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Hy mrithogs mt iy Heh ah Hatta ide ifn ite ry fet ‘ f rea Nina Wen eet Fn leat sina ste Ha A she » abc ksda pete puisiesieny shuns ats maid anit PARTY of cay a4 is Ki i tain a soning air Pyke aan Gy Hist iin miepia it a Bl rand st) : ih oaks) (beeen Sige i ; y eptiyectuA a may 3 eat ra eae Ene bd P i iv ce Aas it ohne : rea RANE Vite Hay: ok dl Fa ite Naa ae rH ey aKa waa y3 ho Lan Bt rhe) yet Ha ete Prerena titen iat ate aia hy ’ ae ) i Q ifs eee th) " Un + rit L) be BAe Baa ni) yh inate it art ey Be A ae iy ie ty iy ay uit te RY? aE Ne ai Kea iat Re Hs mht aii at ATA i at My} iy iy ibe vit feted ; thi cae i yt AIH " r f i (ia MLM LaRue te ; a Mi ie Fag asi parkaty ty) hat 4 Fs i Hh 1 iii ' Hh AHH 1 si u rah nd ia A) a TR aGatuniah Bea eta satu Hn sdot at niu roi ash OME Ge econ i ran a HM Harn yy inthe ie PRU She nea At HN #3) ety a) ua) ihn fata uh jit He i Hite a bh Nee taney seaaie iS Oi i vals ite bed 44 i fad f ¢ ts sa yt ne cebu ht uel iy aA iy date mnt i chi ft lh aa ian ; ai art in Nanay sh bane ; myn! ri 4) i Pane ae) i " i " Pitot ye By ieuet ai HE) bane NE Roy Y sare Ks i pote ata vn " Sry iy af Mosh hy Veni peat feds Fh nes : ai ie ibe iT si hie 44) ate 1) ras aie est enn Y on i ait 1s re ei telnay to i viel i Big) th miner Aten tata tae) vk an ses ; “sf aif Anne aH na ti HH Hy) ies TA ah Mi ae hasta ON sf} alti rat Area Bh ee cae eth CYR SD hehe aie sire ests es abuts Hae at iyait' th tha He apaties ey SUA te i Pa at a “irik ts i CHM LA a iit ih Cai ueAt pai} Us eb Hh AME Aired ait bit SNR eat PN PM MAY Lt ays, TH Ebay baby nat eae SIPS ATR p eos eae tegen . mdet ii Heese) aa ate MA ot bg pea balee batts) 40911 A] 9'T 8 oh Fm Ld Herts Eataaelvaly ‘ads ah i mn Be ites fh Tisai glinns ey va VHPE Tt meget eral a4 vited shail ¢ Tan) hayes i Mar TD ER et ay had SH ity i Polbeke WES Coney co ep iy 4 ui Hy ! a, i 4 ie ae fay : saa)! si atom tj af 4h | Fait! thy rahe ‘galbadyt Ma , Wega Aad iy % {pips sinning er nw Wn ia yt Pa Vii Lie gs ites) i] ‘ {Mises hat ri ti ‘i At ean i oitaiie ve mifvigeens feat iat tus ‘thy mae Hast i ‘ft bis Ks f a at ada ede at tie et qui ai wan ith it ai i ea an eae , § 3. § 4. Taxes on Sales of Land . Taxes on Mortgages and on Loans i in Gen- eral Taxes on Sales of Corporation Securities Summary Cat ee CHAPTER X THE INCIDENCE OF IMPORT AND EXPorRT TARIFFS § 1. S28 § 3. § 4. § 5. Revenue versus Protective Tariffs The Nature and Purpose of a Protective Tariff : When “the Foreigner Pays the Tax” Import Duties Levied Purely for Revenue . Conditions Under Which a Duty Levied Purely for Revenue is Borne Exclusively by the People of the Levying Country . PAGE 2 I 3 iY 213 215v 236 246 v 248 255 258 262 265 267 267 276 284 287 289 290 301 395 308 CONTENTS Xxi PAGE § 6. Conditions Under Which an Import Rev- enue Duty Might Rest in Whole or in Part upon Another Country or Countries than the One Levying the Duty . . . 309 § 7. The Incidence of Revenue Duties on “Ex. DOES ered piel ote csee derek. anal ape eA tae ee Ua RRR MPSOULLLINIAL Vis ats) ck cosy ioe ORL ARer ster caizy Ns ean Od CHAPTER XI BEEP RTOS RICO Sige bia Pig wit gt Lamia Vn eae sia et gt Ova TS TORRE CON ei UN ev he hon te) taiiote Bf shuts eR Ses THE ECONOMICS OF TAXATION Py. bes NE ¥ rot. oo) & heb v ie INTRODUCTION THE SIGNIFICANCE OF TAXATION IN PUBLIC FINANCE The subject of public finance, as commonly studied, includes a variety of topics. Chief among these are public expenditures, the means of. raising public rev- enues and the relation between | expenditures and rev- enues. “In connection_with_ public exp blic expenditures there comes = up the whole theory of of the proper-functions of the" state. Should the state e do more than ‘maintain an army and navy, a police force, prisons and courts of law? Should it build roads and bridges? Should it expend money for the free education of children? Should it maintain hospitals, and homes for the de- fective? Should it endow research? Should it en- courage scientific agriculture by the issue of bulletins and otherwise? Should it encourage foreign trade by means of a consular service and a department of com- merce, publishing bulletins on foreign markets, etc.? Should it encourage a merchant marine by subsidies or otherwise? ‘These and many other like questions are certainly of great importance. But the subject of the proper scope of and limit to state functions is entitled 3 4 THE ECONOMICS OF TAXATION to a much more complete and judicious consideration than it often gets in books on public finance or than it would be likely now to get in a few introductory chapters of a book on taxation. All of the activities above-mentioned are engaged in by some governments; some of them are engaged in by nearly all govern- ments. Nevertheless the considerations by means of which a decision as to the justification of such state activities would have to be arrived at are numerous and intricate; any view which might be herein espoused could hardly be defended with the definiteness and convincingness with which it can be shown that (for example) a tax on soft drinks will raise their price to consumers; and the author is disinclined to. pronounce | ee. judgments which may appear to be merely an echo of current popular views a nd_ practice. ee The problem of the proper functions of government looks still more complicated when there is noted the contention of many persons that government ought to undertake the provision, at cost, or for a nominal re- turn above cost, of various services in addition to those supplied gratis.