FABIAN TRACT No. 152. 

OUR TAXES AS THEY ARE 


AND 

A rfHEY OUG HT TO BE. 


Bv ROBERT JONES, B.Sc. 

How We Stand. 

MoN~<:v has been called the sinew of war. Peace, that " hath her 
victories no le renown'd than war," has often to pay not much le s 
for them. Though reform are not all of them que tion of money, 
or even chiefly of money, yet mo t modern reform ·, and the most 
pre,sing and mo~t important, come quickly to the money test. The 
:-pirit of reform and the cry come fir t, but the tran ·ition from 
demand to accompli hment i governed by the pur e. 

The revenue of thi country is obtained chiefly, though not 
entirely, from taxe . If we eparate out the taxe from the nontaxe:-
in thee timate of the famou · Budget of 1909, we can view 
the important item thu :


RE\'J7. l " FR0:\1 TAXES. £ 
Property and Income Tax 37 000 000 
Exci~e... ... . .. 35,:oo,ooo 
Customs 3o,ooo,ooo 

E>-tate Outie ... 22,7$0,000 
tamp Dutie , -oo,ooo 
Hou c Duty ... 2,ooo,ooo 


No. ·-TAx RFvE. 't'F.. 
Post Office, Telegraph , and Telephone 
(net profits) 4,ooo,ooo 
uez Canal hare 1,000 000 


·oo,ooo

Crown Land · ... 

£:,soo,ooo 

ToTAL... . .. £qr 25o,ooo 
This account · for £I SQ 7:o ooo out of the total estimate of 
£I6'1, 7 30.000, allowing for the fact that we have taken the net profits<lf the Po~t Office (£4 ooo ooo) in the place of the gro s revenue 

(£'1'1,300 ooo) . 
.:\1 t of the total fall · i'1to three group , which concern the 
future and the immediate pa~t not only of national finance, but 
<)f nat ion a! reform. 


2 

1. TAXES oN CoNSUMPTION. £ 
Customs and Excise ... 6s,soo,ooo 
2. TAXES ON PROPERTY. 
Property and Income Tax, Estate Duties, House 
Duty 6I,75o,ooo 
3· PROFITS ON NATIONAL CAPITAL. 
Post Office, Telegraphs and Telephones, 
Canal Shares, Crown Lands 
Suez 
s,soo,ooo 

ToTAL (out of £r62,75o,ooo) ... £132,7501000 

The anti-Budget and Tariff Reform contest was mainly a 
struggle for raising extra revenue from No. 1 rather than from 
No. 2. Socialism is largely an endeavor to increase No. 2 and No. 3· 
So that if this grouping appears somewhat confusing because of its 
novelty, it would appear to be justified because ofits wide significance. 

The Past and the Future. 

A comparison of the Budget of 1909 with any of the Budgets of 
the first half of the nineteenth century would bring to light two 
great changes. 

Firstly: the growth of non-tax revenue. Nearly the whole of 
the £s,soo,ooo is little more than half a century old. 
Secondly : the growth of taxes on property and income in comparison 
with other taxes. 

The second of these differences we shall deal with later. The 
first marks a movement in the direction of substituting nationaE 
profits from "tradmg" for national taxes. As a movement, however, 
it is Yery recent. We are not long emerged from a periodwhen it was accounted an evil thing for the State to possess any 
capital-property-that yielded a net income. Our Crown lands, 
which are now State lands, yield a poor half million. Now that the 
land tax may be paid in land, and now that a development fund is. 
in existence under which land may be bought and developed, there 
is a possibility of increasing State possessions in this direction. 
Saxony, a small country, gets ten millions sterling from State forest 
lands. 

There has never been any strong objection to the State owning 
property that did not give an annual return easily recognizable as 
money. The doctrine which has hindered the growth of national 
capital was that the State could not manage business enterprises, 
and that it was rather wicked of the State to try. The first count is 
met by the simple facts that exist to-day, when States and municipalities 
are managing business enterprises with varying success, 
but, on the whole, quite as efficiently as private firms. The second 
part of the doctrine has now become the chief entrenchment of 
those who loYe their country too well to wish to see it (as a State) 
too well off. Hence the cries of "rate aided trams" and "unfair 


3 

competition." The cry is not that the State or the municipality 
cannot manage business enterprises, but that it can manage them. 
too well for the comfort of capitalists. 

The chief national effect of the doctrine, so far as our revenue is 
concerned, has been the loss of railway profits to the nation. The. 
revenue from the Prussian State Railways alone would pay for our 
navy; or, it would pay the interest on the National Debt, and 
leave enough over for Old Age Pensions. 

If we had State railways, as Prussia has, and State forests, say to 
the extent that Saxony has, nearly fifty out of a hundred millions of 
actual taxes (No. 1 and No. 2 in our second grouping) would disappear. 
What, then, is to prevent a gradual extinction of tax 
revenue altogether and its replacement by profit revenue? Not its 
impracticability, since States are now drawing large revenues from railways, 
forests, lands, post offices, canals, steamship lines, and so on_ 
The prospect of the extinction of taxation-except for purposes other 
than revenue, to the horror of" revenue only" stalwarts-would not 
be particularly terrifying to taxpayers as such. 

What is Taxation ? 
Revenue is the income of the State from all sources ; but it differs 
from the income of an individual in one particular so important that 
it would be misleading to have the same name for both. A privateindividual has an income of a fixed amount, and he must cut his 
coat according to his cloth. But a nation can make its reyenue 
greater or less within very wide limits, and can first decide on the· 
cut and amplitude of its coat and then order sufficient cloth. If a 
nation very badly wants a ten million article it can have it. 
All revenue, as we have noted, does not come from taxes. A ta 
has its own special features-two, in particular-that mark it as a 
tax. It is compulsory ; and it carries no guarantee of anything like 
an equal return. A well-managed State gives a return to its citizens 
greater than the value represented by its exactions. An ill-managedState may give a very trifling return. But the essential idea of the 
tax, the thing that makes it a tax, is that it is quite irrespective of 
the services rendered by the State to the payers. 

