MONEY TAKEN BY TAXES

Given a free people with real control over the conduct of its affairs, a genuine confidence in the justice of the system by which money is taken from it and in the wisdom and care with which the money is spent, and the citizen would no more object to paying taxes than he objects to paying a bill for a book, or a suit of clothes, or a set of golf clubs that he has ordered for himself. The prevalent spirit on the subject shows how very far we are from having attained these ideals.

“All taxes are confiscation,” said Mr. Joseph Hume as already quoted, so expressing the common view that the State takes our money in an arbitrary and unjust manner and spends it on purposes which may be necessary but are only submitted to reluctantly on that ground, the said expenditure being necessarily and inevitably a cause of the impoverishment of the people. In England in the last century, in the heydey of the simple and satisfactory theory that every man knew his own interest best and could be trusted to secure it if left alone, and that by this pleasant process the interest of the whole community would certainly be attained, it was a favorite phrase with politicians and political writers that such money as was saved from taxation would “fructify in the pockets of the people.”

How much truth is there in this view? It is surely a very large assumption to suppose that all the money which Government takes would, if left in the people’s pockets, have been spent on some good and useful purpose and have increased the productive power of the community. This theory takes it for granted that the Government’s revenue is derived entirely from money which would otherwise have been saved and well invested in reproductive enterprise. Whereas we know that, owing to various defects in the machinery of the laws governing joint stock companies and the ingrained craving in the hearts of most of us for short-cuts to fortune, a good deal of the money that is invested gets into the pockets of unsavory company promoters and the evil brood employed by them, or is sunk in enterprises that never had a chance of yielding a profit to their shareholders; and further, it by no means follows that what the Government takes comes out of what the citizens would have saved. Very probably it comes out of what they would have spent on themselves; and only the most incorrigible optimist, or the most ignorant theorist, could maintain that whatever people spend on themselves is spent well. The vulgarity and absurdity and ugliness of many of the objects on which the rich and middle classes spend their money are apparent to all: lavish entertainments at which everybody is bored, theatrical shows which are a scarifying criticism of the intelligence of those who pay money to be amused by them, clothes and gewgaws in which no really civilized people would consent to be found dead,--these are a few of the more innocent examples of the manner in which hundreds of millions of money that the State does not take “fructifies” in the pockets of its more fortunate citizens. Bad spending among the poor is perhaps even commoner, owing to their ignorance of the uses of money, and is much more tragical in its effects owing to the fact that, even if they spent well, they would seldom have enough to give them a reasonable chance of full development of their faculties and capacities.

[Sidenote: “FRUCTIFYING”?]

Since, then, there is much bad spending in all classes, we have no right to assume, as is often done, that all the money taken by the State and spent, well or ill, by it, would have been well spent if left to “fructify in the pockets of the people.” It might have gone in race meetings, Tango teas, picture palaces, fashionable fripperies, strong drink, or trashy “literature,” all of which things have their uses in amusing people who do not know how to amuse themselves better, but do not lead to much “fructification.”

It may also be mentioned here that money taken by Government does not vanish. It is spent by the Government on something, and thereby provides a large number of people with a living. When it is spent on the debt charge, it is handed straight over to the debt-holders, in interest or redemption of debt. Spent on education, it pays those who build schools and on the army of patient workers who teach the rising generation--if spent well, no money could be better invested, or fructify more fruitfully. Even when spent on public defense it provides wages for those who build our navy and make our guns, and feeds and clothes those who fight for us. It is true that if we had universal peace all those good workers might be building merchant ships instead of battleships, or making and growing useful things instead of learning and practicing the art of destruction. But as things are at present, national security is a thing that most of us are very willing to pay for, and with private spending what it is, we cannot be sure that by any means all the work of these workers, if set free from military and naval objects, would be put to good and fruitful use. It is of course absurd to go to the other extreme and contend that taxation creates employment. It only transfers the power of giving employment from individuals, who might or might not have used it well, to the State, which may or may not use it well.

[Sidenote: SMITH’S MAXIMS]

No chapter on taxation can be complete that does not quote Adam Smith’s famous four maxims on the subject:

“(1) The subjects of every State ought to contribute towards the support of the Government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State.

(2) The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor and to every other person.

