We are, at present, living under a _régime_ of private property

and competition. But certainly the progress of the laborer is not

that which can excite enthusiastic hopes for the future, so long

as he remains a mere receiver of wages. The progress of industrial

improvements has resulted, says Mr. Cairnes, in “a temporary

improvement of the laborer’s condition, followed by an increase of

population and an enlarged demand for the cheapened commodity....

Laborers’ commodities, however, are for the most part commodities

of raw produce, or in which the raw material constitutes the chief

element of the value (clothing is, in truth, the only important

exception); and of all such commodities it is the well-known law

that an augmentation of quantity can only be obtained, other

things being the same, at an increasing proportional cost. Thus,

it has happened that the gain in productiveness obtained by

improved processes has, after a generation, to a great extent been

lost—lost, that is to say, for any benefit that can be derived

from it in favor of wages and profits.... The large addition to

the wealth of the country has gone neither to profits nor to

wages, nor yet to the public at large [as consumers], but to swell

a fund ever growing even while its proprietors sleep—the rent-roll

of the owners of the soil.... The aggregate return from the land

has immensely increased; but the cost of the costliest portion of

the produce, which is that which determines the price of the

whole, remains pretty nearly as it was. Profits, therefore, have

not risen at all, and the real remuneration of the laborer, taking

the whole field of labor, in but a slight degree—at all events in

a degree very far from commensurate with the general progress of

industry.”(306)

Under these conditions, it seems that the only hope of an

improvement for the laboring-classes lies in the limitation of

population—or at least in an increase of numbers less than the

increase of capital and improvements. It is possible, however,

that Mr. Cairnes, with many others, has failed to recognize the

full extent of the improvement which is taking place in the wages

of the laborer under the existing social order. Although we hear

much of the wrongs of the working-men—and they no doubt exist—yet

it is unquestionable that their condition has vastly improved

within the last fifty years; largely, in my opinion, because

improvements have outstripped population, and because wide areas

of fertile land in new and peaceful countries have drawn off the

surplus population in the older countries, and because the

available spots in the newer countries like the United States have

not yet been covered over with a population sufficiently dense to

keep real wages anything below a relatively high standard. The

facts to substantiate this opinion, so far as regards Great

Britain, are to be found in a recent investigation(307) by Mr.

Giffen, the statistician of the English Board of Trade. For a very

considerable reduction in hours of daily labor, the workman now

receives wages on an average about 70 per cent higher than fifty

years ago, as may be seen by the following table:

Occupation. Place. Wages Wages, Increase

fifty present or

years ago, time, per decrease,

per week. week. amount,

per cent.

Carpenters Manchester 24 0 34 0 10 0 (+)

42

Glasgow 14 0 26 0 12 0 (+)

85

Bricklayers Manchester(308) 24 0 36 0 12 0 (+)

50

Glasgow 15 0 27 0 12 0 (+)

80

Masons Manchester(309) 24 0 29 10 5 10 (+)

24

Glasgow 14 0 23 8 9 8 (+) 69

Miners Staffordshire 2 8(310) 4 0(311) 1 4 (+) 50

Pattern-weavers Huddersfield 16 0 25 0 9 0 (+) 55

Wool-scourers " 17 0 22 0 5 0 (+) 30

Mule-spinners " 25 6 30 0 4 6 (+) 20

Weavers " 12 0 26 0 14 0 (+)

115

Warpers and " 17 0 27 0 10 0 (+)

beamers 58

Winders and " 6 0 11 0 5 0 (+) 83

reelers

Weavers (men) Bradford 8 3 20 6 12 3 (+)

150

Reeling and " 7 9 15 6 7 9 (+)

warping 100

Spinning " 4 5 11 6 7 1 (+)

(children) 160

With increased wages, prices are not much higher than fifty years

ago. But the clearest evidence as to their bettered material

condition is to be found in the following table, which shows the

amount of food consumed per head by the total population of Great

Britain:

Articles. 1840. 1881.

Bacon and hams, 0.01 13.93

Pounds.

Butter, Pounds. 1.05 6.36

Cheese, Pounds. 0.92 5.77

Currants and 1.45 4.34

raisins, Pounds.

Eggs, No. 3.63 21.65

Potatoes, Pounds. 0.01 12.5

Rice, Pounds. 0.90 16.32

Cocoa, Pounds. 0.08 0.31

Coffee, Pounds. 1.08 0.89

Corn, wheat, and 42.47 216.92

wheat-flour, Pounds.

Raw sugar, Pounds. 15.20 58.92

Refined sugar, Nil. 8.44

Pounds.

Tea, Pounds. 1.22 4.58

Tobacco, Pounds. 0.86 1.41

Wine, Gallons. 0.25 0.45

Spirits, Gallons. 0.97 1.08

Malt, Bushels. 1.59 1.91(312)

The question then at once arises, whether capital has been shown

by the statistics to have gained accordingly, or whether there has

been a proportionally less increase than in wages. Says Mr.

Giffen: “If the return to capital had doubled, as the wages of the

working-classes appear to have doubled, the aggregate income of

the capitalist classes returned to the income-tax would now be

£800,000,000 instead of £400,000,000.... The capitalist, as such,

gets a low interest for his money, and the aggregate returns to

capital is not a third part of the aggregate income of the

country, which may be put at not less than £1,200,000,000.” It is

found, moreover—as a suggestion that property is more generally

diffused—that while there were 25,368 estates entered to probate

in 1838, of an average value of £2,160 each, there were 55,359

estates in 1882 of an average value of £2,500 each.

But yet the vast increase of wealth made possible by improvements

and the growth of capital would have bettered the condition of all

still more had population been somewhat more limited. As it is,

the material gain has been large in spite of an increase in the

population from 16,500,000 in 1831 to nearly 30,000,000 in 1881.

In other words, the landlords have been great gainers, while the

laborers have intercepted much more than Mr. Cairnes supposed.

There are at hand some very striking data relating to the United

States which point in the same direction as those of Mr. Giffen.

Charts No. XIX and XX show vividly how far the increased

productiveness of an industry, arising from greater skill and

greater efficiency of labor in the connection of improved

machinery, has enabled manufacturers to steadily lower the price

of their goods, and yet increase the wages paid to their

operatives. What was true of these two cotton-mills was true of

others within New England; for the rate of wages paid by these

mills was the rate current in the country in 1830 and in 1884.

While each spindle and loom has become vastly more effective, we

see by Chart No. XIX that the average production of each operative

constantly increased from 4,321 yards per year in 1830, to 28,032

yards in 1884; and this it was which made possible the

corresponding increase in the rate of wages from $164 in 1830, to

$290 in 1884. The sum of $290 a year as an average for each

operative, is a stipend too small to cause any general

satisfaction; but he must be gloomy indeed who does not see that

$290 is a cheerful possession as compared with $164. There is,

then, abundant ground for believing that in the past fifty years

the condition of the working-classes in the United States has been

materially improved. The diminishing proportion of the price which

goes to the capital is a significant fact, and illustrates the

tendency of profits to fall with the increase of capital.(313) The

same truth seems to be seen in the table given in a previous

chapter,(314) where the wages have been increased, but the hours

have fallen per day from thirteen to eleven since 1840.

§ 2.—through small holdings, by which the landlord’s gain is shared.

So far we have considered the chances for improvement in an

industrial order in which the present separation of capitalists

from laborers is maintained. But this does not take into account

that future time when cultivation in the United States shall be

forced down upon inferior land, and no more remains to be

occupied, and when capital may no longer increase as fast as

population. What must be the ultimate outlook for wages-receivers?

Or, more practically, what is the outlook now for those who are

wages-receivers, and for whom a more equitable distribution of the

product seems desirable? How can they escape the thralldom of

dependence on the accumulations of others?

In this connection, and of primary importance, is the avenue

opened to all holders of small properties to share in the increase

which goes to owners of land. It has been seen that owners of the

soil constantly gain from the inevitable tendencies of industrial

progress. If one large owner gains, why should not the increment

be the same if ten owners held the property instead of one? The

more the land is subdivided, the more the vast increase arising

from rent will be shared by a larger number. This, in my opinion,

is the strongest reason for the encouragement of small holdings in

every country. The greater the extension of small properties among

the working-class, the more will they gain a share of that part of

the product which goes to the owner of land by the persistent

increase of population. If, then, the gain arising from

improvements is largely passed to the credit of land-owners, as

Mr. Cairnes believes, it should be absolutely necessary to spread

among the working-classes the doctrine that if they own their own

homes, and buy the land they live on, to that extent will they

“grow rich while they sleep,” independently of their other

exertions. Land worth $500 to-day when bought by the savings of a

laborer, besides the self-respect(315) it gives him, will increase

in value with the density of population, and become worth $600 or

more without other sacrifice of his.

§ 3. —through co-operation, by which the manager’s wages are shared.

It will be found, however, that, of the various industrial

rewards, profits tend to diminish, meaning by “profits” only the

interest and insurance given for abstinence and risk in the use of

capital; but that the manager’s wages (wages of superintendence)

are larger than is commonly supposed in relation to other

industrial rewards, owing to the position of monopoly practically

held by such executive ability as is competent to successfully

manage large business interests. To the laborer this large payment

to the manager seems to be paid for the possession of capital.

