§10. Further, in a complete estimate of the incidence of a tax, we ought strictly to take into account not merely the burden laid on producers or consumers of the article taxed, but also the loss to the community through the non-production and non-consumption of the greater quantity and better quality of commodities which would have been produced if the tax had not been imposed. That is, we have to take into account those effects on production which we began by distinguishing from effects (merely) on distribution; so far as the former being unequally distributed, really affect distribution as well. Let us now notice briefly the chief cases of the productional effects.
Let us take first the case of taxes on the manufacture and sale of commodities. Such taxes cause an economic loss, uncompensated by any gain to the treasury, so far as the processes of production are impaired or hampered, or improvements in them precluded, by the necessity of conforming to rules imposed to guard against evasion or otherwise for the convenience of the tax-gatherer. For instance, the production of oil in Asia Minor is said to be seriously deteriorated by the fact that the olives after harvest have to be kept untouched until the tax-collector has found time to come and ascertain their amount. A further uncompensated loss results so far as such taxes admit of being evaded by the adoption of a less economical mode of producing the commodity; or by the production of substitutes for the taxed product, satisfying the same wants by inferior means. Some effect of this latter kind is almost unavoidable so far as the demand for the taxed product is decreased by its rise in price.
So far, again, as taxation of this kind reduces the normal use of materials or instruments of production, or articles whose consumption conduces to the efficiency of productive labourers, for which only imperfect substitutes can be found elsewhere, a loss results to production which may go on increasing at compound interest,
Similarly, taxes on conveyance, so far as they hinder the transfer of commodities, tend to prevent such improvements in production as result from the specialization of the labour of different places; and also, so far as they, hinder the transfer of labour, they tend to prevent its most efficient employment. So again; the stamp duties on bills of exchange, receipts, drafts, &c., have a tendency to hamper the development of trade; though this effect seems inconsiderable, so long as such duties are trifling in proportion to the amount of the transactions on which they are imposed.
We have further to notice that direct taxes on expenditure, such as the taxes on carriages, horses, plate, so far as they reduce the consumption of these commodities, affect their production ultimately---though not altogether at the first imposition---to the same extent as corresponding taxes on the production of these articles.
On the other hand, there are certain taxes on commodities that bring in more to the national treasury than the members of the nation lose as individuals. Thus we have seen that the imposition of import duties is, under certain special conditions, an effective method of increasing a nation's income at the expense of foreigners---though on various grounds a dangerous method: and the same is true of export duties, whenever a country has a monopoly of any product keenly demanded. Again a tax imposed on things that are partly esteemed as signs of wealth, and therefore of social status, pro tanto increases their utility in proportion as it increases their exchange value; so that the consumers do not lose what the government gains. And, obviously taxes that reduce the consumption of commodities liable to be abused, such as alcoholic stimulants, tend to benefit consumers thus prevented from injuring themselves, and indirectly to increase production by diminishing the loss of efficiency caused by such production.
An income-tax is free from the---generally disadvantageous---effects on production of the taxes that we have been considering. But it is to be observed that even an income-tax---as well as any other tax that diminishes the available resources of individuals---is liable to affect production generally, so far as it reduces the amount saved and converted into capital. And this effect cannot be altogether prevented---though it certainly tends to be reduced---by proportioning taxation (as before proposed) to superfluous consumption rather than to income; since the tax-payer may still prefer to let the reduction fall on his saving rather than his consumption. On the other hand, when the proceeds of a tax taken mainly from what would have been luxuriously consumed by individuals are productively employed by Government, it may be regarded as a mode of compulsory saving, by which the capital of the community---though not of individuals---may be materially increased.
It may be noticed further that, so far as saving is an affair of habit, a tax may actually cause a diminution in capital merely by the nature and circumstances of its incidence. Thus it has been plausibly maintained that the taxes on inheritance of property have a special tendency to produce this effect; because the person inheriting ordinarily considers the additional wealth thus acquired as an increase of capital, and does not spend any portion of it, but only increases his expenditure by the annual interest on it.[Back to:][PPE, Book III, Chapter 8, Section 9] Public Finance