circulation is not diminishing, it may be supposed to proceed from the
coming in of a right balance of trade.
4_to_, If stagnations in one part are found to interrupt circulation in
another, public borrowing, for domestic purposes, has the good effect of
giving vent to the stagnation, and throwing the money into a new channel
of circulation.
5_to_, That the sum of interest paid by any nation to strangers, shews
the general balance due by the nation, after deducting all the profits
of their past trade out of all the expence of their foreign wars.
But here it must be observed, that as on one hand we are comprehending
all that is paid to foreign creditors, on account of the funds they have
in England, for example, so on the other hand, must be deducted from
this, all the like payments made to Englishmen by other nations.
6_to_, From this last circumstance we discover, that the lending to
other nations by private hands, produces the same effect to a nation as
if the state were actually paying off the debts due to strangers.
Consequently, when Moses permitted the Jews to lend to strangers at
interest, and forbade such loans among themselves, his view was to
establish a foreign tribute, as it were, in favour of his own nation,
instead of establishing luxury at home.
7_mo_, As the balance due to a nation upon her trade, is found to
compensate, _pro tanto_, the money she spends abroad, we may from the
same principle conclude, that so soon as she ceases to expend money
abroad, the balance of trade in her favour, if not realized at home in
some new improvement, will diminish, _pro tanto_, the interest, or
capitals due to strangers. This is evident from the nature of balances,
of which we have treated already.
8_vo_, The consequence, for example, of England’s owing large sums to
strangers, will, from the same principle, constantly prevent exchange
from rising very high in her favour, when the balance of her trade is to
be paid to her: because on every such occasion, her foreign creditors
will be glad to disappoint exchangers, by furnishing bills for their
interest, or capitals, to those who owe the balance; the consequence of
which is plainly to diminish the foreign debts[36].
Footnote 36:
We must always carefully avoid confounding the grand balance of
payments with the balance between importation and exportation, which I
consider as the balance of trade.
This circumstance implies no loss to the nation which is creditor in the
balance of trade, and debtor upon the capitals; because we have proved
that the price of exchange never affects a nation, but only certain
individuals, who pay it to others.
This is sufficient, I think, to point out in some degree the nature of a
national debt. I come next to examine the consequences of its constant
augmentation, without proper measures being taken, either to pay it off,
or to circumscribe it within certain bounds.
In what is to follow, I shall throw all consideration of capitals
totally out of the question; and as to the amount of taxes, it is quite
indifferent whether the money proceeding from them be in consequence of
an improvement made upon those already established, or from new
impositions: such combinations will come in more properly afterwards.
If the interest paid upon the national debt of England, for example, be
found constantly to increase upon every new war, the consequence will
be, that more money will be raised on the subject for the payment of it.
The question then comes to be, 1. How far may debts extend? 2. How far
may taxes be carried? And 3. What will be the consequence, supposing the
one and the other carried to the greatest height possible?
I answer to the first, that abstracting from circumstances which may
disturb the gradual progress of this operation, before it can arrive at
the _ne plus ultra_, debts may be increased to the full proportion of
all that can be raised for the payment of the interest. As to the
second, How far taxes may be carried, I shall not here anticipate the
subject of the following book, any farther than is necessary to resolve
the question before us.
Taxes, we have said, either affect income, or consumption. The land-tax
of England is now at 4 shillings in the pound, upon a supposed value of
the property affected by it, which is all real and personal estates, the
stock upon lands, and some few other particulars excepted.
This tax may be carried to the full value of all the real estates in
England. As for personal estates it never can affect them
proportionally; and that part of the statute of land-tax which passes
every year, and imposes 4 shillings in the pound on personal estates,
carries in it a vestige of our former ignorance in matters ©f taxation.
The notion of imposing (_facto_) 20 shillings in the pound upon the real
value of all the land-rents of England, appears to us perfectly
ridiculous. I admit it to be so; and could I have discovered any
argument, by which I could have limited the rising of the land-tax to
any precise number of shillings under twenty, I should have stated this
as the maximum, rather than the other.
The second branch of taxes comprehends those upon consumptions, excises,
and the like. The maximum as to this class must be determined by foreign
trade; because this is affected in a certain degree by the price of
domestic industry. Other taxes have not this effect, as we shall shew in
its proper place.
But as foreign trade is not essential to the domestic industry,
consumption, circulation, &c. of any nation, as has been proved in the
second book, but only to their increasing in wealth proportionally to
other nations; if foreign communications should be cut off entirely, I
perceive no limit to which I can confine the extent of proportional
taxes. Let me therefore suppose a term beyond which impositions of all
kinds must come to a stop, and then ask, in the third place, what will
the consequence be? I answer, that the state will then be in possession
of all that can be raised on the land, on the consumption, industry and
trade of the country; in short, of all that can be called income, which
they will administer for the creditors.
When this comes to be the case, debts become extinguished of course;
because they come to be consolidated with the property: a case which
commonly happens when a creditor takes possession of an estate for the
payment of debts equal to its value.
Then government may continue to administer for the creditors, and either
retain in its hand what is necessary for the public expence of the year;
or if it inclines to shew the same indulgence for this new class of
proprietors as for the former, it may limit the retention to a sum only
equal to the interest of the money wanted; and in that way set out upon
a new system of borrowing, until the amount of taxes be transferred to a
new set of creditors. This is the endless path referred to in the ninth
chapter of the second book, which after a multitude of windings returns
into itself.
A state, I imagine, which would preserve its public faith inviolable,
until a period such as I have been supposing, would run little risk of
not finding credit for a new borrowing. The prospect of a second
revolution of the same kind would be very distant; and in matters of
credit, which are constantly exposed to risk, such events being out of
the reach of calculation, are never taken into any man’s account who has
money to lend.
The whole of this hypothesis is, I readily agree, destitute of all
probability; because of the infinite variety of circumstances which may
frustrate such a scheme. I only introduced it to shew where the constant
mortgaging of a public revenue may end; and to disprove the vulgar
notion, that by contracting debts beyond a certain sum, _a trading
nation which has a great balance in its favour_, must be involved in an
unavoidable bankruptcy. To say that a _nation_ must become bankrupt to
itself, is a proposition which I think implies a contradiction.
------------------------------------------------------------------------
CHAP. IX.
_Of Bankruptcies._
In the last chapter we have been running through a chain of consequences
relative to the increase of public debts, which appear as extravagant to
us at present, as it would have appeared to Davenant, to have supposed
the debts of this nation to grow up to their present height, without the
risk of involving the nation in a general bankruptcy.
But those consequences are only contingent. The present debts may either
be paid off, or the nation may be involved in a general bankruptcy. In
either case, the vast property in the funds, this great article of
permanent income, belonging to natives and to foreigners, must wither
and decay, and at last disappear altogether.
We may therefore decide, that one of three events must happen, viz.
either, 1. Debts will swell to such a pitch as at last to pay
themselves: or, 2. The nation will be involved in a bankruptcy: or, 3.
They will be fairly paid off.
The first supposition we have examined; the second we are now to
consider; the last will be the subject of the following chapter, with
which I shall conclude this book.
I shall advance no argument to prove that the scheme of a public
bankruptcy is either lawful, honourable, or expedient, if voluntarily
gone into by a state; because I think it is diametrically opposite to
every principle of good government. It is a maxim uncontroverted, that a
contract is binding between the parties contracting, and that it ought
to be fulfilled in every article. If the public good be alleged as an
overruling principle, to which every other must give way, I readily
admit the exception. There is another of equal force, the impossibility
of performance. When such arguments are used to engage a nation to
commit a deliberate act of bankruptcy, two things must be examined: the
first, is the interest which the public has in adopting the scheme: the
second, the consequences of it. What reasons a state may have, I shall
consider afterwards; at present, I shall enquire what might be the
consequences of a general and total bankruptcy in England; from which we
may gather what difference it would make, were it only partial; and by
such an inquiry, we may be led to discover the proper method of breaking
faith, in case it should become unavoidable. This is what in another
place I called bringing credit decently to her grave; when after being
overstretched, it cannot longer be supported.
A bankruptcy may take place in two ways: either as a consequence of
circumstances which cannot be prevented; or by a deliberate act of
government.
Were the trade and industry of England to decay, the amount of taxes
might so far diminish, as to prove insufficient to pay the interest of
the national debt, and defray the expence of government. Were the people
to be blown up into a spirit of revolt against taxes, the same event
would probably happen. In either case, the natural and immediate
consequences of the bankruptcy would probably follow one another in this
manner:
1_mo_, Every creditor of the state would become poorer in proportion to
the diminution of his income.
2_do_, Consumption and the demand for work would diminish in proportion
to the part of that income withheld, which the creditors annually expend
for these purposes.
3_tio_, Trade would _directly_ suffer, in proportion to that part of the
said revenue yearly thrown into it by the public creditors at present;
and it would _consequently_ suffer, in proportion to the hurt resulting
to private credit, from the consequences of the bankruptcy.
The creditors then would lose all, the trade of England would be undone,
and the multitudes who live in consequence of the demand for their
industry from the one and the other, would be reduced to misery. These
immediate effects would first manifest themselves in the capital. The
consequences would soon be felt all over England: a diminution upon the
consumption of the fruits of the earth; a stagnation of that commerce
which is carried on between London and the country (which we have seen
to be equal to the amount of all the taxes and land-rents spent in
London) would soon throw every thing into confusion. But taxes would be
abolished: of that there is no doubt. Let a deliberate bankruptcy take
place without any abolition of them by law, they would soon sink to
nothing, from the utter impossibility there would be found to pay them.
A total bankruptcy, therefore, coming upon England, either from a decay
of her trade, or a disturbance in collecting the public revenue, would
have the effect of plunging the nation into utter ruin at home: what
might be the consequences from abroad, I leave to the reader’s sagacity
to determine.
Let me now suppose a bankruptcy to take place from a deliberate act of
power, with a view of expediency.
The difference between the two consists only in this; that in the first,
all the consequences we have mentioned would follow one upon another,
without a possibility of preventing them: in the other, a plan to
prevent them might be concerted.
Let me then suppose, that government shall find it expedient, at any
time, to use a spunge for the public debts; that they shall fear no
external bad consequences, either from the resentment of those states
who may be hurt by it, or from the ambition of others who may profit by
it; that they shall cooly resolve to sacrifice the interest of all the
creditors in favour of the whole body; and that they shall deliberate
upon the plan to be followed, in order to bring about so great a
revolution, without essentially hurting any interest in the state, that
of the creditors alone excepted.
In that case, I imagine, they would begin by ordering the amount of all
that is paid to the creditors, to be set apart as a fund for the
execution of the plan.
They would purchase all over England, every article of produce and
manufacture which might remain upon hand for want of a market: they
would feed all those who would be forced to be idle for want of
employment: they would instantly put proper employments into their
hands; one week’s delay in the execution of this part of the plan would
throw the manufacturing interest into such confusion, as to be past all
remedy: they would furnish credit to all the merchants subsisting, in
proportion to what they had lost by the extinction of the funds: they
would establish offices every where, to supply the wants of those who
would be totally ruined, until by degrees they could re-establish
confidence, the parent of trade, the mother of industry. By such
precautions, properly taken, and properly executed, none would suffer
but the unhappy creditors and their families, who, from great opulence,
would be reduced to poverty.
As far as human prudence is insufficient for going through so great a
detail all at once; so far would the effects of a general bankruptcy add
hurtful consequences to those which in every case are unavoidable.