The Purpose of Taxation. 

Quite a number of people have shaken their heads gravely over 
the danger of introducing any but "purely financial considerations,. 
into questions of national finance. Extreme Free Traders affect to 
consider it mischievous to prefer one tax to another because that one 
will (as hoped by some) encourage agriculture. There are others 
whose sense of "sound finance" is shocked by the idea of admittingthe death duties ·into our system on any ground but that of revenue. 
They will not accept as an additional reason the fact that the death 
duties will have some effect in checking the present great inequalityof incomes. What the Free Trader really objects to is a Protective 
System, and he should attack protective duties either because theywill not really help agriculture or any other occupation, or because 


4 


if they do help "agriculture" (a very complex term, behind which 
usually sits a smiling landowner), they will injure people engaged in 
other occupations to a much greater degree. What the other man 
objects to is making wealthy people pay more taxes than they have 
been paying, and he should attack all schemes for increasing taxes, 
unless the increase falls upon all classes in the old proportions, which, 
to people of his way of thinking, are of course the right proportions.
The curious thing is that this latter gentleman is usually a Tariff 
Reformer, and as such he is desirous of raising revenue in such a 
way as to bind the colonies closer to the mother country, restore 
agriculture, and find work for all-or "most." And the former 
gentleman quite possibly belongs to the Budget League, and wishes 
to tax land values, not solely for revenue, but also to check the land-
monopoly of the dukes. And both would rather tax whisky than 
water (although a tax on water would bring in more revenue than 
one on whisky), on the ground that whisky is not a necessity, or that 
it is harmful-which are very good reasons, but not purely financial 
reasons. 

No tax is raised for revenue only: there are always other considerations. 
We have just seen how national revenue differs from privateincome, and since a Government does not get money and then 
consider how to spend it, but first decides to have something and 
then considers how to get the money, it will often happen that the 
very impulses which made people want a thing will impel them to 
raise the money for it in a particular way. Thus a Parliament which 
decided to give elementary education to people who were too poor to 
pay for it would not be likely to raise money for the purpose from 
those same poor people. There might be some to suggest an arrangement 
of this sort, well clothed in verbosity ; but these persons really 
do not want to educate poor people at all. They want poor people 
to pay, or, as they cannot, to do without. The cry of keepingquestions of revenue free from ulterior objects is largely a cry of painand rage at the objects themselves. 

If taxes are levied not only for revenue but also for some other 
purpose, whether it be the encouragement of agriculture, the cementing 
of an Empire, the discouragement of injurious habits, the diminution 
of wasteful luxuries, the reduction of the largest incomes or 
the increase of the smallest, then the points to consider are these :


Is the object desirable in itself? 

Is it best or most conveniently attained through taxation ? 

Will its attainment in this way bring about any evils that will 
outbalance its benefits? 

" Taxation for revenue only" is repudiated in practice by every 
party in the State. It is not a principle of taxation. We had best 
now consider what are the principles of taxation. 

The Canons of Taxation. 

Adam Smith made so great an advance in defining the principlesof taxation in his famous " Canons" or "Maxims," that it is broadly 
true to say that before the appearance of Wfhe Wealth of Nations " 


5 


the principles of taxation had never been clearly set forth ; and 
further, that from the issue of that book until the close of the nineteenth 
century they were never effectively restated. His maxims are 
not obsolete yet, but they are obsolescent. The four maxims can be 
summarized in a sentence, thus : Taxes should be proportional to 
income ; certain and not arbitrary ; convenient in time and manner 
of levying ; and economical in action. They are to be found in 
'' The Wealth of Nations," Book V., Chapter II. Part II. It will 
be convenient, however, to give the first maxim here in full, because 
it is by far the most important, and because around it the defenders 
and assailants have gathered :


"The subjects 9f every State ought to contribute towards the 
support of the Government as nearly as possible in proportion to 
their respective abilities ; that is, in proportion to the revenue which 
they respectively enjoy under the protection of the State." 

We need not consider in any detail the justification of taxes 
generally ; we will take it that when the accredited representatives 
of the nation declare that certain monies are needed for the common 
good the citizens "ought to contribute." But how are the contributions 
to be measured out? One answer that was very readily 
given was this, that each citizen should pay "according to benefit 
received," and as the sole or chief benefit of government was held by 
many to be the protection of life and property, then, as everyone 
benefited according to the amount of his property, it was fitting that 
taxes should be in the proportion of individual wealth, whether 
measured in property or in income, as these would give roughlysimilar results. This is the "Benefit Theory." It accords with 
Adam Smith's maxim, and like them, it is obsolescent. Of course, 
it is quite impossible to measure the exact amount of benefit that each 
individual receives from the State, and quite unwarrantable to assume 
that the benefit is proportional to income. Moreover, as Walker has 
pointed out, since women and children benefit most from the protection 
of the State, they should, on this theory, pay most of the 
taxes! 

The rival theory (the Faculty or Ability Theory) sets forth that 
taxes should be proportionate to ability to pay. It was assumed at first 
that this also was in agreement with Adam Smith's maxim, and that 
it also meant taxation in proportion to income. But it means nothing 
of the kind, as we shall see later. The idea of the Ability Theory 
crops up again in the Equal Sacrifice Theory-that is, that taxes 
should fall so as to demand equal sacrifices from all. A somewhat 
different view is expressed by the Minimum Sacrifice Theory, according 
to which a scheme of taxation is at its best when it demands the 
least possible sacrifice from the nation and from the individual citizens. 
We will consider these three theories together, as they have much in 
common. 