- Whether cities should own and oper- ate their own water plants, their own electric-lighting systems and their own street railways, and whether the central government of a country should own and oper- ate the post-office system, the telegraphs and the rail- roads, are certainly important questions. And they TAXATION AND PUBLIC FINANCE 5 pertain to the general subject of state functions. Not only, however, are they too broad for satisfactory dis- cussion in such a book as this, but, also, the settlement of them either way would not necessarily affect in any important degree the amount of money which must be raised by taxation. pete. The relation of the revenues to the expenditures of a state or government has very great practical impor- tance. It is recurrently a matter for consideration by legislative bodies. For, on the one hand, no program of governmental expenditure can be undertaken with- |. out a plan for raising the necessary incident revenue. — And, on the other hand, no plans for raising revenue , should ordinarily be entered into without due consider- | ation of the expenditures which have to be or which ought to be met. a Indeed, more than this may be said. For if we believe that the functions which government is to per- form gratis should be many, if we believe that these functions are important, and if we are convinced that they should be carried out on an extended scale, then we shall be moved to support high taxation as a nec- essary means to our desired ‘end. And we may be moved to support such taxation even if the community, is poor and the taxation in question hard to bear. 4 on the other hand, our estimates of the importance of governmental services cannot but be relative. A serv-, i ? a le ies, | 6 THE ECONOMICS OF TAXATION ice which is important enough to justify the incident i e e se & _ necessary taxation in the case of a rich community — may not be important enough to justify the necessary ad in the case of a poor community. “ Taxation. is _a_diversion-of-income_or wealth from aera! to the state. Jt means that individuals can spend under their. pwa-direction. Jess of the returns from. economic_activity.and. that more of these returns is spent_for them by the state. The > things ‘which the state does for all of us collectively are, many of them, things which are well worth doing, and some of them, such as maintaining order, may be essential. But the things that we do for ourselves, individually, are per- haps, taken by and large, no less worth while and no less essential. If poverty compels most of us to go without goods and services which we would like to have, the economies will, almost certainly, not all be in those services that we provide for ourselves but will be, partly, in services that are provided by govern- ment and which we pay for through taxation. Our compulsory self-denial will not take the form, entirely, of poor and insufficient food and clothing, unsanitary and inadequate living quarters, deprivation of leisure, and so on. In part it will take the form of a smaller and less well equipped army and navy, a smaller and less efficient police force, fewer and less adequately trained teachers for public schools, poorer roads and TAXATION AND PUBLIC FINANCE 7 streets, fewer and cheaper public buildings, and other public economies. The subject of revenues and expenditures and their relation to each other comes before the legislative body of a state or nation periodically in the form of the budget. Here, again, much might be said did space and inclination permit. In some works on public finance the discussion of the budget extends over a number of chapters. And there are not wanting entire books dealing with the subject or even with a few phases or a single phase of it. The problems of the budget are now, perhaps, more studied by political scientists than by economists. They are problems having to do particularly with the methods of legisla- tion and with the relations between the legislature and the executive, in the preparation and passage of the budget. Efficiency may be served by the so-called executive budget. Bargaining in the legislature, be- tween the spokesmen of different interests and the rep- resentatives of different districts, in regard to the ex- penditure of funds, may be reduced to a minimum if the legislature is not allowed to add new items or to add funds to the budget as proposed and presented by the executive, but only to reject in whole or in part the executive’s proposals. The bargaining in question may often, if not prevented, have serious economic consequences. Yet its existence is a political problem. | 8 THE ECONOMICS OF TAXATION And although we are here in a field where political and economic forces are inextricably intermingled, never- theless the author feels justified in not discussing the . problem further. For the purpose of this book is the study of prob- lems.of taxation,-as..such. And these problems, or even a part of them, are sufficiently important to jus- tify the exclusion, in the main, of other matter, and to justify even more of space and attention than the , author.is prepared to give. a The subject matter of this book is to be taxation, but what sort of facts or theories about taxation do we desire to discover or to elaborate? And what policy or policies of taxation do we expect to advocate? As a matter of fact we shall present no special program of taxation nor shall we advocate any special kind of tax. To do so might arouse the partisan or class bias of some readers and make them less ready to assent to the fairly demonstrable principles upon which ad- vocacy of such a tax program or kind of tax might seem to be based. For it is unfortunately true that not only the public generally but, even, oftentimes, trained economists, are unable to enter into the con- sideration of an economic problem of cause and effect —when it appears that the conclusions have a definite bearing upon a question of public policy—with the single-hearted desire to discover the truth, which TAXATION AND PUBLIC FINANCE fe) marks, ordinarily, the investigator in physics or chem- istry. The author cannot, of course, deny the fact that such generalizations as may be arrived at as a result of the succeeding study, may have a bearing upon problems of public policy. Nor is it desired to deny this. And it cannot be denied that the principal reason for studying economics at all, is to arrive at economic laws the knowledge of which may help us in determining lines of wise policy. But it is the author’s desire, in this book, to keep problems of policy in the background, and to devote attention to the discovery and explanation of