Taxation

The report of the Colwyn Committee on Taxation deals ex haustively with the comparative burdens per head at different dates. The following is a selection of the conclusions (Report PP. 94-5) which differs in small details from the foregoing:— The Progressive Principle of Taxation.—No change of opinion has been so great or so complete in the past fifty years as that upon progression. Adam Smith was, except in one or two passages, an exponent of proportion. Probably he went as far as was necessary in an age when regression was more commonly held as a defensible system. The nineteenth-century view is M'Culloch's oft-quoted remark, "When you abandon the plain principle (of proportion) you are at sea without rudder and compass, and there is no amount of injustice you may not commit." In 1922 Sir Robert Giffen wrote, "As to progressive taxa tion based on the assumption that equality requires a larger pro portionate charge upon a big income than on one of a smaller amount, the practical application of the principle, if true, would be impossible. A great deal more would need to be known than is now known as to the effect of taxes on different classes, and the aggregate amount of different incomes, before such a tax could be undertaken. If there is a greater proportionate charge already on the larger incomes, nothing more need be done, and we cannot know that there is not.

The doctrine of the minimum of subsistence was advanced by Bentham in the form of leaving untouched a certain minimum of income sufficient to provide the necessaries of existence.

There is no magic about the minimum of subsistence. It is not an absolute. "I well remember, when I was serving on the Dawes Committee on German Reparations, and we were consider ing the question of comparative national ability to bear burdens, with the necessary comparisons of total national incomes, the various nations agreed that the minimum of subsistence for each population should first be deducted, as it was only the balance of income that was capable of bearing a special burden. This mini mum per head was, theref ore, explored by the various representa tives. The Americans were amazed at the figure suggested by the French and the Italians, and surprised even at the British ; it seemed to them incredible. The Italians could not admit the British suggestion, and as for the American idea—when applied to Italy it blotted out the whole national income." (Sir Josiah Stamp, The Christian Ethic as an Economic Factor.) The philosophical or mathematical basis of progression as a just principle has been debated since Montesquieu, and writing in 1894 Seligman was able to point to the growing Continental practice, and also the support of marginal theory in economics "as indicative of a great change." The principle is based on the

diminishing satisfaction given by utility of money or wealth as a whole to its possessor, with every increase in it, satisfying less and less urgent wants, so that to take a shilling from the i o,000th L is not so hurtful as to take a shilling from the i ooth L. Taxation in Germany was frankly progressive from 1891. In Great Britain a mild element (degression) existed in the Income Tax, and some progression in death duties, from 1894, but the first instalment of real progression came in 1909 with the super tax. In France the principle was not admitted until much later.

The Incidence of Taxation.

Some of the most important issues in regard to incidence and ultimate effects are considered in the article INCOME TAX, ECONOMIC ASPECTS OF. But one of the fundamental principles in connection with all taxation of a flow of particular kinds of wealth (e.g., taxes on mining royalties, on dividends from diamond mining, or on ground rents) is that of amortization or capitalization. It rests upon two economic prin ciples, first that a tax on results (profits) or surplus (economic rent) does not enter into price and become recouped in sales, but stays as a deduction from the particular profits taxed; second, that all such "flows" have a capital value in the market, and the market (caeteris paribus) is indifferent to gross yields and looks at net yields only. Thus A and B have each L i oo coming from sources X and Y, and its capital value in the market is L1,500 in each case. But a i o% tax is put on X and A receives L90 only—he can only get £1,350 in the competitive market, and at once bears the capitalized (or amortized) burden of future taxation. Every pur chaser takes care to buy himself "free" of the burden and to get the same rate of yield as he would from untaxed sources. It is not necessary to wait for the actual imposition of the special tax— its preparation has the same effect, and even a hint of imposition begins to influence market price. Of course a general income tax leaves no untaxed alternatives open to the investor and there is, therefore, no amortization.

An important "negative" case is the special exemption from a general tax, e.g., a "tax exempt security." Here the capitalized value of the tax escaped is a present to the owner at the time of the exemption, and every new holder has to give pro tanto more. If the tax exemption is a condition of a government offer, ob viously the government gets a subscription on more favourable terms in lieu of the tax they prefer. The problem of tax exempt securities is peculiarly an American one.