Were a statesman endowed with the supernatural gift of turning the minds
of a nation at his will, and of foreseeing every consequence before it
happened, such a plan might be executed. Another who, with the greatest
capacity ever man was endowed with, would, for expediency, not for
necessity, deliberately undertake a general bankruptcy, I should
consider as a madman.
I should rather prefer to submit to the natural consequences which might
result from an accidental bankruptcy, than endeavour to avoid them by a
plan too complicated for human wisdom to execute.
Let us next suppose the scheme to be fairly executed from a view of
expediency, no matter how, and all inconveniences prevented during the
execution, what would be gained by it?
If by the supposition all taxes be kept alive, for at least a certain
time, in order to prevent a total confusion, certainly no body could
gain during that period; even the state itself would lose, because every
branch of consumption would infallibly diminish. But that time elapsed,
and taxes reduced to the lowest, who would be the gainers? We shall see
when we come to the doctrine of taxation, that a sudden abolition of
them, in consequence of a bankruptcy, would be advantageous to no body,
but to creditors upon mortgage, and to the idle: not to landlords;
because their incomes would diminish more than in the proportion of the
present land-tax, at least their improvements would be interrupted, and
their rents ill paid: not to the manufacturing classes; because at
present they pay no taxes, but in proportion to their idleness or
extravagance, as shall be proved: the monied interest, not secured on
land, would I suppose be extinguished; trade and credit at an end. The
gains then would be confined to those who have money secured upon land,
where the capital is demandable. In such a situation, interest would
rise beyond all bounds; and a debt which might have been considered as a
trifle before, might then carry off an estate. The idle also who live
peaceably upon a very moderate income, would find a great advantage from
the fall of prices for want of consumption, and from the distress of the
industrious; but the indigent poor, who are supported from charity,
would suffer: all the great establishments for labour and industry,
would fall to the ground: the numbers of poor who are there maintained,
would come upon a society, which is beginning to lose those tender
feelings of compassion, which are more common in countries of idleness,
in proportion as misery is more familiarly before them.
To say all in one word, a total bankruptcy, and abolition of taxes,
would bring this nation back to the situation it was in before taxes and
debts were known.
Does any body imagine that our present situation is not analogous to our
present policy, and that it is possible that independently of the same
circumstances we should long continue to enjoy the advantages we feel?
No: were we in the same situation as formerly, we should feel as our
fathers felt. They had as good understandings to improve their
circumstances as we have; but they had to do with an idle, we with an
industrious common people. Trade and credit have been long at work to
perform this great revolution: the operation is not as yet compleated,
and a total bankruptcy now would destroy every good effect for a long
time.
Were taxes made to cease, the large sums which proceed from them would
disappear entirely. Money would not, as some imagine, be equally
distributed among those who now pay the taxes, and so proportionally
increase every man’s income. The reason is plain: the money paid for
taxes, circulates; because it is demanded. Were taxes suppressed, people
having less occasion for money than formerly, would circulate less in
proportion. It is the necessity of paying taxes, which _creates_ this
money for the payment of them; and when this method of _creating_ is not
contrived, the taxes cannot be paid, as has been often said. Now it is
this great flux of money from taxes which animates the trade of England:
take them out of the circle, what becomes of the whole?
To suppose, therefore, so great a revolution in the circulation of a
country, as that produced by the cessation of taxes; and to suppose no
interruption from it upon the state of industry, and the employment of
the people of this nation, is a proposition I must reject, as being
contrary to all principles; and to this among the rest, that it would be
a most sudden, and a most violent revolution; which throughout the whole
course of this inquiry, we have found to involve inconveniencies beyond
the power of any theory to extricate.
Upon the whole we may determine, that the fatal consequences of a
bankruptcy would be many; and that the good resulting from a total
abolition of taxes, would be confined to two objects. 1. A relief to
those who pay them upon their possessions, or persons. 2. A diminution
of prices in favour of the idle at home, and of trade abroad: great
objects, no doubt, could they be obtained at less expence than the
consequences of a total failure of public credit and domestic industry.
Perhaps when we come to examine the principles of taxation, we shall
find that taxes do not raise prices so much as is generally believed;
and those which influence the application of public money, will point
out better expedients than a bankruptcy for comparing those great
national purposes.
But let us suppose a case, which may possibly happen, as matters seem to
go on. Suppose, I say, that by continuing to carry on long and expensive
wars, the sum of interest paid to strangers should exceed all that the
nation can gain by her trade. In this case, there must be a general
balance of payments against her every year, which very soon would
manifest itself by the most fatal consequences.
The bank of England would be the first to feel them, by the departure of
all the coin and precious metals. Trade would feel them next, and then
indeed they would become universal.
In such a situation, I fairly acknowlege, that I cannot discover any
expedient to avoid a bankruptcy. Engaging the foreign creditors to
become citizens, by the allurements of the greatest privileges, and
bills of naturalization, are vain speculations. Unless some resource,
hidden from me, should, upon such an occasion, open itself, in the deep
recesses of future events, I believe the nation would soon be driven
upon the fatal rock of bankruptcy. The idea of a nation’s becoming
bankrupt to itself, I have always looked upon as a contradiction; but
that it may become bankrupt to the rest of the world, is quite
consistent with reason and common sense.
I shall not take upon me to suggest what mode of bankruptcy would in
such a case be the best; a total, or a partial one. The partial, I am
afraid, would, in England, work effects almost as hurtful as the other.
But if ever the case should happen, the only way will be, to watch over
every symptom of the approaching catastrophe, and to improve
circumstances to the best advantage.
Of what infinite consequence is it then for a British statesman to
inquire into the amount of debts owing to strangers, and into the state
of the balance of trade? In speaking of exchange, I threw out many
things concerning the idea of putting that branch of business into the
hands of the bank, in conjunction with the exchequer. Were the state
brought into the dilemma of either submitting to this gradual decline of
trade, from a cause which could not be removed; or of being pushed to
the necessity of leaping into the terrible gulph of a deliberate
bankruptcy; in such a dilemma, I say, what infinite advantages might not
be drawn from the management of exchange?
I have heard it said, that the debt owing to strangers was a great
advantage to England; because it drew people to that market where their
funds are settled. I allow all the force any one can give to this
proposition: But alas! what would it avail, whenever England becomes
incapable to furnish goods equivalent to all her imports from abroad,
added to all she owes to her foreign creditors?
I am very far from supposing the present situation of England to
forebode the approach of any such disaster; but it is good to represent
to one’s self some determinate object, by which we may judge of our
situation in times to come.
Debts have increased far beyond the imagination of every mortal. Great
men have uttered prophecies, which have proved false, concerning the
consequences of a debt of one hundred millions. From this most people
conclude, that they will go on until some unforeseen accident shall dash
the fabric to pieces. I have been pretending to shew how they may go on
in a perpetual chain. But alas! one fatal combination was there omitted;
and now that it has been taken in, I think it serves as a datum, to
resolve the most important problem of this science, viz. How to
determine the exact extent of public credit. The solution of which is,
That it is not necessary that public credit should ever fail, from any
augmentation of debts whatever, due to natives; and that it must fail,
so soon as the nation becomes totally unable either to export
commodities equal to all their imports and foreign debts, or to pay off
a proportional part of their capital, sufficient to turn the balance to
the right side.
From this proposition two corollaries may be drawn.
1_mo_, That the most important object in paying off debts, is to get
quit of those due to strangers.
2_do_, That whatever circumstance has a tendency towards diminishing the
burden of foreign debts, should be encouraged.
If it be said, that whenever our foreign debts exceed the balance of our
trade, the best way would be to break faith with strangers, and keep it
with the subjects of the state: I answer, that were the thing possible,
which I apprehend it is not, the consequence might prove equally
hurtful.
The greatest of all the inconveniencies proceeding from a bankruptcy, is
the ruin of industry, and the stop put to circulation. Can it then be
supposed, that a country might execute so glaring a scheme of treachery
to all her neighbours, and still continue her correspondence with them
in the open way of trade? Certainly not. Were all foreign trade to be
stopt at once, what a revolution would it occasion! The circulation of
foreign trade, in the city of London only, exceeds perhaps the amount of
all the taxes. A stop put to that would occasion such a stagnation, as
would ruin the nation as much as if the bankruptcy were to become
universal. I do not here pretend minutely to trace consequences, which
are infinite: all that can be done, is to suggest hints, which every one
may pursue, in proportion to the extent of his combinations.
The intention of touching upon this subject at all, is to shew, that the
expedient of a spunge, which is frequently talked of as a remedy against
the consequence of debts, is, perhaps, more dangerous than any thing
that can be feared from them. The reason is, that the spunge implies a
more sudden bankruptcy than any one brought on in a gradual way, by
natural causes.
Were natural and irresistible causes to operate a total failure of all
profit upon the trade of Britain, one cannot say how far the other
nations of Europe might not find it their interest to assist _us_,
providing we did our utmost to preserve our good faith to _them_. And as
I think I have made it sufficiently evident that nothing can be gained
by openly violating such engagements, the best resolution a nation can
take, is to adhere to them to the last extremity, and to banish from
their thoughts every idea which may be repugnant to them.
------------------------------------------------------------------------
CHAP. X.
_Methods of contracting and paying off Public Debts._
We are now to collect together, in one view, the several methods of
contracting and paying off the debts of a nation. Such methods may be
deduced, either from principles, or from what practice has pointed out.
The foundation upon which public credit is built, is the existence of a
sure and sufficient fund for performing the engagements contracted.
When, in the early times of public credit, the repayment of the capital
was the chief object of the lender, a much more extensive fund was
necessary than at present, when no more is required than the payment of
the interest. As such funds never can be formed but from taxes, or
general contributions from the people, the greater they are, the larger
must the contribution be. Whenever therefore there is occasion to
contract debt, the chief object of a statesman’s care should be, to
model the spirit of his people so as to dispose them to concur in the
proper resolutions to render the plan proposed as easy as possible in
the execution.
In the first place, the body of the people must be made sensible that
the consequence of contracting debts must imply a diminution upon the
income of some individuals; but that the fewer the obstacles thrown in
the way of the loan are, the less will that diminution be.
In the second place, he must gain the confidence of his people, so far
as to impress them with a firm belief that he will consult _their_ good,
and nothing else, in what he undertakes.
And in the last place, he must gain the confidence of those from whom he
is to borrow; and convince them that all covenants between the public
and them will be religiously performed.
In a limited and free government, these three requisites are essential
to the firm establishment of public credit.
Where the power of the statesman is unlimited, he may substitute his
authority over the people, in the place of confidence; but with respect
to those who are to lend, he will find no room for any such
substitution: confidence _here_ is the only expedient.
All therefore that is required as to the people, is to _enable_ them to
do what he requires of them.
For that purpose he must establish credit with them, for finding the
contributions he is to exact of them; because they will have as much
occasion for it, in paying what is demanded of them by authority, as he
himself has in paying what he is obliged to in consequence of his
engagements.
If this general plan be not followed, the consequence will be, that
taxes will fail on one hand, and public credit on the other.
If all this operation cannot be previously concerted, the plan of
borrowing must be circumscribed to funds previously established.
When money is borrowed before the fund is prepared, every obstacle which
occurs in establishing it is a drawback upon the confidence of those who
lend, and renders the conditions less favourable to the state which
borrows.