Whatever Adam Smith and his followers might think, everyone 
knew as a matter of simple fact that a man with £I ,ooo a year was 
better able to pay £ro, or even £zo, than a man with £roo a year 
was to pay £1. According to the " proportion to income " idea, 


6 

taxes of £IO and £I respectively would be equitable, being in proportion 
to income. But the poorer man-say an artizan with £2 a 
week, married, and with three children, to take an average case-
must go without something that is either a necessity or what is called 
a "conventional necessity," to pay his tax. The wealthier man will 
not be able to feel the change from £I,ooo to £990 per year. He 
will not drink a glass of wine the less. The cases come out clearer 
if we imagine the taxes increased, still keeping the same proportion.
A tax of fifty per cent. would hit the richer man hard. He would 
fall to £soo a year; but his fall is not comparable to that of the 
artizan, cut down from £2 a week to £I. A tax of seventy.five per 
cent. would drive the richer man to a suburban villa with a maid-ofall-
work ; but it would drive the artizan and his family underground, 
for his remaining ten shillings a week would not feed four people, 
to say nothing of rent, clothing and firing. 

Statesmen knew this as well as other folk, and when they wanted 
money they acted on the knowledge, and taxed, not in proportion to 
income, but at a progressive rate. 

The True Principles of Taxation. 

What are the true principles of taxation ? They are two, and 
two only-equity and economy. 

I. Equz"ty.-Taxes should be equitable ; that is, they should 
satisfy the sense of fairness of the majority of the community at the 
time. 
2. Ec01zomy.-Taxes should·be economical; that is, they should not 
be costly to the State in collecting, nor should they cause the payer 
to be mulcted in any way of more than the amount received by the 
State. 
By these two principles we may test the kinds and methods of 
taxation in use or proposed. There is a preliminary difficulty about the 
second part of the first principle. It may be objected to as unscientific. 
It is unscientific, but so is equity. There is no measure 
of what is equitable that any statesman can use except what men 
consider as equitable. When everyone agrees that a proportional 
rate is fair, a proportional rate will be adopted by representative 
governments. When it is admitted that a progressive rate is more 
equitable, a progressive rate will appear on the statute book. 

Progressive Taxation. 

The idea of taxing rich people in a greater proportion than poorpeople was first brought vividly before the English people by the 
introduction of the Death Duties in Sir William Harcourt's Budgetof 1894. But it was not at all a new thing. There was a graduated 
tax levied in ancient Athens. The poorest class was exempt, the next 
paid on an assessment of five-ninths of property owned, the next on 
five-sixths, and the wealthiest on the whole of the property owned. 
There were various progressive taxes levied in many cities during 
the Middle Ages. And it may be set among Solomon's claims to 
wisdom that he taxed the wealthier classes at a higher rate than the 


7 


poorer on a register of property revised every four years. The 
super-tax is not a new thing, but may claim old established usage as 
well as the 44 proportional " doctrine of Adam Smith and StanleyJevons. The progressive system died out-under aristocratic influences, 
as Professor Seligman suggests-and has only recently been 
revived. Its reintroduction into practical politics, however, has 
not been accompanied by any scientific or economic justification, 
except among economists themselves. We cannot be content with 
a mere historic justification, a simple appeal to ancient precedent. 
It will be more satisfactory to enquire how far modern economic 
theory justifies or condemns the principle which underlies the 
super-tax. For it has already become obvious to the average 
taxpayer that if a progressive system is really 44 sound finance," in 
the sense of being equitable and economical, there is a possibility of 
lightening the burden on the mass of taxpayers who actually feel it 
without adding any real burden to wealthier people, and without 
withdrawing the more useful parts of incomes from the recipients. 

Curiously enough, the theory which justifies us in taxing a 
millionaire's estate at double the rate percent. that is levied on a£so,ooo 
estate has been worked out from the very principle of utility which 
Stanley Jevons himself brought so vigorously to the front. It is 
based on the doctrine of diminishing utility. Like most economic 
44 laws," it is a mere truism. 

If you have just enough water daily to keep you alive, and your 
supply is increased by an extra quart every day, each added quart is 
less valuable-that is, less advantageous to you-than the last: and 
in time the additions will be of no value to you, but will become a 
mere nuisance. 

As it is with water, so it is with other things; so it is with all 
wealth, all income. Set £I a week in the place of a quart of water 
and follow the argument through again. As a man's income rises to£2, £3, £ IO, £ IOO a week, each additional £I is less useful to him 
than the last, and equitable taxation must be in proportion to these 
changing values. The first pound or two being untouched, a penny 
on, say, the fourth pound should be a shilling or so on the 
hundredth. It actually is over a shilling in our present English 
system.

The theory that taxes should be in proportion to income being 
rejected by common sense and by economic science, it remains to 
choose among the other three that we grouped together, all of which 
satisfy the principles of equity and economy.

Of these the theory of Minimum Sacrifice is the most satisfactory, 
for it most readily responds to the test of these two principles. 
Taxation which entails the least possible sacrifice uponthe community and upon individuals takes away just that part 
of the wealth of individuals which is least useful. Such taxation 
is both equitable and economical. It leads us very far, however. 
Carried to its logical conclusion it means that all taxes should 
be raised (as far as economy is concerned, at all events) from the 
highest incomes. For if we represent the incomes of individuals 


8 

by a row of lines of different length, it follows from what has been 
said that the least useful parts of the whole are those represented bythe tops of the tallest lines. There is no questioning the fact that in 
pure economics it is from these parts that taxes had best be raised. 
But such counsels of perfection are not for actual chancellors. Moreover, 
such a method, although it might satisfy a principle of abstract 
"right" or "natural justice," by no means satisfies the principle of 
equity as we defined it, and the extreme moderation of which is now 
apparent. We cannot legislate very far in advance of public sentiment, 
and if a graduated system, which "satisfies the sense of fairness 
of the majority of the people" is adopted, the future modifications 
of the scale may safely be left to the same guide. 

Levelling Taxes. 

Diagrams do not add anything to an argument, but they are 
valuable aids to clearness. In the diagrams given, incomes are 
represented by the length of the upright lines, and the part above 
the transverse line represents the tax. The diagrams move from 
abomination to (economic) perfection. 