economic laws as such, leaving it to readers to make such application of the conclusions reached as may seem to them proper. Let us illustrate. Much of the space of this book is to be devoted to a discussion of the economic laws of | the shifting and incidence_of taxation. And the con- clusions of such a study should have a significant bear- ing on the question of what is desirable in tax policy. Certainly we cannot intelligently decide whether a given tax may or may not be wisely levied without knowing upon what persons or classes of persons tl the tax will ultimately fall. If, for instance, a tax ‘which is levied, ostensibly, upon the manufacturers of an ar- ticle, may fall, in the last analysis, upon the consumers of it; if, also, a tax levied, formally, upon the income > of capital may fall in part, ultimately, upon the wages 10 THE ECONOMICS OF TAXATION of labor ; and if neither the people in general nor their egislative representatives comprehend the laws of the shifting and incidence of taxation, then the taxation olicy adopted will almost certainly have results that were never intended. Persons and classes that the pub- i desires to have heavily taxed and believes ought to be so taxed may practically escape taxation; while / other persons and classes whom it was not intended to tax appreciably will in fact be heavily burdened. The | theory of shifting and incidence is thus a most impor- | tant and necessary step to the solution of any tax prob- lem. For whatever we finally decide to be our ideal of distribution of the tax burden, we cannot, without a knowledge of the principles of incidence, be certain that our actual legislation will come anywhere near con- forming to it. Nevertheless, two persons might come to perfect agreement on the laws of shifting and incidence and remain in disagreement as to what form of taxation should be adopted by a modern state. For although each should admit that certain taxes must, in the last analysis, rest on certain specified economic classes, the one person might desire to have those classes thus taxed and the other might not. It would take common eth- ical ideals to bring them together. And even if a com- mon ethical goal were in view, e.g., the greatest general welfare, it might still be impossible to get an agreement TAXATION AND PUBLIC FINANCE 11 as to how such general welfare could be ultimately best secured or as to what it might consist in. While the study of the shifting and incidence of taxa- tion is, thus, of tremendous importance and will consti- tute the larger part of our task, there are other conse- quences of taxation than its possible shifting which need to be considered. ‘The levy of a duty on imports may raise the price of these imports to consumers, but it may also cause the purchase of like goods produced at home, instead of the foreign-produced goods previ- ously bought. And it may, further, cause a decrease in exports about equivalent to the decrease in imports. An account of the effects of a tax on imports, which should stop with an explanation of incidence and which should say nothing of the tremendous effects that the tax might produce on commerce, would certainly be an inadequate account. Again, a discussion of taxes on economic rent which stopped with an explanation of. their incidence, and made no reference to their capitali- zation in a reduced selling value of the land and to the various possible consequences of these taxes on the dis- tribution of incomes and on the distribution of land ownership, would be inadequate. The effects which we are interested in investigating are, in the main, objective effects. We shall, of course, have constant occasion to inquire about the effects of various taxes, on men’s minds. But this will not be, as 12 THE ECONOMICS OF TAXATION a rule, because of any interest in their mental states of themselves. It will be rather, ordinarily, because consideration of these subjective mental states helps us to explain how men will objectively act._If a tax on certain goods ccauses.men to feel that they.can make a better living g producing ducing other goods and so diminishes the~supply _o of the goods-taxed, the prices of the taxed goods. will rise. To explain this rise we have to con- sider the mental processes of the producers. But we make inquiry into these mental processes only because of their interest as a means of explaining the ensuing objective phenomena. Our analysis is concerned with mental states in themselves only as it may relate to a comparison of utilities and disutilities from different taxes or tax systems, assuming the incidence and ob- jective effects to be already determined. / We may say, then, that our study is directed to dis- { covering what is the shifting and incidence and what \ are the effects of various taxes. Clearly we cannot in- vestigate every variety of tax, although we hope to con- - Sider such types as will enable the thoughtful reader, or student, to master the principles involved and him- self apply these principles to taxes not discussed. And, clearly, we cannot inquire into all the possible effects of any given tax. These effects, though of varying de- grees of importance, are multitudinous. The stone thrown into the ocean makes ripples which, as they TAXATION AND PUBLIC FINANCE 13 diminish in height with the widening of the circles, may extend—could we but measure their infinitesimal mag- nitude—to shores thousands of miles away. And the light rays which their movement deflects from the courses these rays would otherwise follow, may pur- sue their new way through the stellar universe far past the remotest stars of which the telescope informs us. Similarly, the effects, could we consider all of them in their (possibly) increasing variety though (probably) diminishing intensity, of any given tax, may extend through the future to and beyond the time when human beings shall have ceased to tenant the earth. We can- not treat all these possible effects. We can merely point out a few general principles indicating, in a general way, the kind or kinds of effects to be ex- pected from any given tax, tax