(3) Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.... Taxes upon such consumable goods as are articles of luxury are all finally paid by the consumer, and generally in a manner that is very convenient for him. He pays them little by little, as he has occasion to buy the goods. As he is at liberty, too, either to buy or not to buy as he pleases, it must be his own fault if he ever suffers any considerable inconveniency from such taxes.

(4) Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the State.”[18]

These maxims have been generally accepted by later economists as a summary of the principles on which taxation should be based, except the very lucid and sensible American writer General F. A. Walker, who decided that “the first and most famous of them cannot be subjected to the slightest test without going all to pieces.” As to the other three, their equity and sound sense can hardly be disputed (though Walker thought them “at the best, trivial”), and it is also pleasant to observe that the British system of taxation is not far from securing them. If Englishmen fail in the matter of No. 2, it is their fault rather than the State’s; if they chose they could all know how much they were paying for government when they buy a glass of beer or a pound of tea or a packet of cigarettes, and if many of them buy these things every day without even knowing that they are paying taxes, that is only because they have not troubled to think about it. As to No. 3, the convenience of the contributor might be still further consulted in England if income tax could be paid by installments, instead of in one lump as it was before the war, or in two as now arranged. A system of monthly installments would be much more convenient to a large number of taxpayers, and, though it might involve a good deal of bookkeeping, it would, on the other hand, help to keep the State’s income even, whereas the present system leaves long periods during which it has to borrow in anticipation of taxes to be received later.

But it is in Maxim No. 1 that the whole question of the equitable apportionment of taxation is really locked up; and, if we examine the great American economist’s severe criticism of his great Scottish predecessor, it will help to a clearer understanding of the whole matter.

“This maxim [says Walker], though it sounds fairly, will not bear examination. What mean those last words ‘under the protection of the State’? They are either irrelevant, or else they mean that the protection enjoyed affords the measure of the duty to contribute. But the doctrine that the members of the community ought to contribute in proportion to the benefits that they derive from the protection of the State, or according as the services performed in their behalf cost more to the State, involves the grossest practical absurdities. Those who derive the greatest benefit from the protection of the State are the poor and weak--women and children and the aged; the infirm, the ignorant, the indigent. Even as among the well-to-do and wealthy classes of the community, does the protection enjoyed furnish a measure of the duty to contribute? If so, the richer the subject or citizen is, the less, proportionately, should he pay. A man who buys protection in large quantities should get it at wholesale prices, like the man who buys flour and meat by the carload. Moreover, it costs the State less to collect a given amount from one taxpayer than from many.”[19]

[Sidenote: WALKER ON SMITH]

Walker’s admirable lucidity endears him to economic students, so often baffled by the obscurity in which the masters of the science enfold their utterances, but, I think, these criticisms of Adam Smith only serve to bring out the truth of the principles that lay behind his famous first maxim. For Walker implies that the poor and weak, women and children and the aged, enjoy most revenue under the protection of the State, which they obviously do not. It is very true that the poor need protection, but they do not need it in respect of any property that they own or of revenue that they enjoy. The protection of property, which, as we saw in Chapter I, is the original and still a most important function of the State, has to be given in increasing measure as the extent of the property owned, and the revenue derived from it, increases. A junior clerk whose property consists of the balance in his pocket of his last week’s wages needs little protection from the State or anybody else. “_Cantabit vacuus coram latrone viator._” His employer, with some furniture in a rented suburban house, a few hundreds invested, and a policy on his life, has little that a burglar could get at, though his investments and his business make his revenue depend on the general stability of society, such as is provided by Government. A great English landed proprietor with an agricultural rent-roll and a square mile or two of house property in cities enjoys his revenues only because the State is there to protect his property and enable him to enjoy it in peace and safety. As Adam Smith says in another passage:

“It is only under the shelter of the civil magistrate that the owner of that valuable property which is acquired by the labor of many years, or perhaps of many successive generations, can sleep a single night in security.”[20]

Walker’s contention that those with least property require most protection for it almost looks as if it had been dictated by a desire to pick holes in the work of his illustrious predecessor. And his argument that the physically weak, women and children and the aged, need more protection for their property is very little sounder. For if we went back to a state of anarchy and everybody took what he could get, the strong man would certainly have an advantage, but he would not long enjoy much revenue under such conditions, because production would promptly be brought to a standstill. As to the “reduction on taking a quantity” argument--the view that the rich should buy protection more cheaply because they need more of it, on the same principle that enables a man to buy bread and meat more cheaply by the carload--here Walker is surely quoting the principles of the market-place in a sphere to which they cannot be applied. The merchant with a big stock of an article, which he may or may not be able to sell, is naturally willing to make a concession in price to a buyer who will take a line off his hands, though even in the market-place this principle, or rule of thumb, does not work always, or beyond a certain point. But a Government providing its people with protection for their property works under quite other conditions. It knows exactly how much it means to provide, and it ought to be able to find out which of its citizens will be most benefited by this protection and apportion the cost upon them accordingly by taxation.