No. 1 is the desolating abomination which helped to cause the 
French Revolution. Here the poor pay a greater amount and of course 
in vastly greater proportion than the rich. The smallest income in 
this particular case is taxed at fifty per cent. and the largest at four 
per cent. This is a regressive system, no longer figuring in national 
finance, but familiar enough in other affairs of life, as where the 
poorest folk in London pay more per pound for coal than their 
wealthy and distant relations in theWest End, who can buy in largequ.antities and can stock their cellars with winter coal at summer 
pnces. . 

No. 2 represents a step in advance. Here all pay equal amounts, an 
admirable arrangement among equals, but disastrous otherwise. The 
poor still pay a greater proportion than the rich. The smallest income 
is reduced by half, but the largest is left at quite a comfortable 
amount. Something very like this would appear if we adopted a 
universal contributory scheme of invalidity insurance based on equalcontributions. 

No. 3 represents the obsolete economic ideal, "taxation in proportion 
to income." If the obvious advance in fairness on the two 
previous cases should create any prejudice in its favor, a consideration 
of the parallel lines will be found an excellent corrective. The 
further from the base line, the less the utility. The utility of the 
part cut off the smallest income is far greater to the owner than the 
utility of the larger part cut off from the greatest income is to its 
owner. 

No. 4 represents the economically perfect ideal that we shall 
never reach, but towards which, as far as we can judge from the drift 
of things in national finance, we are now steadily moving. 

It will be noticed that there is no diagram for the very type of 
progressive taxation that has here been most insisted on. It lies, of 
course, between No. 3 and No. 4, and its divergence from No. 3 


9 

TAXES. 


1.-REGRESSl\' E. 2 .-EQUAL. 


4. -EcoNoMICALLY IDEAL.
3.-PROPORTIONAL. 


10 

measures the advance of knowledge from the time when Adam 
Smith's first maxim dominated national finance till now, just as its 
divergence from No.4 measures the practical difference between our 
principle of current equity and our principle of economy. 

Progressive Taxation in Practice. 

The year I 894 marks the definite and open re-entry of progressivetaxation into our system, though it must not be forgotten that in 
many ways, more or less vague, we have stamped on our records an 
appreciation of the underlying principle. But the Death Duties 
entered as dramatically as did the famous Budget of 19091 and with 
very similar results-a mournful forecast of the sale of Chatsworth 
from the Duke of Devonshire, and cartoons of pauper peers in Punch. 
A comparison of the scales of Sir William Harcourt in 1894 with 
those of Mr. Asquith in 1907 and of Mr. Lloyd George in 1909 
will illustrate the tt levelling" of taxation in this direction. Side 
by side with these are placed figures to represent what the rates 
would be in a proportional scheme. The figures below show the 
yield. In order to reach the I 907 total yield on a tt proportional"
basis a rate of seven per cent. would have been necessary. That 
would mean that an estate of £soo would pay £35 instead of £5, 
whilst an estate of £5,ooo,ooo would pay £35o,ooo instead of 
£700,000. 

To reach 1907 

Estate 189+ 1907 1909 total by a 

£ per cent. per cent. per cent. proportional

scheme 

500 I I 

I1ooo 2 2 2 

s,ooo 3 3 3 

1o,ooo 3 3 4 

so,ooo 4t 4t 7 

7 per cent. 

1oo,ooo st s! 8 

soo,ooo 7 1l 12 
1,ooo,ooo 7t IO I4 
s,ooo,ooo 8 14 IS 
Yield * £191Io8,ooo £2z,7so,ooo £191108,ooo 
(estimated) 

The graduation of the income tax is disguised by the system of 
exemptions. An income of £:wo nominally pays a rate of ninepence 
in the pound; but, as £160 is exempt, the rate on the whole 
£zoo is really not ninepence but a penny three farthings. Reckoned 
in this way, there is an elaborate graduation to be traced in the 
income tax, with about a dozen steps, so that the nominal ninepence 
runs from nothing up to one and sevenpence three farthings, if we 
reckon in, as we must, the super-tax of sixpence and the fourteen-
penny rate for unearned incomes. The actual rates in the pound are 
as follows (1909 Budget):


* The yield is not given, because it offers no fair comparison with the other 
totals owing to ~he grov;th of na~ional wealth since 1894· 

II 

Earned income Unearned income 
Amount 
160 ............ 
Rate (per £r) 
o 
Rate (per £r) 
o 
200 ......... ... Ii 2~ 
3°0 
400 
············ 
... ... ...... 
4i 
st 
6i 
8i 
soo ........ ... 6i 9t 
700 ............ 8 12t 
1,ooo ... ...... ... 9 14 
2,ooo ............ 9 14 
3,000 ......... ... 12 14 
s,ooo ...... ..... 14 14 
IO,ooo ............ 18i 18i 
IOo,ooo ............ 19! 19! 

Now when we consider that it is not very long ago since Mr. 
Gladstone was contemplating the complete removal of the income tax 
in times of peace, it is of some significance to find his successors 
to-day increasing it at one end and diminishing it at the other-for 
that is the effect of Mr. Asquith's "earned and unearned" innovation, 
as a glance at the figures will show, and that is the effect of 
Mr. Lloyd George's abatement in respect of children. What is the 
cause? 

It is twofold. On the one hand, more and more money is 
needed for two great purposes-defence and social reform. There 
may be some chance, in the near future, of smaller army and navy 
votes, through arbitration acts and treaties, though at present it 
seems a poor chance. But there is no chance at all of a diminution 
in the money required for social reforms. More money must be 
got. Modern sentiment resents any plan of raising the bulk of this 
money from the poorer classes. Economic teaching shows clearly 
that the wealth that can best be spared is the upper layer of the largebanking accounts. The modern Chancellor harkens to the voice of 
the people and the voice of the expert, crying out in almost perfect 
unison, and levels up a little further the taxation-line in our diagrams. 

