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

by John Stuart Mill

§ 4. —how modified by the tendency of profits to a minimum.

The preceding is, I apprehend, a correct statement of the manner in which taxes on agricultural produce operate when first laid on. When, however, they are of old standing, their effect may be different. Now, the effect of accumulation, when attended by its usual accompaniment, an increase of population, is to increase the value and price of food, to raise rent, and to lower profits; that is, to do precisely what is done by a tax on agricultural produce, except that this does not raise rent. The tax, therefore, merely anticipates the rise of price and fall of profits which would have taken place ultimately through the mere progress of accumulation, while it at the same time prevents, or at least retards, that progress. If the rate of profit was such that the effect of the tithe reduces it to the practical minimum, after a lapse of time which would have admitted of a rise of one tenth from the natural progress of wealth, the consumer will be paying no more than he would have paid if the tithe had never existed; he will have ceased to pay any portion of it, and the person who will really pay it is the landlord, [pg 569] whom it deprives of the increase of rent which would by that time have accrued to him. At every successive point in this interval of time, less of the burden will rest on the consumer, and more of it on the landlord; and, in the ultimate result, the minimum of profits will be reached with a smaller capital and population and a lower rental than if the course of things had not been disturbed by the imposition of the tax. If, on the other hand, the tithe or other tax on agricultural produce does not reduce profits to the minimum, but to something above the minimum, accumulation will not be stopped, but only slackened; and, if population also increases, the twofold increase will continue to produce its effects—a rise of the price of corn and an increase of rent. These consequences, however, will not take place with the same rapidity as if the higher rate of profit had continued. At the end of twenty years the country will have a smaller population and capital than, but for the tax, it would by that time have had; the landlords will have a smaller rent, and the price of corn, having increased less rapidly than it would otherwise have done, will not be so much as a tenth higher than what, if there had been no tax, it would by that time have become. A part of the tax, therefore, will already have ceased to fall on the consumer and devolved upon the landlord, and the proportion will become greater and greater by lapse of time.

But though tithes and other taxes on agricultural produce, when of long standing, either do not raise the price of food and lower profits at all, or, if at all, not in proportion to the tax, yet the abrogation of such taxes, when they exist, does not the less diminish price, and, in general, raise the rate of profit. The abolition of a tithe takes one tenth from the cost of production, and consequently from the price, of all agricultural produce; and, unless it permanently raises the laborer's requirements, it lowers the cost of labor and raises profits. Rent, estimated in money or in commodities, generally remains as before; estimated in agricultural produce, it is raised. The country adds as much, by the repeal of a tithe, to the margin which intervenes between it and the stationary [pg 570] state as was cut off from that margin by the tithe when first imposed. Accumulation is greatly accelerated, and, if population also increases, the price of corn immediately begins to recover itself and rent to rise, thus gradually transferring the benefit of the remission from the consumer to the landlord.

§ 5. Effects of discriminating Duties.

We have hitherto inquired into the effects of taxes on commodities, on the assumption that they are levied impartially on every mode in which the commodity can be produced or brought to market. Another class of considerations is opened, if we suppose that this impartiality is not maintained, and that the tax is imposed, not on the commodity, but on some particular mode of obtaining it.

Suppose that a commodity is capable of being made by two different processes—as a manufactured commodity may be produced either by hand or by steam-power—sugar may be made either from the sugar-cane or from beet-root, cattle fattened either on hay and green crops or on oil-cake and the refuse of breweries. It is the interest of the community that, of the two methods, producers should adopt that which produces the best article at the lowest price. This being also the interest of the producers, unless protected against competition, and shielded from the penalties of indolence, the process most advantageous to the community is that which, if not interfered with by Government, they ultimately find it to their advantage to adopt. Suppose, however, that a tax is laid on one of the processes, and no tax at all, or one of smaller amount, on the other. If the taxed process is the one which the producers would not have adopted, the measure is simply nugatory. But if the tax falls, as it is of course intended to do, upon the one which they would have adopted, it creates an artificial motive for preferring the untaxed process, though the inferior of the two. If, therefore, it has any effect at all, it causes the commodity to be produced of worse quality, or at a greater expense of labor; it causes so much of the labor of the community to be wasted, and the capital employed in supporting and remunerating [pg 571] that labor to be expended as uselessly as if it were spent in hiring men to dig holes and fill them up again. This waste of labor and capital constitutes an addition to the cost of production of the commodity, which raises its value and price in a corresponding ratio, and thus the owners of the capital are indemnified. The loss falls on the consumers; though the capital of the country is also eventually diminished, by the diminution of their means of saving, and, in some degree, of their inducements to save.

The kind of tax, therefore, which comes under the general denomination of a discriminating duty, transgresses the rule that taxes should take as little as possible from the taxpayer beyond what they bring into the treasury of the state. A discriminating duty makes the consumer pay two distinct taxes, only one of which is paid to the Government, and that frequently the less onerous of the two. If a tax were laid on sugar produced from the cane, leaving the sugar from beet-root untaxed, then in so far as cane-sugar continued to be used, the tax on it would be paid to the treasury, and might be as unobjectionable as most other taxes; but if cane-sugar, having previously been cheaper than beet-root sugar, was now dearer, and beet-root sugar was to any considerable amount substituted for it, and fields laid out and manufactories established in consequence, the Government would gain no revenue from the beet-root sugar, while the consumers of it would pay a real tax. They would pay for beet-root sugar more than they had previously paid for cane-sugar, and the difference would go to indemnify producers for a portion of the labor of the country actually thrown away, in producing by the labor of (say) three hundred men what could be obtained by the other process with the labor of two hundred.

An interesting illustration, in late years, of the operation of a discriminating duty is to be found in the case of different grades of sugar imported into the United States. Our tariff levied certain duties on different grades of sugar classified by color, on the theory that color was a test of saccharine strength. Cargoes were examined and compared with graded sugars hermetically sealed in glass bottles and distributed by the Dutch [pg 572] authorities, whence came the name of “Dutch standard.” Grades from No. 1 (melado) to No. 10 must go to the refiner before consumption; but the grades to No. 13, although some might have gone into immediate consumption, were usually sent to be manufactured into the highest grades of soft and hard sugars. So long as the sugar was secured by evaporation in open coppers, or by passing the molasses through a layer of clay, saccharine strength and color went fairly well together. But with the invention of the vacuum-pan and the centrifugal wheel, by which the sugar is reduced through a shorter and more effective process, sugar of a certain grade of color by the Dutch standard contained a much greater degree of sweetness than that produced by the old methods. Cuban planters, therefore, were permitted to send sugar into this country at a duty which was really levied on grades much inferior, and so paid a less duty than other sugars. The products of one country were discriminated against in favor of another. The difficulty was settled by using the polariscope, which gave an absolute chemical test of the sweetness, irrespective of color.

One of the commonest cases of discriminating duties is that of a tax on the importation of a commodity capable of being produced at home, unaccompanied by an equivalent tax on the home production. A commodity is never permanently imported, unless it can be obtained from abroad at a smaller cost of labor and capital, on the whole, than is necessary for producing it. If, therefore, by a duty on the importation, it is rendered cheaper to produce the article than to import it, an extra quantity of labor and capital is expended, without any extra result. The labor is useless, and the capital is spent in paying people for laboriously doing nothing. All custom duties which operate as an encouragement to the home production of the taxed article are thus an eminently wasteful mode of raising a revenue.