§5. The most obvious principle of equitable distribution of taxation---assuming that apportionment in the ratio of service rendered is excluded---seems to be that of simply equalising, as far as possible, the burden or sacrifice that taxation imposes on individuals. Adam Smith's maxim that taxation should be proportioned to income or revenue is perhaps designed to realise this principle: but reflection will show that the realisation can only be very imperfect; since the needs of different classes of contributors with equal incomes are very different, and the sacrifices imposed by contributions proportioned to income tend to differ accordingly. In the first place, needful expenditure on the instruments of a man's handicraft, trade, or profession, should obviously be subtracted from his income before it is estimated for the purposes of proportionally equal taxation: on the other hand, the line between this and expenditure for enjoyment is often obscure, especially in the case of professions---the library of a teacher or writer, the carriage of a physician, the travels of an artist, are partly sources of professional earnings, but partly also of enjoyment. More important still and more obvious is the greater burden imposed on fathers of families as compared with bachelors by the same tax: and here we may also notice the greater proportional burden---incomes being the same---of the worker who has to save for children, or his own old age, as compared with the owner of capital. Most important of all is the severer burden that taxation proportioned to income throws on the poorer classes, so far as it tends to reduce their expenditure below the standard required for health or efficiency. Indeed, if equalisation of burden were the sole consideration, the equity of a graduated ratio of taxation, rapidly increasing as incomes rise, could hardly be denied: the serious objection to such a measure lies in the danger of economic loss to the whole community caused by checking accumulation or driving capital from the country. There is no similar danger in what has been called a ``degressive'' as distinct from a ``progressive'' taxation: that is, taxation graduated at the lower but not the upper end of the scale of incomes, so as to be roughly proportioned not to total income, but to income minus necessary expenditure. And there is a strong argument for adopting this degressive graduation, in a community where indigence is relieved from public funds. For if Government risks some of the evils of communism in order to secure the poorest citizens from want of the necessaries of life, consistency requires that it should not endeavour to take by taxation from the poor who remain independent a part of what it would have to give them if they sought its aid: and if, on this ground, we exempt from taxation incomes below a certain minimum, it would be unreasonable to tax those just above this minimum in proportion to income,---since persons who could only earn a little more than the minimum would thus be liable to lose the whole of what they earned.
These considerations would lead us to treat as taxable only that portion of any individual's income that is not required to provide necessaries either for the personal consumption of himself and those dependent on him, or for the efficient performance of his work. But, owing both to the difficulty of defining necessaries and the complicated differences in the needs of different persons, it would be practically impossible to carry out this principle with even approximate accuracy by any method of direct taxation. Probably the best method of realising it is by taxing small incomes only indirectly, through taxes on consumable articles that are not necessaries;---a method which has the advantage of enabling those persons whose needs are greatest to lighten their own burden by abstinence not dangerous to health; though it must be admitted that it is also liable to entail serious inequalities, from the variations in taste, constitution, and habits of different consumers. Still this objection is less important, as we must in any case be content with a very rough approximation to equality of burden.
In taxing commodities, it is generally expedient to select articles of which the consumption is not likely to be restricted to any great extent by the tax; since all such restrictions tend to cause loss of utility to the public over and above the gain to the treasury. But some restriction is inevitable: hence the special advantage of taxing commodities like alcoholic liquors and tobacco, which tend to be largely consumed in excess of what is salutary. It is to be observed, however, that the normal expenditure on such commodities usually absorbs an increasing proportion of the consumer's income as we descend in the scale of wealth: to balance this, therefore, we shall require further taxation of the middle and upper classes---either directly, by an income-tax in the narrower sense, or by taxation of the special luxuries of such classes. On the other hand, under a system which combines direct taxation with indirect taxation of luxuries largely consumed in excess, we cannot simply estimate the burdens imposed by taxation on different classes from the amounts which they respectively pay to the treasury. For firstly, direct taxation being inevitable, is a greater burden than an equal amount of taxation voluntarily incurred by purchasing commodities;---though the amount of the extra burden cannot be definitely calculated. Secondly, we have to allow for the extra contribution levied by indirect taxes from those who consume in excess alcoholic liquors or similar dangerous luxuries: for the moderate drinkers in any class have obviously no claim to be regarded as overtaxed because their class includes a minority of drunkards who materially increase the total consumption of the class. Under these conditions, exact justice is not attainable in the distribution of the burden of taxation among different income-classes; and probably the best thing to aim at is an approximate proportionment of the contributions of different income-classes to their total incomes, all direct taxation of the poor, and all taxation of necessaries, being carefully excluded.
So far I have assumed that the burden of taxes---whether direct or indirect---will be borne by the persons on whom Government designs to impose it; and, speaking broadly, I think this will be the case with the system of taxation so far suggested. I do not conceive that any considerable part of this taxation has any important tendency to be transferred from the persons on whom it is intended to be imposed to other classes in the community, whether it takes the form of an income-tax in the narrower sense, or that of taxes on commodities;---so far as these latter are practically paid by the consumer, which may be taken to be in the main the case with taxes imposed for revenue only, when they have been some time established. A new tax on any article of luxury is doubtless liable to fall to some extent on those who supply the article; which is a reason on the ground of equity for avoiding frequent changes in this department.
The clearest case of transfer of burden is that of a special tax laid on land (or any other species of durable wealth). It would be clearly contrary to equity to impose such a tax, in a modern community---except as payment for special utilities furnished by Government to landowners, etc.; but, supposing such a tax to have been imposed some time ago, then to whatever extent land has been sold since it was imposed, the injustice would not be repaired by taking it off now; since, so far as the tax is taken into account by the purchaser, it practically remains a burden on the original owner even after the sale; and not on the purchaser. Hence such a tax, when of old standing, should be regarded as a portion of rent reserved by the community, and not taken into account in distributing the burden of taxation.
It seems also right to treat taxes on inheritance as quite sui generis; since neither the economic nor the equitable considerations that ought ordinarily to be decisive in distributing taxation are applicable to this case---at least in the ordinary manner and degree. In the first place, Government, by taking a portion of what would otherwise have come to a man by inheritance, in no way diminishes the motives that prompt him to produce and accumulate wealth if anything, it tends to increase these motives; nor does it necessarily cause even any disappointment of expectations, except when the tax is first imposed. A heavy tax on inheritances may indeed diminish the inducements of prospective testators to industry and thrift: but its bad effect in this way is not likely to be considerable, so long as such taxation is kept within the limits which the danger of evasion by gifts from the living to the living practically imposes on the financier: and this latter danger will generally be much less where there are no children or other direct descendants to inherit. Hence it seems expedient, in the case of these taxes, to give up the ordinary aim at equality of incidence, so far as to tax more heavily wealth inherited by others than direct descendants. But if so, we can hardly include these taxes in our general distribution of the burden of taxation on the equitable principles above laid down: and, on the whole, it seems best to treat them as a special burden on the propertied classes---inheritances below a certain value being exempted. Such an arrangement has the advantage of conceding something to the equitable claim for a graduated income-tax, without incurring any serious danger of checking accumulation.[Back to:] [Elempol, Chapter 11, Section 4] Maintenance of Government