This we now know to be wrong. The manager’s wages are payments of

exactly the same nature as any laborer’s wages. It makes no

difference whether wages are paid for manual or mental labor. The

payment to capital, purely as such, known as interest (with

insurance for risk), is unmistakably decreasing, even in the

United States. And yet we see men gain by industrial operations

enormous rewards; but these returns are in their essence solely

manager’s wages. For in many instances, as hitherto discussed, we

have seen that the manager is not the owner of the capital he

employs. To what does this lead us? Inevitably to the conclusion

that the laborer, if he would become something more than a

receiver of wages, in the ordinary sense, must himself move up in

the scale of laborers until he reaches the skill and power also to

command manager’s wages. The importance of this principle to the

working-man can not be exaggerated, and there flows from it

important consequences to the whole social condition of the lower

classes. It leads us directly to the means by which the lower

classes may raise themselves to a higher position—the actual

details of which, of course, are difficult, but, as they are not

included in political economy, they must be left to sociology—and

forms the essential basis of hope for any proper extension of

productive co-operation. In short, co-operation owes its existence

to the possibility of dividing the manager’s wages, to a greater

or less degree, among the so-called wages-receivers, or the

“laboring-class.” And it is from this point of view that

co-operation is seen more truly and fitly than in any other way.

For it is to be said that in some of its forms co-operation gives

the most promising economic results as regards the condition of

the laborer which have yet been reached in the long discussion

upon the relations of labor and capital.

§ 4. Distributive Co-operation.

It will be my object, then, to describe the chief forms in which

the co-operative principle has manifested itself. These may be

said, in general, to be four: (1) distributive co-operation, by

which goods already produced are bought and sold to members

without the aid of retail dealers; (2) productive co-operation, by

which associations are formed for producing and manufacturing

goods for the market; (3) partial productive co-operation in the

form of industrial partnerships between laborers and employers,

without dispensing with the latter; and (4) co-operative, or

People’s, banks. There are, of course, many other forms in which

the principle of co-operation has been applied; but these four are

probably the most characteristic.

Distributive co-operation is at once the simplest and the most

successful form, not merely because it requires less for capital

than any other for its inception, but also because it calls for

less business and executive capacity. The number of persons

capable of managing a small retail store is vastly greater than

the class fit to assume control of the very complex duties

involved in the care of wholesale houses—or, at all events, of

mills and factories. Distributive co-operation has its origin in

the fact that the expenses of a middle-man between the producer

and consumer may be entirely dispensed with, and in the fact that

more capital had collected in the business of distribution than

could economically be so employed. Its educating power on the men

concerned in teaching them to save, in showing the need of

business methods, and in instilling the elements of industrial

management, is of no little importance. It is, therefore, the best

gateway to any further or more difficult co-operative

experiments—such experiments as can be attempted only after the

proper capital is saved, and the necessary executive capacity is

discovered, or developed by training. In England co-operation

began its history in distributive stores, and has finally led to

such a stimulus of self-help in the laborer, that now co-operative

gymnasiums, libraries, gardens, and other results have proved the

wisdom of calling upon the laborers for their own exertions. Under

the system which separates employers and the employed, high wages

are not found to be the only boon which the receivers could wish;

for it is sometimes found that the best-paid workmen are the most

unwise and intemperate.(316) For the most ignorant and unskilled

of the workmen in the lowest strata the object would seem to be to

give not merely more wages, but give more in such a way as might

excite new and better motives, a desire as well as a possibility

of improvement. Self-help must be stimulated, not deadened by

stifling dependence on a class of superiors, or on the state. The

extraordinary growth of co-operation is one of the most cheering

signs of modern times. Distributive co-operation originated in

Rochdale, in England, about 1844, with a few laborers desirous of

saving themselves from the high prices paid for poor provisions.

By uniting, they purchased tea by the chest, sugar by the

hogshead, which they sold to each member at market prices. They

were surprised to find a large profit by the operation, which they

divided proportionally to the capital subscribed. Others soon

joined them; they took a store-room, and in 1882 there were 10,894

members, with a share capital of $1,576,215, and with realized

profits in that year of $162,885. They have erected expensive

steam flour-mills, and the society occupies eighteen branch

establishments in Rochdale. Libraries containing more than 15,000

volumes, and classes in science, language, and the technical arts,

attended by 500 students, have been maintained. The extension of

the Rochdale store led to the necessity of a wholesale

establishment of their own. It is now a large institution with

branches in London and Newcastle. “It owns manufactories in

London, Manchester, Newcastle, Leicester, Durham, and Crumpsall;

and it has depots in Cork, Limerick, Kilmallock, Waterford,

Tipperary, Tralee, and Armagh, for the purchase of butter,

potatoes, and eggs. It has buyers in New York and Copenhagen, and

it owns two steamships. It has a banking department with a

turn-over of more than £12,000,000 annually.”(317)

The following figures for England and Wales tell their own story

as to the progress of co-operation:(318)

1862. 1881.

Number of members 90,000 525,000

Capital: Share 428,000 5,881,000

Capital: Loan 55,000 1,267,000

Sales 2,333,000 20,901,000

Net profit 165,000 1,617,000

Several persons each subscribe a sum to make up the share capital

of a store, and a person is selected to take charge of the

purchase and care of the goods. The advantages of the plan are:

(1) A division among the co-operators of all the net profits of

the retail trade; (2) a saving in advertisements, since members

are always purchasers without solicitation; (3) no loss by bad

debts, since only cash sales are permitted; and (4) security

against fraud as to the character of the goods, because there is

no inducement to make gains by adulterations. It is often found

that the capital is turned over ten times in the course of a year;

while the cost of management in the wholesale Rochdale stores does

not amount to one per cent on the returns.

The arrangement of obligations in due order of their priority,

which has been recommended by Mr. Holyoake,(319) is as follows: of

funds in the store, payment should be made, (1) of the expenses of

management; (2) of interest due on all loans; (3) of an amount

equivalent to ten per cent of the value of the fixed stock to

cover the annual depreciation from wear and tear; (4) of dividends

on the subscribed capital of the members;(320) (5) of such a sum

as may be necessary for an extension of the business; (6) of two

and a half per cent of the remaining profit, after all the above

items are provided for, for educational purposes; (7) of the

residue, and that only, among all the persons employed, and

members of the store, in proportion to the amount of their wages,

or of their respective purchases during the quarter.(321) The

payment of dividends to customers on their purchases seems now to

be considered an essential element of success.

§ 5. Productive Co-Operation.

Productive co-operation presents many serious difficulties, the

chief of which is the need of managing ability. Some one in the

association must know the wholesale markets well, the expectation

of crops connected with his materials used, the proper time to

buy; he must know the processes of the special production

thoroughly, the best machinery, the best adaptation of labor to

the given end; he must know the whims of purchasers, and be ready

to change his products accordingly—in short, a man eminently

fitted for success in his own factory is essential to the

profitable management of one belonging to a body of co-operators.

It has been already seen how large a variation in profit is due to

manager’s wages; and it is very often only his skill, prudence,

and experience that make the difference between a failure and a

success in business. Unless co-operators are willing to pay as

large a sum for the services of a good manager as he could get in

his own establishment, they can not secure the talent which will

make their venture succeed.(322)

In France the national workshops of Louis Blanc, established in

1848, were a failure. Nowhere has it been more clearly seen that

state help has been disastrous than in France, where the

Constituent Assembly voted 3,000,000 francs for co-operative

experiments, all of which failed. Curiously enough, distributive

co-operation has not succeeded in France, because, owing to a

wide-spread dislike of the wages system, workmen will try nothing

less than productive schemes. And their success in this has been

no greater than might be expected, when inexperience is put to a

task beyond its powers.(323)

In Great Britain and the United States there have been some

successful experiments in production; and Mr. Holyoake(324) holds

that, although workmen certainly do begrudge the manager’s salary,

productive associations are possible when managed by a board of

elected directors. He urges, moreover, that, as in distributive

co-operation, if profits are shared with customers, there will be

insured both popularity and continuity of custom without the cost

of advertising, and such expenses as those of travelers and

commissions. The plan of actual operations upon which successes

have been reached in England seems to be briefly this: (1) To save

capital, chiefly through co-operative associations; (2) to

purchase or lease premises; (3) to engage managers, accountants,

and officers at the ordinary salaries which such men can command

in the market according to their ability; (4) to borrow capital on

the credit of the association; (5) to pay upon capital subscribed

by members the same rate of interest as that upon borrowed

capital; (6) to regard as profit only that which remains after

making payment for rent, materials, wages, all business outlays,

and interest on capital; and (7) to divide the profits according

to the salaries of all officers, wages of workmen, and purchases

of customers. Those mills and factories which have sprung out of

the extension of distributive associations, as at Rochdale, seem,

and naturally so, to have been most successful. They have

gradually trained themselves somewhat for the work, and their

customers were beforehand secured. That is, where the difficulties

of the manager’s function have been lessened, they have a better

chance of success. And yet it must be said that productive

associations will gain largely from the efficiency of the labor

when working for its own interest; and this is an important

consideration to be urged in favor of such associations.