So when Walker goes on:

“Returning to the maxim of Dr. Smith, I ask, does it put forward ability to contribute, or protection enjoyed, as affording the true basis of taxation? Which? If both, on what principles and by what means are the two to be combined in practice?”--

when he puts these posers we have an easy answer. Ability to contribute, since it depends on revenue enjoyed (when we have got at the right meaning of that ambiguous phrase), involves also protection enjoyed, so that both principles lead us to the same end. And the two can be combined in practice and are, in a halting manner that needs improvement and expansion, in the system of taxation that has been painfully evolved in English-speaking countries. Logically applied, Adam Smith’s first maxim would confine taxation to direct taxation, that is taxation paid directly by the taxpayer to the State, assessed on a graduated scale according to the taxpayer’s net income and differentiated according to the source from which it is derived. In other words, by laying down this maxim he anticipated the beauties of the income tax and death duties, and of the principles of graduation and differentiation that have been so slowly and tentatively introduced into our fiscal systems. All these things are implied in the prophetic musings of the great Scottish thinker.

Graduation is clearly implied, as was shown by Walker’s criticizing Adam Smith for having apparently forgotten it, because he did not actually mention it. We cannot put the proof better than in Walker’s words:

“Is the ability [he asks] of two persons to contribute necessarily in proportion to their respective revenues? Take the case of the head of a family having an income of $500 a year, of which $400 is absolutely essential to the maintenance of himself and wife and children in health and strength to labor. Is the ability of such a person who has only $100 which could possibly be taken for public uses, one-half as great as that of another head of a family similarly situated in all respects except that his income amounts to $1,000, and who has therefore $600 which could conceivably be brought under contribution? Manifestly not.”

Most true, but there is nothing to show that Adam Smith thought that it was. Any one who has only $500 a year, of which $400 is needed for the bare necessaries of “health and strength to labor,” can hardly be said to enjoy a revenue at all, for the whole of his margin is needed for the decencies and comforts that must be had before he and his children can be provided for in such a manner as is necessary to make them efficient citizens of a civilized state, with their intelligence cultivated to a point that will enable them to exercise judgment concerning public questions. Those only can be said to enjoy a revenue who have a margin over what is needed to maintain them and their dependents in health and efficiency. To tax anybody below that line is bad business from the State’s point of view, because by injuring their health and efficiency the State promotes the growth of a class that is compelled to live, more or less, either on private charity or public support, and by its lack of efficiency impairs that of the nation at a time of crisis.

This principle is recognized by the terms on which an income tax is assessed. It would not be imposed on a man with $400 a year at all. Graduation, the system by which no income tax is imposed below a certain limit, and varies afterwards according to the size of the income, is the great advantage that income tax carries with it. The release of small incomes has always, necessarily, been part of it. When it was first introduced in Britain in 1798 it was only imposed on incomes of $300 and upwards, was graduated between $300 and $1,000 and was 10% above that line[21]; in 1806 the limit of exemption was reduced to $250. Its medieval predecessor, the poll tax, was first raised in 1377, and was graduated. Beggars paid nothing, ordinary folks 4_d._ a head, and the rate varied from this level up to 10 marks (£6 13_s._ 4_d._) on dukes.[22] The income tax was, most unwisely, taken off after the Napoleonic wars, and when it was reintroduced in 1842 by Peel, it was imposed on incomes of $750 and upwards.[23] This level was later raised to $800, and was reduced in Mr. McKenna’s first War Budget in 1915 and brought down to $650, which seems to be low enough as it is at present assessed, but by no means as low as it should go if and when the tax is rid of a great anomaly that at present mars it, namely, its great unfairness to those who have families to educate. But before we look further into this and other drawbacks that at present clog an otherwise excellent tax, let us consider its other beauty, that of being differentiated according to the source of income, whether “earned or unearned.”

