Principles of Political Economy

by Arthur Latham Perry

Objection has been often raised to any form of Income-tax from the publicity of private affairs resulting from it. It was just this that proved fatal to our own first experiment along this line of national action. But there seems to be some confusion of ideas in connection with this phrase, "publicity of private affairs," for really, so far as taxation is concerned, there ought to be nothing "private" about the amount of any man's income, or the aggregate of all forms of his property, inasmuch as every man has a right to know, that all his neighbors are contributing pro rata with himself to support that Government, which is common to him and them. There is nothing, at least there should be nothing, "private" in connection with Government; that is the one absolutely "public" thing of the world; least of all should there be anything private in the matter of public taxes, since in bearing up the burdens of Government all the citizens are alike copartners, and in this view and for this purpose each has a right to demand a look into the books of all the others.

Another objection has often been raised, namely, that some men will never give in a true return of their Income. Ah! but they can be made to do so, as the forms are perfected, as fraudulent returns are promptly punished by additional assessment and collection, and as the memory and conscience of the payers are quickened by the action of a healthful public opinion brought to bear through the annual publication of the list of their returns. Men are not so isolated from each other as that a man's neighbors do not know pretty well the general amount of his income. There is the additional security of an oath, of the fear of punishment, and of the wish to stand well with one's class. At the worst, it may be said, that evasions and fraud accompany also all other forms of Taxation.

5. What is the difference between Direct and Indirect Taxes? This is an old and proper division: we must now see what is the economical basis of it. A direct tax is levied on the very persons who are expected themselves to pay it; an indirect tax is demanded from one person in the expectation that he will pay it provisionally, but will indemnify himself in the higher price which he will receive from the ultimate consumer. Thus an income tax is direct, while duties laid on imported goods are indirect. There has been a great amount of discussion on the point whether direct or indirect taxation be the more eligible form; but the reader of penetration will perceive that there is not at bottom any very radical difference between them; each is alike a tax on actual or possible exchanges, with this main difference, that men pay indirect taxes as a part of the price of the goods they buy, without thinking perhaps that it is a tax they are paying, and consequently without any of the repugnance that is sometimes felt towards a tax-gatherer who comes with an unwelcome demand. Thus indirect taxes are conveniently and economically collected. Especially is this true of impost taxes; since one set of custom-house officers may collect easily and at once the government tax which is ultimately paid by consumers all over the country. The taxes also levied by the present United States internal revenue law are indirect taxes, whereby the government gets in a lump what is afterwards distributed over many subordinate exchanges. The countervailing disadvantage of indirect taxation, however, is, that the price of the commodity is usually enhanced to an extent much beyond the amount of the tax, partly because it is a cover under which dealers may put an unreasonable demand, and partly because the tax, having to be advanced over and over again by the intermediate dealers, profits rapidly accumulate as an element of the ultimate price.

Direct taxes are laid either on Income or Expenditure. As the difficulty of a tax on a person's whole expenditure is much greater than one on his whole income, inasmuch as the items are more numerous and more diffused, it is only attempted to levy a few taxes on some special items of expenditure, such as those on horses, carriages, plate, watches, and so on; but as these do not reach all persons with any degree of quality, they are so far forth objectionable. A house-tax, levied on the occupier, and not on the owner, unless he be at the same time the occupier, would be a direct tax on expenditure every way unobjectionable. Taking society at large, the house a man lives in and its furniture are probably the most accurate index attainable of the size of his general expenditures. They are open to observation and current remark; they are that on which persons rely more perhaps than on anything else external for their consideration and station in life; the tax could be assessed with very little trouble on the part of the assessor; and it is well worthy the attention of our State and National Legislatures, whether such a tax, if more taxes should be needed, would not be more equal and more easy of collection than any others now open; or whether it might not with advantage take the place of some of the complicated and objectionable taxes now laid. Direct taxes have this general advantage over indirect, that they bring the people into more immediate contact with the government that lays the taxes, and subject it to a quicker supervision and more effectual curb, whenever its expenditures grow larger than the people think it desirable to incur; perhaps they have this general disadvantage over indirect taxes, especially over imposts, that the number of officials required to assess and collect them is larger, thus swallowing up a part of the proceeds of the taxes, with this liability also of bringing the people into an attitude of hostility to the government and to its contemplated expenditures. But whether the taxes be direct or indirect, or whatever be their form, except it be a poll-tax, which is questionable at best, they are laid upon Exchanges, and are designed to withdraw for the use of the government a part of the Gains of exchanges.