The Sun Mill,(325) at Oldham, England, was established for

spinning cotton in 1861 by the exertions of some co-operative

bodies. Beginning with a share capital of $250,000, and a loan

capital of a like amount, it set 80,000 spindles in operation. In

1874 they had a share capital of $375,000 (all subscribed except

$1,000), and an equal amount of loan capital, while the whole

plant was estimated as worth $615,000. Two and a half per cent per

annum has been set apart for the depreciation in the value of the

mill, and seven and a half per cent for the machinery; so that in

the first ten years a total sum of $160,000 was set aside for

depreciation of the property. The profits have varied from two to

forty per cent; and, while only five per cent interest was paid on

the loan capital, large dividends were made on the share capital.

During the last few years the Sun Mill has on an average realized

a profit of 12-½ per cent, although it is known that the cotton

trade has suffered during this time from a serious depression.

Many experiments, however, have proved failures; and sometimes,

when they are successful (as in the case of the Hatters’

Association in Newark, New Jersey(326)), the workmen have no

desire to share their benefits with others, and practically form a

corporation by themselves. The mere fact that they do sometimes

succeed is an important thing. Then, too, they have an opportunity

of securing by salaries that executive ability in the community

which exists separate from the possession of capital. And in these

days, in large corporations, the manager is not necessarily

(although he often is) a large owner of capital. The last annual

report of the Co-operative Congress (1882) shows the existence in

England and Scotland of productive associations for the

manufacture of cloth, flannel, fustian, hosiery, quilts, worsted,

nails, watches, linen, and silk, as well as those for engineering,

printing, and quarrying; and these were but a few of them.(327)

In the United States there have been some successes as well as

failures. In January, 1872, a number of machinists and other

working-men organized in the town of Beaver Falls, Pennsylvania, a

Co-operative Foundry Association for the manufacture of stoves,

hollow-ware, and fine castings. On a small capital of only $4,000

they have steadily prospered, paid the market rate of wages, and

also paid annual dividends, over and above all expenses and

interest on the plant, of from twelve to fifteen per cent. In 1867

thirty workmen started a co-operative foundry in Somerset,

Massachusetts, with a capital of about $14,000. In the years

1874-1875 the company spent $5,400 for new flasks and patterns,

and yet showed a net gain of $11,914. In 1876 it had a capital of

$30,000, and a surplus fund of $28,924.(328)

§ 6. Industrial Partnership.

The difficulties of productive co-operation arising from the need

of skilled management, together with the existing unsatisfactory

relation between employers and laborers when wholly separate from

each other, have led to a most promising plan of industrial

partnership by which the manager retains the control of the

business operations, but shares his profits with the workmen. The

gain through increased efficiency, greater economy, and superior

workmanship, recoups the manager for the voluntary subtraction

from his share, and yet the laborers receive an additional share;

but more than this, it educates the laborer in industrial methods,

discloses the difficulties of management, and stimulates him to

saving habits and greater regularity of work. This system is

particularly adapted to reaching those laborers who would not

themselves rise to the demands of productive co-operation.

The principle was tried on one of the Belgian railways.

“Ninety-five kilogrammes of coke were consumed for every league of

distance run, but this was known to be more than necessary; but

how to remedy the evil was the problem. A bonus of 3-½_d._ on

every hectolitre of coke saved on this average of ninety-five to

the league was offered to the men concerned, and this trifling

bonus worked the miracle. The work was done equally well, or

better, with forty-eight kilogrammes of coke instead of

ninety-five; just one half, or nearly, saved by careful work, at

an expense of probably less than one tenth of the saving.”(329)

The experiment which has attracted most attention in the past has

been that of the Messrs. Briggs, at their collieries in Yorkshire,

England.(330) The relations between the owners and the laborers

were as bad as they could well be. “All coal-masters is devils,

and Briggs is the prince of devils,” ran the talk of the miners,

when they did not choose to send letters threatening to shoot the

owners. In 1865 Messrs. Briggs tried the plan of an industrial

partnership with their men, purely from business considerations.

Seventy per cent of the cost of raising coal consisted of wages,

and fully fifteen per cent of materials which were habitually

wasted. The whole property was valued, and divided into shares of

$50 each, of which the owners retained two thirds, together with

the control of the business. The remaining one third of the shares

was offered to the employés. If any subscriber was too poor to pay

$50 for a share, the subsequent dividends and payments were to be

applied to purchasing the share. After reserving a fair allowance

for expenses, like the redemption of capital, whenever the

remaining profits exceeded ten per cent on the capital, that

excess was to be divided into two equal parts, one of which was to

be distributed among all persons employed by the company in

proportion to their wages, and the other was to be retained by the

capital. In previous years but once had they made ten per cent

profit on their capital, and twice only five per cent. In the

first year after the new system came into operation, the total

profits were fourteen per cent, and the four per cent of excess

was divided, two to the laborers’ bonus, and two to the capital,

so that capital received twelve per cent. In the second year the

profits were sixteen per cent, in the third year seventeen per

cent; the first year the work-people received in addition to their

wages $9,000, in the second $13,500, in the third $15,750. The

moral effect was striking. Work was done regularly, forbearance

was exercised, habits improved, and the faces of the men were set

toward improvement in life. The scheme worked successfully for

years, but was finally ended by the pressure of the outside

trades-unions, who compelled the workmen to give up the

arrangement.

A similar experiment was tried by the Messrs. Brewster,

carriage-manufacturers, of New York. They offered to their workmen

ten per cent of their profits, before any allowance was made for

interest on the capital invested, or before any payment was made

for the services of the firm as managers. In one year as much as

$11,000 was divided among the laborers. Again, as in the case of

the Briggs colliery, the experiment was brought to an end by an

unreasoning submission to the pressure of outside workmen during a

strike.(331)

But, all in all, industrial partnership(332) offers a great field

for that kind of improvement which is worth more than a mere

increase of wages, and seems to make it possible to reach the

heavy weight of sluggishness among the lower and more hopeless

strata of society. And it is possible that it will stir in them

the powers which may afterward find employment in the harder

problems of productive co-operation.(333)

§ 7. People’s Banks.

In Germany the struggle between the two theories—self-help and

state-help—was fought out by Schultze-Delitsch—that is, Schultze

of Delitsch, a town in Saxony—and Lasalle, and the victory given

to the former. Schultze-Delitsch, as a consequence, was successful

in directing the co-operative principle in Germany to giving

workmen credit in purchasing tools, etc., when he had no security

but his character. This form of co-operation works to give the

energetic and industrious workmen a lever by which, through the

possession of credit, they can raise themselves to the position of

small capitalists, and thus widen the field of possible

improvement. While the former schemes of co-operation described

above have given the wages-receivers a share of the unearned

increment from land, and tend to give them a share of the

manager’s wages, the plan of Schultze was to assist them to gain a

share in the advantages belonging to the possession of capital.

The capital was to be accumulated by their own exertions, and, in

his scheme depended on the principle of self-help. The following

is the plan of banks adopted:

“Every member is obliged to make a certain weekly payment into the

common stock. As soon as it reaches a certain sum he is allowed to

raise a loan exceeding his share in the inverse ratio of the

amount of his deposit. For instance, after he has deposited one

dollar, he is allowed to borrow five or six; but, if he had

deposited twenty dollars, he is allowed only to borrow thirty. The

security he is compelled to offer is his own and that of two other

members of the association, who become jointly and severally

liable. He may have no assets whatever beyond the amount of his

deposits, nor may his guarantors; the bank relies simply on the

character of the three, and the two securities rely on the

character of their principal; and the remarkable fact is, that the

security has been found sufficient, that the interest of the men

in the institutions and the fear of the opinion of their fellows

has produced a display of honesty and punctuality such as perhaps

is not to be found in the history of any other banking

institutions. Such is the confidence inspired by these

institutions that they hold on deposit, or as loans from third

parties, an amount exceeding by more than three fourths the total

amount of their own capital. The monthly contributions of the

members may be as low as ten cents, but the amount which each

member is allowed to have in some banks is not more than seven or

eight dollars, in none more than three hundred dollars. He has a

right to borrow to the full amount of his deposit without giving

security; if he desires to borrow a larger sum, he must furnish

security in the manner we have described. The liability of the

members is unlimited. The plan of limiting the liability to the

amount of the capital deposited was tried at first, but it

inspired no confidence, and the enterprise did not succeed till

every member was made generally liable. Each member, on entering,

is obliged to pay a small fee, which goes toward forming or

maintaining a reserve fund, apart from the active capital. The

profits are derived from the interest paid by borrowers, which

amounts to from eight to ten per cent, which may not sound very

large in our ears, but in Germany is very high. Not over five per

cent is paid on capital borrowed from outsiders. All profits are

distributed in dividends among the members of the association, in

the proportion of the amount of their deposits—after the payment

of the expenses of management, of course—and the apportionment of

a certain percentage to the reserve-fund. Every member, as we have

said, has a right to borrow to the extent of his deposit without

security; but then, if he seeks to borrow more, whether he shall

obtain any loan, and, if so, how large a one, is decided by the

board of management, who are guided in making their decision just

as all bank officers are—by a consideration of the circumstances

of the bank as well as those of the borrower. All the affairs of

the association are discussed and decided in the last resort by a

general assembly composed of all the members.”(334) The main part

of the capital loaned by the banks is obtained from outside

sources on the credit of the associations. In 1865 there were 961

of these institutions in Germany; in 1877 there were 1,827, with

over 1,000,000 members, owning $40,000,000 of capital, with

$100,000,000 more on loan, and doing a business of

$550,000,000.(335)

BOOK V. ON THE INFLUENCE OF GOVERNMENT.