[Sidenote: DIFFERENTIATION]

This, again, is a principle that has only fought its way with the utmost difficulty into England’s system of taxation, though the logical soundness of it is obvious. It is clear that two men, each with $5,000 a year, do not “enjoy” a revenue of this amount in the same sense if one of them earns it as a salary by hard work, which will cease at any time if, owing to bad health or advancing years, he has to give his work up, while the other receives it in dividends on Government securities which he has inherited or bought out of his own savings, and is therefore certain of enjoying it as long as he lives and of being able to hand it on when he dies to his children or any one else whom he may choose. It has not yet been possible to differentiate still further and impose a different rate of tax on the income that a man receives from investments which he has saved himself from that which is paid on an inherited income. When a taxpayer has created, by saving, his own “unearned” income, it is at first sight unfair that it should be so called and so taxed. But, even so, his enjoyment of it is clearly so much the more secure, and moreover the principle of differentiation is also at work through the British death duties, which take a large and well-graduated slice out of estates when the demise of their owner gives the State its periodical opportunity. So that the income of those who live on inherited wealth, besides paying income tax, is either diminished every time an owner of it dies and the State takes toll of the capital, or is lessened each year by the provision that the owner makes, through insurance or otherwise, in order to provide against the death duties, and maintain the capital of the estate intact.

[Sidenote: TAXING CAPITAL]

It is commonly objected to the death duties that they are a tax on accumulated capital and that, as the State uses their proceeds for purposes of ordinary expenditure, it is paying for current needs out of capital and so doing a thing that is vicious in the case of an individual or company. But is this necessarily true? The tax, it is true, is assessed on capital, but I think it is paid, and that all taxes have to be paid, out of current income, either of the previous owner of the estate, if he insured in order to provide for it, or of its inheritors, if they do not realize any portion of the estate to meet it, or of those who buy, with saved money, any part of the estate that is sold to meet the tax. In the last-mentioned case, the saved money that is handed over to Government to spend would otherwise have gone into some other investment which would perhaps have increased the community’s productive power, but this possibility is attached to all money that the Government takes out of our pockets and is one of the reasons why we have to be careful to see that the Government spends it well. A graver objection to the death duties is that they may tend to check the incentive to accumulation by the individual, a point that will be dealt with later.

All taxation comes out of somebody’s income. If we try to tax capital, we can only do so if the owner can pay the tax out of income or can sell a bit of his capital to some one else who pays for it out of his income. A tax on capital is thus only a way of assessing income tax according to the amount of capital possessed, and is a questionable way of doing so because of the difficulty of knowing what anybody’s possessions are really worth until they are offered for sale in a free market, and also because of the great expense and delay involved by making any such valuation. Moreover, the mistakes made by Government valuers, when estates have to be valued for purposes of taxation, are astonishing. In a certain British colony a man once died who had picked up, in the course of several visits to England, a collection of beautiful and very valuable Turners and other water-colors. The local official valuer remarked to his heir, “I see from the dates on these pictures that they’re all second-hand, so I’ve put them in at half a crown[24] each.”

But since all taxation falls on income, and since the amount of the income, with due regard to its source, is the obvious test of ability to pay, and since this ability clearly grows with each increase in the income above the sum required for the bare necessaries of life, it is evident that the income tax, if we could get it into an ideal shape, is the most equitable form in which taxation can be imposed. Regard to the amount of the income involves graduation, and regard to the source of the income involves differentiation, because it is easier to pay, and more protection by the State is involved, in the case of income from saved money than in the case of earned money; and still more protection from the State is involved in the case of income from money that is inherited or received by gift, since the secure transfer of wealth by legacy or otherwise is one of the most obvious of the material benefits granted by stable government.

The ideal form of an income tax would thus be thrice differentiated, according to whether it was imposed on--

(1) An income now being in the technical sense earned, that is a wage or salary or professional or business profits;

(2) An income that is produced by savings made by its owner;

(3) An income that is produced by inherited wealth or wealth received by gift.

