The Institute of Bankers. JANUARY, 1889. RICHARD B. MARTIN, Esq., in the Chair. THE INCIDENCE OF TAXATION. By PRIDEAUX SELBY, Esq., Fellow of the Institute. N the battle of life, practice precedes theory, and is ever deemed of more importance. Numberless are the sneers levelled at the head of the "mere theorist," by those whose ideas never rise beyond the exigencies of the moment. Yet the theorist, even the mere theorist, has his use in the social system, and his ideas, scouted by the generation to which they are propounded, become often the practical guide of its successor. But the practical, thus apparently vanquished, soon re-asserts its supremacy. The generation which has first practically profited by the application of a new theory, is succeeded by one which follows the practice, but forgets the evidence proving the theory on which that practice is founded. Then, too often, the original vice of practice is revived under some high-sounding phrase which, while professing to accept the amply-proved theory, yet, in fact, ignores the conclusions it necessitates. This introduction to a paper intended for consideration by an association of practical bankers, may appear to some of you to be eminently unpractical. Its object is to disarm, in anticipation, some objections to my argument. That argument must be, to a great extent, theoretical, and bankers, however perfect in theory, must be, before all things, practical men. As practical men, you will require me to give reasons for asking your attention at all, to such a subject as the "Incidence of Taxation." In reply, I can but refer to the effect of taxation on the wealth of the community, and on the distribution of that wealth. All that concerns wealth must be of practical importance to bankers, whose existence pre-supposes a community which has accumulated wealth. I will not presume upon your indulgence by dwelling upon the impossibility of banking (as we understand the term) in any country in which, even should B wealth have accumulated, the property of the subject is habitually seized by an irresponsible despot, or by the agents of his power, in proportions limited only by their success in discovering the hoards of the thrifty. Such countries there are, and have been since the power of a strong man's arm first compelled the submission of his weaker neighbours. To consider the "Incidence of Taxation" of this arbitrary character would be waste of time. But it may prepare the way for future argument if I pause a moment to ask you to bear in mind how terribly such arbitrary exactions discourage thrift. They make secret hoarding the safest or only means of exercising that forethought which is, perhaps, the primary essential of the progress of mankind; for, without forethought, man's numbers would be limited to the few who could subsist, as wild animals, on the spontaneous productions of Nature. As an aid to the progress of our race, secret hoarding is only one degree better than the absence of forethought. It is not until men have learned to submit to the rules of law, and have, to some extent, systematised taxation that they learn to trust each other, with the use of their hoards, in confidence that the bread thus "cast upon the waters" to relieve the present necessities of others, will return to them "after many days," increased by the interest or usufruct which those whose lives have been preserved by the timely help are too often disposed to grudge to the providers of that help. In the course of much desultory reading, I find great evidence of a lamentable tendency of the present day, in those who seek the favour of the classes mainly dependent on daily labour for their daily bread, to revert to the barbaric system from which I have assumed above that the civilised world is free. But these men would substitute the exactions of the delegates of a despotic mob for those of a single despot's myrmidons. They are practical men, and they would tax the rich for the benefit of the poor, or, they would transfer taxation from the poor to the rich. However, disguised by specious pleas, such efforts do but discourage thrift, and put difficulties in the way of forethought; they thus tend to diminish, or to prevent further increase of, the accumulations, without which a month-nay, a fortnight would depopulate these islands, or the whole world. The subject indicated by my title is a wide one, and I cannot hope in the time at my disposal to do more than indicate the tendency of such reflections upon it as I am able to bring under your notice. My object is to plant in good soil the seeds of the tree of thought, not to train its branches on the garden wall. I am anxious, therefore, to see that my groundwork is good, but must leave you, if my premises appear sound, to work out for yourselves their application to every-day facts. But enough of introduction; I have the authority of Professor Nicholson for saying that "A thorough investigation of the general principles of taxation must pre-suppose the principles of Political Philosophy, whilst a full inquiry into the incidence of particular species of taxes must presuppose the principles of political economy." Although I cannot pretend to be a political philosopher, and am not now proposing any thorough investigation of the principles of taxation, I feel it necessary to preface my argument concerning the true incidence of taxation by reference to some of the axioms or elementary principles on which I build. Much argument on such subjects is pointless, because the disputants have no common premises. I assume, then, that man is a social animal; that, like other social animals, he has kindly feelings towards his friends or associates; that, nevertheless, self-preservation is his first care, and that of those immediately dependent upon him his second. If this be disputed, I reply simply that any other theory lands us in the absurd contention that all will benefit, if each neglects his own interest, and attends only to that of others. My hand, then, must not carry food to my own mouth but to my neighbour's, and his to mine. I assume, further, that man's progress beyond merely animal existence, depends upon the development in his actions of the qualities of industry and of forethought, the latter including thrift; so long as a man gathers for each meal of the fruits of the earth just what the meal requires, he remains a mere animal, so far, that is, as concerns his earthly life, which alone economic researches can consider. So soon as man realises that the fruits of the earth mature in summer only but can be stored away and preserved for winter sustenance; so soon as some individuals act on this knowledge while others do not, the distinction arises between rich and poor. A man who has preserved a pit of potatoes is then envied by those who were too lazy or too thoughtless