6. Are Credits a legitimate subject of Taxation? The answer is very easy. Unless this whole treatise from beginning to end be unsound, Credits stand upon the same economical grounds as Commodities and Services, and so may be taxed for the same reasons as those may be taxed. Whatever is bought and sold is properly enough taxed, if the needs of the government require it, and if such taxation would be productive and not too unequal. As Values always spring from the action of individuals, so the incidence of taxes is upon persons rather than upon things; and the question is what can a man sell, or what has he already sold, on the gains of which sale the government may lay some claim? If I have a note and mortgage on my neighbor's farm, I can sell it at any time to a third party; it pays me interest ad interim, and I can collect it at maturity. Government therefore properly taxes me for that credit in my possession. It is a part of my property. The holders of the government bonds occupy an economical position exactly similar. They have a lien on the national property and income. The credits they hold are vendible commodities. They are a paper bearing interest. They can be collected at maturity. They are indeed exempted by law from municipal and State taxation. That was a legitimate inducement held out to everybody alike to invest in the bonds. But there is no reason why the nation, having withdrawn them from town and State taxation, should not itself all the more subject them to their fair share of the national burdens, unless indeed it be claimed, as perhaps it fairly may be, that the exemption enables the government to borrow at a just so much lower rate of interest. The income at any rate derived from the bonds should be taxed as soon as any other income is. It is no longer any ground of merit, even if it ever has been, for persons to buy the government debt. It is a mercantile transaction, and should be so considered in relation to taxes. So of other mercantile credits. They are taxable. Massachusetts has had a great deal of trouble of late years both in the Legislature and otherwise about the taxation of mortgages on taxed Massachusetts farms and other real estate. The question is intricate and full of difficulty. Some things about it, however, are clear. The note and mortgage is a different piece of property, and a different kind of property, from the real estate. It is a peculiar sort of credit. The owner of it is a different person from the owner of the real estate. Either bit of property may change hands without changing the status of the other. The question of taxing the note and mortgage, like the question of taxing the bonds, seems to hinge on the effect it would have on the rate of interest of the obligation secured by the mortgage. If the holder of the mortgage expects to have to pay a tax upon it, he will try to get a higher rate of interest on his money loaned and thus secured. Whether mortgagees taxed as such can throw off the tax upon the mortgagors in a higher rate of interest on the money loaned is a point much disputed and at least doubtful. General principles would lead us to favor the taxation of note and mortgages in the hands of their holders, so long as such cumbersome forms of taxing as prevail in Massachusetts are maintained. A universal income-tax would solve this difficulty also in a moment of time.

7. Has Political Economy anything to say about the Rate of taxes per unit of that which is subject to tax? Yes; it has an important word to say upon that point. From the very nature of Taxes in general, and in order that they may be most productive in the long run, as well as discourage as little as possible the Exchanges which would otherwise go forward, the Rate of taxes ought always to be low relatively to the amount of Values exchangeable. A high rate of tax not infrequently stops exchanges in the taxed articles altogether, and of course the tax then realizes nothing to the government. As the only motive to an exchange is the gain of it, the exchange ceases whenever the government cuts so deeply into the gain as to leave little margin to the exchangers. The greater the gain left to the parties, after the tax is abstracted, the more numerous will the exchanges become, and the greater the number of times will the tax fall into the coffers of the government. In almost all articles, consumption increases from a lowered price in even a greater ratio than the diminution of the rate of tax; so that the interests of consumers and of the revenue are not antagonistic but harmonious. On articles of luxury and ostentation, and on those, such as liquors and tobaccos, whose moral effects are clearly questionable, very high taxes may properly enough be laid, because their incidence will hardly tend to diminish consumption, and it would scarcely be regretted if it did; but with this exception, duties and taxes should be levied at a low rate per centum as well for the interest of revenue as of consumers. It is to be added, however, that the taxes even on these articles may be too high to meet either a revenue or a moral purpose. The internal tax of two dollars a gallon upon distilled spirits was of this character. Experience has demonstrated that a less tax will produce more revenue, and the drinking of whiskey, bad as that is, is less culpable than the endless frauds on the government provoked by the high tax.

