Principles of Political Economy

by Arthur Latham Perry

Political Economy is the Science of Buying and Selling. It must include of course in its discussions the Motives, the Methods, the Obstacles, the Rewards, relating to Sales, which are themselves first to be defined as furnishing the sole Field of the Science. We have now gone through with painstaking all of these topics in order, but we have not yet fairly struck Taxation, which is indeed in all its forms an obstacle to Sales, and in some of them the annihilation of Sales, but which in its nature is something much more than an obstacle, namely, a Condition of something higher than itself. In the very strictest sense of the terms, Taxation is not a part of the Science of Political Economy, because it is not an essential part of any one of those natural processes by which men buy and sell and get gain. It is rather a Condition through Government of the successful ongoing of all those processes. There cannot be, therefore, a science of Taxes, as there is unquestionably a science of Sales. The facts of Taxes are artificial and governmental, the facts of Sales are natural and original.

All forms of Production, as we have now seen, go forward in accordance with positive natural forces and motives, which God has appointed, and which men have a natural impulse to ascertain and generalize and profit by; for it is Nature bids men work and save, buy and sell, invent and transport, navigate and grow rich; but Nature has given no whisper anywhere, at least that we can hear, about any Taxes. That is the work of Society. That seems to be something negative, not positive, so far as Buying and Selling is concerned. Taxation is indeed something necessary to the social order, as men are; it furnishes means of defence against greater evils than itself is; but in itself considered, it is an economic evil, because it takes away from exchangers a part of the gains of their exchanges; strictly speaking, therefore, it cannot be made a part of Economic Science.

But, on the other hand, as we shall see at length in the exposition that follows, all the relations of Taxation from the beginning to the end are so ultimately connected with Exchanges, are so founded on and limited by Exchanges, its true principles are so exclusively economical, and its abuses are so instantly and constantly harmful to all the ongoings of natural and profitable Trade, that Taxation must always be treated as if it were a part of Economics. The latter is a science, the former is an art; but the art is almost exclusively dependent upon the principles of this one science; and a comprehensive treatise on the science, accordingly, must exhibit all its main bearings upon those practical rules of Taxation, which are so vital to the happiness and prosperity of any People. All scientific Economists, therefore, have considered the subject of Taxes to lie within their legitimate beat. They have, however, justified the inclusion upon very different grounds, one from another; and so far as now appears, the present writer was the first technical Economist to disclaim in the name of his Science direct jurisdiction over Taxation.

A careful discussion of a series of distinct though related Questions belonging to Taxes will exhibit the whole practical matter in the light of well-established principles of economical Science.

1. What is the fundamental Ground of Taxes? Government is an essential prerequisite to any general and satisfactory Exchanges, since it contributes by direct effort to the security of person and property; and justly claims, therefore, from each citizen a compensation in return for the Services thus rendered to him. We do not mean to say that government exists solely for the protection of person and property, or that all the operations of government are to be brought down within the sphere of exchange, for government exists as well for the improvement as for the protection of society, and many of its high functions are moral, to be performed under a lofty sense of responsibility to God and to future ages; nor do we mean to say that government has not also a deep ground for its existence, in virtue of which it may on extraordinary occasions demand all the property of all, and even the lives of some, of its citizens; but we do mean to say that, whatever may be conceded as the ultimate ground of government, the matter of taxation, by which government is outwardly and ordinarily supported, and by which it takes to itself a part of the gains of every man's industry, finds a ready and solid justification in the common principles of Exchange. If, as far as the tax-payer is concerned, the exchange does not seem to be voluntary, on a closer analysis it is seen to be really voluntary; for in effect the people organize government for themselves, and voluntarily support it, and there is no government separate from the will of the people.

In a very important sense, accordingly, a tax paid is a reward for a service rendered. The service which government renders to Production by its laws, courts, and officers, by the force which it is at all times ready to exert in behalf of any citizen or the whole society when threatened with evil in person or property, is rendered somewhat on the principle of division of labor, one set of agents devoting themselves to that work; and, notwithstanding some crying abuses of authority which no constitution or public virtue has yet been found adequate wholly to avert, is rendered on the whole economically and satisfactorily. Taxes, therefore, demanded of citizens by a lawful government which tolerably performs its functions, are legitimate and just on principles of Exchange alone.