In the contract of loan, the first article to be agreed upon is the rate
of interest. We have, in the beginning of this book, examined the causes
of its rise and fall; and have in general determined, that when the
demand is for borrowing, interest rises; when for lending, interest
falls.
As the object of the borrower is to have interest low, the statesman who
intends to borrow, must use all possible means to increase the quantity
of money in circulation.
But if coin alone be used as money, and if this coin be sent out of the
country, when borrowed, and if what is sent away cannot be replaced at
will, the scheme of augmenting money becomes impracticable: it will
daily become more scarce, more difficult to procure, and interest must
rise higher every day. Symbolical or paper money, that is credit, must
then be established at home, upon the firmest basis: this will enable
every one to pay what he owes; consequently, the taxes will be paid, the
creditors will receive what is due to them regularly, money will every
year augment in proportion as debts are contracted; and if borrowing do
not augment beyond that proportion, interest will not rise; and if
borrowing should fall below that proportion, interest will sink.
Is not this whole doctrine verified in the strongest manner by the
operation of the Missisippi? At the death of the late King of France,
money had disappeared. Some years before, he had, for seven millions in
coin, engaged his kingdom for thirty-two millions; upon a distant fund
indeed, but still it became a debt to be paid. Paper money had not been
introduced three years, when interest fell to 2 _per cent._ The paper
indeed was a bubble _in fact_; but we have shewn that it became so from
bad management only.
By the augmentation of money, capitals cease to be so valuable. By the
melting down of property, the very capital, though in the hands of the
state, may be turned into money by the creditor, whenever he has
occasion for it; in the same way as the coin which is buried in the
vaults of the town-house of Amsterdam, is constantly performing all the
uses of circulation.
The method, therefore, of borrowing money to the best advantage, is
previously to establish a fund of credit, arising from annual taxes; to
provide the people who are to pay them with money in proportion to their
property or industry; and to prevent the latter from ever failing for
want of the medium, money, for carrying it on.
So long as interest stands high, relatively to other states with which
you are at war, throw as much money as possible into the hands of your
creditors, in payment of the debts already contracted; because the more
you throw in there, the more you will draw out, if you have occasion to
borrow more; and if you have no occasion to borrow more, the lower you
will reduce the interest, by augmenting the fund of money to be lent.
From these principles I conclude, that every nation which sets out by
contracting debts with its own citizens, must _begin_ by borrowing upon
condition of repaying the capital in a short term of years. This is also
the best method to engage the people to contribute largely without
murmuring. The reason is, that when taxes begin to be imposed, the mass
of circulation becomes proportionally augmented; and the paying back
considerable sums to the creditors, prevents, on the one hand, the debts
from increasing so fast, and supplies circulation, and facilitates new
borrowings on the other. While this plan of augmenting circulation is
carrying on, the statesman must prevent his expence abroad from
diminishing it proportionally at home. This is to be accomplished by
opening loans for foreign expence in foreign countries, and by paying
the _interest only_ of such loans, with the greatest punctuality.
The difficulty of performing this, is no argument against it. It must
either be done, or credit will be hurt; because without obtaining credit
abroad, it is impossible to defray any expence incurred abroad, beyond
what the metals of your country and the exports from it can pay: that
is, in other words, beyond the quantity of metals exported, and general
balance in your favour upon all reciprocal payments with the world.
If it be said, that nations never pay the interest of their debts any
where but at home, I answer, that it is so much the worse for them;
because wherever the debts or interest is to be paid, the lender always
states his account as if the payment were made in his own house. All the
expence to him of sending his money to the place of subscription, and of
drawing back his returns, are compared with the interest offered by the
borrower; and if upon the whole the lender finds his account in the
bargain, he subscribes; otherwise not. Since therefore the money
borrowed must in this case be sent abroad, it is an advantage for the
borrower to be under an obligation to provide a method of sending it;
and by that means he will borrow cheaper than he can do, when he refunds
to every lender all his expence and trouble in getting his interest
remitted to him.
I am now deducing principles, and therefore shall not enter into a
discussion of the many objections which occur against this plan, from
foreign considerations; such as the facility it might procure to a
statesman of defrauding his foreign creditors, and several others which
might be formed: all I say is, that this is a cheaper and more
systematical way of borrowing, and it has this good effect, that it
constantly points out the state of the external debt, from which alone a
bankruptcy is to be feared.
Were a favourable balance to return after an expensive war, the payment
of this foreign debt would be the consequence, as much as now when the
payment is made at home, and rather more so; because who ever owed a
balance (to England, I suppose) would then pay his debts at London, with
money due by England, payable at Antwerp, for example; consequently, he
would transfer at discount; and when he transferred in favour of an
Englishman, the debts may be considered as discharged upon the foreign
fund, and stated a-new upon the funds payable in London. Could the
payment of the interest of the public debts be rendred susceptible of
such transfers upon all occasions, it would, I imagine, have a
remarkable effect in favour of public credit.
This thought suggested itself, while I was considering the situation of
a country where borrowing is in its infancy; and it occurred as an
expedient _for preventing foreign expence from draining the country of
the money necessary for circulation at home._ _This_, in every
combination of circumstances, is the most important object of a
statesman’s care, while he is engaged in wars abroad.
Now whether the money of a country be paper or coin, it is equally taken
out of circulation, by every foreign payment. When it is coin, it goes
out of the country, as well as out of circulation: when it is paper, it
does not go out of the country, certainly, but by coming upon the debtor
in it for payment, it is equally taken out of circulation; and what the
debtor gives for it (viz. a bill of exchange upon another country) goes
out of the country. And unless that bill of exchange can be paid with
value exported in merchandize, it will remain a debt upon the country,
contracted in favour of some other nation.
This I hope will be sufficient to recall to mind what has been so fully
explained in the 13th chapter upon banks; where the same question was
stated with regard to the payments Scotland was obliged to make to
England, towards the end of last war. The same principles operate in the
case before us, and may be applied to every circumstance of it; with
this difference only, that here the statesman’s interest is more closely
connected with that of his banks than was the case during the distress
in Scotland: because if he does not support them by a systematical chain
of conduct, he will drain the fund of circulation by his remittances;
his credit will fail; his taxes will not be paid; and his people will be
oppressed. But if he pursues his plan systematically, circulation will
be kept full; his credit will be supported; his taxes will be paid; his
people will be easy: because no check will be put either to industry or
to consumption for want of money; a great part of the former solid
property will be melted down into money; whatever part of that money is
lent to the state will be, by that operation, consolidated into a new
species of property, the public funds; and if after the borrowing scheme
is over (that is, when peace is restored) circulation should be
contracted, a part of the money will stagnate in the hands of
individuals, and will, in their favour, be realized in that part of the
solid property which was melted down in order to produce it. That is,
lands will be sold by the former proprietors, and will be acquired by
those who have money not realized in stock; and for which circulation
has no farther demand. This is the reason why, at the end of every war
which has run the nation in debt, lands have constantly risen in their
value, even when considerable quantities of them have been offered to
sale.
If it be said that the stock-holders are those whom we commonly see
buying the lands, and not those who have sums not realized:
I shall, in answer, observe, that the stock-holders can only buy lands
by selling their stock, to those who have money not realized; so it is
still the money not realized which is employed in buying every article
of solid property: and even after that operation, the money still
remains in circulation; because it is impossible to realize even paper
money itself, except when the creditor in it becomes proprietor of the
property upon which it is secured; and if the money be coin, it is plain
that this cannot be realized any farther than it is by nature. When
therefore we say, that a man realizes his money, we do not mean any
thing farther, than that he gives his money to another in exchange for
solid property. Thus when an estate is bought in a country where banks
upon mortgage are established, a part of the price is commonly taken out
of circulation altogether; because in consequence of the price paid, the
bank is refunded what it had melted down of the land sold; consequently,
that paper becomes consolidated a-new, as it were, with the lands which
are relieved of the mortgage.
But when lands are sold in a country where there is no paper, the price
remains in circulation as before; and if the quantity of coin in
circulation should exceed the uses for it, a case which seldom happens
in these days, it would be exported, and realized abroad.
When this complicated and systematical scheme of credit is not
established, the infallible consequence is, that money disappears:
consequently, interest rises. The taxes formerly imposed cannot be paid:
consequently, it is in vain to seek to augment them; because in
proportion as they are augmented, they become less productive. If money
be borrowed upon remote funds, engaged for other debts previously
contracted, and if public faith be at all events to be preserved, the
consequence must then be, that the public will be eat up by usurers.
This was the case in England during the wars of Queen Anne.
So early as 1706, government, as has been said, began to borrow at 6
_per cent._ upon funds already engaged. What was the consequence? The
exchequer having no money to pay the interest as it fell due, paid with
tallies; these fell to great discount, and had they remained long in
that discredited situation, lending would have stopt, or interest would
have risen, as in France, so high as to lose the name of interest
altogether. This was the case, in the example above cited, when seven
millions ready money, borrowed by the late King of France, became a debt
of thirty-two millions on the state.
Upon the occasion above mentioned, government availed themselves of the
bank of England, as I say every private citizen should have a power to
do, on every occasion, when his credit is good, though money should fail
him. They engaged the bank to discount all tallies issued for interest
of debts; that is, in other words, to turn those sticks into money: but
as public credit was so low that money could not be found to discharge
even the interest of the advance made by the bank, the government
consented, that all advances of that kind should bear compound interest
quarterly, at 6 _per cent._ What a monstrous profit to the bank! what a
charge upon the state! Had banks of circulation upon mortgages been
established at that time, money would have come in at a moderate simple
interest to individuals, who would have availed themselves of them, for
the payment of all public burdens. Instead of which, industry was made
to suffer; the public money did not come in; taxation stopt; expences
went on, and deficiencies were paid by the public at this monstrous
charge.
On the other hand, had it not been for the assistance the bank then gave
the state, in circulating those exchequer tallies, bills, &c. it is very
certain that credit would have failed as totally in England as it had
done in France in 1708, when Desmaretz undertook the finances. This
minister had no bank to avail himself of, and accordingly he run France
in debt at the rate of two hundred millions of livres _per annum_,
during seven campaigns; of which, I am persuaded, he did not receive one
half, or near it, in effective value.
What I have said will, I hope, be sufficient to shew that the only way
for any state to borrow, is previously to provide a fund for making good
what is agreed upon with the lenders; and that all expedients to supply
the want of it will in the end bring great expence upon the people,
either by involving them in an excessive burden of debts, in case public
engagements should be held sacred, as has constantly been the case in
Great Britain; or by driving the state to a bankruptcy, as was the case
in France upon the death of the late King. I call it a bankruptcy,
because _all_ that was owing was not paid. A man who pays no more than
19_s._ 11¾_d._ in the pound, is a bankrupt, as well as he who cannot pay
one farthing.
I now come to the methods of paying off debts when already contracted.
Public debts may be divided into two classes, redeemable and
irredeemable. Redeemable debts may be paid off in several ways, which we
shall briefly enumerate before we compare their several advantages.
First then, such _debts_ may be paid off at once, by refunding to the
creditors the whole capital, with all arrears of interest.
2_do_, _They_ may be paid off yearly, according to a certain rule to
determine the preference, and order of payment: for this purpose, a
determinate sum must be set apart as a sinking fund.
3_tio_, _They_ may be paid off cumulatively and proportionally every
year, by incorporating the sinking fund into the money appropriated for
discharging the interest, and by placing all that is paid beyond the
interest, as payment in part of the capital.