If this triple differentiation could be made, then England would be able to do away with the death duties, with the great unfairness that they involve, for example, when one estate changes hands frequently owing to the accident of death, and another escapes by being held for eighty or ninety years by a specially tough owner who happened to inherit it when an infant. If the death duties were thus commuted into the shape of a higher annual income tax on those who got income from inherited wealth, there would be a much greater chance, amounting almost to certainty, that they would be met by saving on the part of the holder of the income.

[Sidenote: THE IDEAL TAX]

Thus differentiated, the ideal income tax would be graduated logically and steadily up to the highest range of incomes, not as it is now in England with a series of capricious jerks, and with the super-tax as an excrescence on the top. It would also be purged of the inequity which at present in England lumps together the income of husband and wife as one for assessment purposes, and of the still worse vice that it now possesses of taking little or no account of the children whom the taxpayer may have to educate. The unfairness of an income tax which is the same in the case of two brothers who each earn $5,000 a year, but one of whom has eight children and the other has none, is glaringly apparent, if we apply Adam Smith’s test of ability to pay. Allowances for children were introduced during the Napoleonic war, but were given up in 1806, as they had “led to an astounding official increase of large families.”[25] Mr. Lloyd George made a small beginning in his Budget of 1909 towards remedying this great blot on this tax by giving an abatement of $50 (from the income assessed) for each child under sixteen in the case of incomes under $2,500. Since then the amount of the abatement has been raised to $125 for each child, and this relief is given to incomes up to $3,500. Even so it is pitifully inadequate. The proposal made by Mr. Sidney Webb and his fellow-Fabians in their book on _How to Pay for the War_ is much more efficacious, if it could be put into practice. They suggest that the basis of assessment in the case of families dependent on one income should be the income divided by the number of those dependent on it; that is to say, that if a man had $5,000 a year and a wife and eight children, he would be assessed on ten incomes of $500 each, and, as incomes of $500 each are at present exempt, he would be free of all income tax, while his bachelor brother would pay the full amount on his $5,000.[26]

“But wait a minute,” says the bachelor. “I don’t quite see why I should be penalized for choosing, or perhaps being obliged by a hopeless passion, to live in single blessedness. If you let my brother off, it is clear that I shall have to be taxed higher. But why? He chooses to spend his income on the joys of bringing up a family and the delights of an uproarious nursery. Why should he therefore be let off while I, because I prefer keeping a yacht, and collecting blue china, and living a life of peace and comfort, or perhaps, if you knew all, giving up my spare cash to good works, am to pay more to encourage his philoprogenitive proceedings?”

The answer is obvious to all but confirmed bachelors, and it lies in the fact that the State wants citizens and wants them brought up under the best possible conditions. To penalize income tax payers who are bringing up families, promotes that tendency to small families, or none, among the professional classes, which leaves the business of bringing up the heirs of the race to those who are least likely to give them the good air, good food, good clothes, and good teaching in their early years that are all-important to their efficiency when they are grown up. Economically and in every other respect, a nation can only thrive if it is composed of citizens sound in mind and body, and any taxation that makes the middle class sterile is a bad economic blunder.

And since we are only chasing the rainbow of the ideal, we may also add that, in order to make the income tax perfect, it would, though assessed on the whole income, only be imposed on that part of a man’s income which he spends, and he would be allowed abatement in consideration of any part of it that he invested and not only, as now in England, on that part invested (within certain limits) in life insurance. This further exemption would be made, under an ideal system, because a State cannot make economic progress unless its citizens continually produce more than they consume on immediate enjoyment, so that there may be a margin of savings continually available for capital purposes, that is, for increasing future production by putting labor and energy into new equipment instead of into luxuries and amusements. This can only be done if we save, and it is therefore obvious that no tax can be called ideal which does not encourage investment. In time of war, however, this abatement might have to be modified.