to dig for more than the wants of the day. He, the rich man, may then be generous. But his generosity will stop short of parting with what he needs for preserving his own life, or the lives of his nearer friends; so far as strength allows he will defend this. Let those who doubt ask of their own consciences, how often they really deny themselves a meal in order to send it to those in want, in the next street. If I have carried your attention so far you will hardly require me to show that the next stage of progress, after individual thrift and individual protection of the results of that thrift, involves the principle of taxation. The rich man finding his own strength unequal to defending his property from unscrupulous and less provident neighbours, buys the support of some with a part of his hoard, and by their aid is enabled to defend the remainder. The part with which he buys support is in its nature a tax. He gives a part of the result of his industry and thrift to preserve the balance. There is here the essence of all taxation, properly so called. "Encyclopædia Britannica": Taxation. You may pay police to preserve your lives from assault as well as your property, or teachers to educate your neighbours' children; but protection of life is practically inseparable from that of property, life without property-that is, without means to live-being possible only to those few to whom police are unknown, who live on the natural fruits of the earth gathered and eaten in their season, or on the flesh they can capture without the aid of weapons; and education is given in the hope that it will increase respect for law, and thus reduce the cost of police, or that it will increase the productiveness of labour. In the latter case it is a form of forethought but its cost, so far as it diverts present food from reproductive to unproductive labour, is a form of luxury. I may note, in passing, that in such taxes as those for the support of education there is another element, that of vicarious charityI think it desirable that you should pay the expense of educating our neighbours' children. Therefore, having political power, I tax you with that object. The incidence of such taxes does not, however, require separate consideration. I define a tax to be a part of the previously unconsumed, but consumable, products of industry and thrift, relinquished by the owner, to secure him in the enjoyment of the balance. McCulloch* defines it as-"A portion, or the value of a portion, of the property or labour of individuals, taken from them and disposed of by Government." Whatever apparent complications the customs of civilised society may introduce; whatever diversities of form taxation may assume ; it will, I believe, be found that, in ultimate incidence, every continuous tax, every tax levied by instalments over a long period of time, falls under my definition. It is obvious that the most arbitrary exactions of despotic authority cannot extract from their victims more than the whole accumulations of past industry and thrift. There is, therefore, a natural limit to taxation even when not properly so called. Even forced labour must allow the labourer to retain, or must provide him with, the means of subsistence, out of the previously unconsumed products of past industry or the immediate products of current industry. I have held elsewheref that there is a more general law underlying, and rendering unnecessary, as regards old taxes, any consideration of the first of Adam Smith's famous maxims, that, namely, in which he requires that taxes be so imposed as to fall upon the several members of the community in proportion to their means. I held that "the total taxation continuously paid by any community forms a charge on production and is deducted from the total product of the "A Treatise on the Principles and Practical Influence of Taxation, and the Funding System." Edinburgh, 1863. "Thoughts on Taxation." Melbourne Review, April, 1878. co-operation of labour and capital before the division of that product." My aim now is, firstly, to convince you of the truth and of the practical operation of this law; and, secondly, to show what an important bearing its recognition in practice would have upon the welfare of the working, or wage-earning, classes of the community. Many writers on taxation have devoted much space to consideration of the arrangements necessary to provide by legislative enactment for due observance of Adam Smith's fallacious canon. To prove the practical importance attached to it, I need only quote a recent admirable article in the Quarterly Review. The writer, without political bias, considers that the remission of particular taxes, the simplification of taxation, has in England been carried too far, and in this he is right. But in the course of his argument he says:— "It is one of the most difficult duties of a statesman to adjust the balance between direct and indirect taxation." Now, my main object is to show that that balance will adjust itself if only statesmen can be induced to abstain from legislative changes. The incidence of a newly-imposed tax is quite different to that of an old tax nominally the same. Professor Nicholson says truly :-"It has been found by experience that an old tax causes less inconvenience than a new tax of smaller amount, a fact which is so striking in some cases as to have given rise to the saying that an old tax is no tax," but I dispute his further dictum that "Regard must always be paid to the real incidence of taxation and care taken that the real burden of the tax falls on those aimed at by the Legislature." He adds "No part of the theory or practice of taxation has given rise to so much controversy as the incidence of particular taxes, a subject, indeed, of so much. difficulty and importance as to occupy the greater portion of the treatment by systematic writers." Allow me to justify my opposition to such writers by some reference to individual taxes. A Land tax, let us suppose, to be imposed upon all agricultural land. Land in England pays, or has redeemed, such a tax to the extent of 20 per cent. on what was once its value. As a new tax, such an impost diminishes the selling value of all agricultural land to the extent of the capitalised amount of the tax: because investment in land is but one form among many for the investment of the savings of the community. The land will not bear a heavier rent because of the tax, so, other things being equal, the landlord must pay it out of the previous rental and any new purchaser will expect such rental, reduced by the tax, to yield him the same percentage on his investment as was enjoyed, before the tax, by the then owner. The tax, then, although it has forfeited a part of the property of the original owner of the land, does not, if continued, fall on the new *No. 332. April, 1888. |