Chapter I. On The General Principles Of Taxation.

§ 1. Four fundamental rules of Taxation.

One of the most disputed questions, both in political science and in

practical statesmanship at this particular period, relates to the proper

limits of the functions and agency of governments.

We shall first consider the economical effects arising from the manner in

which governments perform their necessary and acknowledged functions.

We shall then pass to certain governmental interferences of what I have

termed the optional kind (i.e., overstepping the boundaries of the

universally acknowledged functions) which have heretofore taken place, and

in some cases still take place, under the influence of false general

theories.

The first of these divisions is of an extremely miscellaneous character:

since the necessary functions of government, and those which are so

manifestly expedient that they have never or very rarely been objected to,

are too various to be brought under any very simple classification. We

commence, [under] the first head, with the theory of Taxation.

The qualities desirable, economically speaking, in a system of taxation,

have been embodied by Adam Smith in four maxims or principles, which,

having been generally concurred in by subsequent writers, may be said to

have become classical, and this chapter can not be better commenced than

by quoting them:(336)

“1. The subjects of every state ought to contribute to the support of the

government, as nearly as possible in proportion to their respective

abilities: that is, in proportion to the revenue which they respectively

enjoy under the protection of the state. In the observation or neglect of

this maxim consists what is called the equality or inequality of taxation.

“2. The tax which each individual is bound to pay ought to be certain, and

not arbitrary. The time of payment, the manner of payment, the quantity to

be paid, ought all to be clear and plain to the contributor, and to every

other person. The certainty of what each individual ought to pay is, in

taxation, a matter of so great importance, that a very considerable degree

of inequality, it appears, I believe, from the experience of all nations,

is not near so great an evil as a very small degree of uncertainty.

“3. Every tax ought to be levied at the time, or in the manner, in which

it is most likely to be convenient for the contributor to pay it. Taxes

upon such consumable goods as are articles of luxury are all finally paid

by the consumer, and generally in a manner that is very convenient to him.

He pays them little by little, as he has occasion to buy the goods. As he

is at liberty, too, either to buy or not to buy, as he pleases, it must be

his own fault if he ever suffers any considerable inconvenience from such

taxes.

“4. Every tax ought to be so contrived as both to take out and to keep out

of the pockets of the people as little as possible over and above what it

brings into the public treasury of the state. A tax may either take out or

keep out of the pockets of the people a great deal more than it brings

into the public treasury in the four following ways: First, the levying of

it may require a great number of officers, whose salaries may eat up the

greater part of the produce of the tax, and whose perquisites may impose

another additional tax upon the people.” Secondly, it may divert a portion

of the labor and capital of the community from a more to a less productive

employment. “Thirdly, by the forfeitures and other penalties which those

unfortunate individuals incur who attempt unsuccessfully to evade the tax

it may frequently ruin them, and thereby put an end to the benefit which

the community might have derived from the employment of their capitals. An

injudicious tax offers a great temptation to smuggling. Fourthly, by

subjecting the people to the frequent visits and the odious examination of

the tax-gatherers it may expose them to much unnecessary trouble,

vexation, and oppression”: to which may be added that the restrictive

regulations to which trades and manufactures are often subjected, to

prevent evasion of a tax, are not only in themselves troublesome and

expensive, but often oppose insuperable obstacles to making improvements

in the processes.

§ 2. Grounds of the principle of Equality of Taxation.

The first of the four points, equality of taxation, requires to be more

fully examined, being a thing often imperfectly understood, and on which

many false notions have become to a certain degree accredited, through the

absence of any definite principles of judgment in the popular mind.

For what reason ought equality to be the rule in matters of taxation? For

the reason that it ought to be so in all affairs of government. A

government ought to make no distinction of persons or classes in the

strength of their claims on it. If any one bears less than his fair share

of the burden, some other person must suffer more than his share. Equality

of taxation, therefore, as a maxim of politics, means equality of

sacrifice. It means apportioning the contribution of each person toward

the expenses of government, so that he shall feel neither more nor less

inconvenience from his share of the payment than every other person

experiences from his. There are persons, however, who regard the taxes

paid by each member of the community as an equivalent for value received,

in the shape of service to himself; and they prefer to rest the justice of

making each contribute in proportion to his means upon the ground that he

who has twice as much property to be protected receives, on an accurate

calculation, twice as much protection, and ought, on the principles of

bargain and sale, to pay twice as much for it. Since, however, the

assumption that government exists solely for the protection of property is

not one to be deliberately adhered to, some consistent adherents of the

_quid pro quo_ principle go on to observe that protection being required

for persons as well as property, and everybody’s person receiving the same

amount of protection, a poll-tax of a fixed sum per head is a proper

equivalent for this part of the benefits of government, while the

remaining part, protection to property, should be paid for in proportion

to property. But, in the first place, it is not admissible that the

protection of persons and that of property are the sole purposes of

government. In the second place, the practice of setting definite values

on things essentially indefinite, and making them a ground of practical

conclusions, is peculiarly fertile in the false views of social questions.

It can not be admitted that to be protected in the ownership of ten times

as much property is to be ten times as much protected. If we wanted to

estimate the degrees of benefit which different persons derive from the

protection of government, we should have to consider who would suffer most

if that protection were withdrawn: to which question, if any answer could

be made, it must be, that those would suffer most who were weakest in mind

or body, either by nature or by position.

§ 3. Should the same percentage be levied on all amounts of Income?

Setting out, then, from the maxim that equal sacrifices ought to be

demanded from all, we have next to inquire whether this is in fact done,

by making each contribute the same percentage on his pecuniary means. Many

persons maintain the negative, saying that a tenth part taken from a small

income is a heavier burden than the same fraction deducted from one much

larger; and on this is grounded the very popular scheme of what is called

a graduated property-tax, viz., an income-tax in which the percentage

rises with the amount of the income.

On the best consideration I am able to give to this question, it appears

to me that the portion of truth which the doctrine contains arises

principally from the difference between a tax which can be saved from

luxuries and one which trenches, in ever so small a degree, upon the

necessaries of life. To take a thousand a year from the possessor of ten

thousand would not deprive him of anything really conducive either to the

support or to the comfort of existence; and, if such _would_ be the effect

of taking five pounds from one whose income is fifty, the sacrifice

required from the last is not only greater than, but entirely

incommensurable with, that imposed upon the first. The mode of adjusting

these inequalities of pressure which seems to be the most equitable is

that recommended by Bentham, of leaving a certain minimum of income,

sufficient to provide the necessaries of life, untaxed. Suppose [$250] a

year to be sufficient to provide the number of persons ordinarily

supported from a single income with the requisites of life and health, and

with protection against habitual bodily suffering, but not with any

indulgence. This then should be made the minimum, and incomes exceeding it

should pay taxes not upon their whole amount, but upon the surplus. If the

tax be ten per cent, an income of [$300] should be considered as a net

income of [$50], and charged with [$5] a year, while an income of [$5,000]

should be charged as one of [$4,750]. An income not exceeding [$250]

should not be taxed at all, either directly or by taxes on necessaries;

for, as by supposition this is the smallest income which labor ought to be

able to command, the government ought not to be a party to making it

smaller.

Both in England and on the Continent a graduated property-tax (_l’impôt

progressif_) has been advocated, on the avowed ground that the state

should use the instrument of taxation as a means of mitigating the

inequalities of wealth. I am as desirous as any one that means should be

taken to diminish those inequalities, but not so as to relieve the

prodigal at the expense of the prudent. To tax the larger incomes at a

higher percentage than the smaller is to lay a tax on industry and

economy; to impose a penalty on people for having worked harder and saved

more than their neighbors. It is not the fortunes which are earned, but

those which are unearned, that it is for the public good to place under

limitation. With respect to the large fortunes acquired by gift or

inheritance, the power of bequeathing is one of those privileges of

property which are fit subjects for regulation on grounds of general

expediency; and I have already suggested,(337) as the most eligible mode

of restraining the accumulation of large fortunes in the hands of those

who have not earned them by exertion, a limitation of the amount which any

one person should be permitted to acquire by gift, bequest, or

inheritance. I conceive that inheritances and legacies, exceeding a

certain amount, are highly proper subjects for taxation; and that the

revenue from them should be as great as it can be made without giving rise

to evasions, by donation _inter vivos_ or concealment of property, such as

it would be impossible adequately to check. The principle of graduation

(as it is called), that is, of levying a larger percentage on a larger

sum, though its application to general taxation would be in my opinion

objectionable, seems to me both just and expedient as applied to legacy

and inheritance duties.