An income tax adorned by the improvements above suggested would be so evidently equitable that it might be imposed on wage-earners’ incomes considerably below the limit which it touches at present, and might be used for raising the greater part of the national revenue, however great the extent of the revenue required. There would be no need then to talk about widening the basis of taxation, for taxation would be based on the widest possible foundation, the aggregate income of all citizens above the poverty line. Under ideal conditions it would be collected, no longer “at the source,” but from the individual citizen, on his declaration of all the particulars required. It would not be payable by companies and firms, but only by their creditors, shareholders, and partners as they received interest due and profits distributed. Thereby all the evil effects on company finance that are now produced by the close watch that the British Inland Revenue authorities keep on their interpretation of profit would be abolished. Any company or firm that preferred the strait path of good finance and took a generous view of the claims of depreciation and upkeep would no longer be deterred by the consideration that it would have to pay income tax on some of the money that it was putting into the maintenance and improvement of its business. Moreover, British companies with a large number of foreign shareholders, and whose profits are earned abroad, would no longer be impelled, as they are by the present high rate of income tax, to shift their seat of domicile to a foreign clime, because only that portion of their profits would be taxed which is paid into the pockets of British creditors and shareholders. So devised, taxation would not fall directly upon industry at all, but only on those who spent the proceeds of industry. We need not pretend that it would not affect and hamper industry, since all taxation must do so more or less; but, I think, we can claim that it would do so less than any other.

Such a tax would meet and fulfill all the requirements laid down by Adam Smith or added to them by the light of modern experience. We should all know exactly what we were paying for the maintenance of the State; graduation and differentiation would do all that can be done by human fallibility to make the tax work according to the ability of the taxpayer with due regard to the degree of protection that the State has to give to secure him the enjoyment of his revenue; if the tax were payable in monthly installments it would cause no inconvenience to the man with a small income; every penny of it would go straight into the coffers of the State, less the cost of collection; and the monthly collection of it would ensure a comparatively regular revenue against the nation’s outlay.

How far is all this mere rainbow chasing and straining our eyes after an impossible ideal? Not so far as it looks, perhaps, though the acceptance of such a tax in its entirety requires a degree of economic education and of common honesty in the community that we may not yet have attained. In England it has long been an argument against all schemes of graduation and differentiation of the income tax that we thereby lose the great hold over the would-be evader which is given to the tax-gatherer by collection at the source. And yet graduation and differentiation have been introduced without any sign of loss to the revenue, and during the war the British Treasury has gone a step further and issued a loan the interest on which, so far as it is held by registered or inscribed holders, is to be paid without deduction of the tax, the holder being left to include it in his own declaration of the extent of his liability.

The fact that if the income tax were worked on these lines everybody who was believed to be within its scope would be obliged to make a declaration of his income would be a drawback in the eyes of those who still object to the “inquisitorial” requirement implied by it--that the State should know the details of everybody’s income. This old-fashioned objection is, I think, out of date. As it is, the majority of British income tax payers have to declare details of their incomes, either in order to secure abatement, or differentiation, or for super-tax purposes. Seeing that the alleged “inquisition” is already applied to so many, there would be little or no hardship in clapping it on in all cases, as was actually done in 1798.[27] Like all the other suggestions made above, it is only a further development of a principle already recognized and acted on in England.

This is true even of the proposal, though it seems at first sight revolutionary, that the tax should only be imposed on that part of the income which is spent instead of on what is earned. This principle is already recognized in England in the case of life insurance, and it is hard to see why it should not be applied to all other forms of thrift into which the taxpayer likes to put his savings. That income tax should be so imposed was urged, over half a century ago, by John Stuart Mill, and the suggestion also has the authority of Professor Pigou behind it, though he admits that there are technical difficulties to be overcome.[28] These difficulties are obvious enough, until the day comes when every citizen can be trusted to make an honest declaration, or when at least--as may be the case now--the general level of honesty is high enough to ensure that the amount of evasion by tax-cheaters would be small enough not to count. Such an arrangement would, of course, carry with it its contrary; if the tax were not imposed on the net amount invested, it would have to be imposed on the net amount of any investments realized in those years in which the taxpayer sold out more than he invested; because otherwise any one could escape the tax by investing all his income in one year and selling the securities in the next. If the thing could be worked, its effect in cheapening capital, increasing the capital fund of the country, and so adding to its power to produce the good things of the earth, would be excellent, and it would be an equitable set-off to put against the high taxation now imposed in England on what is called “unearned” income. It might be possible to do it by means of evidence in the shape of stockbrokers’ contracts, and certificates from lawyers in the case of investments in mortgages. The thing is not necessarily a pedantic aspiration on the part of academic dreamers, for I have heard it urged, not only as a good thing if it could be done, but as a good thing that could be done, by a very practical man of business; and if the ingenious taxgathering experts were to decide that it was worth doing, they could probably devise the ways and means.