Taxes on Land. 

The war over the Budget of 1909 was largely a land war, and it 
ensured a very full discussion of the question of land taxation. We 
have laid it down here that all taxes are really on persons ; so that 
the only essential points arising are whether the landowner, as such, 
was or was not less hit before that Budget than owners of other 
property, and whether it was and is wise, for non-revenue reasons, 
that the State should tighten its grip upon the land. At presentonly the first of these questions directly concerns us. 

The land-owner paid income tax and super tax, like the owner of 
capital. But his position was and is unique in this, that as a rule, 
an increase of population, of traffic, of general prosperity, automatically 
enriches him. He is allowed ten per cent. free and then the 
community, by whose industry £IOo has been added to land values, 
takes back £2o of this. The logic is faulty, as was point<;!d out in 


12 

the Commons. Why £zo only? The answer, of course, is that 
even people who want a wedge driven in deepest are not always so 
impatient as to try the thick end first. 

The new Reversion Duty of ten per cent. of increase in value on 
the falling in of a lease is only a further application of the Increment 
Duty, and need not be specially considered. 

The duty on undeveloped land would appear to be an exampleof taxing the less useful rather than the more useful parts of income; 
and so it is, but not so directly as appears at first sight. It is necessary 
once more to remember that taxes are paid by persons. The avowed 
object of this tax is to check the ''cornering" of land and the 
creation of artificial scarcities. Reform, even more than revenue, is 
the significant feature of the land taxes. 

These taxes, and the tax on mineral royalties, fall almost immovably 
on the actual payers. The farmer, shopkeeper, and the 
miner are not going to pay them, except to the extent that they were 
paying less than a true competition rent before the tax. Agriculturalland is specifically exempted as a matter of fact, but the farmer would 
finally be untouched in any case. 

Even now many people are inclined to say, "But why could not 
a ground landlord put up his rents from £roo, say, to £1lo?" 
Why did he not do so before the tax? Because £roo was the 
highest rent he could get. And since the demand for shops is justwhat it was before the tax was levied, £Ioo is still the highest he 
can get, and out of that he must pay the tax. 

These taxes, then, are economical. They take from the payer no 
more than they bring to the State, except the cost of collection. 
This cost will at first be relatively so heavy that from the pointof view of a single year's revenue the taxes offend the canon of 
economy grossly. But they are intended to produce a growing 
revenue, and they are levied for reform as well as for revenue, just 
as a Tariff Reform customs duty might be levied with an eye to 
unemployment or retaliation. 

They are not in themselves graduated. Here we had best 
remember that a just and systematic graduation should apply to the 
total of rates and taxes paid by individuals. This is quite impossible, 
except roughly, and the movement towards a graduation of 
total payments is necessarily slow. At present we have the State and 
municipality indirectly subsidizing bachelors, non-smokers, and teetotallers. 
The land clauses of 1909 filled a gap. It is only necessary 
to put together the two facts that until 1909 the land tax was 
assessed on a valuation at the time of WilliamIII., and thatfor centuries 
the landed interests in England have controlled taxation. As for 
the small owner, he should not be exempt (partially or entirely)
because he is a small landowner, but because he has a small income. 
It is uneconomic to tax users of land in such a way as to check 
development, but it is highly economic to tax the owners who merely 
tax the users. 

Some of the new land taxes may be paid in land, which opens 

up a possible increase of State holdings. This point has a curious 


13 


interest, ancient and modern. It is a reversion to "payment in 

kind," an ancient method of levying. Its modern application has 

recently been illustrated in New Zealand. When a land-owner 

objected to the State valuation and assessed his land at a much lower 

figure, the State, as provided by law, bought the land at his own price. 

But '~hether much or little of the land taxes will be paid in land 

remams to be seen. 

As for the second point, whether it is wise for the State to 

tighten its grip upon the land, the answer in this and in most qther 

countries has already been given unmistakably. And it must be 

remembered that in English law there is no such thing as absolute 

ownership of land. If an American or English trust bought up 

Lancashire and gave all Lancastrians notice to quit, Lancashire and 

Parliament would have a say in the matter. 

Taxes on Capital and Property. 

We have been assuming that the taxes are levied on income, as, 
indeed, they are in the main, however they may be arranged. Everyone 
pays his taxes out of his yearly income, if he possibly can. 
When he pays out of his capital, he is either feeling the pressure of 
taxation or experiencing hard times. It has often been pointed out 
that taxes on capital must check saving, and so hinder the growth 
of accumulated wealth ; and this argument has been used with 
regard to the death duties. 

It is usually wealthy people who save, and if what they save is of 
any value to them, it is either as a hoard or as an investment ; as a 
hoard which they can enjoy (like the little girl who saved her daily 
stick of chocolate until she had enough to give her a feast and a 
repentance), or as an investment by which the hoard becomes what is 
called productive capital, yielding an income. A wealthy man has, say, 
£ 2o,ooo a year coming in from property. Of this he "spends," let 
us say, £7,ooo on his house, food, clothes, and so on, and "saves" 
£I3,ooo. We might as readily say that he •t spends" this also in 
buying railway and other shares, for that is what he does with it. 
His£I 3,ooo is taken by him, not in the form of goods now available, 
but in the form of new productive appliances, and he holds a claim 
over part of the products of these appliances. 

Suppose now the State takes £3,ooo of this income of his that is 
just about to become capital in a company. If the State uses the 
£310oo in a less productive way than the company would, there is a 
real check in the nation's rate of increasing wealth. If the State 
uses it in a more productive way, there is more increase of wealth in 
the nation through the State's action. A sum of £31000 has been 
taken from a private income and has become nationally owned 
capital instead of becoming privately owned capital.

