The influence of taxes on consumption is of less importance than in former times. In the Middle Ages sumptuary taxes were very common. It was, however, not luxurious consumption, but necessary consumption, which was frequently sought to be hit. The ease with which taxes of certain kinds may be made to check consumption are so pronounced that it is primarily in periods of war finance that recourse is taken to this medium.
The political effects of taxation are no less important than the economic. The history of free government itself has been intimately in fluenced by the effects of taxation.
Incidence of By the incidence of a tax is meant its final resting place. We must distinguish between the impact of a tax or its original assessment, the shifting of a tax or its transfer, and the incidence of a tax or its final resting place. Shifting is the process, incidence is the result. The person who bears the tax is not always the one who pays the tax in the first instance. This has led some writers to lay down the so-called equal-diffusion theory of taxation, the theory, namely, that the body economic is like any organism and that if a liquid is injected into the veins at any point it will at once be diffused throughout the body. The tax, therefore, no matter where imposed, will be shifted to the community at large. This theory suffers from undue generalization. It is true that certain taxes give rise to such changes in economic relations that they may in a sense be said to be ultimately spread over the com munity. There are, on the other hand, many taxes which do not lead to this phenomena and some taxes which are not shifted at all. A dis tinction must furthermore be observed between capitalization and shifting. .If a tax is shifted, it cannot be capitalized; if it is capitalized, it cannot be shifted. There are certain conditions which predispose to the shifting of taxation. The more general a tax is the less likely is it to be shifted because the smaller the tax the less the field to which the individual can betake himself. Where commodities are produced un der varying conditions, much depends upon whether the tax is imposed upon the marginal or the intra-marginal producer. Where a tax is imposed upon land which produced a com modity with a local market, the tendency is for the tax to be shifted to the consumer. If the tax is imposed on the North Dakota farmer whose wheat is sold in Liverpool, the shifting of the tax depends upon the relative cost of producing Argentine or Russian wheat and upon the existence or absence of equal taxes in those countries. Where a tax is imposed not upon commodities or property in particular, but upon profits or income in general, the tendency to shift is much less pronounced. With taxes
upon a particular kind of commodity or upon a particular kind of income, the situation is different.
The shifting of the tax is of importance not only as between producer and consumer, but also as between borrower and lender. In taxes imposed upon mortgages or upon funds bor rowed the incidence of the tax depends to a large extent on whether the tax is general or exclusive. If the tax is levied as a part of a general income tax, it will not be shifted;.if, however, it is an exclusive or unequal tax, either by law or in actual operation, the tax will ordinarily be shifted from the borrower to the lender. A complete study of the shift ing of taxation would involve a treatise on the formation and distribution of wealth.
Principles of There are four different sets of principles of taxation, fiscal, administrative, economic and ethical. The fiscal principles are those of adequacy and elasticity. Unless a tax is sufficient to bring in the revenue that is needed or expected, it cannot be pronounced successful. Again, un less a tax is so elastic as to respond to the varying changes in economic conditions, it is also to be deprecated. The administrative principles of taxation are those of certainty, of convenience and of economy. Unless a tax law is certain in its provisions, it is a bad law. There is a great difference, for instance, be tween the certainty of a land tax and the un certainty of a comprehensive or of a compli cated income tax. The principle of conven ience of taxation includes the question of how the tax is to be paid, when it is to be paid, where it is to be paid, and under what lions, inquisitorial or otherwise, it is to be paid. The economy of taxation implies that a tax should take out of the pocket of the peo ple as little as possible above what it brings into the government, or, in other words, that the cost of collection should be low. The eco nomic principles of taxation may be declared to be innocuity and efficiency. The innocuity or harmlessness of a tax is a most desirable attribute. All taxes, indeed, represent a burden but, as has been pointed .out above, certain taxes have a far more destructive effect than others. Other things being equal, the legislator must chose the most innocuous tax. By the efficiency of taxation is meant the capacity of a tax to accomplish the desired result. Many a tax is admirable in other respects, but can be made to work in practice only with diffi culty. The present property tax, for instance, in the United States is to-day no longer an efficient tax. The ethical principles of taxation are those of uniformity and universality. As these are the most important, they will be dis cussed separately.