8. What is the difference between Specific and Advalorem Taxes, and why should the student take careful note of these both singly and combined? These terms are used more particularly in relation to Tariff-taxes, but there is nothing in the distinction itself so to limit its application. A Specific tax is a tax of so many cents or dollars on the pound, yard, gallon, or other quantity measurable: an Advalorem tax is a tax of so much per centum on the invoiced or appraised money value of the goods subject to the tax. Specific taxes, accordingly, are far simpler and steadier in their operation than the others; it is easy to ascertain the weight or number or other quantity of valuables, and then to apply a fixed ratio to them in the way of tax; the payer knows or may know beforehand precisely how much the tax will amount to, and consequently just how it is to affect the profitableness of his current trade; and on these and other grounds specific taxes are preferable to advalorem ones. To be sure, this form of tax involves that high-priced grades of an article pay no higher taxes than low-priced grades of the same, but this consideration is largely overbalanced by those of convenience and productiveness.

Advalorem taxes, on the other hand, are never calculable beforehand; because Values from their nature are variable, and as a matter of fact do constantly vary. Imported goods, for instance, bring with them the invoice of the seller giving the values at the place of exportation. But the importer is by no means sure that the tax will be levied upon that valuation. The home valuation will of course be higher, otherwise the goods would not be imported. Whenever it becomes the policy of a country, as of the United States at present, to keep foreign goods out to the utmost extent possible under the law, which law is itself devised on purpose to keep them out, there will always be suspicions and charges of undervaluations at the place of export; there will always be a motive on the part of the foreign seller or agent thus to undervalue the goods in the interest of the importer, so as to lessen his tax, and so increase the seller's market; such abnormal tariff-taxes are the enemy of mankind in general, and, therefore, there will be no end of deceits and evasions at both terminals of the ocean-route, and "custom-house oaths" will become a by-word of course; the importing, or rather the non-importing, country will keep in pay an army of spies and informers on both sides of the water in order to prevent what is called "frauds," and another army of "appraisers" at its custom-houses in order to discredit the invoices, and to jump at a valuation of the goods, on which the tax shall be levied; and honorable merchants and importers, without any fault of their own, are liable to get entangled in the miserable meshes of such goings-on, as happened in a memorable case in New York a few years ago, and be mulcted in fines (perhaps to immense amounts) one-half of which shall go to the informer.

There are too many practical difficulties connected with either of these two forms of tax to make it proper to combine the two upon the same article of merchandise. To combine them thus is one of the tricks and traps of Protectionism. That makes it next to impossible for any importer to tell beforehand what the two taxes will aggregate, and quite impossible for any ultimate consumer to tell how much of his price paid is due to the demands of his Government. Opening the official tax-book at random, we quote as follows from a single page: "Webbings, pound 50 cents, and 50 per cent"; "Buttons, pound 50 cents, and 50 per cent"; "Suspenders, pound 50 cents, and 50 per cent"; "Mohair cloth, pound 30 cents, and 50 per cent"; "Dress trimmings, pound 50 cents, and 50 per cent." Besides these, on that same page, there are 14 other articles under similar compound taxes, mostly at 50 cents a pound and 50 per cent additional, this as under the Tariff as it was 1874-83; but all these 18 articles were put in 1883 at "pound 30 cents, and 50 per cent."

9. What are the economical reasons for an Excise or Internal-Tax in connection with Tariff-taxes for revenue? A tariff-tax, whether for revenue or other purpose, raises the price by so much of the article subjected to it and actually imported; now, if similar articles of the same quality be made or grown at home, and be not subjected to a corresponding tax, these will inevitably rise to the price of the foreign, with the tariff-tax added, for there is no possible competition or conceivable impulse that can keep it lower than that; so that, in that case, the government gets in revenue, only the taxes paid on the part imported, while the people are compelled to pay in addition virtually the same taxes on all that part produced at home. Why should not the government have the proceeds of the last as well as of the first? The last is the direct result of the first. If now, a corresponding excise-tax be put on the domestic product also, the government will get in revenue all that the people are obliged to pay in consequence of government-tax. This is just: the other is wantonly unjust.