4_to_, _They_ may be paid in one sense, as shall be farther explained,
by reducing the interest upon the capitals, without diminishing them.
5_to_, _They_ may be paid off by converting them into annuities for
lives.
6_to_, And lastly, _they_ may be paid off under the value of the
capitals, by the means of lotteries; where the state may gain what the
creditors choose to lose from a desire of gaining.
To one or other of these methods may be reduced all the fair and honest
expedients which a state may employ to get rid of their debts, without
any breach of public faith, or without proceeding to the extremity of
prescribing conditions of payment, which the creditors are forced to
accept against their will.
As for the irredeemable debts, I apprehend, that, without consent of the
creditors, no change upon the condition of loan can justly be made.
I shall next point out the advantages and disadvantages of the several
methods of discharging debts, as they may affect the separate, or
cumulative interest of a state.
Were large debts which have subsisted for a long time to be paid off all
at once, it would occasion a sudden and a violent revolution, which is
always attended with inconveniences.
Were, for example, the proprietors of lands to consent to sell off a
part of their estates for the payment of the public debts, the quantity
of land brought to market, would sink the price of it very considerably;
from which would arise a great detriment to landlords. I shall not here
inquire from whence such a sum of money could come.
Could a treasure be brought from India (let me suppose) sufficient at
once to discharge the debts of Great Britain, circulation would become
so glutted with money, that interest would fall to nothing. This would
be a temporary loss to all the former creditors, until they had time to
lend to the other states of Europe, who would, in consequence of the
revolution, sink the rate of interest upon their own debts. Something
like this was the consequence of paying off all the debts of France with
bank notes in 1720, upon which interest fell, as we have observed above,
to 2 _per cent._
When, in the second place, debts are paid off partially every year,
according to a certain rule, it is expedient to have the capitals
reduced into shares of a determinate value, as is the practice in
France, that they may be drawn out as in a lottery. The lots drawn may
then be paid, and no detriment will follow to any particular creditor,
more than to another: because if by being paid there be either profit or
loss to the creditor, it will affect the value of the whole stock in
proportion. If, upon the establishment of such a plan, the stock be
found to rise, it will be a proof that either the interest formerly paid
was below the common rate, or that the credit of the state was looked
upon as precarious: if it should sink, contrary conclusions may safely
be drawn.
This is a common method of paying off debts in France, where funds are
more commonly divided into shares than in Great Britain.
In 1759, the King opened a subscription for seventy-two millions of
livres upon the general farms: this sum was divided into seventy-two
thousand actions, bearing 5 _per cent._ and it was stipulated, that upon
the renewal of the farms in 1762, twelve thousand actions should be
drawn by lot, and paid off monthly; so that in six months the whole debt
was to be discharged.
The third method of applying what is annually paid above the interest,
in extinction of the capital, is the measure proposed by Cardinal
Richlieu for discharging the debts of France; only the Cardinal went to
work in a very arbitrary way, both in determining the interest, and in
fixing a value upon the capital, equally detrimental to the creditors.
To apply this to an example. Had England at the time government first
established a sinking fund, arising out of the savings which were made
upon reducing the rate of interest, from time to time, continued to pay
to the creditors the same annual sums as formerly; and thereby applied
what was paid beyond the interest, to the payment of the capital, there
could not have been any misapplication of the sinking fund; and the
debts by this time would have been greatly diminished. Whereas by
applying the sinking fund to the service of the year, for the ease of
the people and advantage of the creditors, the consequences _may_ prove
exceedingly inconvenient.
The fourth method of reducing debts is that adopted by Great Britain,
viz. by reducing the interest paid upon them. From this we discover the
reason why taxes, even in time of war, are seldom augmented in this
kingdom much above the proportion of the interest of the money borrowed.
We have, in the second chapter of the first book, boldly declared this
to be against principles, and the authors of such a scheme were there
stigmatized as men of no foresight: we now see how much people may be
mistaken in their conclusions in political matters, when they are formed
upon too narrow combinations.
Were capitals intended _ever_ to be paid, no doubt the conclusion would
be just; but if it be resolved, that capitals shall never be considered
as the object of attention, and that the interest alone shall be looked
upon as the real burden, then all payment of capitals is unnecessary,
except so far as by paying a part of them, it may serve to reduce the
interest upon the rest, by making money regorge in the market beyond the
uses found for it.
This plan cannot be carried on while a nation is engaged in an expensive
war, which absorbs all the money to be lent: but it becomes the object
of a statesman’s care, after peace is restored, and when trade begins to
bring in a balance upon exportations.
We have seen how that balance tends every year to diminish the capitals
due to strangers, and to keep money at home. Then is the time to extend
taxation beyond the uses found for money to pay the interest. Two or
three millions extraordinary, raised at the close of a war, and thrown
into the hands of the creditors of Great Britain, in extinction of their
capitals, would soon engage them to cry for mercy. They would find no
outlet but France for such sums; and it is precisely after a war, that
France is busy in playing off the arbitrary operations on her debts,
which reduces her credit too low for any one to trust her with money.
Let peace continue for a few years, confidence will there advance apace,
and then it will become more difficult to make money regorge in England.
To say that taxes are already beyond all bounds, is, in other words, to
say the nation is no more in a state of defence: because should Britain
be again involved in an unavoidable war, the consequence will be, either
to render more taxes indispensable, or to oblige the nation to submit to
any terms demanded by her enemies.
If it be therefore true, that taxes may still be augmented, the most
proper time for augmenting them, is, at the very close of a war; because
then every circumstance favours the scheme, as we shall now explain.
We have said above, and experience proves the truth of it, that at the
end of a war circulation becomes too full for domestic uses; and that
the superfluity of money is realized upon property. This is the
consequence of a sudden stop in national expence. Were taxes at such a
time augmented, part of this regorging money would find a vent by the
augmentation upon domestic circulation which taxes would occasion; which
augmentation would circulate into the exchequer, instead of becoming
consolidated with property, as has been said, and coming into the hands
of government, would be poured into those of the creditors, in payment
of part of their capitals. There it would regorge a-new; because it is
observed, in general, that those who have property in the funds are not
apt to squander money when unexpectedly thrown into their hands; on the
contrary, they are commonly found to live very much within their
income[37].
Footnote 37:
Experience shews, that when the debts of a nation have come to a
height, the public creditors become people of great consequence, upon
account of the ease and affluence of their circumstances. They are not
exposed to the many hidden expences incident to land proprietors. They
are a class in the state but lately known; the capital of their wealth
is hid; and opinions concerning their figure and rank are as yet
unformed. Whereas the family of a land proprietor is known; his
expence _may surpass_ that of his predecessors without much
observation; but if it should _fall below_ it, he commonly sinks in
the estimation of his neighbours, who seldom combine circumstances
which can only be guessed at. An heir to a landed estate, is bred up
from his infancy with the notion of living like his father: the son of
a monied man has commonly very different sentiments; and even when any
of this class takes a turn to expence, the lustre of it is all
displayed round their own bodies; that is, in their own house, and in
their own families: no country seats, hounds, horses, servants in
every quarter, family interest to keep up, little oeconomy in
spending. In a word, every one feels better than I can describe, that
landed men commonly exceed, and monied men commonly live within their
income.
But suppose it should not immediately regorge, it would then increase
expence and consumption; consequently, would advance industry, and
render every branch of excises more productive. In every combination we
can form, public opulence would be augmented: money would regorge at
last; and then the creditors would come with their application to
government to suspend the reimbursement of capitals, and to accept, in
lieu of that, a diminution upon the interest.
This is the golden opportunity for diminishing the public burden
occasioned by debts; and this method of compassing so desirable an end,
is far preferable to that of compelling creditors to submit to a
diminution, by offering a sudden reimbursement, which was put in
practice in Britain in the year 1749, as has been observed. Had the
public waited with patience one year longer, and then thrown in a few
millions more than they did into the hands of the creditors, the
proposal of reducing the interest would have come from the other
quarter; which in all bargains with creditors is of the greatest
consequence to the debtor.
The sum of interest thus diminished, upon an obligation to suspend the
reimbursements of capitals for a limited time, three questions will
naturally occur: 1. Whether the taxes should be diminished in
proportion: or 2. If they should be allowed to subsist with a view to
apply the overplus of them to national purposes: or 3. Whether it may
not be most adviseable to turn such a part of the debts into annuities
for lives, as may absorb the saving upon the former interest paid. The
first two questions I reserve for the following book, where they will be
fully examined; the last is the fifth expedient proposed for acquitting
the public debts. As the nature of it is abundantly evident, I shall
only repeat what I formerly observed, that this method of establishing a
sinking fund, has the advantage of being less exposed to misapplications
than any other.
The last expedient of paying off capitals, below the original value, by
the means of lotteries, should only take place after interest is brought
so low as to cut off any near prospect of reducing it still farther.
I shall not pretend to guess at the lowest point to which the rate of
interest may be brought, by the expedients of increasing money at will,
by the means of banks upon mortgage. I have in the seventh chapter of
the first part of this book, thrown out a hint of a land-bank, which
opens a very wide field of speculation; but in this place, it would be
unnecessary to enlarge upon that subject.
Let me suppose the rate of interest brought lower in Britain than
anywhere else, it will nevertheless be subject to periodical risings, on
many occasions.
Upon every such emergency, capitals will sink in the market below par.
It is then _only_ that a state can have recourse to this last expedient
of opening lotteries, and taking in subscriptions at the market price of
the funds subscribed into them. And although the annuities to be paid
upon the lottery fund be regulated by the rate of interest at the time,
and consequently considerably above the standard of the other debts; yet
the same methods of reducing it afterwards will constantly produce their
effects, and thereby diminish the capital by degrees.
In like manner, in time of war, when the public funds fall greatly in
their price, government may open new subscriptions, and receive payment
for them in their own paper at the market price, allowing a small
premium in the rate of interest. If the creditors willingly subscribe
upon these conditions, no violation of public faith can be alledged. By
this operation, the capitals will be diminished, and the advanced rate
of interest paid during the war, will return upon the peace to where it
was: then the new subscriptions may be paid off, or subscribed for again
at a lower rate than before.
Suppose it then resolved, that in time of war, the nation’s creditors
should be allowed, at certain times, to subscribe their capitals in
books opened at the bank for that purpose, one quarter _per cent._ above
the selling price. Would not this have the good effect of supporting the
price of stocks on one hand, and of reducing the capital of the national
debt upon the other? Example.
Let me suppose that in time of war, the 3 _per cents._ sell at 74¾,
might not government receive them at 75, and constitute the new
subscription at 4 _per cent._? What interest could any one have not to
subscribe, who at such a time intends to sell his stock? His 3 _per
cent._ sold to government at 75, and turned into a 4 _per cent._ would
afterwards, when sold in the market, produce ¼ _per cent._ more than if
it had not been subscribed into the new fund.
Perhaps in Change alley, where calculation is carried to the utmost
pitch of refinement, even this eventual advantage to government might
sink the value of the new 4 _per cents._ Let this be allowed. The answer
is, that when people compute with such nicety, and comprehend in their
calculations every circumstance the most minute, it is, I think, the
interest of a state (whose views should extend far beyond the period of
human life) to grant a premium upon such subscriptions more than
sufficient to indemnify the subscribers, according to the most rigid
calculation concerning their present advantage.