What is important is whether taxes are moderate enough to be 
payable out of income, or so excessive that people who are making 
use of capital to gain a livelihood are obliged to surrender part of 
that capital to the State or any other user, who will make a less productive 
use of it. That is what concerns the nation in regard to the 


eftect ot taxation upon production. The best distribution of wealth 
(economically) is that which gives the best return to labor, and this 
reacts upon production. If the change makes a very rich man less 
rich, the nation, as a whole, is likelier to gain than to lose by it, 
for no economic justification of the very rich has yet appeared.
If the change brings the payer below the line of sufficiency for his 
best work and life, there is a heavy loss, even if the State uses wisely 
the capital obtained; but such cases are non-existent here and now, 
or are so accidental that they are of no importance, except as political 
bogies.

English tax revenue is obtained mainly by taxing purchases,
incomes, properties. 

Taxes on purchases (or on consumption) are bad because they 
are not levied progressively, or on those most able to pay them ; and 
good in so far as they bring in revenue freely, and are capable of 
being laid upon luxuries and things considered rather harmful than 
otherwise. 

Taxes on income are good because income is the best measure of 
ability to pay, and because they can be levied progressively. 

A tax according to income is more likely to be equitable than 
one according to property, but experience leads legislators to use 
both taxes, for a property tax partly adjusts the lapses of a systembased on income. Thus in the working of the Old Age Pensions 
Act it appeared that one or two people with quite a considerable 
capital, having it invested at a very low rate of interest, were eligiblefor pensions. Property taxes are complementary to income taxes, 
and can regulate them in the direction of equity.

Experience has proved that for local taxes (rates) fixed property is 
the best basis. 

Taxes on property are only capable of equitable progression if 
they are assessed according to the productiveness of the property(capital), and hence are really taxes on income; but they can be used 
us a means of transferring property to the State which the State can 
employ with advantage to the community. Succession duty or 
estate duty on land can now be paid in land. 

Line of Reform. 

Thus we may infer that it will be equitable and economical for 
us to direct the development of our present system in the following 
ways. 

First. Non-tax revenue should be extended, for by this means 

a constantly increasing revenue from profits may be secured, and 

real taxes will gradually disappear. To this end the State should 

ever seek to obtain and employ more and more productive property,

e.g., railways, canals, telegraph cables, forests, land. 

Secondly. While taxes continue to be raised, a progressive

system. assessed on income, should be the chief feature. 

Thirdly. Taxes on property should be used to supplement taxes 

on incomes and make them more equitable, and also as a means by 


15 


which the State can obtain productive property (capital), which will 
help to extinguish taxation. 

Fourthly. Taxes on commodities (customs and excise) should be 
limited to such commodities as are considered harmful or less necessary, 
and only extended beyond such bare limits under the stress of 
need for revenue at all costs. 

Earned and Unearned Income. 

In the United States property is taken as a general test of ability 
to pay ; in England income is taken, and this seems decidedly the 
better test. But two incomes of £r,ooo a year each are not necessarily 
equivalent. One may be the wage of a year's labor, from 
which the community benefits, and the other not a wage, but a toll 
levied through the possession, say, of ground rents or Consols. 

To the economist the essential difference between these two is 
-that one is uncertain, dependent on the accidents of life, and the 
other is practically certain and everlasting. 

To the community there is more particularly the difference that 
the one is balanced by services rendered and the other may not 
represent services at all. It may, however, for a time. A doctor 
who invests some of his "wage" in Consols against the time he 
retires, partly purchases an Old Age Pension. But this element of 
"deferred pay" ceases when the Consols pass to his son. 

The essential distinction between an income that is uncertain 

and limited by time and an income that is more certain and un


limited by time is not touched by the ''deferred pay" argument, 

and it forms the economic basis for the higher rate upon unearned 

income~ that Mr. Asquith introduced. 

The very name that we give to this class of income-unearned 
(or zmverdient, undeserved, as the Germans say)-brings forward 
vividly the disassociation from services rendered. But its characteristic 
of being free from the accidents of life that cut off all earned 
incomes is not suggested by the name and is not so generally 
grasped. It is, however, a characteristic of the greatest importance 
to a State which has a long life and can profitably consider the 
future. Future chancellors may build up two scales of taxes for 
these two kinds of income, but the likelier development is that of a 
steeper graduation, with certain additional rates for unearned m-
comes. Such a system we have already in bold outline. 

Direct and Indirect Taxation. 

There is another way of raising the extra money, as we have 
been told with insistence and iteration of late. We may increase 
our customs and excise duties, spurred on by the hope (for there is a 
hope) that a small part of the customs duty will be paid, temporarily, 
by people of other nations. This does not amount to verymuch, however, except on election posters, and may quite safely be 
neglected. Now a very important and significant feature of this 
scheme has been neglected in the recent discussion. A graduated 
scale, by which the wealthy will pay according to any such 


scale as that in the death duties or the r909 income tax, is very difficult 
to introduce into indirect taxation. Attempts might be made 
in this direction, and indeed are made at present, as by taxing wine 
at a higher rate than beer. So, it might be suggested, we could 
levy a high rate on motor cars and a low one on chairs. But several 
difficulties arise. There are not very many motor cars made and 
very few imported. A very heavy tax on these and on the few 
classes of goods bought only by the rich would be needed to effect 
anything like a recognizable progression. And a heavy tax would 
very seriously reduce the number of cars demanded, industrywould suffer, and the tt Work for All" posters would wear a waggish 
and ironic look. Lastly, there are the vested interests to consider, 
and experience shows that these would make short work of 
any atrempt to build up a progressive scheme. It is importantenough to be worth repeating that the present movement in 
national finance towards progressive taxation will receive a serious 
check if our revenue is to be derived largely from indirect taxation. 

There is a Parliamentary fallacy of considerable age and of 
amazing robustness which must be dealt with in this connection. It 
may fitly be described in the stirring words of one of its latest exponents, 
Mr. F . E. Smith, M.P. :


tt With characteristic arrogance, Mr. Lloyd George has thrown 
over the financial maxims of the past. Instead of an even balance 
between the two sets of taxes-direct and indirect-the direct burdens 
are more (szc) the heavier by about seven per cent." ("Daily Mail 
Year Book," 1910). 