The objection to a graduated property-tax applies in an aggravated degree

to the proposition of an exclusive tax on what is called “realized

property,” that is, property not forming a part of any capital engaged in

business, or rather in business under the superintendence of the owner; as

land, the public funds, money lent on mortgage, and shares in stock

companies. Except the proposal of applying a sponge to the national debt,

no such palpable violation of common honesty has found sufficient support

in this country, during the present generation, to be regarded as within

the domain of discussion. It has not the palliation of a graduated

property-tax, that of laying the burden on those best able to bear it; for

“realized property” includes the far larger portion of the provision made

for those who are unable to work, and consists, in great part, of

extremely small fractions. I can hardly conceive a more shameless

pretension than that the major part of the property of the country, that

of merchants, manufacturers, farmers, and shopkeepers, should be exempted

from its share of taxation; that these classes should only begin to pay

their proportion after retiring from business, and if they never retire

should be excused from it altogether. But even this does not give an

adequate idea of the injustice of the proposition. The burden thus

exclusively thrown on the owners of the smaller portion of the wealth of

the community would not even be a burden on that _class_ of persons in

perpetual succession, but would fall exclusively on those who happened to

compose it when the tax was laid on. As land and those particular

securities would thenceforth yield a smaller net income, relatively to the

general interest of capital and to the profits of trade, the balance would

rectify itself by a permanent depreciation of those kinds of property.

Future buyers would acquire land and securities at a reduction of price,

equivalent to the peculiar tax, which tax they would, therefore, escape

from paying; while the original possessors would remain burdened with it

even after parting with the property, since they would have sold their

land or securities at a loss of value equivalent to the fee-simple of the

tax. Its imposition would thus be tantamount to the confiscation for

public uses of a percentage of their property equal to the percentage laid

on their income by the tax.

The above proposition has been extended, by those in the United

States who appeal to class prejudice, to a proposal to tax the

incomes of those who hold government bonds. It so happened that,

for example, the six dollars income on a one-hundred-dollar bond

of the United States was not, in the war period, deemed a

sufficient equivalent for the risk of loaning one hundred dollars

to the state; and Congress, therefore, agreed to relieve them of

taxation. It is the same thing to a lender if he receive six per

cent directly from the Government, or if he receive seven per

cent, and is obliged to pay back one per cent to the treasury in

the form of taxation; but to the Government it is another thing,

because if it sell a taxed bond at seven per cent interest, it

does not receive back the whole of the one per cent tax, but the

one per cent tax less the expense of levying it. In other words

the Government, in the latter case, pays six per cent interest

plus the cost of levying the tax; and consequently borrowed more

cheaply in the form of an untaxed bond, as was the hope when the

provision was made. If, then, a tax were now to be put upon the

bonds, it would fall exclusively on the present holders of them;

for, since it diminishes the net income from the bond, it lowers

the selling price of the bond itself, as before explained.(338)

§ 4. Should the same percentage be levied on Perpetual and on Terminable

Incomes?

Whether the profits of trade may not rightfully be taxed at a lower rate

than incomes derived from interest or rent is part of the more

comprehensive question whether life-incomes should be subjected to the

same rate of taxation as perpetual incomes; whether salaries, for example,

or annuities, or the gains of professions, should pay the same percentage

as the income from inheritable property.

The existing tax [in England] treats all kinds of incomes exactly

alike,(339) taking its [fivepence] in the pound as well from the person

whose income dies with him as from the landholder, stockholder, or

mortgagee, who can transmit his fortune undiminished to his descendants.

This is a visible injustice; yet it does not arithmetically violate the

rule that taxation ought to be in proportion to means. When it is said

that a temporary income ought to be taxed less than a permanent one, the

reply is irresistible that it is taxed less: for the income which lasts

only ten years pays the tax only ten years, while that which lasts forever

pays forever. The claim in favor of terminable incomes does not rest on

grounds of arithmetic, but of human wants and feelings. It is not because

the temporary annuitant has smaller means, but because he has greater

necessities, that he ought to be assessed at a lower rate.

In spite of the nominal equality of income, A, an annuitant of £1,000 a

year, can not so well afford to pay £100 out of it as B, who derives the

same annual sum from heritable property; A having usually a demand on his

income which B has not, namely, to provide by saving for children or

others; to which, in the case of salaries or professional gains, must

generally be added a provision for his own later years; while B may expend

his whole income without injury to his old age, and still have it all to

bestow on others after his death. If A, in order to meet these exigencies,

must lay by £300 of his income, to take £100 from him as income-tax is to

take £100 from £700, since it must be retrenched from that part only of

his means which he can afford to spend on his own consumption. Were he to

throw it ratably on what he spends and on what he saves, abating £70 from

his consumption and £30 from his annual saving, then indeed his immediate

sacrifice would be proportionally the same as B’s; but then his children

or his old age would be worse provided for in consequence of the tax. The

capital sum which would be accumulated for them would be one tenth less,

and on the reduced income afforded by this reduced capital they would be a

second time charged with income-tax; while B’s heirs would only be charged

once.

The principle, therefore, of equality of taxation, interpreted in its only

just sense, equality of sacrifice, requires that a person who has no means

of providing for old age, or for those in whom he is interested, except by

saving from income, should have the tax remitted on all that part of his

income which is really and _bona fide_ applied to that purpose.

If, indeed, reliance could be placed on the conscience of the

contributors, or sufficient security taken for the correctness of their

statements by collateral precautions, the proper mode of assessing an

income-tax would be to tax only the part of income devoted to expenditure,

exempting that which is saved. For when saved and invested (and all

savings, speaking generally, are invested) it thenceforth pays income-tax

on the interest or profit which it brings, notwithstanding that it has

already been taxed on the principal. Unless, therefore, savings are

exempted from income-tax, the contributors are twice taxed on what they

save, and only once on what they spend. To tax the sum invested, and

afterward tax also the proceeds of the investment, is to tax the same

portion of the contributor’s means twice over.

No income-tax is really just from which savings are not exempted; and no

income-tax ought to be voted without that provision, if the form of the

returns and the nature of the evidence required could be so arranged as to

prevent the exemption from being taken fraudulent advantage of, by saving

with one hand and getting into debt with the other, or by spending in the

following year what had been passed tax-free as saving in the year

preceding. But, if no plan can be devised for the exemption of actual

savings, sufficiently free from liability to fraud, it is necessary, as

the next thing in point of justice, to take into account, in assessing the

tax, what the different classes of contributors _ought_ to save. In fixing

the proportion between the two rates, there must inevitably be something

arbitrary; perhaps a deduction of one fourth in favor of life-incomes

would be as little objectionable as any which could be made.

Of the net profits of persons in business, a part, as before observed, may

be considered as interest on capital, and of a perpetual character, and

the remaining part as remuneration for the skill and labor of

superintendence. The surplus beyond interest depends on the life of the

individual, and even on his continuance in business, and is entitled to

the full amount of exemption allowed to terminable incomes.

§ 5. The increase of the rent of land from natural causes a fit subject of

peculiar Taxation.

Suppose that there is a kind of income which constantly tends to increase,

without any exertion or sacrifice on the part of the owners: those owners

constituting a class in the community, whom the natural course of things

progressively enriches, consistently with complete passiveness on their

own part. In such a case it would be no violation of the principles on

which private property is grounded, if the state should appropriate this

increase of wealth, or part of it, as it arises. This would not properly

be taking anything from anybody; it would merely be applying an accession

of wealth, created by circumstances, to the benefit of society, instead of

allowing it to become an unearned appendage to the riches of a particular

class.

Now, this is actually the case with rent. The ordinary progress of a

society which increases in wealth is at all times tending to augment the

incomes of landlords; to give them both a greater amount and a greater

proportion of the wealth of the community, independently of any trouble or

outlay incurred by themselves. They grow richer, as it were, in their

sleep, without working, risking, or economizing. What claim have they, on

the general principle of social justice, to this accession of riches? In

what would they have been wronged if society had, from the beginning,

reserved the right of taxing the spontaneous increase of rent, to the

highest amount required by financial exigencies? The only admissible mode

of proceeding would be by a general measure. The first step should be a

valuation of all the land in the country. The present value of all land

should be exempt from the tax; but after an interval had elapsed, during

which society had increased in population and capital, a rough estimate

might be made of the spontaneous increase which had accrued to rent since

the valuation was made. Of this the average price of produce would be some

criterion: if that had risen, it would be certain that rent had increased,

and (as already shown) even in a greater ratio than the rise of price. On

this and other data, an approximate estimate might be made how much value

had been added to the land of the country by natural causes; and in laying

on a general land-tax, which for fear of miscalculation should be

considerably within the amount thus indicated, there would be an assurance

of not touching any increase of income which might be the result of

capital expended or industry exerted by the proprietor.