The smallest profit to be discovered by the nicest pen will engage the
monied man to subscribe; consequently, the capitals of debts may be
diminished, at a loss to the public almost imperceptible. And for this
imperceptible loss in the mean time, the greatest national advantage may
be obtained at a distant period.
It is now full time to close this book, which has swelled far beyond its
due proportion. The subject of credit and debts is so connected with
many questions relating to taxes, and to the application of their
amount, that the connection of the subject would have suffered little in
blending them together. But as I find it is a great relief to the memory
to interpose, now and then, a pause; and as taxes were intended to be
treated of by themselves, according to the plan I at first proposed, I
shall make no alteration in it.
At the end of the first and second books, I subjoined a chapter of
recapitulation; in the third book, this was supplied by a very full
table of contents; here, because of the intimate connection of the
subject of this and the following book, I shall refer the reader to the
end of the volume, for a full recapitulation of both.
END OF THE FOURTH BOOK.
------------------------------------------------------------------------
------------------------------------------------------------------------
AN
INQUIRY
INTO THE
PRINCIPLES OF POLITICAL OECONOMY.
------------------------------------------------------------------------
BOOK V.
OF TAXES, AND OF THE PROPER APPLICATION
OF THEIR AMOUNT.
------------------------------------------------------------------------
INTRODUCTION.
The subject of taxes is so closely connected with every branch of
political oeconomy, that I have not been able to avoid anticipating a
subject, which, according to my plan, is left for the conclusion of this
work.
What has been hitherto introduced concerning taxation, in treating of
industry, trade, money, credit, and debts, relates principally to the
effects of taxes upon circulation, prices, and several other things
relatively to those subjects.
What therefore remains, not as yet touched upon, chiefly concerns the
principles which determine the nature of every tax, relatively to the
interest it is intended to affect.
To investigate the different consequences of taxes when imposed upon
possessions, and when upon consumption, are questions which relate
directly to the principles of taxation. But in this book I shall also
have occasion to trace out, farther than as yet I have done, certain
combinations concerning the effects which taxes have in multiplying the
fund of circulation: and as the augmentation of taxes tends greatly to
increase money, I am thence led to examine, how far the advantage gained
by the suppression of taxes may not be more than compensated to a
nation, by the inconveniences proceeding from so great a diminution of
circulation.
Taxes have all along been supposed to enhance the price of living; we
shall therefore have an opportunity of investigating the proper extent
to be allowed to that general proposition.
CHAP. I.
_Of the different Kinds of Taxes._
Taxes have been established in all ages of the world, under different
names of tribute, tithe, tally, impost, duty, gabel, custom, subsidy,
excise; and many others needless to recapitulate, and foreign to my
subject to examine.
Though in every species of this voluminous category, there are certain
characteristic differences; yet one principle prevails in all, upon
which the definition may be founded.
I understand therefore by _tax_, in its most general acceptation, _a
certain contribution of fruits, service, or money, imposed upon the
individuals of a state, by the act or consent of the legislature, in
order to defray the expences of government_.
This definition may, I think, include, in general, all kinds of burdens
which can possibly be imposed. By fruits are understood either those of
the earth, of animals, or of man himself. By service, whatever man can
either by labour or ingenuity produce, while he himself remains free.
And under money is comprehended the equivalent given for what may be
exacted in the other two ways.
I have no occasion to consider the nature of such taxes as are not in
use in our days. Tributes of slaves from conquered nations are as little
known in our times, as contributions of subsistence from the subjects of
the state.
I divide, therefore, modern taxes into three classes. 1. Those upon
alienation, which I call proportional: 2. Those upon possessions, which
I call cumulative or arbitrary: and 3. Those exacted in service, which I
call personal. These terms must now be fully explained, that I may use
them hereafter without being misunderstood.
A proportional tax presents a simple notion.
It is paid by the buyer, who intends to consume, at the time of the
consumption, while the balance of wealth is turning against him; and is
consolidated with the price of the commodity.
Examples of this tax are all excises, customs, stamp-duties, postage,
coinage, and the like.
By this definition, two requisites are necessary for fixing the tax upon
any one: first, he must be a buyer; secondly, he must be a consumer. Let
this be retained.
A cumulative or arbitrary tax, presents various ideas at first sight,
and cannot well be defined until the nature of it has been illustrated
by examples.
It may be known, 1_mo_, By the intention of it; which is to affect the
possessor in such a manner as to make it difficult for him to augment
his income, in proportion to the tax he pays.
2_do_, By the object, when instead of being laid upon any determinate
piece of labour or consumption, it is made to affect past and not
present gains.
3_tio_, By the circumstances under which it is levied, which imply no
transition of property from hand to hand, nor any change in the balance
of wealth between individuals.
Examples of cumulative taxes are land-taxes, poll-taxes, window-taxes,
duties upon coaches and servants, that upon _industrie_, in France, and
many others.
A personal tax is known by its affecting the person, not the purse of
those who are laid under it. Examples of it are the _corvée_, in France;
the six days labour on the high roads, and the militia service before
pay was allowed, in England[38].
Footnote 38:
The _corvée_ in France is the personal service of all the labouring
classes, for carrying on public works. Were they paid for in money, it
is computed they would amount to no more than 1 200 000 livres a year.
This tax was omitted in the account of the French revenue.
Having thus explained what I mean by proportional, cumulative, and
personal taxes, it is proper to observe, that however different they may
prove in their effects and consequences, they all agree in this, that
they ought to impair the fruits and not the fund; the expences of the
person taxed, not the savings; the services, not the persons of those
who do them.
This holds true in every denomination of taxes. In former days, when
annual tributes of slaves were paid, and even at present among the
Turks, where it is customary to recruit the seraglios of great men by
such contributions, I consider the young women who are sent, as part of
the fruits of the people who send them. This is a fundamental principle
in taxation; and therefore public contributions, which necessarily imply
a diminution of any capital, cannot properly be ranged under the head of
taxes. Thus when the Dutch contributed, not many years ago, the
hundredth part of their property towards the service of the state, I
cannot properly consider that in the light of a tax: it was indeed a
most public spirited contribution, and did more honour to that people,
from the fidelity with which it was made, than any thing of the kind
ever boasted of by a modern society.
------------------------------------------------------------------------
CHAP. II.
_Of proportional Taxes, and their proper Object._
Whatever exists for the use of man, so far as it is considered as a fund
for taxation, may be classed under the following heads: 1. The produce
or fruits of the earth; 2. the produce of the industry of man; or 3. his
personal service. Farther,
Fruits cannot be obtained without the necessary labour of man and
cattle. As this labour presupposes all the necessary consumption of
maintenance, &c. the produce of the land must be understood, with regard
to taxes, to be that part of the fruits only which remains after
deducting an equivalent for all necessary expences in making the earth
produce them. The net produce alone of the earth is to be considered as
a fund liable to taxation; and every contribution which bears not a just
proportion to that quantity, is wrong imposed, as shall be shewn as we
go along.
Again, as to the produce of work: this cannot be brought into existence
without some expence, viz. the maintenance of the workman; that is to
say, his food, raiment, fire, lodging, and the expence he is at for
tools, and every other necessary. This we shall, for the future, call
his physical-necessary. The value of the work, over and above an
equivalent for these articles, is the only fund to be taxed with regard
to the workman.
As to work itself, we have seen above (Book II. chap. 26.) in the
general distribution of things which may be purchased with money, how it
was ranged under the class of things incorporeal. For that reason, the
work performed cannot come under taxation; and therefore the person
working, who by work acquires a balance in his favour, is brought to be
affected by proportional taxes upon the articles of his consumption; and
when it is found that these articles suffer no alienation before they
are consumed by him, and consequently escape taxation, then he may
either be laid under the cumulative taxes, which will affect his wealth,
or under the personal, which are paid in work itself, and in that
respect may be considered as the fruit of the man.
Nothing would be so easy as a general rule for imposing proportional
taxes, did the labourers of the ground actually consume a part of the
fruits of the earth, and the other industrious classes a part of their
own work, in lieu of this physical-necessary. In that case, nothing but
what remained of fruits and work, not already consumed by the immediate
producers, would come to market for the use of those who do not work;
but who have an equivalent to give for it, out of the produce of past
industry. Were that, I say, the case, then at the time of alienation
(or, as we expressed it in the 26th chapter of the second book, at the
time when the balance of wealth is going to turn in favour of the
industrious, against the idle consumer) a tax proportional to the value
of the alienation might, with the greatest propriety, be imposed, as we
shall presently discover.
This, I hope, will recall to mind the principles deduced in the chapter
above cited, where we made it appear, how the industrious classes, who
furnish consumable commodities for the price of their overplus, must
constantly have the balance of wealth turning in their favour: and when
once they arrive at a certain degree of ease, proportional to their
ambition, then they give over working, and become incorporated into the
class of those who have enriched them.
Thus matters go on in a perpetual circle. The industrious become easy,
and the public lays the consumers under a perpetual contribution in
proportion to their expence.
The hypothesis we have made, is not entirely agreeable to matter of
fact; because the operation of taxes is far more complex than we have
described it to be; but by simplifying it, as I have done, it serves to
give an idea of the result, or general consequence of proportional
taxes, which, when properly imposed, do affect the idle only, but never
the industrious.
Were, I say, the operation of taxation as simple as we have represented
it, nothing would be more easy than to deduce its principles. Nothing
would come to be refunded to the labourer or workman, at the sale of his
surplus. This surplus would be equal to the whole produce of the earth,
and whole industry of the country, deducting the physical-necessary of
all the industrious; and this physical-necessary need not then be
deducted; because it is supposed to be consumed in the very production
of the surplus, as the aqueous part of sea water is consumed before you
can have the salt.
This illustrates what has been said, viz. that the fruits of the earth
are only to be reckoned to exist, after deducting the necessary expence
of providing them. For though in fact a farmer possesses all his crop
after harvest, yet part of it, _as to him_, is virtually consumed out of
his own stock, or that of others who have furnished him food and
necessaries all the time it was coming forward: consequently, that part
neither belongs to the ground, or to the farmer.
If it be urged still, that the whole must be supposed to exist with
regard to the state, I agree to the proposition; but according to our
argument, it must not be supposed to exist in favour of the state, to
the prejudice of the farmer; for this reason, that the total of the
farmer’s expence must be understood to have been taken from the surplus
of other people’s industry, and therefore if the crop be supposed to
exist with respect to the state, because it is in the farmer’s yard, the
surplus of industry which he has consumed must not be supposed to exist
in favour of the state, at the same time. But as the farmer is supposed
to have paid the tax upon what he has borrowed and consumed, he must
_draw it back_ from those who, in their turn, are to consume his crop:
and if he draws it back, he cannot be said to pay it, although the state
profits of it as much as if he did.
Does it not appear from this analysis, that a state can only take
gratuitously and proportionally out of the surplus of fruits and
industry? Now what is here called surplus, relatively to the
industrious, is the necessary fund of consumption for all the rich and
idle; consequently, were the state to diminish any part of the
_quantity_, the idle and the rich would be deprived of a sufficiency:
but in regard that those who do not work give money, which is the price
of all things, in exchange for what they consume, there the state steps
in, and says, we ask nothing of those who have nothing but their
physical-necessary, this they have been allowed to take; we take none of
their surplus from them, this we allow them to sell to you: but as for
you, who do not work, and have in your coffers wherewithal to purchase
the labours of your industrious brethren, this labour you shall not
profit of, unless you give the state a certain value out of your wealth,
in proportion to the work and fruit you are going to consume, although
you have contributed nothing towards the production of it.