2. What is the Source out of which Taxes are actually paid? The answer is, out of the gains of Exchanges of some sort. Gifts aside, and thefts which are out of the question, no man ever did, no man ever can, pay his taxes, except out of the gains of some sales which he has already made. Even the man who lives wholly on the interest of his money must make a true exchange in lending it (a credit transaction), and must already have gotten his return-service in interest, before he can pay his taxes; personal and professional servants must receive their wages, the outcome of exchanges, before they can possibly pay their taxes; and men can realize nothing for taxes or other payments from their farms or foundries or stocks in trade except as they sell either them or their products. The more sales, the more gains, and the greater reservoir whence taxes may be drawn. Political Economy, as the vindicator of sales, as the defender of all legitimate gains whatsoever, is the best possible friend of tax-payers and tax-gatherers as such. Whatever thought or force restricts sales, makes it pro tanto the harder to pay and collect taxes, so much the harder for a government to keep its head above water and reach the ends of its being.

It follows from all this, by a necessary inference, that the annual Taxes of any country must come out of the annual Earnings of the people of that country, using the word "earnings" in its general and proper sense. The greater the earnings per capita, the easier are the taxes paid. Sir Richard Temple read an address not long since in the Section of Economic Science and Statistics of the British Association, some of whose results are not only interesting but also astonishing. For instance, taking the whole population of the United Kingdom (England, Scotland, and Ireland), without division into classes, he demonstrates that the average of yearly earnings per head of the population is £35 4s., or $171.28. This exceeds the average earnings in the United States by 30%, £27 4s.:£35 4s. It exceeds also the average on the Continent of Europe by 95%, £18 1s.:£35 4s. It falls below that of Australia only, £43 4s.:£35 4s., or 19% less. Canada's average earnings per capita are $126.80, or 5% less than those in the United States, £27 4s.:£26 18s. According to the same unimpeachable authority in the same paper, the annual income from investments is in Great Britain and the United States as nearly as possible one-seventh of the aggregate Property in each (all kinds), or 14%. In Canada and Australia, 18% and 22% respectively. Undoubtedly the most profitable country in the world at present is Australia, and Great Britain stands next. The only apparent reason why the United States, whose natural resources of every kind are vastly superior to either, takes the third rank is, that profitable exchanges here are forcefully suppressed by law, and that to an enormous extent, neutralizing natural resources and glorious opportunities for easily acquired and widespread gains. This violent suppression of commerce by national legislation makes it just so much the harder for any man to pay his taxes, whether these be due to Nation, State, or Municipality. If the reservoir be diminished the flow from it through every pipe becomes feebler.

3. In what Proportion ought the individual citizens to contribute to the fund annually necessary to be raised by Taxation? The usual answer has been, that a man should be taxed according to his Property. That is the radically correct answer, though most who have given it have not understood clearly the meaning of the word property. We have already seen that the ultimate idea of property is the power and right to render services in exchange, and defined it as anything that can be bought and sold. Robinson Crusoe, while solitary upon his island, did not and could not have property, in the true sense of that word. It is not the fact of appropriation that makes anything property; it is not the fact that a man has made it or transformed it, that makes anything property; it is not the fact that a man may rightfully give it away, that makes anything property; but it is the fact that a man has something, no matter what it is, for which something else may be obtained in exchange, that makes that something property, and gives government the right to tax it. In other words, property consists in Values, in a purchasing-power, and not in possession, or in appropriation, or in the esteem in which a man holds anything he has as long as it is his own.

The test of property is a sale; that which will bring something when exposed for exchange is property; that which will bring nothing, either never was, or has now ceased to be, distinctively property. This view may not seem to be as novel as it is, or it may be prejudiced by its very novelty, but at any rate it carries along with it that strongest of the criteria of truth, that it simplifies and illumines a confused section of the field of human thinking; and at the same time justifies a practice which governments have reached, as it were through instinct, the practice, namely, of taxing men who have neither real estate nor chattels, on their incomes from industry and from credits.