Economics recognises no "financial maxim " which declares that 
direct and indirect taxes should be equal. The idea behind this 
curious delusion seems to be that as direct taxes are paid chiefly bythe wealthier classes and indirect taxes chiefly by the poorer classes, 
the taxes ought to be halved between them. But taxes are paid by 
persons. Even company taxes are really paid by persons. If we 
take a line, say £ 16o per year, to separate those who pay direct 
taxes from those who pay only indirect taxes, we can work out the 
amount paid by the two classes in some fashion. But the results are 
valueless, because £1 income, or £ r tax, is only a great or a small 
sum as it relates to a small or a great income, as we have already seen. 

It would be interesting to trace the rise of this doctrine. Consider 
for a moment the following figures :


Direct taxes Indirect taxes 
Year Per cent. Per cent. 
!841 
r86r 
1891 
1893 
!895 
············ 
············ ............ 
............ 
........ . .. 
27 
38 
44 
45 
48 
... .... .... . 
············ ............ 
............ 
············ 
7362 
s6 
55 
52 
!898 ......... .. . 48 ............ 52 
1903 ......... ... so ... ......... so 
l901l ············ 53 ......... ... 47 


The figures cannot be absolutely exact, but they are fairly close 
approximations, and their significance is plain enough. In the early 
part of the nineteenth century the burden of taxation lay very 
heavily on the poorer classes, who paid then, as they pay now, the 
bulk of indirect taxes. There is a steady movement visible tending 
to transfer the heavier part of the burden to the better-off classes, 
who pay the bulk of the direct taxes. Is it an unfair inference that 
the cry for an "even balance between the two sets of taxes'' was an 
attempt to check the movement, and that it became articulate at the 
period when something like an "even balance " was reached? 
Whether that be so or not, it is a fair and relevant question to ask 
where that doctrine was in 1841, when the indirect taxes made upthree·quarters of the revenue. 

The argument must not be pressed too far. Indirect taxes are 
not all of one kind, and some of them, as the tax on motor-cars, fall 
on the richer classes. But the rise in the one column and the fall in 
the other is quite clear on any fair system of reckoning. 

For and Against Indirect Taxation. 

It is not to be assumed, however, that indirect taxation is 
necessarily bad in itself. 1t is only bad in so far as it is inequitable 
or uneconomical, and although it is very often both, it need not be 
either. The case for and against indirect taxation is this :


On the one hand, so long as people must pay taxes, they undoubtedly 
prefer paying them without being too insistently reminded 
of the fact. If it galls a man more to pay £r to a tax collector on 
demand than to pay £1 in instalments through his tobacconist, then, 
if other things were equal, common sense would suggest that the 
State should take the tobacconists for its tax collectors. But, of 
course, other things are not equal. The non-smoker escapes.

This brings up the false argument for indirect taxation, that it is 
voluntary. If a man chooses he need not buy tobacco or beer, and 
so he " volunteers" to be taxed. Of course, if the taxation were 
really voluntary it would not be paid at all. The argument is a mere 
sophism.

To return. Although bread and tobacco and whisky are equallycommodities, they are not equally important or necessary to the 
State or to the individual. It is true that luxuries shade off into 
necessities, and harmful things into useful things ; but there is not 
the slightest doubt as to bread being more useful than whisky or 
tobacco, and if the State must tax some commodities, it had better 
tax the less useful and less necessary things. Only the State must 
tax things that are likely to produce the revenue it wants from that 
source, and it must not do it so clumsily that consumers will pay a 
penny when the State only gets a halfpenny. The beer tax of 1909 . 
is an example of this error, and every Protectionist country has a 
cluster of such taxes. 

The case against indirect taxation is that it cannot easily be made 
progressive, and so sins against equity by falling heavily on the poor;
and that it often costs the consumer more than it brings in to the 


18 

State, and so sins against economy. The English duties on commodities 
are all open to the first of these objections ; but some of 
them, such as the tea duty, which is levied on an article not producedin the country, escape the second objection. 

Retrenchment and Reform. 

" P eace, Retrenchment, and Reform," was a political cry of some 
value in its day. It was based on the false doctrine that the less 
the State spent the better. A new cry is needed to express the 
newer doctrines-that the cry for reform precedes finance, and does 
not follow it, that the best State is that which raises wisely and 
expends wisely the largest percentage of the national income. So 
''reform" must stand midway between "peace" and-somethingbetter than "retrenchment." Rather is "Peace, Progression and 
Progress " the ideal of to-day ; peace only as a necessary condition 
for progressive taxation, and that as a necessary condition for progress_ 

There need be no fear of a " crushing burden " at the prospecthere outlined. There is no burden when there is compensating 
gain. No one speaks of the " burden " of the price of the 
ordinary goods he buys so long as he is not cheated. The word 
becomes distorted with misuse. One can only speak of the ''burden" 
of a gas bill if the gas company overcharges for the quality or 
quantity of its gas. People who use municipal gas do not talk in 
such fashion. Those who are apt to speak of a company's "capital"
and a municipality's "debt " are apt also to speak of the "price" of 
motor-cars and the "burden" of the roads upon which they run. 
What is equitably and economically levied, wisely and usefully spent, 
can only be described as a "burden " by a misuse of language. 
In the words of a modern economist, " If a nation gets in return for 
its taxes as much of the things it wants as it could get otherwise, 
there is no burden." We would add, for completeness sake, "provided 
the taxes are equitably and economically raised." 

Good and Bad Taxes. 