system or tax change. In choosing what facts to present and what to omit in the infinite multiplicity of possible detail, we shall doubtless make mistakes. For this we offer no apology. Others who write in the future may have to fill in the gaps. The things which to-day are unimportant—or which seem unimportant to the author—may become relatively more important in the future, when the ap- parently more pressing tasks now awaiting effort are accomplished. To the future, then, many of these other tasks must be left. CHAPTER TI MONETARY INFLATION A SPECIES OF TAXATION SB How Paper-Money Inflation Taxes Consumers Perhaps it may be well to begin our study of the incidence of taxation with a consideration of a finan- cial policy which is not generally thought of as taxa- tion at all, viz., the securing of funds, by government, through the issue of inconvertible paper money. Nev- ertheless such raising of funds is, in effect, taxation, and the fact that it is ought to be more emphasized. So long as the issue of inconvertible paper money merely displaces an equivalent or nearly equivalent amount of metallic money, under the operation of Gresham’s law, its issue may be no special burden on the people of the issuing country. The government buys goods and services with the paper money. Thus this money gets into circulation. In doing so it tends to bid up prices. Such higher prices encourage buy- ing abroad where prices have not thus risen. The result is increased monetary obligations to foreign 14 MONETARY INFLATION AND TAXATION © 15 countries and a flow of gold to them. ‘Thus, instead of a great rise of prices in the paper-money-issuing country alone, there is a smaller rise of prices affect- ing many or all countries. The paper-money-issuing country has given up gold to these other countries and has secured, in its stead, goods of various kinds. But the loss of the gold is made good by the paper money -which takes over the money function. In spending this money when first printed, the government has got from the citizens various goods and services; but in sending abroad for goods and services a substantially equivalent value of gold, the citizens have largely re- couped their losses. Although the people of the coun- try have now only paper money in place of the gold, they are not, on that account, necessarily any the worse off, since with the paper money they will pre- sumably be able to carry on business as effectively as if the money were gold. For in order that anything should circulate as money and have value in the pur- chase of goods, it is only necessary that each* person shall have confidence that, if he accepts such money from others in selling goods or services, he can, in his turn, get others to accept it from him; and that the quantity of such money shall be limited. Experience seems to show that, when an established government issues inconvertible paper money which it makes legal 1 Most persons,—not necessarily every individual. 16 THE ECONOMICS OF TAXATION tender, such money actually does pass from hand to hand in the exchange of goods and services and per- forms the ordinary functions of money; and that the value of such money declines greatly only if it is over- issued in quantity. But if there may be a question whether a govern- ment is really taxing its citizens when it issues not more than enough inconvertible paper money to push out of circulation a metallic money of bullion value equal to its monetary value, there is no possible doubt that it is taxing its citizens if it continues to issue the paper money beyond that point. Thus, to illustrate, suppose that there is, in the United States, $4,000,- 000,000 in inconvertible paper money and that all metallic money has been driven out of circulation through the operation of Gresham’s law. Suppose that then the government issues another $4,000,000,000 of paper money. This new issue clearly cannot make the country as a whole any richer. It cannot facilitate the importation of goods from abroad because for- eigners will not accept the money * and because there is no longer any gold money in circulation which can be displaced by the use of paper and so sent abroad for goods. The only effect the paper money can have 1 This statement may be somewhat qualified. People outside of Germany have accepted depreciated German marks—have, in some cases, made it a point to invest in them—as a speculation, hoping that they would rise in value. MONETARY INFLATION AND TAXATION = 17 is to raise prices. As there is twice as much money to spend, approximately twice as much of goods and services would be demanded at the previously prevail- ing prices. But no such increased volume of goods can be produced. Demand for goods must, therefore, exceed supply unless and until prices approximately double. And this is what prices will tend, rapidly, to do.’ When prices have doubled, the people of the country will be getting money incomes roughly twice as large as before and paying prices for goods approximately twice as high as before. In this there is obviously no advantage. But, on the other hand, in this fact there is no loss. Yet if such paper money issue by government is a kind of taxation the citizens of the country must lose somehow as much as the govern- ment gets. Where and how is this loss suffered? ‘For the government to issue $4,000,000,000 of paper money when there is already $4,000,000,000 of such money in circulation and no gold or other metal- lic money capable of being displaced, and for the gov- ernment so to buy approximately $4,000,000,000 worth of goods, is for the government to compete against citizens for the purchase of goods. Thus, if 1 Recent experiences in Germany and Austria have shown that, under rapid inflation, prices rise more than in proportion to the increase in monetary circulation. Velocity of circulation of money is increased. 