Taxation is "proportional" if the payment any person is re quired to make varies directly with the amount of income or wealth the payer possesses, "regressive" if the burden becomes a less percentage of income or wealth as the latter increases, and "progressive" if it becomes a greater percentage. Thus local rates are said to be regressive, because the average amount paid by a householder with £5,000 a year is a less percentage of his income than that paid by one with L5oo a year. But the income tax and estate duties are now almost universally progressive.
Taxes in rem are laid or assessed upon a thing or physical object, regardless of the circumstances of its owner, e.g., a motor licence, or a house tax; while taxes in persona pay due regard to the financial status and domestic circumstances of the payer, e.g., income tax and death Fundamental Principles.—Adam Smith's famous canons or maxims were I. The subjects of every State ought to contribute towards the support of the Government as nearly as possible in propor tion to their respective abilities, i.e., in proportion to the revenue which they respectively enjoy under the protection of the State.
3. Every tax ought to be so levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay it.
4. Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the State.
Formerly it was thought to lead logically to proportional taxa tion (see above), but now it is generally agreed to require pro gression. It is now considered to be best tested by the total wealth of an individual, or else by his income over a certain unit of time. The unit varies with different classes of people, e.g., weekly wage earners against business owners. With high rates of taxation, income may have to be carefully dissected to take out elements that are not pure income (for example, the wasting asset in an income from a diamond mine, or the capital element in an annuity). The nature of the income, whether it is precarious, or, on the other hand, independent of the work and health of the recipient, is more generally regarded, and a difference in the burden is made, while there is also a growing tendency to consider whether the income is burdened with inevit able family claims. These different elements have been recog nized only in recent years, and taxation, formerly mostly "objec tive" and equal for every pound of income to every man, has become highly "subjective" or personal to individual loss. A few years ago a bachelor in Great Britain with LI,000 per annum from investment paid the same tax as a man with a salary of £i,000 and a wife and family of children and a number of dependent relatives.
Adam Smith's principles have thus been elaborated in British practice, especially as regards the first and the refinements of the principle of ability; for the other canons are really only com mon-sense administrative rules, and do little as a guide to the proper amounts of taxation to be levied between different classes.
A recent addition to the category of "ability to pay" is the special ability or "windfall" principle, which postulates that a special addition to the regular flow of wealth or income, not counted upon by the individual in regulating his expenditure and mode of life, has a greater capacity to bear taxes without hurting him than a similar amount which forms a regular part of his receipts.
Thus a higher rate of tax upon a legacy received from a distant relation than on a similar amount from a near relation (from whom one had "legitimate" expectations) has been justified on this principle, and so also have various increment taxes. The excess profits duty in war time was based mainly on the principle that in a time of general hardship anyone who found himself enjoying larger profits than in peace time was specially lucky and could well make a special contribution to the Exchequer.
Successful personal taxation is a great test of advanced admin istrative methods. It is always a failure where Government is not strong and uniform in its nation-wide application. In modern times so much wealth is only loosely attached to individuals— the profits of companies which are not distributed as dividends, or the wealth of corporate bodies—and taxation of these non personal elements has to be reached by the same system. (See INCOME TAx.) Ad Valorem Duties.—Adam Smith's second maxim (of un certainty) is perhaps most nearly violated in modern times by the practice of imposing ad valorem and not fixed or specific duties on commodities. Specific duties applied to classes of goods of widely varying quality are obviously a higher proportionate tax upon the goods of poor quality and low price than upon the best quality. A duty of id. per cigar would be a very heavy tax upon a cheap cigar, and a very light one upon a Corona. This can be represented as a regressive tax upon the poor and favour ing the rich, and also as very disturbing to production. If it is to raise a substantial duty over the whole class, it may even be so high as to lead to substitution in the lower grades of quality, a process which may easily raise the costs of production of the higher grades. The ad valorem duty is the natural escape, but the successful administration of a highly complex tariff requires a better and more skilled and honest staff of valuers or assessors than many countries are prepared to admit or afford. Although, therefore, an ad valorem tax is theoretically a certain tax, and the same levy must always be made upon this same quality, de fects of administration may make it arbitrary and uncertain.