With reference to such a tax, perhaps a safer criterion than either a rise

of rents or a rise of the price of corn, would be a general rise in the

price of land. It would be easy to keep the tax within the amount which

would reduce the market value of land below the original valuation; and up

to that point, whatever the amount of the tax might be, no injustice would

be done to the proprietors.

In 1870 Mr. Mill became President of the Land Tenure Association,

one of whose objects was: “To claim for the benefit of the State

the Interception by Taxation of the Future Unearned Increase of

the Rent of Land (so far as the same can be ascertained), or a

great part of that increase, which is continually taking place,

without any effort or outlay by the proprietors, merely through

the growth of population and wealth; reserving to owners the

option of relinquishing their property to the state at the market

value which it may have acquired at the time when this principle

may be adopted by the Legislature.” It is urged against this plan

that, if the Government take for itself the increase from rent, it

should also make compensation for loss arising from declining

rents, whenever there happens to be any readjustment of values in

land.(340)

§ 6. Taxes falling on Capital not necessarily objectionable.

In addition to the preceding rules, another general rule of taxation is

sometimes laid down—namely, that it should fall on income and not on

capital.

To provide that taxation shall fall entirely on income, and not at all on

capital, is beyond the power of any system of fiscal arrangements. There

is no tax which is not partly paid from what would otherwise have been

saved; no tax, the amount of which, if remitted, would be wholly employed

in increased expenditure, and no part whatever laid by as an addition to

capital. All taxes, therefore, are in some sense partly paid out of

capital; and in a poor country it is impossible to impose any tax which

will not impede the increase of the national wealth. But, in a country

where capital abounds and the spirit of accumulation is strong, this

effect of taxation is scarcely felt. To take from capital by taxation what

emigration would remove, or a commercial crisis destroy, is only to do

what either of those causes would have done—namely, to make a clear space

for further saving.

I can not, therefore, attach any importance, in a wealthy country, to the

objection made against taxes on legacies and inheritances, that they are

taxes on capital. It is perfectly true that they are so. As Ricardo

observes, if £100 are taken from any one in a tax on houses or on wine, he

will probably save it, or a part of it, by living in a cheaper house,

consuming less wine, or retrenching from some other of his expenses; but,

if the same sum be taken from him because he has received a legacy of

£1,000, he considers the legacy as only £900, and feels no more inducement

than at any other time (probably feels rather less inducement) to

economize in his expenditure. The tax, therefore, is wholly paid out of

capital; and there are countries in which this would be a serious

objection. But, in the first place, the argument can not apply to any

country which has a national debt and devotes any portion of revenue to

paying it off, since the produce of the tax, thus applied, still remains

capital, and is merely transferred from the tax-payer to the fund-holder.

But the objection is never applicable in a country which increases rapidly

in wealth.

Chapter II. Of Direct Taxes.

§ 1. Direct taxes either on income or expenditure.

Taxes are either direct or indirect. A direct tax is one which is demanded

from the very persons who, it is intended or desired, should pay it.

Indirect taxes are those which are demanded from one person in the

expectation and intention that he shall indemnify himself at the expense

of another: such as the excise or customs. The producer or importer of a

commodity is called upon to pay tax on it, not with the intention to levy

a peculiar contribution upon him, but to tax through him the consumers of

the commodity, from whom it is supposed that he will recover the amount by

means of an advance in price.

Direct taxes are either on income or on expenditure. Most taxes on

expenditure are indirect, but some are direct, being imposed, not on the

producer or seller of an article, but immediately on the consumer. A

house-tax, for example, is a direct tax on expenditure, if levied, as it

usually is, on the occupier of the house. If levied on the builder or

owner, it would be an indirect tax. A window-tax is a direct tax on

expenditure; so are the taxes on horses and carriages.

The sources of income are rent, profits, and wages. This includes every

sort of income, except gift or plunder. Taxes may be laid on any one of

the three kinds of income, or a uniform tax on all of them. We will

consider these in their order.

§ 2. Taxes on rent.

A tax on rent falls wholly on the landlord. There are no means by which he

can shift the burden upon any one else. It does not affect the value or

price of agricultural produce, for this is determined by the cost of

production in the most unfavorable circumstances, and in those

circumstances, as we have so often demonstrated, no rent is paid.

This, however, is, in strict exactness, only true of the rent which is the

result either of natural causes, or of improvements made by tenants. When

the landlord makes improvements which increase the productive power of his

land, he is remunerated for them by an extra payment from the tenant; and

this payment, which to the landlord is properly a profit on capital, is

blended and confounded with rent. A tax on rent, if extending to this

portion of it, would discourage landlords from making improvements; but

whatever hinders improvements from being made in the manner in which

people prefer to make them, will often prevent them from being made at

all; and on this account a tax on rent would be inexpedient unless some

means could be devised of excluding from its operation that portion of the

nominal rent which may be regarded as landlord’s profit.

§ 3. —on profits.

A tax on profits, like a tax on rent, must, at least in its immediate

operation, fall wholly on the payer. All profits being alike affected, no

relief can be obtained by a change of employment. If a tax were laid on

the profits of any one branch of productive employment, the tax would be

virtually an increase of the cost of production, and the value and price

of the article would rise accordingly; by which the tax would be thrown

upon the consumers of the commodity, and would not affect profits. But a

general and equal tax on all profits would not affect general prices, and

would fall, at least in the first instance, on capitalists alone.

There is, however, an ulterior effect, which, in a rich and prosperous

country, requires to be taken into account. It may operate in two

different ways: (1.) The curtailment of profit, and the consequent

increased difficulty in making a fortune or obtaining a subsistence by the

employment of capital, may act as a stimulus to inventions, and to the use

of them when made. If improvements in production are much accelerated, and

if these improvements cheapen, directly or indirectly, any of the things

habitually consumed by the laborer, profits may rise, and rise

sufficiently to make up for all that is taken from them by the tax. In

that case the tax will have been realized without loss to any one, the

produce of the country being increased by an equal, or what would in that

case be a far greater, amount. The tax, however, must even in this case be

considered as paid from profits, because the receivers of profits are

those who would be benefited if it were taken off.

But (2.) though the artificial abstraction of a portion of profits would

have a real tendency to accelerate improvements in production, no

considerable improvements might actually result, or only of such a kind as

not to raise general profits at all, or not to raise them so much as the

tax had diminished them. If so, the rate of profit would be brought closer

to that practical minimum to which it is constantly approaching. At its

first imposition the tax falls wholly on profits; but the amount of

increase of capital, which the tax prevents, would, if it had been allowed

to continue, have tended to reduce profits to the same level; and at every

period of ten or twenty years there will be found less difference between

profits as they are and profits as they would in that case have been,

until at last there is no difference, and the tax is thrown either upon

the laborer or upon the landlord. The real effect of a tax on profits is

to make the country possess at any given period a smaller capital and a

smaller aggregate production, and to make the stationary state be attained

earlier, and with a smaller sum of national wealth.

Even in countries which do not accumulate so fast as to be always within a

short interval of the stationary state, it seems impossible that, if

capital is accumulating at all, its accumulation should not be in some

degree retarded by the abstraction of a portion of its profit; and, unless

the effect in stimulating improvements be a full counterbalance, it is

inevitable that a part of the burden will be thrown off the capitalist,

upon the laborer or the landlord. One or other of these is always the

loser by a diminished rate of accumulation. If population continues to

increase as before, the laborer suffers; if not, cultivation is checked in

its advance, and the landlords lose the accession of rent which would have

accrued to them. The only countries in which a tax on profits seems likely

to be permanently a burden on capitalists exclusively are those in which

capital is stationary, because there is no new accumulation. In such

countries the tax might not prevent the old capital from being kept up

through habit, or from unwillingness to submit to impoverishment, and so

the capitalists might continue to bear the whole of the tax.

§ 4. —on Wages.

We now turn to Taxes on Wages. The incidence of these is very different,

according as the wages taxed as those of ordinary unskilled labor, or are

the remuneration of such skilled or privileged employments, whether manual

or intellectual, as are taken out of the sphere of competition by a

natural or conferred monopoly.

I have already remarked that, in the present low state of popular

education, all the higher grades of mental or educated labor are at a

monopoly price, exceeding the wages of common workmen in a degree very far

beyond that which is due to the expense, trouble, and loss of time

required in qualifying for the employment. Any tax levied on these gains,

which still leaves them above (or not below) their just proportion, falls

on those who pay it; they have no means of relieving themselves at the

expense of any other class. The same thing is true of ordinary wages, in

cases like that of the United States, or of a new colony, where, capital

increasing as rapidly as population can increase, wages are kept up by the

increase of capital, and not by the adherence of the laborers to a fixed

standard of comforts. In such a case, some deterioration of their

condition, whether by a tax or otherwise, might possibly take place

without checking the increase of population. The tax would in that case

fall on the laborers themselves, and would reduce them prematurely to that

lower state to which, on the same supposition with regard to their habits,

they would in any case have been reduced ultimately, by the inevitable

diminution in the rate of increase of capital, through the occupation of

all the fertile land.

