INCOME TAX: ECONOMIC ASPECT. The most im portant economic aspect of income taxation is naturally its effect upon the capacity and psychology of the taxpayer, for these may affect his willingness to work and to save, and thus have important reactions upon national production. Any general discussions about the economic effects of a particular tax are usually idle unless a comparison is made with the effects of alternative forms of taxa tion, designed to raise a given sum. Again, discussions of the effects of taxation in whatever form to a particular amount, are of only limited value unless the effects are brought into contrast with the effects of the expenditure of the money upon the individual and the community. It may be, for example, that the expenditure of a certain fund derived from taxation has, in its general application to the improved organization of society, an aggregate value of additional production or economic satisfaction in improved social relationships, or in peacefulness and law and order, or in indus trial organization measured by an amount 2x. Examination of the effects of the taxation to produce this sum may indicate a depressing effect upon producing agents measured by an amount x. The taxation as a whole may, therefore, yield a net profit to the community, but whereas the burden is of ten obvious and vocal, the benefits are generally diffused, intangible and silent, so that most discussions upon the burdens of taxation which deal only with the one side are inconclusive as a contribution to its economic aspects. But it must not be supposed that a mere quantitative surplus of benefits over burdens is a sufficient test, if the burden falls entirely upon one section and the benefits go entirely to another. Redistribution of wealth per se by way of taxation, lies rather beyond the field of economic science, and in that of politics. Three aspects have to be present then in discuss ing the economics of taxation. What is the alternative? How great is the benefit? Who gets it? Income Tax and Prices.—With these reservations in mind, the most important economic aspect of income tax to be con sidered is its effect upon prices. The common business view is that an increase in income taxation tends to increase prices and vice versa. The generally accepted view of the economist is that income tax does not enter into prices. A tax on every barrel of beer enters into price, a tax upon the profits on beer does not. There is a distinction between the "incidence" of taxation and the "effects," the most recent and exhaustive examination of which was made by the Colwyn committee in their report on national debt and taxation : "In general usage the term `incidence' covers not only the initial burden of a tax, but also the whole range of consequential effects. Economists, however, have given it a narrower meaning. For them `incidence' is only concerned with the question on whom the more immediate burden of the tax as a tax rests. This is the first thing to be decided about any tax. It is to be distinguished from the question of further effects, which may be exceedingly important. For instance, the burden of a tax may rest upon an employer, and in consequence he may cut down his staff ; in such a case the effects of the tax may be more serious to the employees than to anyone else, but the incidence of the tax is not said to be upon them." In a full examination of the two current views, according to one of which a general in come tax cannot be shifted by the person on whom it is laid, while according to the other it "can be shifted, and is in fact shifted, in the form of an addition to price," the committee con cluded that "if and so far as the latter view is correct, the income tax must abandon part of its chief claim to virtue as a method of taxation. However carefully graduated, it can no longer be said to satisfy the canon of ability to pay, if the burden is in discriminately shifted; if this happens, no one can tell how much tax he really suffers. This implication is usually not developed by those who advocate the view that income tax is added to price. They more often pursue the argument that income tax is responsible for raising prices, and is therefore a potent factor in depressing trade." The committee's final conclusion was that the broad economic argument was true over practically the whole field and over practically the whole of the time, any exceptions being local or temporary and insufficient to invalidate it. The main feature of the doctrine is that where there is no profit there is no tax; try tax comes out of the margin of profit, and does not enter into cost. At the point at which, in economic parlance, the demand price meets the supply price, the supply price only covers costs in that part of the supply which it is just worth while to main tain. At the same time it is agreed that the "effects" as distinct from incidence of income tax, may, on balance, be repressive to production. But whether production so diminished results in a higher price level with a gold standard is a matter of rather refined economic analysis, which is not capable of ultimate solu tion. In the first instance there is the effect upon enterprise. One view is that a high rate of taxation lessens the willingness to work for a diminished reward, and also lessens the willingness to take risks. It is probable that there is some truth in this point of view for short period changes, but there is no absolute relation between the amount of work the average man is prepared to do and the amount of the real reward that he enjoys. For there have been very wide variations as between different countries in the reward, without any corresponding variation in the amount of effort given, and in a particular country, England, for example, it cannot be said that willingness to work has varied directly with the real reward for effort, which has multiplied fourfold in the last ioo years. Indeed, strong counter tendencies are always in operation and high taxation may often lead to greater effort in order to maintain the net standard of living at the original point. It is probable that sudden changes in taxation do affect the will ingness to take risk directly, but "tolerance" sets in rapidly.
Whether high income taxation is worse in this respect than other forms of taxation for an equivalent amount is a nice point dependent upon the industrial habits and the psychological char acter of the people. So far we have considered the effect upon individuals acting on their personal volition, but a large part of modern industry is conducted by corporate bodies actuated by rather different motives. In this instance, income tax which is levied upon the whole profits is said to diminish the amount put to reserve, and, therefore, the funds available for further exten sions. Probably this is the case, but there is no corresponding effect on incentive, for income tax, whether high or low, is passed on as a deduction from dividends, and the conscious effort of profit-making by the management is not usually touched by its amount. Income tax in a particular country has important economic influences upon other countries, inasmuch as the income of its people is never entirely self-contained; it draws income from beyond its borders to its nationals living within them, and it makes income within its borders which goes to people living beyond them. Two separate income tax systems in two countries having economic relations of this kind have most important reactions of an economic character. The problem of double taxation is so far only partly solved. It acts as a kind of arti ficial barrier in the international flow of capital, inasmuch as funds are prevented from flowing from the point where they are most abundant to the point where they are most needed. Con trary to popular impression, the real burden of double taxation is on the borrowing country, and not upon the lender, although the latter often appears to suffer it.
In elaborating methods of income taxation, the pursuit of ideals connected with justice as between individuals with widely different incomes may have to be reconciled with disadvantages of a social or industrial character. Thus, highly progressive rates may be "fair," but they may also be socially inexpedient, espe cially where they trench upon the fund for savings, and the popu lation with smaller incomes, who reap the benefits of the pro gression, are not prepared to make good the deficiency, or are unaware of its existence. A fall in the national fund of savings must ensue, with economic reactions upon total productivity.