In modern times there has been a strong tendency for Gov ernments to place taxes on certain classes of expenditure which fall rather within the category of what Marshall has termed "con ventional necessaries" than of what are ordinarily regarded as luxuries. Most expenditure upon alcohol, tobacco, articles of silk, entertainments, private motor-cars, etc., is clearly superfluous in the sense that a large part of it is in excess of what is required for economic efficiency and personal well-being. No man need consume any specific quantity of these things, and any contribu tion that he may make to the revenue by purchasing them is the result of his own voluntary act. He can avoid taxation by ref rain ing from consuming the taxed articles. Nevertheless, in actual fact these articles are purchased on an enormous scale and, as objects of taxation, they have the great advantage from the point of view of the chancellor of the Exchequer of having, within limits, an inelastic demand and thus of bearing heavy rates of tax without an undue contraction of demand. In appearance the familiar strictures on the taxation of necessaries are observed, but in reality many people pay an altogether undue proportion of their incomes to the Exchequer, owing to their insistence on purchasing articles, much of the price of which is composed of tax; just as before the World War it was a familiar grievance in Ireland that the Irish people as a whole paid an excessive proportion in rela tion to their wealth of taxes to the British Government, owing to the very high level of the whisky duty.
The problem of the relation between the revenue and the sumptuary aspects of a tax on consumption is nowhere more clearly seen than in the case of taxes on alcohol. Every chancellor of the Exchequer, as a member of the Government, will lay stress on the beneficial effects of high taxation in reducing the quantity of alcohol consumed and in lessening the evils of drunkenness. But in his capacity as finance minister he is continually looking at the quantity of revenue to be derived and carefully estimating that rate of tax which will bring in the largest total receipts. The advocates of temperance reform would probably seek his support in vain if they were to urge the raising of the duties to such a level as to diminish seriously their aggregate yield to the Exchequer. The case of alcohol illustrates some of the difficulties which may arise in a financial system which depends to any important extent upon taxes on articles of a luxury character. Luxuries are notori ously subject to changes in fashion, or taste, or public opinion. An alteration in the attitude of English people towards the con sumption of alcoholic beverages, which led to a large decrease in such consumption, would create a most serious budget deficit.
In considering the proper position of luxury taxes in the general tax system of a country like England, it may be pointed out that an income tax can only make very partial allOwances for variations in necessary expenditure, and there is therefore a strong case for supplementing the progressive rates of direct taxation with rather high taxes on the kind of luxuries which can only be bought by those whose incomes are much in excess of all normal and necessary requirements. (C. W. G.) The United States.—The early colonial governments followed the examples of European states and taxed those things which from traditional or arbitrary points of view were regarded as lux urious, such as billiard tables, pleasure vehicles and even window glass. "Luxury" taxation is a dubious term, for as modern econo
mists illustrate, luxuries and necessities tend rapidly to obliterate their lines of demarcation.
The modern type of luxury tax, in the form of sales or turn over or excise taxes, began in the U.S. in the Civil War; a heavy, comprehensive system of excise taxes on "non-essentials" being adopted in 1862, the rates being increased again in 1864. These excise taxes supplied over half the Civil War tax receipts; the income tax playing a minor role. The War Revenue Act of laid new taxes on a wide range of "non-essential" commodities, many of which were promptly dubbed "nuisance" taxes. Some, like the tax on soda fountain drinks, were not only costly to collect but were frequently evaded. When the Revenue Act of 1921 was adopted, the objectionable "nuisance taxes" (on soda fountain drinks, transportation tickets, etc.) were repealed.
The impact of the 1929-35 depression was such that new luxury taxation became inevitable, not only through Federal excise taxes but through state sales taxes. The Revenue Bill of 1932 taxed admissions and laid manufacturers' excise taxes on cosmetics, furs, jewelry, sporting goods, cameras, yachts, motor boats, fire arms, radios, phonographs, automobiles, mechanical refrigerators, chewing gum and candy, beverages, malt, oil, gasoline, telephone and telegraph messages, matches, pipe lines, safety deposit boxes. Earlier luxury taxes included tobacco, liquor, club-dues, playing cards, sale of produce, oleomargarine, stock transfers, etc. Im portant exemptions were made—garden and farm products, food items, newspapers, periodicals.
Resistance to adoption of a general turnover or sales tax has had the natural effect, under pressure of war or depression, of raising the taxation rates on luxuries. The usual 1 or 2% rate rises to io% or 15%. However, the history of taxation shows that only taxes on articles of wide consumption enjoying inelastic demand may be depended upon to yield large tax revenues at low collection cost. Collection of luxury turnover taxes is notoriously difficult, and they yield low revenue ; taxation tending strongly to limit consumption. Ideal items of so-called luxury taxation consequently are alcoholic beverages, tobacco, coffee, tea, sugar, gasoline ; but the general public will not admit that these are in a real sense luxuries. It is also a realistic tax fact that ordinary taxable articles change hands many times from producer to con sumer and the tax at a low rate may total almost as much as the tax on "luxuries" at the high rate.
The policy of selected taxes is nevertheless adapted to Ameri can ideas and experience. A major part of Federal revenues ever since the Civil War has come from selective excise taxes. The issue at stake has been, and is now, whether a general sales tax may be avoided by means of the selected taxes. The remarkable rise of state sales taxes (most of which have been selective because of exemptions) during the 1929-35 depression seemed during 1934-35 to point to replacement of state sales taxes with Federal sales taxes, but revulsion against state sales taxes set in in 1935 and averted this tendency. Manufacturers' selected excise taxes prevent pyramiding in the process of producer-consumer distri bution. (J. G. F.)