18 THE ECONOMICS OF TAXATION we suppose the velocity of circulation of money (the average number of times a dollar changes hands dur- ing a year in payment for goods) to be 26, then, with $4,000,000,000 in circulation, about $4,000,000,000 would be spent in two weeks. But if, during such two weeks, the government puts into circulation an- other $1,000,000,000, which it has had printed for the purpose, and so purchases supplies and services, it to that extent outbids the citizens who are trying to buy these things for themselves; and these citizens, as in- dividuals, can purchase, with the $4,000,000,000 spent by them, only some four-fifths as many goods as it would otherwise be possible for them to buy.’ The government takes the other one-fifth. Thus, the gov- ernment practically gets, in effect, a fifth of the out- put of industry during such a period. And this is abstracted from the people. Hence, the citizens may properly be regarded as being, to that extent, taxed for government needs. The extra $1,000,000,000 spent because of the new issue, bids up prices. The government bids against the citizens for goods. De- 1 We are here supposing, for simplicity, that none of the new $1,000,000,000 put into circulation by government is spent a second time before the expiration of the two weeks; also the assumption is made that the velocity of circulation of money has remained unchanged with the increase in inflation. This latter assumption violates the recent experiences in many countries of Central Eu- rope, where under rapidly increasing inflation the velocity of cir- culation has increased greatly and prices have risen much more than in proportion to the increase in the monetary medium. MONETARY INFLATION AND TAXATION — 19 mand for goods, at prevailing prices, exceeds supply. Prices therefore rise to such a point that the $4,000,- 000,000 spent by the people individually buys less than before and the government gets the reduced purchasing value of $1,000,000,000. When the government has spent its $1,000,000,000 of new money, it can tax the people no more in this ‘way without a further issue. There is now $5,000,- 000,000 in circulation instead of $4,000,000,000. Prices of goods and services are, on the average, ac- cording to our assumption, twenty-five per cent. higher than before. Money incomes are larger but it costs more to live. Some will be better off, but, on the average, the people of the country are neither better off nor worse off than before except for the wealth and services abstracted from them by the government when the new money was first put into circulation. But if the government, during the next two weeks, puts into circulation another $1,000,000,000, and then another, and another, it thus continues to tax citizens through outbidding them for goods in addition to setting in motion a whole series of expropriating influences which derive their force from the rapidity rather than the extent of the inflation. In order, however, that the government may tax citizens an equal amount with each new ‘issue, these issues must become progressively larger as prices be- 20 THE ECONOMICS OF TAXATION come progressively higher. Thus, after $8,000,000,000 is in circulation, a new issue of $2,000,000,000 is nec- essary if the government would take even approxi- mately a fifth of the industrial output of the next spending period (assumed to be two weeks), as $1,000,000,000 new issue was necessary when only $4,000,000,000 was in circulation. And so a govern- ment which long attempts to finance itself in any such way causes prices to rise in geometric ratio until finally, perhaps, the money becomes worth no more than the paper on which it is printed. If, however, the money issued continues to be used, even the diffi- culty that the value of the money tends to approach that of the paper it is made of is not insurmountable. For the government can print, as exemplified in Cen- tral Europe, ever larger denominations—instead of increasing the number of original denominations—and so, in effect, introduce successively new official stand- ards. The time when the money is completely dis- credited may be long in coming, as we see from the case of post-war Germany where money has increased and prices have risen rapidly year after year, yet where the inconvertible paper money—they have no other in circulation *—continues to be used, the limit, if any, to the process seeming to lie in its rapidity rather than in its extent. 1 Stabilized since the above was written. MONETARY INFLATION AND TAXATION ~ 2r § 2 The Unequal Effects of Inflation on the Welfare of Different Economic Classes If, with paper money inflation, all prices should rise equally and with equal swiftness, the burden of the inflation tax would be distributed over the public in proportion to purchases. Paper money issue as a means of financing government would then resemble, in respect of its ultimate incidence, taxation of com- . * modities in general or a general sales tax as being a burden on consumers as such.* However, in practice prices do not ordinarily rise with equal rapidity or in equal degree* and, there- fore, the burden is not distributed in proportion to consumption or to purchases-in-general. Upon some classes the burden falls with crushing weight while other classes may gain, at the expense of the classes who lose, more than the gaining classes contribute to the government. All the classes with fixed money in- comes lose at such a time: the recipients of salaries, which are apt to change but slowly; the recipients of rentals which have been determined in advance by contracts applying over a period of years; the recipi- 1 Cf. Chapter ITI, § 4. 