According to the principles we have laid down, we may describe 
a good tax:


I. A good tax is paid by people of different degrees of wealth, 
not in proportion to wealth, but progressively. Thus the graduated 
tax (other things being equal) is the best tax. This is an application 
of the principle of equity (from each according to his powers), 
and of economy (the most useful parts of income being undisturbed). 
2. A good tax is not costly to the State to collect, nor does it take 
anything (or very little) from the payer more than is received by the 
State. This is an application of the principle of economy.
By these standards the Death Duties appear as the best tax we 
have, and the Income Tax, now that it is graduated, stands next. 
How far a tax may be from the ideal set out above may be judged bythe case of the beer tax of twelve shillings per fifty barrels imposed 
by the Budget of I 909. This is less than threepence a barrel, yetbrewers were able for a while to meet it by raising the price of beer 


a halfpenny per pint, or twelve shillings per barrel. Thus the real 
taxpayer (the beer drinker) was mulcted of twelve shillings, and the 
State got threepence. 

The direct and progressive taxes of the Budget of 1909, the 
Estate Duties and the Property and Income Tax, amount to nearly 
£6o,ooo,ooo out of £r6z,ooo,ooo. Among the other taxes, some, 
like the land taxes, increase the progressive effect of the whole to 
some extent ; others, like the tobacco duty, decrease it ; some items 
in the total, as the £zz,soo,ooo revenue from the Post Office, are 
not taxes at all. Yet, it may be noted, items such as this last are 
generally included when there is an outcry about the " burden " o£ 
"taxes." 

The Case Against Progression. 

The arguments that have been used against a progressive system 
of taxation are about six in number. We will group them as sinningagainst the principles we have laid down. 

As against the principle of equity, it is said that they are arbitrary 
and confiscatory. For the first, it may be said at once that al~ 
taxation is arbitrary. If the argument means that there is no mathe-matical 
law of progression, as there is of proportion, it is quite true._ 
The proportional system is easy. We can tax incomes of£roo, £z,ooo,
£ so,ooo to the extent of £I, £ zo, and £ soo by the proportionalmethod. The only mathematical expression yet suggested to represent 
the doctrine of diminishing utility which lies at the base of the 
progressive system is that of inverse squares, which would give us a 
scale of progression at which even Mr. Lloyd George would blench. 
Supporters of the proportional system would be better content with the 
arbitrary scales of 1909 than with any mathematical scale likely to be 
furnished by economists. As for confiscation, that is in the very 
nature of taxation. \Vhat makes a tax a tax is that it is levied irrespective 
of what compensations may be forthcoming. Progressiveand all other taxes are necessarily arbitrary and confiscatory, simply 

because they are taxes. 

As against the principle of economy, it is said that progressive 

taxation is unprofitable, for the yield is no greater than in a propor


tional system ; that it checks saving ; that it drives out capital ; and 

that it encourages evasion. For the first point, it is obvious that a 

proportional scale may yield more or less than a graduated scale. 

We have illustrated a case on page ro, where the same amount is 

raised by a progressive and by a proportional rate (columns 3 and 5).

But, of course, the columns can be varied as against each other by 

altering the rate of progression or the per centage. The argument

only means that a chancellor can get as much without outcry from a 

proportional as from a progressive rate. In fact he can get more, for 

outcries against taxation are loudest from the well-to-do, as recent 

events have shown. The second point, that a progressive system 

checks saving, may be met also in the same way by saying that all 

taxation tends to check saving. The effect of a progressive system

is to encourage saving relatively on the part of people with smaller 


20 

mcomes. The argument about driving out capital has had to face a 
constant and increasing exodus of capital, which bears a close relation 
to the increase of the total wealth or income of the people of 
the country, but which is only germane to the question of taxation 
in so far as the system makes investment at home less profitable 
than investment abroad. A State that spent much. and spent it 
wisely, would be constantly offering opportunities for home investment. 
Capital is driven abroad because the State is not adventurous 
enough at home. Many sound investments are waiting in these 
islands which private enterprise cannot or will not venture upon.
The last argument, that evasion will be encouraged, is of some 
weight. Evasion is of two kinds, legal and illegal. The illegalmethods must be met by greater vigilance, the legal methods bynew legislation. Until a better public spirit grows up among the 
wealthy classes, they must be educated in civic responsibilities and 
national honor on the one hand, and restrained from disobeying the 
law of the land or dodging it on the other, in common with all 
wrongdoers. They have been educated in false doctrines, and have 
yet to learn what true equity in taxation is. But there is hope for 
them. It was one of the opponents of the Budget of 1909 who said 
that it did not tax the rich heavily enough. Even the idle rich maylearn to be good citizens. 

S E LE CT BIBLIOGRAPHY. 

BASTABLE, C. F. Public Finance. Third edition. 1895. Macmillan. 12s. 6d. net. 
CANNAN, E. History of Local Rates in England. 1896. King. 2s. 6d. 
GRICE, J. W. National and Local Finance. (London School of Economics Series.) 


1910. King. ros. 6d. net. 
SNOWDEN, P. The Socialist Budget. (Labor ldeal Series.) 1907. Allen. Is. net. 
WILLIAMS, W. M. J. The King's Revenue, being a Handbook to the Taxes and the 

Public Revenue. 1909. King. 6s. 
Annual Statement of Revenue and Expenditure ("the Budget''). King. 2d. 
Graduated Income Taxes in Foreign Countries. 1905. Cd. 2587. King. rs. 5d. 
Graduated Income Taxes in Colonies. 1905. S. P. 196. rod. 
Graduated Income Taxes in Tasmania. 1905. S. P. 282. 7d. 
ScHoNBERG's Handbuch der Politschen Oekonomie, Vol. III., Taxation, is a compre


hensive work kept up to date. Lauppschen, Tiibingen. Part I , Theory. 26s. 
Part II., General. r6s. 
Science des Finances, by BOUCARD and JE:zE, is perhaps the most suitable work in 
French. Paris, Giard et Briere. 

E. R. A. SELIGMAN's Progressive Taxation gives the case for progression. Sonnenschein. 
3s. 6d. 
Printed by G. STANDRING, 7 Finsbury Street, London, E.C., and published by the 
FABIAN SOCIETY, 3 Clement's Inn, Strand, London, W.C. 


]ANUARY1 1911.