The suggestion that the income tax should be paid by the individual citizen and not by the companies which earn his income for him as stockholder may be criticized, apart from its parting from the principle of collecting at the source, as giving the power to companies to escape taxation by refraining from paying dividends and putting profits into improvement of their plant or into investments. This criticism falls to the ground at once if the principle is admitted that income tax should not be paid on saved money, because money that companies put into depreciation is saved money in every sense of the word. The economic progress of the community is helped by every dollar that companies keep back from their stockholders and put into their plant or invest well otherwise; and any encouragement that a fiscal system can give to this process has something to be said for it, though there may be countervailing drawbacks. If ever a time came when the productive capacity of the whole world were fully equipped and there were a real glut of capital, this need to encourage saving would no longer exist. But we are not likely to see that happen just yet. There would, perhaps, be a danger that some companies might try to distribute profits by devious means--issues of bonus stock and so on--in order to enable their stockholders to escape taxation. But the keen blades of the Revenue Department could very well be trusted to deal faithfully with any such buccaneering.

[Sidenote: INDIRECT TAXATION]

Still greater is the difficulty involved in making the range of the income tax run lower and embrace all the wage-earners who are a fit subject of taxation. In their case (in England, at least) the precariousness of their earnings is much greater than in that of the salary-earner or even of the more precarious professional workers, such as the freelance journalist. Moreover, they cannot, thanks to the education that has been given, or denied, them for many generations, be expected to keep count of their earnings with any regularity, and they would be likely to resent being pestered about them. It may take a long time before they are ready to recognize that an income tax applied more vigorously to wages would be fairer to them, if they would take the necessary trouble to tackle it, than the heavy charge of indirect taxation that they now bear. Economic education of all classes is the only way in which the path of the tax-gatherer can be made smooth and easy. The more this education grows, the faster will be the movement towards graduated and differentiated direct taxation as the fairest way by which the State can take our money.

It is sometimes said that the income tax punishes and fines the hard and successful worker. This is so, but what system of taxation does not? Whatever device you use, you can only tax those who are getting and spending money. But a system which taxes more lightly those who are earning than those who are getting interest on saved or inherited money, which makes due allowance for family liabilities and taxes what is spent and not what is saved, seems to give the hard and successful worker a better chance than most others.

When once the beauty and fairness of graduation and differentiation are seen and appreciated, it becomes clear that all indirect taxation is to a certain extent unfair, because graduation and differentiation cannot be applied to it. It might be possible, though very difficult, to graduate indirect taxation by increasing its rate according to the quantities of goods purchased; but this system, if applied to necessaries of life, would evidently involve hardship by taking no account of the taxpayer’s ability to pay. That the amount of taxation paid by the buyer of a pound of tea should be the same (as it is in England), whether the tea is to be consumed by one living on an inherited million, or by a widowed charwoman with five children and earning, with luck and when in good health, perhaps ten dollars a week, is a gross fiscal blunder and a serious practical injustice. But there is no way round it, and this unfairness is necessarily attached to all forms of indirect taxation. It is true that, as Adam Smith pointed out, taxes upon “such consumable goods as are articles of luxury can be avoided by the taxpayer, as he is at liberty either to buy or not to buy as he pleases.” But so many things, such as clothes, are necessaries up to a point, and become luxuries when that point, so difficult to decide on, has been passed, that taxing luxuries is not nearly as easy as it is desirable. And even in the case of admitted luxuries, such as alcoholic drink, the absence of graduation makes the tax unfair. Why should I, if I drink a glass of beer in the course of a country walk, pay no more taxation on it than a mechanic who partakes of a similar indulgence after working eight hours in front of a furnace? Ability to pay is quite different in these two cases, but the amount paid is the same. And yet this inequity attached to indirect taxation, that is so evident as soon as the principles of graduation and differentiation are admitted, has been so slowly recognized, and is still so much ignored, that it was once observed by the late Sir Robert Giffen that “on the whole an equal amount of indirect taxation causes perhaps only the half or the third of the privation and suffering entailed by an equal amount of direct taxation.” Mr. Gladstone’s ponderous joke, in which he compared the two forms of taxation to two attractive damsels, to both of whom, “whether it be due to a lax sense of moral obligation or not,” he paid his addresses impartially, is well known to all students of the subject,[29] and only shows how little the equities of taxation were studied in the days of that enlightened fiscal reformer.

