Adam Smith's third maxim is an administrative rule. In prac tice to-day taxes are levied at that point in the productive process, or the course of distribution, which is most convenient. Where "bonded" warehouses are available, duty payments may be post poned until there is actual withdrawal for use. It is generally considered that taxes on raw materials infringe the fourth maxim. If taxes are imposed at the first process, capital is locked up in the tax, and the payer has to secure interest upon it, and the user must get interest upon interest until the price of the final article has rolled up compound interest on the tax. Taxes on raw materials are almost universally condemned, but the reason ing behind these objections is not, from an economic point of view, particularly sound. A more important infringement of the fourth rule is the indivisibility of a tax. "Where a charge upon a commodity is not of such a figure as to be easily divisible among the ordinary units of retail consumption, so that it can be passed on to a consumer of the articles in the form of an increased price, it may remain fixed upon those who first pay it, at least for a time. Thin is supposed to have actually happened with the increase of the beer duty in the British budget of by 6d. per barrel—a sum which would not when divided by the pints in a barrel amount to the smallest coin." It is, therefore, the object of the financial authority to impose a tax on the com modity which may find a proportional equivalent in the price of a minimum quantity usually demanded—thus a penny on a gallon of beer would have no workable equivalent on the half pint.
Relations Between Direct and Indirect Taxation in Great Britain.—Much discussion has centred on the relations between direct and indirect taxation, and for many years it was thought, for no very clear reason, that the Government should "hold the balance even" between their respective yields. In 1840 in the United Kingdom indirect taxation was 73%, in 1870, 61%, in 188o, 6o%, in 1895, 62%, and in 1906, 50%—for many years it hovered round this figure. To-day there is much less regard paid to the proportions, since direct taxes have developed to a marked extent, and there is a recent tendency to look at them as part of a common system, and all taxes taken together are reduced to a per centage of total income at each grade of income to determine the effect. Indirect taxes are justified in this view for their adminis trative convenience in reaching the incomes of the poorer classes who are only with difficulty brought within direct taxes, such as income tax, and death duties, and who otherwise would have po litical power and control over expenditure without any share in the responsibility.
The causes of the trend towards more direct taxation may be summarized in a three-fold classification :— (I ) Natural Administrative Development.—It is most natural
for countries in their early stages of development to rely almost entirely upon indirect taxation, and in proportion as they become more highly differentiated in function or densely populated, and industrialized so as to be more completely of the type of western civilization—in that proportion is it found more administratively possible to resort to direct taxation. A country that is sparsely peopled has ill-developed administrative machinery. In agricul ture it is always difficult to assess incomes, and it often takes many years after the adoption of an income tax to attain a high degree of administrative efficiency. A country in an early stage of devel opment has to rely very largely upon a scattered and not too skilled administration, perhaps with no tradition of industry and probity. Such a country has one or two main outlets for its produce, and means of ingress for imports, confined to one or two chief ports, and by concentrating administration at these places, the gateways, as it were, of the country, it is possible to levy toll on things going in and out. Consumption taxes or taxes upon produce are the rule. These taxes are most easily checked at the points of ingress and egress.
(2) Social and Political Reasons.—Democracy has a growing power politically to put the major burden upon a minority. A landowning majority tends to put the weight upon manufacture and wages. Seligman says the indirect taxes of the i9th century were the outgrowth of the effort on the part of the commercial classes to escape the burdens which the landowners were desirous of placing upon them. Socialistic theories desire to equalize in comes, and heavy taxation of the rich is one important method. But this cannot be achieved by ordinary indirect taxes.
(3) Economic Causes.—The principle of ability to pay has led in recent times to progression (see below) through the economic principles of diminishing utility and equal sacrifice. This can only be attained by direct taxes.
According to calculations by Sir Herbert Samuel, before the Royal Statistical Society in 1903, the income of LI so a year bore •I% of direct and 4.8% of indirect taxes. In 1918 this was •I% and 10.9% respectively. For the isoo income the 1903 figure was 5.6% direct, 3.1% indirect, 8.8% total, and the 1918 figures 52% direct, 6.1% indirect, total 18.1%. The 1903 income of £5,000 bore 8.7% direct, 0.8% indirect, total 9.6%, but in 1918 the L5,000 income bore 42.2% direct, 1.3% indirect, 43.5% total. The £5o, 000 income bore 10.2% direct, .o8% indirect, total 10.2% in 1903, and 63.7% direct, .1% indirect, total 63.9% in 1918.
It is true to say that the smaller incomes during the last zoo years have been so systematically relieved from taxation that, if a workman chose not to drink alcohol or to smoke, his taxation was almost negligible.