Principles of Political Economy / Abridged with Critical, Bibliographical, and Explanatory Notes, and a Sketch of the History of Political Economy

by John Stuart Mill

§ 1. A Tax on all commodities would fall on Profits.

By taxes on commodities are commonly meant those which are levied either on the producers, or on the carriers or dealers who intervene between them and the final purchasers for consumption; the phrase being, by custom, confined to indirect taxes—those which are advanced by one person, to be, as is expected and intended, reimbursed by another.

Taxes on commodities are either on production within the country, or on importation into it, or on conveyance or sale within it, and are classed respectively as excise, customs, or tolls and transit duties. To whichever class they belong, and at whatever stage in the progress of the community they may be imposed, they are equivalent to an increase of the cost of production; using that term in its most enlarged sense, which includes the cost of transport and distribution, or, in common phrase, of bringing the commodity to market.

When the cost of production is increased artificially by a tax, the effect is the same as when it is increased by natural causes. If only one or a few commodities are affected, their value and price rise, so as to compensate the producer or dealer for the peculiar burden; but if there were a tax on all commodities, exactly proportioned to their value, no such compensation would be obtained; there would neither be a general rise of values, which is an absurdity, nor of prices, which depend on causes entirely different. There would, however, as Mr. McCulloch has pointed out, be a disturbance [pg 563] of values, some falling, others rising, owing to a circumstance, the effect of which on values and prices we formerly discussed—the different durability of the capital employed in different occupations. The gross produce of industry consists of two parts; one portion serving to replace the capital consumed, while the other portion is profit. Now, equal capital in two branches of production must have equal expectations of profit; but if a greater portion of the one than of the other is fixed capital, or if that fixed capital is more durable, there will be a less consumption of capital in the year, and less will be required to replace it, so that the profit, if absolutely the same, will form a greater proportion of the annual returns. To derive from a capital of $1,000 a profit of $100, the one producer may have to sell produce to the value of $1,100, the other only to the value of $500. If on these two branches of industry a tax be imposed of five per cent ad valorem, the last will be charged only with $25, the first with $55; leaving to the one $75 profit, to the other only $45. To equalize, therefore, their expectation of profit, the one commodity must rise in price, or the other must fall, or both.[343] Commodities made chiefly by immediate labor must rise in value, as compared with those which are chiefly made by machinery. It is unnecessary to prosecute this branch of the inquiry any further.

§ 2. Taxes on particular commodities fall on the consumer.

A tax on any one commodity, whether laid on its production, its importation, its carriage from place to place, or its sale, and whether the tax be a fixed sum of money for a given quantity of the commodity, or an ad valorem duty, will, as a general rule, raise the value and price of the commodity by at least the amount of the tax. There are few cases in which it does not raise them by more than that amount. In the first place, there are few taxes on production on account of which it is not found or deemed necessary to impose restrictive regulations on the manufacturers or dealers, in order to check evasions of the tax. These [pg 564] regulations are always sources of trouble and annoyance, and generally of expense, for all of which, being peculiar disadvantages, the producers or dealers must have compensation in the price of their commodity. These restrictions also frequently interfere with the processes of manufacture, requiring the producer to carry on his operations in the way most convenient to the revenue, though not the cheapest or most efficient for purposes of production. Any regulations whatever, enforced by law, make it difficult for the producer to adopt new and improved processes. Further, the necessity of advancing the tax obliges producers and dealers to carry on their business with larger capitals than would otherwise be necessary, on the whole of which they must receive the ordinary rate of profit, though a part only is employed in defraying the real expenses of production or importation. The price of the article must be such as to afford a profit on more than its natural value, instead of a profit on only its natural value. Neither ought it to be forgotten that whatever renders a larger capital necessary in any trade or business limits the competition in that business, and, by giving something like a monopoly to a few dealers, may enable them either to keep up the price beyond what would afford the ordinary rate of profit, or to obtain the ordinary rate of profit with a less degree of exertion for improving and cheapening their commodity. In these several modes, taxes on commodities often cost to the consumer, through the increased price of the article, much more than they bring into the treasury of the state. There is still another consideration: the higher price necessitated by the tax almost always checks the demand for the commodity; and, since there are many improvements in production which, to make them practicable, require a certain extent of demand, such improvements are obstructed, and many of them prevented altogether. It is a well-known fact that the branches of production in which fewest improvements are made are those with which the revenue-officer interferes; and that nothing, in general, gives a greater impulse to improvements [pg 565] in the production of a commodity than taking off a tax which narrowed the market for it.

§ 3. Peculiar effects of taxes on Necessaries.

Such are the effects of taxes on commodities, considered generally; but, as there are some commodities (those composing the necessaries of the laborer) of which the values have an influence on the distribution of wealth among different classes of the community, it is requisite to trace the effects of taxes on those particular articles somewhat further. If a tax be laid, say on corn, and the price rises in proportion to the tax, the rise of price may operate in two ways: First, it may lower the condition of the laboring-classes; temporarily, indeed, it can scarcely fail to do so. If it diminishes their consumption of the produce of the earth, or makes them resort to a food which the soil produces more abundantly, and therefore more cheaply, it to that extent contributes to throw back agriculture upon more fertile lands or less costly processes, and to lower the value and price of corn; which therefore ultimately settles at a price, increased not by the whole amount of the tax, but by only a part of its amount. Secondly, however, it may happen that the dearness of the taxed food does not lower the habitual standard of the laborer's requirements, but that wages, on the contrary, through an action on population, rise, in shorter or longer periods, so as to compensate the laborers for their portion of the tax, the compensation being of course at the expense of profits. Taxes on necessaries must thus have one of two effects: either they lower the condition of the laboring-classes, or they exact from the owners of capital, in addition to the amount due to the state on their own necessaries, the amount due on those consumed by the laborers. In the last case, the tax on necessaries, like a tax on wages, is equivalent to a peculiar tax on profits; which is, like all other partial taxation, unjust, and is specially prejudicial to the increase of the national wealth.