2Cf. Fisher, The Purchasing Power of Money, revised edition, New York (Macmillan), 1911, Chapter IX, 22 THE ECONOMICS OF TAXATION ents of interest on bonds, which continue to pay the - same number of dollars, francs, marks or kronen a year however much these standards of value may de- preciate. But, on the other hand, other classes may actually gain. ‘Thus the borrowing business enterpriser finds that, with prices rising, he gains at the expense of lenders and, perhaps, of recipients of salaries. He borrows (say) $50,000 to build a factory, pledging an interest payment of $2,500 a year. At first, his direct outlays for current production come to $60,000 per year and the salable value of his output is $70,000. He pays his interest of $2,500, sets aside $1,500 for a sinking fund, and $2,000 for depreciation and has $4,000 left for himself. But suppose prices in gen- eral to double! ‘Then his outlays for production be- come $120,000 and the salable value of his output $140,000. But his interest is, by contract, still only $2,500. Also, his debt is still only $50,000 despite the fact that each dollar is worth only half what it was before. On this account he does not need to increase at all the annual contribution of $1,500 to his sinking fund. Doubling his allowance for depre- ciation—a new plant would now cost twice as much —he still has left for himself $12,000. With prices doubled, he needs $8,000 a year to be as well off as he was before with $4,000, but he has $4,000 in excess MONETARY INFLATION AND TAXATION — 23 - of this. The lender, however, is still receiving $2,500 interest though now he should be receiving $5,000 to be as well off as before; and also, on the same basis, the debt should now be reckoned as $100,000 instead of $50,000, so that it would take $3,000 instead of $1,500 a year to provide the sinking fund necessary to pay it. In other words, the $4,000 net gain a year of the borrower is balanced by a $4,000 net loss a year of the lender. During a process of inflation financing, the govern- ment, as we have seen, is continually outbidding the public for goods, so that prices rise faster than, on the average, individual incomes increase. Part of the net $4,000 gain of the borrower of our illustration may thus be abstracted from him by a further rise of prices consequent on the bidding for goods by gov- ernment through a new paper money issue. It is con- ceivable, indeed, that further issues might come so fast and prices rise so rapidly as to leave him worse off with $12,000 than he was previously with $8,000. But such further issues and further rise of prices would add more to the injury of lenders. It follows, then, that this method of taxation—for we have seen that inflation is really taxation—is a method by which the lending class not only pays taxes to government but also, in addition, loses to the borrowing class; while at the same time it is a method by which the borrow- 24 THE ECONOMICS OF TAXATION ing class may gain at the expense of lenders far more than it contributes to government. These inequalities from inflation are, of course, a consequence partly of men’s failure to realize that the value of the monetary standard may vary, and they are due partly to men’s inability to foresee in what direction and how great the variation will be. Could the lender both realize the significance of a declining value of the monetary unit and foresee such a declin- ing value, he would refuse to lend except at a very high rate of interest measured in such depreciating money. But during long periods of comparatively stable prices, the habit of counting on this stability and making long-term contracts in expectation of it becomes all but universal. If government finance through paper money infla- tion is, as we have shown, in effect taxation, and if it is taxation of so unequal a kind as actually to benefit some classes (or tax them only a little) while perhaps taking from other classes more than it yields to gov- ernment, why is paper money inflation ever adopted for the finance of war or any other emergency? Such a question may well be asked by one who expects to see governments act intelligently and for the general interest. It is unlikely to be asked by those whose knowledge of human nature and whose study, in his- tory, of the past actions of men, have taught them in MONETARY INFLATION AND TAXATION 25 how slight degree men understand the nature of the economic forces to which they are subjected and how much they are swayed by prejudice, and, what is most pertinent from the standpoint of a government, how much more important it is for political reasons, to avoid unpopular taxes than to impose just ones. Since the goods and services secured by government through competitive spending of new paper money issues are, in effect, obtained by taxation which may actually profit some citizens as well as the government, it is reasonable to suppose that as much or more wealth and services could be obtained by more equitably ad- justed taxation. If existing taxes are not high enough to secure the needed revenue, then they can be raised | higher as an alternative to money inflation. But a government may fear to lose popular support if it definitely thus increases the tax rate, since such an increase can be clearly seen and will be understood by citizens to be an increase; while the putting into circulation of inconvertible paper money taxes them insidiously without their being, as a rule, for some time aware what is the cause of their new poverty. The rise of prices will be attributed to scarcity of goods, to demands of organized labor, to “profiteers,” to “war demands,” etc., and few will realize until the inflation has become very great, if they ever do, what is the real cause of the rising prices. Indeed it is 26 THE ECONOMICS OF TAXATION more than probable that many of the legislators them- selves who are instrumental in initiating the inflation will not realize. For men who are chosen as repre- sentatives of the voters to make the statute laws of a country, though they are often plausible in manner and effective in speech making, frequently understand the laws of our economic life no better than they un- derstand differential calculus or physiological chem- istry. Being themselves ignorant of the complex forces of economics they the more readily accept cur- rent fallacies and even themselves initiate such fal- lacies by way of attempted explanation of the rising prices. According to the influential sentiment of their constituents and their own bent—whether “radical” or “conservative”—they may attribute the evils for which their own action is responsible to the “profiteer- ing” of captains of industry or to the “exactions” of organized laborers et al. § 3 Summary In this chapter the attempt has been made