden of taxation we ought not to lay a progressively increasing tax on the luxurious expenditure of the rich. I must admit that in my opinion, such a tax would be justifiable from the point of view of distribution alone: but it is open to the practical objection that the progression if once admitted would be very difficult to limit, owing to the impossibility of establishing any definite quantitative comparison between the pecuniary sacrifices of the rich and those of the poor; and therefore there would be a serious danger that the progression would be carried so far as to check accumulation or drive capital from the country, thus causing a loss to production which would more than outweigh the gain in equalization of sacrifice'.
If, however, we allow the rule of equality in the distribution of financial burdens to be overborne in favour of the rich by the advantage of encouraging the accumulation of capital in the country, it seems reasonable to aim at the same result more directly by a measure that will operate generally in favour of those who derive their income mainly from labour: viz. by exempting savings from taxation. A certain minimum of savings, indeed,---enough to prevent individuals from becoming a burden to others in age or sickness---should be included in the exemption of necessaries argued in the preceding paragraph. Further than this there would be no ground for carrying the exemption, if what were saved were merely hoarded, in the form of coin or durable consumer's wealth; since the portion of wealth that at any given time was so hoarded would at the time be merely employed in gratifying the hoarders by giving them a sense of power or security; and there would be no reason why these personal gratifications should not bear along with others the reduction required to supply the needs of government. But, actually, since what is saved takes mainly the form of capital that aids industry, the saver,---whatever his motives may be---does in fact render an important service to production; and it seems desirable that this should at least be as little as possible discouraged by taxation.
But again; if we exempt savings on this ground, it seems reasonable to extend the exemption to what is spent by a father of a family on the education of his children, so far as it tends to make them more efficient labourers: and, similarly, to encourage by a similar exemption the devotion of funds by gift or bequest to public objects of real utility, provided that adequate security is taken that they are efficiently administered; especially if the objects are of a kind to which public money might reasonably be allotted, if private liberality were wanting. It may even be fairly urged, that a considerable part of the non-necessary expenditure of the rich is actually incurred in maintaining and transmitting culture, and that this also is a function of sufficient social importance to be properly encouraged by exemption from taxation;---though there is, of course, great difficulty of distinguishing expenditure of this kind from that which ministers to mere personal enjoyment. I should propose to recognise these various claims to exemption by throwing a large share of the burden of taxation on the consumption of commodities that are neither necessary nor promotive of culture. Such taxes on commodities, however, tend to be seriously unequal; especially since there are very strong technical reasons for concentrating such taxation on a few articles largely consumed, in order to minimize the cost---financial and extra-financial---that it involves; and it is almost inevitable that the expenditure on these particular articles should form a very variable proportion of the total expenditure of different classes of the community on things that are neither necessaries nor promotive of culture. So far as the classes thus overburdened can be distinguished as those receiving incomes of certain amounts, the inequality may be---and should be---roughly compensated by an income-tax on other classes, as is done in the English budget; but there are still liable to remain great variations in the consumption of taxed commodities among persons of similar incomes---owing to variations of taste, constitution, &c.---for which it is practically impossible to make compensation. The adoption, therefore, of this method of raising taxes must be admitted to be incompatible with any exact equalisation of the burden of taxation. But in fact any such exactness is rendered practically unattainable, on the general principle above adopted, by the vagueness of the distinction between necessaries and luxuries, and the great differences in the needs of different persons and of the same person at different times; and the method of taxing commodities has the merit of avoiding the worst inequalities which taxation proportioned to income would cause, in consequence of these differences of need; since it enables those persons whose needs are greatest to diminish their share of taxation, by abstinence from customary luxuries. For this latter reason chiefly I think it desirable that the taxation of the poor should be almost entirely thrown on commodities of the kind I have defined: as is the case in England with taxation for the purposes of the central government.
Generally speaking, it is expedient to select for taxation commodities of which the consumption is not likely to be restricted to any great extent, through the desire to avoid payment of the tax, as all such restriction increases the excess of the loss to the public caused by the tax, over and above the gain to the treasury; since the persons who are driven to consume commodities which they do not like so well suffer a manifest loss of utility. But some restriction is inevitable: hence there is a strong reason for fixing taxation on commodities which are liable to be largely consumed in excess of what is salutary: since so far as such excess is prevented by the tax, the restriction of consumption is positively beneficial to the community. And though legislative interference with the sole object of limiting the consumption of dangerous commodities is emphatically condemned by advocates of natural liberty, they have not, for the most part, pushed their antagonism so far as to maintain that the selection of taxes ought not to be partly to be influenced by this consideration. On the other hand, the burden of such taxes---as those on alcoholic liquors and tobacco---is liable to a special inequality; since many persons shun these dangerous commodities altogether, while among those who consume them the standard of strict moderation is vague and variable, and there are many degrees of excess possible. It is desirable to prevent this inequality from being very marked:---thus, if it were necessary to increase taxation in England, there would be a positive advantage, from a distributional point of view, in reimposing the duty on sugar abolished in 1874. But imperfect equalization is a drawback inseparable from the special advantage of taxation on non-necessary commodities---viz. that the needy tax-payer can avoid it: and what is most important socially and politically in distributing taxation is to avoid marked over-taxation or under-taxation of different grades of income.[Back to:][PPE, Book III, Chapter 8, Section 6] Public Finance