[Sidenote: STUPIDITY’S PRICE]

Nevertheless, if it be a fact that direct taxation hurts while indirect does not, it is natural and inevitable that the practical politician who has to raise revenue for the State should prefer the latter. If we are really so stupid as to prefer to be bamboozled out of our money by paying, on a necessarily inequitable basis, for government, while we think we are paying for groceries or tobacco, instead of being assessed directly according to our ability and the source of our income and knowing exactly what we are paying, then we deserve what we get and get what we deserve, which is unfair taxation. In a democratic country in which all have political responsibility, it is clear that all, except those who have only the barest necessaries of life, should pay taxes and so have some share in fiscal responsibilities. To do this in a manner which is specially designed to veil the fact that taxes are being paid, is hardly facing the problem squarely; but until education has gone far enough to make everybody ready to pay his fair share by means of direct taxation, it is the only way that can be hit on. The inequities connected with indirect taxes are manifold; not only can they not be graduated or differentiated, but it is impossible to impose them generally, in a country like England, because taxes on the necessaries of life are clearly bad, from the national point of view, in a community in which many people have not enough to eat. So that in days before the war any Englishman who escaped income tax and did not smoke or drink alcohol or tea contributed practically nothing to the Government under whose protection he lived. Since the war, taxes on cocoa, mineral waters, and entertainments have widened the fiscal net. The proportion of British revenue contributed by indirect taxation has steadily declined. In 1841-2 it was 73%; in 1912-13 it was 42.4%,[30] and during the war it is generally assumed to have declined still further, though it might be argued that the excess profits tax is an indirect tax, since most of it has been ultimately paid by consumers through the high prices that caused the excess profits.

Indirect taxation, being paid by those who buy certain articles for consumption, has one great advantage, which justifies its position in England’s fiscal system until such time as she is able to impose income tax only on that part of the income which is spent. It hits us when we spend and not when we earn or save. In time of war, when there is not enough labor and energy to do all that is needed for the fighting forces and for the export trade and for providing necessaries, any tax that checks individual spending, or takes part of the sum spent for the Government, is clearly useful and beneficial. And this is almost equally true in time of peace, for then also wasteful spending is economically unsound, checks the material progress of the nation, makes the hard lot of the poor still harder, and lessens the demand for labor.[31] So that if only we could graduate and differentiate indirect taxation, it would have advantages over direct as the latter is at present imposed. As we cannot, it has to be left in its present unsatisfactory state, pressing heavily, in England, on the poorest consumers of such articles as tea, tobacco, and alcohol, while patriotic ladies who give $15,000 for a fur coat in time of war pay no taxation in the process except the penny stamp on a cheque. A graduated invoice stamp on all retail purchases of $2-1/2 and over is a way round this problem, but there are many practical difficulties in the way of it and if, as is likely, both shopkeepers and their customers united in resenting and detesting the tax, it is highly probable that there would be much evasion.

[Sidenote: IMPORT DUTIES]

Of all forms of indirect taxation, the worst, according to the pure principles of taxation, is that imposed on imported goods of a kind that is produced in the country, unless a home tax (or excise duty) of the same amount is imposed on goods produced inland. Because the effect of the import duty is to raise the price of the article and, if the home producer is not similarly taxed, this means that part of the higher price will go into his pocket instead of into the coffers of the State. Nearly all nations, including the British colonies, make free use of this method of taxation, because they think it pays them in the long run, or think it necessary to the dignity or security of the State, that certain industries should be thus protected at the expense of the consumer; or because they hope thus to maintain the standard of comfort of their wage-earners. Some people think that when the war is over England also will adopt the system of a protective tariff. We shall see. It is beyond the scope of this work to enter on this highly controversial ground. Every one will admit that, if Protection is the only or the best means of keeping alive in the country an industry that is essential to national safety, then the most bigoted Free Trader must agree to it. It must also be admitted that many great, rich nations--including England’s richest enemy and her richest ally--have flourished under Protection. On the other hand, it warps and hampers trade, as a whole, and introduces an artificial complication into a matter which is naturally quite complicated enough; but perhaps the strongest argument against it is its tendency to make questions of taxation, especially in a democratically governed country, an unclean welter in which politics and business cover one another with dirt.