Some will object that, even in this case, a tax on wages can not be

detrimental to the laborers, since the money raised by it, being expended

in the country, comes back to the laborers again through the demand for

labor. Without, however, reverting to general principles, we may rely on

an obvious _reductio ad absurdum_. If to take money from the laborers and

spend it in commodities is giving it back to the laborers, then, to take

money from other classes, and spend it in the same manner, must be giving

it to the laborers; consequently, the more a government takes in taxes,

the greater will be the demand for labor, and the more opulent the

condition of the laborers—a proposition the absurdity of which no one can

fail to see.

In the condition of most communities, wages are regulated by the habitual

standard of living to which the laborers adhere, and on less than which

they will not multiply. Where there exists such a standard, a tax on wages

will indeed for a time be borne by the laborers themselves; but, unless

this temporary depression has the effect of lowering the standard itself,

the increase of population will receive a check, which will raise wages,

and restore the laborers to their previous condition. On whom, in this

case, will the tax fall? A rise of wages occasioned by a tax must, like

any other increase of the cost of labor, be defrayed from profits. To

attempt to tax day-laborers, in an old country, is merely to impose an

extra tax upon all employers of common labor; unless the tax has the much

worse effect of permanently lowering the standard of comfortable

subsistence in the minds of the poorest class.

We find in the preceding considerations an additional argument for the

opinion, already expressed, that direct taxation should stop short of the

class of incomes which do not exceed what is necessary for healthful

existence. These very small incomes are mostly derived from manual labor;

and, as we now see, any tax imposed on these, either permanently degrades

the habits of the laboring-class, or falls on profits, and burdens

capitalists with an indirect tax, in addition to their share of the direct

taxes; which is doubly objectionable, both as a violation of the

fundamental rule of equality, and for the reasons which, as already shown,

render a peculiar tax on profits detrimental to the public wealth, and

consequently to the means which society possesses of paying any taxes

whatever.

§ 5. —on Income.

We now pass, from taxes on the separate kinds of income, to a tax

attempted to be assessed fairly upon all kinds; in other words, an

Income-Tax. The discussion of the conditions necessary for making this tax

consistent with justice has been anticipated in the last chapter. We shall

suppose, therefore, that these conditions are complied with. They are,

first, that incomes below a certain amount should be altogether untaxed.

This minimum should not be higher than the amount which suffices for the

necessaries of the existing population. The second condition is, that

incomes above the limit should be taxed only in proportion to the surplus

by which they exceed the limit. Thirdly, that all sums saved from income

and invested should be exempt from the tax; or, if this be found

impracticable, that life-incomes and incomes from business and professions

should be less heavily taxed than inheritable incomes.

An income-tax, fairly assessed on these principles, would be, in point of

justice, the least exceptionable of all taxes. The objection to it, in the

present state of public morality, is the impossibility of ascertaining the

real incomes of the contributors. Notwithstanding, too, what is called the

inquisitorial nature of the tax, no amount of inquisitorial power which

would be tolerated by a people the most disposed to submit to it could

enable the revenue officers to assess the tax from actual knowledge of the

circumstances of contributors. Rents, salaries, annuities, and all fixed

incomes, can be exactly ascertained. But the variable gains of

professions, and still more the profits of business, which the person

interested can not always himself exactly ascertain, can still less be

estimated with any approach to fairness by a tax-collector. The main

reliance must be placed, and always has been placed, on the returns made

by the person himself. The tax, therefore, on whatever principles of

equality it may be imposed, is in practice unequal in one of the worst

ways, falling heaviest on the most conscientious.

It is to be feared, therefore, that the fairness which belongs to the

principle of an income-tax can not be made to attach to it in practice.

This consideration would lead us to concur in the opinion which, until of

late, has usually prevailed—that direct taxes on income should be reserved

as an extraordinary resource for great national emergencies, in which the

necessity of a large additional revenue overrules all objections.

The difficulties of a fair income-tax have elicited a proposition for a

direct tax of so much per cent, not on income but on expenditure; the

aggregate amount of each person’s expenditure being ascertained as the

amount of income now is, from statements furnished by the contributors

themselves. The only security would still be the veracity of individuals,

and there is no reason for supposing that their statements would be more

trustworthy on the subject of their expenses than on that of their

revenues. The taxes on expenditure at present in force, either in this or

in other countries, fall only on particular kinds of expenditure, and

differ no otherwise from taxes on commodities than in being paid directly

by the person who consumes or uses the article, instead of being advanced

by the producer or seller, and reimbursed in the price. The taxes on

horses and carriages, on dogs, on servants, are of this nature. They

evidently fall on the persons from whom they are levied—those who use the

commodity taxed. A tax of a similar description, and more important, is a

house-tax, which must be considered at somewhat greater length.

§ 6. A House-Tax.

The rent of a house consists of two parts, the ground-rent, and what Adam

Smith calls the building-rent. The first is determined by the ordinary

principles of rent. It is the remuneration given for the use of the

portion of land occupied by the house and its appurtenances; and varies

from a mere equivalent for the rent which the ground would afford in

agriculture to the monopoly rents paid for advantageous situations in

populous thoroughfares. The rent of the house itself, as distinguished

from the ground, is the equivalent given for the labor and capital

expended on the building. The fact of its being received in quarterly or

half-yearly payments makes no difference in the principles by which it is

regulated. It comprises the ordinary profit on the builder’s capital, and

an annuity, sufficient at the current rate of interest, after paying for

all repairs chargeable on the proprietor, to replace the original capital

by the time the house is worn out, or by the expiration of the usual term

of a building-lease.

A tax of so much per cent on the gross rent falls on both those portions

alike. The more highly a house is rented, the more it pays to the tax,

whether the quality of the situation or that of the house itself is the

cause. The incidence, however, of these two portions of the tax must be

considered separately.

As much of it as is a tax on building-rent must ultimately fall on the

consumer, in other words, the occupier. For, as the profits of building

are already not above the ordinary rate, they would, if the tax fell on

the owner and not on the occupier, become lower than the profits of

untaxed employments, and houses would not be built. It is probable,

however, that for some time after the tax was first imposed, a great part

of it would fall, not on the renter, but on the owner of the house. A

large proportion of the consumers either could not afford, or would not

choose, to pay their former rent with the tax in addition, but would

content themselves with a lower scale of accommodation. Houses, therefore,

would be for a time in excess of the demand. The consequence of such

excess, in the case of most other articles, would be an almost immediate

diminution of the supply; but so durable a commodity as houses does not

rapidly diminish in amount. New buildings, indeed, of the class for which

the demand had decreased, would cease to be erected, except for special

reasons; but in the mean time the temporary superfluity would lower rents,

and the consumers would obtain, perhaps, nearly the same accommodation as

formerly, for the same aggregate payment, rent and tax together. By

degrees, however, as the existing houses wore out, or as increase of

population demanded a greater supply, rents would again rise; until it

became profitable to recommence building, which would not be until the tax

was wholly transferred to the occupier. In the end, therefore, the

occupier bears that portion of a tax on rent which falls on the payment

made for the house itself, exclusively of the ground it stands on.

The case is partly different with the portion which is a tax on

ground-rent. As taxes on rent, properly so called, fall on the landlord, a

tax on ground-rent, one would suppose, must fall on the ground-landlord,

at least after the expiration of the building-lease. It will not, however,

fall wholly on the landlord, unless with the tax on ground-rent there is

combined an equivalent tax on agricultural rent. The lowest rent of land

let for building is very little above the rent which the same ground would

yield in agriculture: since it is reasonable to suppose that land, unless

in case of exceptional circumstances, is let or sold for building as soon

as it is decidedly worth more for that purpose than for cultivation. If,

therefore, a tax were laid on ground-rents without being also laid on

agricultural rents, it would, unless of trifling amount, reduce the return

from the lowest ground-rents below the ordinary return from land, and

would check further building quite as effectually as if it were a tax on

building-rents, until either the increased demand of a growing population,

or a diminution of supply by the ordinary causes of destruction, had

raised the rent by a full equivalent for the tax. But whatever raises the

lowest ground-rents raises all others, since each exceeds the lowest by

the market value of its peculiar advantages. If, therefore, the tax on

ground-rents were a fixed sum per square foot, the more valuable

situations paying no more than those least in request, this fixed payment

would ultimately fall on the occupier. Suppose the lowest ground-rent to

be $50 per acre, and the highest $5,000, a tax of $5 per acre on

ground-rents would ultimately raise the former to $55, and the latter

consequently to $5,005, since the difference of value between the two

situations would be exactly what it was before: the annual $5, therefore,

would be paid by the occupier. But a tax on ground-rent is supposed to be

a portion of a house-tax which is not a fixed payment, but a percentage on

the rent. The cheapest site, therefore, being supposed as before to pay

$5, the dearest would pay $500, of which only the $5 could be thrown upon

the occupier, since the rent would still be only raised to $5,005.