Hence it appears evident, that without _money_ there could be no tax
imposed: for were the state to take their proportion of the real
surplus, and dispose of it out of the country, a part of the inhabitants
would be starved. But by an equivalent’s being found, quite different
from the surplus itself, of no use for subsistence, the whole produce of
industry is left for the use of those who have it; the state takes what
part of the equivalent they please from the idle; and no body starves,
but such as have not money, nor industry, nor the talent of exciting the
compassion of the charitable.
By this simple representation of a most complicated operation, I have
been able to deduce the capital principle of proportional taxation. If
the reasoning be found solid, it may be retained; because we shall have
occasion to recur to it, at almost every new combination.
------------------------------------------------------------------------
CHAP. III.
_How proportional Taxes are drawn back by the industrious, and how that
drawing back is the only reason why Taxes raise the Prices of
Commodities._
What perplexes our notions in the theory of proportional taxation, is,
that the industrious man, instead of bringing his surplus to market, is
obliged to bring the whole of his work.
Let me, therefore, suppose him to be creditor upon one part of his work,
and proprietor of the other. This will divide it, as it were, into two
parts, which I shall call (A) and (B).
(A) represents that part upon which he is creditor, and answers to all
the expence he has already been at; that is, to his physical-necessary,
as we have called it. This we have said ought to be considered as
virtually consumed by the workman, and if a tax be raised upon it, it
must not affect _him_; that is, he must draw it totally back from the
person to whom he disposes of it. (B) on the other hand, represents that
part of which he is proprietor, to wit, his profit; and therefore may
either be taxed or not, as the state shall think it.
If it be taxed in the hands of the industrious man, without suffering an
alienation, the tax will be of a cumulative nature. If it be left free
to him, and taxed to the person who buys it, it will be of the
proportional kind, as we shall see afterwards. Again,
In the first case, it will check the growing wealth of the industrious
man; in the second, it will accelerate the dissipation of the buyer.
Taxes, therefore, of the first kind, are proper to be imposed in
countries where the state is jealous of growing wealth, as we have
observed in the 25th chapter of the second book. If the tax, again, be
laid upon the buyer, then the balance turns in favour of the industrious
man, in proportion to the full amount of (B), and produces no other
effect than to accelerate the dissipation of the buyer.
Let us now take in a new combination.
If, when the work is brought to market and sold, the price shall not
exceed the value of the industrious man’s (A), then he is of the class
of those we call _physical-necessarians_, who accumulate no profits. If
the price of it be less than (A), he becomes a load upon the state, a
bankrupt to those who have fed him upon credit, and will die for want,
unless he be supported by charity.
So far with regard to the seller: next as to the buyer.
The buyer appears at market with his money. When he comes there he must
give, first, an equivalent for the prime cost of the merchandize; that
is, he must refund every expence necessarily incurred in producing it;
or he must refund the value of (A). Next, the industrious man has a
claim upon him for his profits, viz. his (B). Then comes the state, who
claims a part of his wealth, in regard that he is going to purchase what
his own industry has not produced. This is the tax; I shall call it (C).
This tax will be found of the proportional kind. It will not affect the
growing wealth of the seller, but it will accelerate the dissipation of
the buyer; and will pull down the scale against him, in favour of the
industrious. This is a proper tax, in countries where the state observes
the maxim of sharing the wealth of those who dissipate.
Let us now take in another combination. Let us suppose this buyer to be
an industrious person, and the thing bought to be a necessary material
for the manufacture in which he is employed. Is it not plain, that when
the second industrious man comes to market to sell his work, which I
also suppose composed of his (A) and his (B), that his (A) is a still
more compounded body? It first includes his own physical-necessary, as
above: 2. the (A) and (B) of the man from whom he bought the materials:
and 3. the (C) which he paid to the state for the liberty of acquiring
what he himself had not produced.
Whoever therefore buys from the second industrious man, must, in like
manner, refund to him his full (A); he must also pay him his (B); and
then he will find the state claiming their (C), as in the former
operation.
This being done, let us examine the interests of all parties. The first
industrious man has no reason to complain of the tax; because he was
paid his necessary expence (A), and also his (B) for his profit; and the
state realized the tax at the expence of the second industrious man, who
paid it. Now we said that the dissipation of his wealth was accelerated
in proportion to the value of what he paid for (C); but as he is none of
the idle, and as the thing bought was a material necessary for his
manufacture, the second buyer finds himself obliged to refund the whole
amount of the first (A), (B), (C); because the sum of them make a part
of the second man’s (A). Now it is the refunding of this (C) to the
industrious man which is the only circumstance, from which proceeds the
rise in the price of commodities, in consequence of proportional taxes.
Moreover, the second buyer must pay the second industrious man’s (B), in
favour of the balance which is going to turn against him; and last of
all, he must pay the second (C), which is the share the state requires
of him, in order to accelerate his dissipation.
Now let us observe, that if the commodity bought by the second
industrious man, be not necessary for the existence of his manufacture,
it cannot enter into his (A), and therefore must be diminished upon his
(B); and if his (B) cannot pay it, then he will owe it to some body, and
for the future must either abstain from such expences, or leave off
working, in favour of those who can live without them.
Let me illustrate all this by an example.
A tanner sells his leather to a shoemaker; the shoemaker in paying the
tanner for his leather, pays the tanner’s subsistence and profit, and
the tax upon leather.
The man who buys the shoes for his own consumption, refunds all this to
the shoemaker, together with his subsistence, profit, and the tax upon
shoes; consequently, the price of shoes are raised, only by refunding
the taxes paid by the industrious.
But if the shoemaker’s subsistence shall happen to include either tavern
expences, or his consumption on idle days, he will not draw these back;
because other shoemakers who do not frequent the tavern, and who are not
idle, will undersell him: he must therefore take his extraordinary
expence out of his profits; and if his profit be not sufficient, he must
run in debt to the tavern-keeper.
The extravagance and idleness, therefore, of particular workmen does not
check industry, nor raise prices; for these will always be in proportion
to demand, and there is no reason why demand should either rise or fall,
because a particular workman is extravagant, or consumes a commodity not
necessary for his manufacture or subsistence.
From this example there arises a new combination: that in proportion as
the industrious do not consume of the produce of their own industry, but
come to market with the whole, and then purchase the work of others,
they are considered, as to taxes, in the light of idle consumers, who do
not work, but purchase with money the fruits of the industry of others.
By this operation, the taxable fund is augmented beyond the extent of
the general surplus called (B). The reason is plain. Whatever is brought
to market is supposed to be surplus, as it _may_ there be bought by the
idle, as well as the industrious. The only difference is, that the first
do not draw back the tax, and that the second do, as we have already
shewn.
From this reasoning we may conclude, that the way to carry proportional
taxes to their utmost extent, is to draw all commodities to market, to
engage every one to carry thither the whole produce of his industry, and
buy whatever he stands in need of.
But which way will you engage either a farmer to sell his crop, and buy
subsistence from another; or a shoemaker to sell his own, and buy his
neighbour’s shoes? The thing is impracticable; and were it attempted, it
would prove an arbitrary proceeding, and a cumulative tax laid upon
their industry: a tax which, by the nature of it, they cannot draw back,
as we shall presently see, and from this circumstance alone proceeds the
whole oppression of it.
Let me next analize the price paid by the last buyer, whom we have
called the rich and idle consumer of the manufacture, who can draw
nothing back from any body.
Is it not composed of the whole value of the subsistence, of the work,
of the profits, of the tax? The whole reimbursement of all former
payments and repayments lands upon him. Those who have been at all the
expence, appear in the light of his servants and agents, who have only
advanced money upon his account.
How absurd, therefore, is it either to say, that all taxes fall
ultimately upon land; or as others, for no better reason, pretend, that
they fall upon trade. I say, that this category of taxes which I have
now been describing, and which I shall still more fully explain in a
subsequent chapter, never can either fall upon, or affect any person but
the idle; that is to say, the not industrious consumer. If there be
found a possibility for any consumer to draw back the tax he has paid, I
say he is of the class of the industrious, in one way or other: and I
farther say, that such a tax raises the price of the commodity. But by
drawing back, I understand, that the repayment is an inseparable
consequence of his having paid the tax. I do not, for example, say that
a place-man draws back his taxes by the emoluments of his office: but I
say a brewer draws back his excise by the sale of his beer.
Let this principle also be retained, that with respect to the
consumption of superfluities by the manufacturing classes, they must be
considered as being of the class of the rich and idle, as much as the
first Duke in England. When therefore the extravagance of the
manufacturing classes becomes general, and when the rate of the market
can afford them great wages, relatively to the price of necessaries,
such profits consolidate into the price of the manufacture, according to
the principles laid down in the 10th chapter of the second book. The
statesman then must endeavour to create a competition, by introducing
fresh and untainted hands into such branches. This will be a sure check
upon the industrious, and, if rightly applied, will prevent all frauds,
all pretences for the rise of the price of labour on account of taxes:
and, if carried to the full extent, will prevent any industrious person
from enjoying either a day’s idleness, or the smallest superfluity;
except in consequence of his peculiar dexterity, or extrinsic
advantages.
------------------------------------------------------------------------
CHAP. IV.
_Of cumulative Taxes._
I shall not repeat what I have already said concerning the
characteristics of this kind of imposition; but after citing some
examples, I shall examine it more closely, as to its nature and
consequences.
The most familiar examples of it to an Englishman, are tithes, land-tax,
window-tax, and poors-rates.
The most familiar examples to a Frenchman, are the _Taille_, _Fourage_,
and _Ustencil_, (which go commonly together) also the _Capitation_, the
_Dixieme_, the _Vingtieme_, and the _Industrie_[39].
Footnote 39:
The _Taille_ is properly a land-tax, to which men called _noble_ are
not subjected. The reason of which is, that it was originally imposed
in lieu of such personal military services as were peculiar to the
lower classes.
The _Fourage_ and _Ustencil_ are laid upon all those who pay the
_taille_, and are in proportion to it. The first is appropriated for
the subsistence of the cavalry, when they are in quarters; the last
for kettles and small utensils for the infantry.
The _Capitation_ is the poll-tax. The _Dixiemes_ and _Vingtiemes_ have
been already explained, and tithes are well known to every one.
The _Industrie_ is that imposition arbitrarily laid on by the
Intendants of provinces, upon all classes of industrious people, in
proportion to their supposed profits in every branch of business.
The nature of all these taxes, is, to affect the possessions, income and
profits of every individual, without putting it in their power to draw
them back in any way whatever; consequently, such taxes tend very little
towards enhancing the price of commodities.
Those who come under such taxes, do not always consider that their past
industry, gains, or advantages of fortune, are here intended to suffer a
diminution, in favour of the state; for which outgoing they have,
perhaps, made no provision.
When people of the lower classes, instead of being subjected to
proportional taxes, are laid under such impositions, there results a
great inconvenience. They are allowed to receive the whole profit of
their industry, which in the former chapter we called their (B), the
state however reserving to itself a claim for a part of it: this,
instead of being paid gradually, as in a proportional tax, is collected
at the end of the year, when they have made no provision for it, and
consequently, they are put to distress.
Besides, how hard is it to deprive them of the power of drawing back
what they pay? And how ill judged to trust money with those who are
supposed only to gain an easy physical-necessary? An equivalent for
procuring the articles of ease and luxury, should not be left in the
hands of those who are not permitted to enjoy them.
