Taxes are reckoned by enterprisers as a part of the cost of production whenever the conditions of competition and of substitution make it possible to do so. In such a case the products rise in price and most of the tax falls upon the consumers. In the Civil War an increase in the tax on whisky increased its selling price, and distillers who owned stocks on which a smaller tax had already been paid reaped profits of millions of dollars. When recently the tax on tea was increased in England, all dealers who had accumulated a stock before the law went into effect were gainers. Every change in taxation inevitably affects, either favorably or unfavorably, many interests. The chance to anticipate a change in tax laws or to get, from those in power, information of a proposed change, makes speculation possible and political corruption profitable.
Shifting and incidence of taxation
3. After every change in taxation, competition among bargainers goes on and a new equilibrium of prices results. The citizen who pays a tax into the public treasury is not always the one whose income is reduced in the long run. In most cases the final and regular burden of the tax is distributed over a number of incomes. The passing on of the burden is called the shifting of the tax; the location of the final burden is called the incidence of the tax. The lawmaker cannot tell exactly where the weight will fall. The principles of value give some guidance in the inquiry, but the workings of the principle are difficult to follow. Certain it is that the new tax, both in its collection and in its expenditure, becomes a new influence in industry. Some occupations are made more attractive, others less so. Some places are made more, others less, desirable to live in. As property thus fluctuates in value, as investments become more or less remunerative, the market price of corporation stocks rises and falls. The rate of adjustment varies greatly under different conditions. The inflow and the outflow of labor and capital are more or less rapid in the various industries.
Many personal incomes affected
The fact that a change in taxation is a disturbing element in price is not to be thought insignificant merely because "all comes out right in the end." Every change in taxation is an element of uncertainty in business and increases the fortunes of some men at the expense of others. Hence no considerable change should be made without good reasons in its favor. The older taxes have the virtue of stability, but in many cases they have grown out of harmony with the industrial conditions. While, therefore, from time to time there is a real need of a reform in the tax system, it should not be undertaken without recognizing the many and complex interests involved.
§ III. PRINCIPLES AND PRACTICE
Various standards of justice suggested
1. Taxation should be adjusted with reference to the general social interest. Many standards have been suggested to measure the distribution of the burden of taxation, such as benefit, equality, and ability. Each of these terms is capable of various interpretations which have changed from time to time. The benefit derived by any citizen from most of the public services evidently cannot be measured with exactness. The standard of equality cannot be applied in any literal sense to strong and weak, to rich and poor. It is possible, however, to interpret equality with reference not to objective goods, but to the psychic sacrifice occasioned by taxation. Ability thus is of many kinds and may be differently understood. Some think ability to bear taxation is "in exact proportion to the money income"; others believe that it increases at a greater rate than money income, and favor, therefore, progressive taxation, that is, higher rates on the larger incomes.
Social welfare as the aim