Consequently, $495 of the $500 levied from the expensive site would fall

on the ground-landlord.(341) A house-tax thus requires to be considered in

a double aspect, as a tax on all occupiers of houses, and a tax on

ground-rents.

In the vast majority of houses the ground-rent forms but a small

proportion of the annual payment made for the house, and nearly all the

tax falls on the occupier. It is only in exceptional cases, like that of

the favorite situations in large towns, that the predominant element in

the rent of the house is the ground-rent; and, among the very few kinds of

income which are fit subjects for peculiar taxation, these ground-rents

hold the principal place, being the most gigantic example extant of

enormous accessions of riches acquired rapidly, and in many cases

unexpectedly, by a few families, from the mere accident of their

possessing certain tracts of land without their having themselves aided in

the acquisition by the smallest exertion, outlay, or risk. So far,

therefore, as a house-tax falls on the ground-landlord, it is liable to no

valid objection.

In so far as it falls on the occupier, if justly proportioned to the value

of the house, it is one of the fairest and most unobjectionable of all

taxes. No part of a person’s expenditure is a better criterion of his

means, or bears, on the whole, more nearly the same proportion to them.

The equality of this tax can only be seriously questioned on two grounds.

The first is, that a miser may escape it. This objection applies to all

taxes on expenditure; nothing but a direct tax on income can reach a

miser. The second objection is, that a person may require a larger and

more expensive house, not from having greater means, but from having a

larger family. Of this, however, he is not entitled to complain, since

having a large family is at a person’s own choice; and, so far as concerns

the public interest, is a thing rather to be discouraged than

promoted.(342)

A valuation should be made of the house, not at what it would sell for,

but at what would be the cost of rebuilding it, and this valuation might

be periodically corrected by an allowance for what it had lost in value by

time, or gained by repairs and improvements. The amount of the amended

valuation would form a principal sum, the interest of which, at the

current price of the public funds, would form the annual value at which

the building should be assessed to the tax.

As incomes below a certain amount ought to be exempt from income-tax, so

ought houses below a certain value from house-tax, on the universal

principle of sparing from all taxation the absolute necessaries of

healthful existence. In order that the occupiers of lodgings, as well as

of houses, might benefit, as in justice they ought, by this exemption, it

might be optional with the owners to have every portion of a house which

is occupied by a separate tenant valued and assessed separately.

Chapter III. Of Taxes On Commodities, Or Indirect Taxes.

§ 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 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 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 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.

It remains to speak of the effect on rent. Assuming (what is usually the

fact) that the consumption of food is not diminished, the same cultivation

as before will be necessary to supply the wants of the community; the

margin of cultivation, to use Dr. Chalmers’s expression, remains where it

was; and the same land or capital, which, as the least productive, already

regulated the value and price of the whole produce, will continue to

regulate them. The effect which a tax on agricultural produce will have on

rent depends on its affecting or not affecting the difference between the

return to this least productive land or capital and the returns to other

lands and capitals. Now, this depends on the manner in which the tax is

imposed. If it is an _ad valorem_ tax, or, what is the same thing, a fixed

proportion of the produce, such as tithe for example, it evidently lowers

corn-rents. For it takes more corn from the better lands than from the

worse, and exactly in the degree in which they are better, land of twice

the productiveness paying twice as much to the tithe. Whatever takes more

from the greater of two quantities than from the less, diminishes the

difference between them. The imposition of a tithe on corn would take a

tithe also from corn-rent: for, if we reduce a series of numbers by a

tenth each, the differences between them are reduced one tenth.

For example, let there be five qualities of land, which severally yield,

on the same extent of ground and with the same expenditure, 100, 90, 80,

70, and 60 bushels of wheat, the last of these being the lowest quality

which the demand for food renders it necessary to cultivate. The rent of

these lands will be as follows:

The land producing 100 bushels will yield a rent of 100-60, or 40

bushels.

That producing 90 bushels, a rent of 90-60, or 30 bushels.

That producing 80 bushels, a rent of 80-60, or 20 bushels.

That producing 70 bushels, a rent of 70-60, or 10 bushels.

That producing 60 bushels, will yield no rent.

Now let a tithe be imposed, which takes from these five pieces of land 10,

9, 8, 7, and 6 bushels respectively, the fifth quality still being the one

which regulates the price, but returning to the farmer, after payment of

tithe, no more than 54 bushels:

The land producing 100 bushels reduced to 90 will yield a rent of 90-54,

or 36 bushels.

That producing 90 bushels reduced to 81, a rent of 81-54, or 27 bushels.

That producing 80 bushels reduced to 72, a rent of 72-54, or 18 bushels.

That producing 70 bushels reduced to 63, a rent of 63-54, or 9 bushels.

and that producing 60 bushels, reduced to 54, will yield, as before, no

rent. So that the rent of the first quality of land has lost four bushels;

of the second, three; of the third, two; and of the fourth, one: that is,

each has lost exactly one tenth. A tax, therefore, of a fixed proportion

of the produce lowers, in the same proportion, corn-rent.

But it is only corn-rent that is lowered, and not rent estimated in money,

or in any other commodity. For, in the same proportion as corn-rent is

reduced in quantity, the corn composing it is raised in value. Under the

tithe, 54 bushels will be worth in the market what 60 were before; and

nine tenths will in all cases sell for as much as the whole ten tenths

previously sold for. The landlords will therefore be compensated in value

and price for what they lose in quantity, and will suffer only so far as

they consume their rent in kind, or, after receiving it in money, expend

it in agricultural produce; that is, they only suffer as consumers of

agricultural produce, and in common with all the other consumers.

Considered as landlords, they have the same income as before; the tithe,

therefore, falls on the consumer, and not on the landlord.

The same effect would be produced on rent if the tax, instead of being a

fixed proportion of the produce, were a fixed sum per quarter or per

bushel. A tax which takes a shilling for every bushel takes more shillings

from one field than from another, just in proportion as it produces more

bushels; and operates exactly like tithe, except that tithe is not only

the same proportion on all lands, but is also the same proportion at all

times, while a fixed sum of money per bushel will amount to a greater or

less proportion, according as corn is cheap or dear.

There are other modes of taxing agriculture, which would affect rent

differently. A tax proportioned to the rent would fall wholly on the rent,

and would not at all raise the price of corn, which is regulated by the

portion of the produce that pays no rent. A fixed tax of so much per

cultivated acre, without distinction of value, would have effects directly

the reverse. Taking no more from the best qualities of land than from the

worst, it would leave the differences the same as before, and consequently

the same corn-rents, and the landlords would profit to the full extent of

the rise of price. To put the thing in another manner: the price must rise

sufficiently to enable the worst land to pay the tax, thus enabling all

lands which produce more than the worst to pay not only the tax, but also

an increased rent to the landlords. These, however, are not so much taxes

on the produce of land as taxes on the land itself. Taxes on the produce,

properly so called, whether fixed or _ad valorem_, do not affect rent, but

fall on the consumer, profits, however, generally bearing either the whole

or the greatest part of the portion which is levied on the consumption of

the laboring-classes.

§ 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, 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 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 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 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.

This character belongs in a peculiar degree to custom duties on the

produce of land, unless countervailed by excise duties on the home

production. Such taxes bring less into the public treasury, compared with

what they take from the consumers, than any other imposts to which

civilized nations are usually subject. If the wheat produced in a country

is twenty millions of quarters, and the consumption twenty-one millions, a

million being annually imported, and if on this million a duty is laid

which raises the price ten shillings per quarter, the price which is

raised is not that of the million only, but of the whole twenty-one

millions. Taking the most favorable but extremely improbable supposition,

that the importation is not at all checked, nor the home production

enlarged, the state gains a revenue of only half a million, while the

consumers are taxed ten millions and a half, the ten millions being a

contribution to the home growers, who are forced by competition to resign

it all to the landlords. The consumer thus pays to the owners of land an

additional tax, equal to twenty times that which he pays to the state. Let

us now suppose that the tax really checks importation. Suppose importation

stopped altogether in ordinary years; it being found that the million of

quarters can be obtained, by a more elaborate cultivation, or by breaking

up inferior land, at a less advance than ten shillings upon the previous

price—say, for instance, five shillings a quarter. The revenue now obtains

nothing, except from the extraordinary imports which may happen to take

place in a season of scarcity. But the consumers pay every year a tax of

five shillings on the whole twenty-one millions of quarters, amounting to

£5,250,000 sterling. Of this the odd £250,000 goes to compensate the

growers of the last million of quarters for the labor and capital wasted

under the compulsion of the law. The remaining £5,000,000 go to enrich the

landlords as before.

Such is the operation of what are technically termed corn laws, when first

laid on; and such continues to be their operation so long as they have any

effect at all in raising the price of corn. The difference between a

country without corn laws and a country which has long had corn laws is

not so much that the last has a higher price or a larger rental, but that

it has the same price and the same rental with a smaller aggregate capital

and a smaller population. The imposition of corn laws raises rents, but

retards that progress of accumulation which would in no long period have

raised them fully as much. The repeal of corn laws tends to lower rents,

but it unchains a force which, in a progressive state of capital and

population, restores and even increases the former amount.