From this we may conclude, 1. That the more such taxes are proportional
to the subject taxed, 2. the more evident that proportion appears; and
3. the more frequently and regularly they are levied, the more they will
resemble proportional taxes, and the less burden will be found in paying
them. Let me illustrate this by some examples.
The stoppage upon a soldier’s pay, either for the invalids, or Chelsea,
is a cumulative tax; but the method of levying it gives it all the
advantages of one of the proportional kind. 1st, It bears an exact and
determinate proportion to the value of his pay. 2_dly_, This proportion
he knows perfectly. And 3_tio_, Instead of receiving the whole into his
own possession, and paying the hospital at the end of the year, it is
regularly and gradually retained from him at every payment.
Tithes are a cumulative tax; but they are accompanied with all the three
requisites to make them light; although in other respects they are
excessively burdensome. 1_st_, They bear an exact proportion to the
crop. 2_dly_, This proportion is perfectly known. 3_dly_, Nature, and
not the labourer, makes the provision. But they fall upon an improper
object: they affect the whole produce of the land, and not the surplus;
which last is the only fund that ought to be taxed.
The land-tax in Scotland bears, 1_st_, a very determinate proportion to
the valuation of the land; and has, 2_dly_, the advantage of being well
known to every contributor; so that provision may easily be made for it.
But the third requisite is wanting: the proprietor having the public
money in his hands, often applies it to private purposes; and when the
demand is made upon him, he is put to distress.
The _taille_, in many provinces of France, bears, first, a very exact
proportion to the value of the land[40].
Footnote 40:
This sort of _taille_ is called _tariffée_; because it is imposed
according to a valuation of the land. It is a late improvement; but
still is exposed to numberless inconveniences, which are mentioned in
the text.
But in the second place, the proportion is entirely unknown to the man
who pays it; being nowhere to be seen but in the offices of the
intendant and his deputies.
And in the last place, the whole payment comes at once.
What hides, and consequently destroys this proportion, is, that after
the distribution is laid on, as in Scotland, at so many shillings in the
pound of valuation, the full sum intended to be raised does not come in;
either because the intendant has given exemptions to certain parishes,
on account of the accidents of sterility, hail, mortality among the
cattle, and the like; or because the property of a part of the parish
has fallen into the hands of people exempted from the _taille_; or that
others, who were really bound to pay part of it, are become insolvent.
The intendant must then make a second, and perhaps a third general
distribution of the deficiency upon all the contributors, in the most
exact proportion to the first, but yet by their nature impossible to be
foreseen. It is for these reasons chiefly that the _taille_ in that
kingdom is so grievous.
These second distributions of the tax, 1_st_, destroy the proportion
between the tax and the revenue taxed. _2dly_, They make it impossible
to judge of the amount of them. And lastly, the demand comes at once,
when, perhaps, the money has been otherwise applied.
The French tax upon industry is more grievous still; because none of the
three requisites above-mentioned are allowed to operate.
This tax is supposed to be proportional to the profits made upon trade,
and other branches of industry, not having the land for their object.
All merchants and tradesmen, in cities, and in the country, pay the tax
called _Industrie_; and the reason given for establishing this tax, as I
have said in another place, is in order to make every individual in the
state contribute to the expence of it, in proportion to the advantages
he reaps. Nothing would be more just, could it be put in execution,
without doing more hurt to the state, than the revenue drawn from it can
do good.
I shall now shew how, in this tax, all the three requisites we have
mentioned are wanting.
1_mo_, By its nature, it can bear no exact proportion to the profits of
the industrious man; since nobody but the person taxed can so much as
guess at their extent.
2_do_, It cannot possibly be provided for, as no check can be put upon
the imposer, unless so far as general rules are laid down for each class
of the industrious; and from these again other inconveniences flow, as
shall be observed.
3_tio_, It comes at once upon poor people, who have been frequently
forced to beg for want of employment before the tax-gatherer could make
his demand; and those who remain, frequently become beggars before they
can comply with it.
I say, that from the general rules laid down for regulating this tax, as
to every class, a workman who has a large family to maintain, is no less
taxed than one who has no charge but himself: and it will be allowed, I
believe, that the profits of one industrious person of the lower
classes, is in no country sufficient to pay any considerable tax, and
maintain a large family, much less a sickly one. I therefore imagine,
that cumulative taxes never should be raised upon such classes of
inhabitants as have no income but their personal industry, which is so
frequently precarious.
Merchants also ought not to be subjected to any tax upon their industry.
They ought to be allowed to accumulate riches as fast as they can:
because they employ them for the advancement of industry; and every
deduction from their profits is a diminution upon that so useful fund.
When cumulative taxes are laid upon any of the industrious classes, they
tend to check growing wealth; and are most familiarly imposed in
monarchical states, where riches are apt to excite jealousy, as has been
observed.
But as to the class of land proprietors, that is to say, the more
wealthy inhabitants, who live upon a revenue already made, the
impropriety of cumulative taxes is much less. They are however
burdensome, and disagreeable in all cases, and ought to be dispensed
with, when the necessary supplies can be made out by proportional taxes,
without raising the prices of labour too high for the prosperity of
foreign trade.
From the examples I have given of this branch of taxation, I hope the
nature of it may be fully understood, and that for the future no
inconvenience will arise from my employing the term of _cumulative tax_.
I shall now subjoin its definition.
A _cumulative tax_, is _the accumulation of that return which every
individual, who enjoys any superfluity, owes daily to the state, for the
advantages he receives by living in the society_. As this definition
would not have been understood at setting out, I thought it proper,
first, to explain the nature of the thing to be defined.
------------------------------------------------------------------------
CHAP. V.
_Of the Inconveniences which proceed from proportional Taxes, and of the
Methods of removing them._
A proportional tax, as I have said, is that which is levied upon the
idle consumer, at the time he buys the commodity; and while, by
consuming it, the balance of wealth is turning against him, in favour of
the seller. This tax is consolidated as it were with the price of the
commodity, and must of necessity raise it.
I say, it is levied at the time of buying, and affects the buyer, in
consequence of his consumption; because we have seen, that when the
commodity is not consumed by the purchaser, then upon a subsequent
alienation he is refunded all he paid. I consider him therefore, in that
case, not as _paying_, but as _advancing_ it for another; and while any
part of the commodity remains unconsumed, there still remains the
equivalent of a proportional part of the tax in the hands of him who
advanced it.
I shall now proceed, as in the former chapter, by giving some examples
of such impositions; and in examining them, endeavour to shew their
nature and consequences.
The most familiar to an Englishman are, _excises_, _customs_,
_malt-tax_, _stamp-duties_, and the like.
To a Frenchman the _gabelle_, the _traittes_, the _aides_, _tobacco_,
&c.[41]
Footnote 41:
The _gabelle_ is a branch of the general farms, and consists of an
excise upon salt. The manufacture of the commodity is in the hands of
the farmers; and they, for a liberty to sell salt at a certain price,
far above the expence of the manufacture, pay to the King an annual
revenue of 28 millions of livres.
This I call a proportional tax, relatively to consumers; although in
reality no tax-gatherers are employed for the collection of it,
contrary to what is the case of all excises; which are never farmed by
government to the manufacturers of the commodity taxed.
The _traittes_, or, as they are otherwise called, the five great
farms, were established by Colbert, when he took away a multitude of
customs paid upon the transportation of goods from one province to
another. They answer very much to our customs, or to the duties of
tunnage and poundage, and are let to the farmers general for the sum
of 12 millions.
The _tobacco_ is of the same nature with the salt tax. The farmers
general have the exclusive privilege of selling it at a price fixed by
the King.
For the farm of the tobacco is paid 15 millions. The _aides_ resemble
our excises more than those we have mentioned. They consist in duties
upon liquors, either brought into towns, or sold by retail in public
houses; and upon all articles of food sold in corporations, except
grain of every kind, which is free. They comprehend also a multitude
of other duties superfluous to enumerate. They are collected by
tax-gatherers at the gates of every town, who also have access to all
public houses, where retail is laid under additional rates. The
_aides_ are farmed at 38 600 000 livres. These were the rates in the
farms let in 1755. They have been since augmented in 1762, as has been
observed.
In all kinds of this imposition we find the tax regularly reimbursed
from hand to hand; it adheres so closely to the commodity, that it
becomes as essentially a part of the value, as carriage, packing, and
the like incident charges, enter into the prices of goods. It never can
affect the industrious person who does not consume; and never can be
avoided by him who does. Such taxes therefore necessarily raise the
price of the commodity taxed.
Having already pointed out the principal advantages of proportional
taxes, which is to throw the whole of the burden upon the rich, whom we
have called the idle consumers, the better to distinguish them from the
opulent class of the industrious; I must now enumerate the principal
inconveniences complained of, from this mode of taxation, and trace out
the principles from which they may be ascertained and removed.
The principal inconveniences alledged against proportional taxes may be
reduced to three:
1_mo_, That they have the effect of raising the price of labour, and the
produce of industry, and thereby prove hurtful to the prosperity of
foreign trade.
2_do_, That they discourage consumption, by carrying the prices of many
things too high for people of a middling rank in life.
3_tio_, That they are both expensive in the collection, and oppressive,
from the many restrictions put upon liberty, in order to prevent frauds.
In analyzing every one of these inconveniences, it will be proper to
inquire, how far the conclusions against those taxes are drawn from
matter of fact; how far from plausible appearances only; and so far as
they are real, not imaginary, to discover the methods of removing them.
As the first inconvenience lies in raising the price of all kinds of
labour, and consequently of manufactures, I must distinguish between the
consequence of raising prices at home, and of raising them upon articles
of exportation; and I must consider the one and the other relatively to
the collective body of a state, and not to some few individuals in it.
High prices at home are no discouragement to the industrious, most
certainly, however disagreeable they may prove to consumers; and while
they stand high, it is a proof that the demand of the consumers does not
diminish.
High prices upon goods to be exported, are to be judged of by the
proportion they bear to those in other countries.
Now the price of a manufacturer’s wages is not regulated by the price of
his subsistence, but by the price at which his manufacture sells in the
market. Could a weaver, for example, live upon the air, he would still
sell his day’s work according to the value of the manufacture produced
by it, when brought to market. As long as he can prevent the effects of
the competition of his neighbours, he will carry the price of his work
as high as is consistent with the profits of the merchant, who buys it
from him in order to bring it to market; and this he will continue to
do, until the rate of the market is brought down.
It is therefore the rate of the market for labour and manufactures, and
not the price of subsistence, which determines the standard of wages.
Were proportional taxes to raise the price of subsistence, and by that
circumstance to discourage manufactures, we should see the generality of
workmen living with sobriety, depriving themselves of superfluity,
confining themselves to the plain but sufficient physical-necessary,
working with all the assiduity that a man can support, and still not
able to supply the market at the ordinary rates.
When in any country the work of manufacturers, who live luxuriously, and
who can afford to be idle some days of the week, and still live upon
their wages, finds a ready market, this circumstance alone proves beyond
all dispute, that subsistence in that country is not too dear, at least
in proportion to the market prices at home; and if taxes on consumption
have, in fact, raised the price of necessaries, beyond the former
standard, this rise cannot, in fact, discourage industry: it may
discourage idleness; and idleness will not be totally rooted out, until
people be forced, in one way or other, to give up both superfluity and
days of recreation.