to ana- lyze paper money issue as a means of government finance. So far as the issue of paper money operates to push out gold or other metallic money into foreign countries, the people of the issuing country suffer no MONETARY INFLATION AND TAXATION = 27 loss in their current consumption of goods. But fur- ther issue of inconvertible paper money bids up prices and consumers are, in effect, taxed since government bids against them and their money will buy fewer goods. If prices of all sorts rose in equal proportion the burden of government’s buying would be dis- tributed over all consumers according to their expen- ditures. But, in fact, salaries, interest on bonds, etc., are relatively unadjustable to new conditions. Hence rise of prices consequent on monetary inflation dis- tributes the burden of government financing most un- evenly over various classes of citizens. CHAPTER It GOVERNMENT BORROWING AND ITS ULTIMATE INCIDENCE § 1 The Nature of Government Borrowing Government borrowing is a recognized and a not uncommon means of government finance. But it is a means of finance the inner nature of which is generally misunderstood. ‘The probable reason for its being misunderstood is that a nation’s borrowing is thought of as analogous to an individual’s borrowing. An in- dividual who borrows money borrows from another individual. And the borrowing of a nation may be like this, for a nation may borrow of another nation. During the recent World War, allied nations did so borrow of the United States. But, in general, a na- tion borrows within itself, i.e., the nation’s government borrows of its own citizens, Hence, so far as the na- tion is concerned, there is no increase of assets or | spending power. There is merely a transfer from in- dividuals to the government, from some of the people 28 GOVERNMENT BORROWING—ITS INCIDENCE 29 in their individual capacity to all of the people in their collective capacity. Let us examine this proposition more carefully. Suppose, for example, that the United States govern- ment borrows $500,000,000 from its own people. Just what does such borrowing involve? In the simplest case, where there is no least element of inflation, it involves a transfer, from citizens to government, of $500,000,000 of purchasing power. Five hundred mil- lion dollars in money or bank checking accounts, which would have been in the possession of citizens for the purchase of such material goods or services as they might desire, are instead put into the posses- sion of the government which thus gets the purchas- ing power that the citizens relinquish. Then these citizens, as individuals, can buy $500,000,000 less of goods; but the government can buy $500,000,000_... more. ‘There need be neither less goods produced nor — more goods; there need be neither less labor employed nor more labor; industrial activity need be neither discouraged nor encouraged: for the market, though in a different direction, is neither smaller nor greater than before. It is true that the government, with the money borrowed, may not buy the exact articles or services that the people as individuals would have bought. But the labor, land and capital which would have been devoted to making goods for the people-as-~ 30 THE ECONOMICS OF TAXATION individuals can instead be devoted to making goods required by the government. § 2 “Business as Usual’ in War Time In the light of the above facts it should be easy to see the fallacy in the notion advocated by some busi- ness men and_ others, in 1917, that we should have, despite. our_participation—in— the- -war, “‘business as usual.” sah “What. many of them clearly had in mind oe ARR BDI Sasi ee when using the phrase and what numbers of them endeavored to bring about by _their_ advertising was expenditure as usual, Thus, a firm might be manu- facturing pleasure cars and trying to encourage the purchasing of these cars by the public “as usual.” Yet if the public had the same money incomes as be- fore and spent as much as usual on all the things for which they had been spending, then they could turn no money over to the government for its ex- penditure.* In the long run and on the (rough) aver- age, prices and wages tend to be just low enough so that the total expenditures of the public purchase the 1 The points made in this section are not new. They are made clear by the discussion of various economists during the Great War, among whom were Professors Davenport, Sprague, and Carver. A good discussion of the problem is to be found in Carver’s War Thrift, New York (Carnegie Endowment for In- GOVERNMENT BORROWING—ITS INCIDENCE 31. current output of goods and keep currently employed the available supply of labor. If the people as in- dividuals continue to spend the usual amounts, if no new money or bank credit is put into circulation, and if prices do not change, their spending will continue | to suffice to purchase current output and to employ . available labor. There will be no appreciable addi- tional supply of goods and no appreciable surplus labor to satisfy the war needs—or any emergency needs—of government. p : If we discuss the problem in general terms, with- out especial reference to the use of media of exchange, we shall reach a similar conclusion. In periods of ordinary prosperity the current purchases of the pub- lic absorb all the current production and keep prac- tically all would-be laborers busy. Ituis.not to be claimed that current consumption necessarily ‘equals current production. ‘There may be saving and conse- quent increase of durable capital. “Indeed, capital is cee nnnn Sab never brought into | existence except as time is Spent i nn tect PEA cn aetna tee ce nearer fe 0 in the production « of things that are not currently c¢ con- sumed. The construction of a railroad, the building ‘of a factory, the erection of a bridge, all involve put- ternational Peace—Oxford University Press), 1919, Chapter III. See, also, on this and other matters connected with war finance, an interesting article by F. F. Anderson on “Fundamental Factors in War Finance,” in the Journal of Political Economy for No- vember, 1917, pp. 857-887. 