§8. So far we have implicitly assumed that taxes on commodities can be so imposed as to fall entirely on those who consume them; and similarly that an income or property tax will be borne by the persons on whose income or property it is laid. We have now to notice a new element of imperfection and uncertainty in the equalization of taxation, due to the fact, that we can only partially succeed in making the burden either of `direct' or `indirect' taxes fall where we desire; the burden is liable to be transferred to other persons when it is intended to remain where it is first imposed; and, on the other hand, when it is intended to be transferred the process of transference is liable to be tardy and incomplete. Indeed this process is often so complicated and obscure that it is a problem of considerable intricacy and difficulty to ascertain where the burden of a tax actually rests: and it is not even a simple matter to state accurately the general principle for determining the incidence of a tax, supposing all the facts to be known. Thus (e.g.) Mill appears to assume as a general principle (Bk. v. ch. iii. §3) that a tax must be ``considered as paid'' by ``those who would be benefited if it were taken off''. But it is easy to shew that, in some cases, the whole benefit of remission would be reaped by persons who have not borne any part of the burden of the tax: it is not the extra income that a man would gain if the tax were taken off which gives the true measure of the burden it imposes on him, but rather the extra income that be would now be enjoying if it had never been laid on. But to get even an approximate estimate of this hypothetically determined burden may require a very careful consideration of complex consequences; and the result must often be at the best but partially satisfactory. I will illustrate by taking the most important cases; observing that whenever a tax is transferred---at once or gradually, in whole or in part---the benefit of its remission tends to be correspondingly transferred.
To begin with the simplest case.
I. A special tax on a class of persons, distinguished by characteristics either irremovable or of no economic importance tends to be wholly borne by the persons who pay it. This would be the case (e.g.) with a tax on Jews or Papists; for even if some of the Jews left the country in consequence, or some of the Papists became Protestants, the exchange value of the services of the remainder would not thereby be materially increased.
II. Taxes of the above kind are opposed to modern sentiments of equity. A nearly similar inevitability, however, attaches to a general tax on incomes, simply proportioned to their amounts, so long as it is not heavy enough to induce any particular class of the persons on whom it is imposed to diminish materially the relative supply of their labour; either voluntarily, through emigration or abstinence from matrimony, or involuntarily in consequence of the resources of their families being reduced below the minimum required to support life. But if any considerable diminution in the relative numbers of any class takes place through these causes, it will tend to raise the market value of their labour to some extent, and to that extent to transfer the burden of the tax to other members of the community; but obviously with very different degrees of rapidity, according as the effect is produced (1) by emigration, or (2) by abstinence from matrimony or inability to rear children. Similar consequences may of course follow from any taxation that falls specially on the poorer classes of labourers; hence there is an element of truth in the old doctrine that ``taxes on wages tend to fall on profits'', if applied to the wages of unskilled labour, supposed to be already at the minimum required to ``enable the labourers, one with another, to subsist and perpetuate their race''. And some effect of this kind might no doubt be produced even by taxes proportional (as above proposed) to non-necessary expenditure: but, unless such taxes were extremely heavy, it would generally be of so indefinite and remote a kind as not to be practically worth estimating.
III. A tax annually levied on the owners of any particular kind of durable wealth, of which the supply is absolutely limited, is in effect more intransferable than it is intended to be; since it will remain onerous to the persons on whom it was originally imposed even after they have sold the article taxed. For instance if Raphael's pictures were thus taxed, the amount of the tax capitalised would tend to be subtracted from their price, so that, after a single transfer by sale, the tax would not be really onerous to the person who actually paid it. A similar effect will be produced by a special tax on land of fixed amount, not increasing with its value or rent: so far as land has changed hands by sale since its imposition, the burden of the tax will be no longer borne by the actual landowner; and therefore even if the tax was originally unjust, the actual landowner will in such case have no claim to its remission. Hence where such a tax is of old date, so that a considerable amount of land has changed hands by sale,---and all by inheritance,---since its original imposition, it seems best not to regard it as really a tax at all, but as a share of the rent of land reserved to the community; just as if it had been a payment imposed when the land was allowed to pass into private ownership.
IV. When, however, a special tax is imposed on land, varying in proportion to its value, the case is different, and the incidence of the tax more complicated; and it may be of some practical interest to examine it in detail, on account of the special burdens laid on land and houses---which may be regarded as a particular form of utility added to land---in our system of local taxation. At any given time there is a certain amount of outlay of various kinds for the purpose of increasing the utility of land, which would, apart from the tax, be remunerative; but a portion of which will be unprofitable, if the tax be imposed, unless the price of the produce of land rises. Hence the imposition of the tax will tend to prevent this portion of the outlay from being made, and so to restrict the supply of the utilities that it would have produced, and consequently---sooner or later---to raise their price to an extent varying according to the conditions of supply and demand for the produce in question. If (e.g.) the producers are closely pressed by foreign competition, the rise may be very slight; thus (e.g.) an increase in local rates in England, sufficient to be a serious discouragement to the improvement of agricultural land, would still have comparatively little effect in raising the price of corn. But to whatever extent the price rises from this cause, the burden of the tax will ultimately rest on the consumer or purchaser of the utilities furnished by the land; i.e. to the occupier (who may, of course, be actually the owner) of land used for enjoyment (parks, gardens, &c.), or to the purchaser of the produce of agricultural land,---who, however, if he be a purchaser not for consumption but for sale or production, will, under ordinary conditions, hand on the whole or part of the burden still further, till it reaches what we may call the ultimate consumer.
The initial operation, however, of such a tax may be somewhat further complicated by its effects on the business of producing the increased utility of the land. To illustrate this complication, we may take the specially important case of land used for building. Suppose that a new tax proportional to value---not balanced by corresponding taxes on other sources of income---is laid on owners of land generally, including owners of land with buildings on it (the value of the buildings also being reckoned); and suppose for simplicity that the tax is annual and rent is competitively determined afresh from year to year. Then, as the imposition of the tax cannot at once affect the supply of houses or the demand for them, the whole tax will at first tend to be paid by the owner; so that the building of houses will become less remunerative, and will consequently be reduced in extent. The resulting limitation of supply---as houses cannot profitably be imported---will tend to raise their price and rent sufficiently to make building remunerative; that is, if the cost of building were unaltered the rent would tend to be increased by the amount of the proportion of the tax that falls on the rent of the building as distinct from the ground. But in fact, if the tax be a heavy one, the rise will tend to be temporarily somewhat less than this; since the cost of building will undergo some reduction in consequence of the check given to the building industry by the tax, which will tend to diminish for a time the returns to the labour and capital employed in this industry. Ultimately, however, the whole portion of the tax that is paid for the value of the house itself, will tend to fall---in the case of private dwelling houses---on the consumer or occupier. The portion, however, that falls on the ground-rent will continue to be borne by the owner of the ground (supposing, as above explained, that he has not sold it) unless the tax has caused a rise in agricultural produce and the land is so situated that it could be as remuneratively employed for agricultural purposes as for building. Nay further, if the tax be not uniform but higher in some districts than in others, the whole excess---and not merely the proportion of the excess that falls on the ground-rent,---will tend to remain on the owner; at least so long as the fall does not render the land more profitable for other purposes than it is for building.
So far I have supposed the tax to be formally paid by the owner. If, however, it be laid in the first instance on the occupier, the effect will be substantially the same as soon as the rent comes to be determined afresh, after the imposition of the tax.
[Back to:][PPE, Book III, Chapter 8, Section 7] Public Finance