People are very apt to draw conclusions from what they think ought to
be, according to the particular combinations they form to themselves;
and for this reason it is generally thought, because taxes are higher in
England than in some other countries, that foreign trade should
therefore be hurt by them. But the sloth and idleness of man, and the
want of ambition in the lower classes to improve their circumstances,
tends more, I suspect, to circumscribe the productions of industry, and
thus to raise their price, than any tax upon subsistence which has been
hitherto imposed in that kingdom.
The whole of this doctrine is proved by experience, and is confirmed by
our natural feelings. Many have been amazed to see how well the
manufacturing classes live in years of scarcity, which frequently have
the effect of doubling the price of the most necessary articles of
subsistence. Are they not found, in bad years, more assiduous in their
labour? Do they then frequent ale-houses, as in the years of plenty? Are
they found idle one half of the week? Why should a tax laid on by the
hand of nature prove such a spur to industry; and another, similar to it
in its effect, laid on by the hand of man, produce such hurtful
consequences? Were a tract of bad years, I dare not say an increase of
taxes, to continue long enough to bring manufacturers to a habit of
sobriety and application, a return of plenty, and low prices, would
throw into their coffers, what many of them dissipate in riot and
prodigality.
Even this conclusion will be too general, if every combination be taken
in. Manufacturers there are, who work hard, and live soberly six days of
the week, and who at the end find little superfluity, notwithstanding
the high price of labour. Alas! they have many mouths to feed, and only
two hands to supply the necessaries. This is the fatal competition so
much insisted on in the first book, and by which a door is opened to
great distress. Either the unmarried gain what the married should, and
become extravagant, or the married gain no more than the unmarried can
do, and become miserable.
The average between the two ought to determine the rate of wages in
every modern society.
The remedies for this unequal competition, flowing from the happy
liberty we enjoy, have been considered in another place.
The inconvenience here under examination will not be removed by an
abolition of taxes; nor will it increase by the augmentation of them, as
long as manufacturers, upon an average, enjoy superfluity and idle days.
Under these circumstances I conclude, that if foreign trade suffers by
the high prices of commodities in our markets, the vice does not proceed
from our taxes, but from our domestic luxury, which swells demand at
home. Were we less luxurious, and more frugal in our management in
general, all classes of the industrious, from the retailer down to the
lowest manufacturer, would be satisfied with more moderate profits. Let
not, therefore, a statesman regulate his conduct upon suppositions, nor
conclude any thing from theory, nor from arguments _à priori_, drawn
from the supposed effects of taxes; but let him have recourse to
information and experience concerning the real state of the matter.
Let him inquire what are the prices abroad; what are the prices at home;
how those who work in exportable commodities live; what superfluities
they enjoy; and what days of idleness they indulge in.
If he finds that goods are not exported, because of high prices, while
manufacturers are enjoying superfluity, and indulging themselves in
idleness, let him multiply hands, and he will reduce them all to their
physical-necessary; and by thus augmenting the supply, he will also
reduce the prices in his markets at home.
If he wants to reduce prices still lower, in favour of exportation, but
finds that he has occasion for the amount of certain taxes, which
enhance the value of this physical-necessary, to which he has reduced
his industrious classes, then let him grant a bounty upon the quantity
exported, more than equivalent to all the taxes paid by those who
provide it; and let the people at home continue to pay dearer than
strangers, in favour of the state. If you only want to promote
exportation by lowering prices, there will be no occasion to lower them
universally, any more than there is occasion to put a large plaister
over the whole body, to cure a small pimple on a particular part of it.
I have said, that while the rate of the market remains the same, so will
the prices of every part of labour and industry, which enters into the
composition of the thing brought to market. This is consistent with
reason, and experience proves the truth of it; because we do not see
wages fluctuate with the price of living. If they do not fluctuate in
that proportion, how can we conclude that a rise in the price of
subsistence, occasioned by taxes, should raise wages more than when the
price is raised by a natural scarcity. It may be answered, that the
imposition of a tax gives a general alarm; the effect it must have upon
prices is immediately felt; and manufacturers then insist upon an
augmentation: whereas, when nature either produces the same, or even a
greater effect, people submit to what they think comes from the hand of
God, and content themselves with the hopes of better times. I shall
allow this argument all its force. But I must observe, that when
manufacturers can thus capitulate with their employers, and insist upon
an augmentation of their wages, the demand of the market must be greater
than the supply from their work. This is the circumstance which raises
the price of labour. Let the demand of the market fall, the prices of
labour will fall, in spite of all the reasons which ought naturally to
make them rise. The workmen will then enter into a hurtful competition,
and starve one another, as has been often observed. Let the demand of
the market rise, manufacturers may raise their wages in proportion to
the rise of the market; they may, in the cheapest years, enjoy the
highest wages; drink one half of the week, and laugh at their employer,
when he expects they should work for less, in order to swell his profits
in the rising market.
I have endeavoured to throw this question into different shapes, the
better to apply different principles to it; and upon the whole, I must
determine that proportional taxes will,
1_mo_, Undoubtedly raise the price of every commodity upon which they
are properly and immediately imposed; and if they be laid upon bread,
and other articles of nourishment, they will directly raise the price of
these articles in proportion; but the price of labour will be raised
consequentially only, and according to circumstances.
That if taxes be laid upon the day’s labour of a man, they will raise
the price of that day’s labour. What I mean by this, is, that if every
one who employs a man for a day, were obliged to pay a penny to the
state, for a permission to employ him, the employer would charge a penny
more at least upon the day’s work performed by the labourer. Were a tax
equivalent to it laid on the labourer by the year, it would be of a
cumulative and arbitrary nature, and would not raise the price of his
wages in proportion; but were it laid upon the workman at a penny a day,
and levied daily, in this case, he might raise his wages in proportion.
But this is not the practice any where.
2_do_, The price of subsistence, whether it be influenced or not by the
imposition of taxes, does not determine the price of labour. This is
regulated by the demand for the work, and the competition among the
workmen to be employed in producing it.
3_tio_, If wages rise beyond the physical-necessary of the workman, they
may be brought down by multiplying hands, but never by lowering the
price of necessaries; because every man will make a profit of the low
price, but will regulate his gain by the rate of demand for his labour.
4_to_, If, therefore, the price of his physical-necessary be raised upon
him by the effect of taxes, he must work the harder to make it up.
5_to_, If hands increase, after he is reduced to his physical-necessary,
the whole class of the manufacturers will be forced to starve.
6_to_, The increase of hands means no more than the augmentation of the
quantity of work produced. If, therefore, the same hands work more than
formerly, it is the same thing as if their numbers were increased.
From these positions it seems to result, that whenever it is found that
manufacturers enjoy wages more than in proportion to their
physical-necessary through the year, reckoned upon the general average
of married men and batchelors, the method of reducing them to the proper
standard, is either to multiply hands, if you want to reduce prices in
your own market, or to augment the price of their physical-necessary, if
you incline they should remain the same. When the hands employed are
really diligent, and prices still too high, then it may be expedient to
increase their numbers, providing they enjoy considerable profits. This
will cut them off, and reduce the price of commodities; because it will
augment the supply.
When the hands employed are not diligent, the first expedient is to
raise the price of their subsistence, by taxing it. By this you never
will raise their wages, until the market can afford to give a better
price for their work. If, when they are brought to be fully employed,
you incline to sink the price of labour universally, you must take off
some of the impositions which affect subsistence, and at the same time
gradually throw in fresh hands, in order to promote competition, which
alone will force them to lower their prices in proportion. The whole
delicacy of this operation is to prevent competition from taking place
after the industrious are reduced to moderate profits; and to promote
competition, or to raise the price of their subsistence, until they be
brought to the proper standard. Having insisted so fully upon these
principles in the xviiith chapter of the second book, I here refer to
it.
1 have said, that the price of work is not regulated by the price of
subsistence, but by the price of the market for the work. Now I say,
that the price of the market may in a great measure be influenced by the
price of subsistence. This is a new combination.
The first proposition is undeniable. The price of the market at all
times _regulates_ the price of work; because it regularly makes it
fluctuate, in proportion to its own fluctuations. The price, again, of
subsistence only _influences_ it; because two circumstances may destroy
that influence. A high demand for work will raise the price of wages in
years of plenty: a low demand will sink the price of wages in years of
scarcity. When therefore it is said, that the price of subsistence
_influences_ the rate of markets, we only mean, that the average price
of subsistence, when good and bad years are taken together, have a
certain influence in regulating prices. But this average price of
subsistence cannot every where _regulate_ the value of work, as the
average price of a ship’s cargo can regulate the price of every part of
it; because the variations there are at too great a distance of time, to
be able to compensate one another with respect to all the manufacturing
classes of a people.
Could a plan be concerted, either to preserve the price of grain at one
uniform standard, or within the limits of 15 or perhaps 20 _per cent._
at all times; and were this to be executed by the assistance of a tax at
one time, and a bounty as it were at another; it would certainly have an
admirable effect in every industrious nation. It would in a manner take
away the difference between good and bad years. The industrious finding
themselves subsisted at all times nearly at the same expence, would not
feel those alternate motives to be idle and extravagant at one time, and
diligent and sober at another.
I have enlarged so much upon the nature of this first inconvenience
proceeding from proportional taxes, that I have left myself very little
to say as to the second, which is,
2_do_, That they discourage consumption, by raising prices too high for
people of a middling rank in life.
In answer to this, I must observe, that all the amount of proportional
taxes is refunded to the industrious consumer, so far as they are raised
on articles _necessary_ for his subsistence; and when he is either idle,
or consumes a superfluity, he is classed along with the idle and rich.
Now if the rate of market prices be high, relatively to the income of
certain individuals, it can only be because the supply of the things
they want to consume is not above the proportion of the demand of those
who are richer.
If, therefore, the rate of the market affords such profits to
manufacturers as to render them idle and luxurious, how can the
augmentation of these profits, by the abolition of taxes, and consequent
diminution of the price of subsistence, ever diminish the competition of
the rich, unless the supply be augmented?
But if the high prices of our own markets cut off the demand of
strangers, then every principle laid down in the 10th and 18th chapters
of the second book, must be applied to bring them down: and so far as
taxes, which are imposed either to supply the exigencies of the state,
or to cut off consolidated profits, enjoyed by manufacturers in
consequence of our own extravagance, have contributed either to raise
them, or to support them when raised, above the foreign standard, a full
equivalent, in the way of bounty, must be given for them, in order to
bring the exportation price of goods below the level of foreign
competition.
I come now to the last inconvenience alleged against proportional taxes,
to wit, the expence of collecting them, and the oppression which is a
consequence of the many restrictions laid upon liberty, in order to
prevent frauds.
As to the expence of collection, it is entirely in proportion to the
disposition of the people to defraud the public.
In France, the collecting the branches of cumulative taxes, such as the
general receipts, comprehending the taille, poll-tax, &c. costs the
state no less than 10 _per cent._ or two sols in the livre, which is
superadded to those impositions, in order to defray that expence.
Whereas in England the expence of collecting the excise, administred by
commissioners, who act for the public, not by farmers who act for
themselves, does not cost above 5_l._ 12_s._ 6_d._ in the 100_l._
This matter of fact is sufficient to prove, that excises, when under a
proper administration, are not so very expensive in the collection as is
generally imagined; and they would still be attended with less expence,
were some proper alterations made in the present method of imposing
them. This will appear as we go along.