32 THE ECONOMICS OF TAXATION ting forth labor the fruits of which are realized only during a period of many years extending into a future far past the time when the work was done. When berries are eaten as they are picked, when all the products of the harvest are used up for food as quickly as they are gathered, and when, in general, no time is devoted to producing any goods except such as are immediately consumed, there is no increase of capital. But although, in a saving community, production nor- mally more than keeps pace with consumption, pro- duction for sale does not normally exceed purchases. The community may be growing richer but it is not thereby producing more goods than its citizens want. And if these citizens, as individuals, retain or buy or both—if they in any way appropriate—all that is pro- duced, then nothing is available for the state. Or, if the state has new and additional needs, and if the citizens as individuals do not curtail their purchases, then these new and additional needs cannot be pro- vided for. It should be, then, obvious that a country cannot gpa rank sabre a san mere rae Seam int nO” get emergency means “for carrying on a war ‘unless there is increased production,. -increased saving, or, diversion of saving from 1 providing the equipment of peace to providing th the means ‘of war. If more labor “qs to be diverted to the manufacture of cannons, rifles and gunpowder and if no more total labor is to be GOVERNMENT BORROWING—ITS INCIDENCE 33 had, less labor must be devoted to making pleasure cars, jewelry, furniture and the like for private citi- zens. But if the view above criticized is so hopelessly fallacious, why, it may be asked, was it so widely accepted? One answer would be: self-interest. The manufacturer of a luxury serving only the uses of peace, unless and until he realized that he could turn his plant to the production of things needed for war, feared loss of business if the public did not continue to spend money for personal gratifications in the same way as before. There was, however, a certain plausibility about the argument for continuance of peace-time expenditure, which doubtless not only aided in convincing those whose apparent self-interest made them anxious to be convinced but also deceived many who had perhaps no special interest in the matter but whose economic training was not such as to make real analysis pos- sible. For it was contended that, by spending money freely, the purchasers of goods made business pros- . perous and so enabled the war to be paid from such © é prosperity. ' Let us suppose the case of a man who, in 1917, contemplates buying an automobile at a price of $2,000. He might, instead, lend the government the $2,000, ie., he might buy a Liberty bond, and with BOA nie ot ' 34 THE ECONOMICS OF TAXATION the $2,000 the government might buy war equipment. But it is argued that, if the automobile is not bought, the company selling the automobile would not make the “profit” of (say) $300, which might, it is alleged, be lent in part to the government and so “help win the war.” Better spend $2,000 for an automobile in order that $200 of the “profit” of the manufacturer should be available to help finance the war rather than make the entire $2,000 available at once to help finance the war! But the above sentences imply that the net disad- vantage of buying the automobile, so far as providing funds for war finance is concerned, is but $1,800 ($2,000—$200), whereas (except for possible tempo- rary difficulties of industrial readjustment) the net dis- advantage is a full $2,000. For if the citizen foregoes his car and lends the government the $2,000 which he would have spent for it and if, therefore, the govern- ment buys $2,000 worth of goods or services with the money, the manufacturer or producer of such goods or services is probably as likely to make a $300 “profit”? as would have been the manufacturer of the automobile. ‘Therefore he is probably as likely to be able to lend the government $200. In either case, then, the government has probably an equally good chance to get the $200 from the $300 “profit.” In one case, however, it gets $2,000 to begin with and GOVERNMENT BORROWING—ITS INCIDENCE 35 in the other case it fails to secure this $2,000. The above argument does not indicate, however, that, out of $2,000 worth of saving, the government can get $2,200 worth of goods. The original $2,000 will presumably be paid for $2,000 worth of goods. The possibility of getting another $200 worth lies in the fact that one (or more) of the producers of the $2,000 is willing to (in effect) give $200 worth of services or goods in excess of what he is immediately paid for, accepting instead of cash the government promise to pay, i.e., accepting government bonds. He may, indeed, receive money or checks but he turns back $200 of it and takes the bonds. He is able to do this because he can live on less than his full in- come. He refrains from consuming all he might con- sume. In short, he saves. So there has been $2,200 saved instead of merely $2,000." While we are on this point regarding lending to 1 Lest some critic accuse us of overlooking it, we point out that the lending of money to government, e.g., the buying of government bonds, may slightly diminish the velocity of circulation of money and bank credit, i.e., may diminish the amount spent for goods in any given period. The citizen might have spent his $2,000 for goods but instead lends it to the government through the purchase of government bonds. If the government does not spend it as quickly after receiving it as it would have been spent by the citizen had he not lent it, then there is a diminished velocity of circulation with a consequent tendency, other things equal, towards very slightly lower prices. This tendency, however, is probably more than overbalanced by the greater velocity of circulation of government deposits, 36 THE ECONOMICS OF TAXATION government—or the buying of government bonds—at- tention may be called to another fallacy propounded in the early months of American participation in the World War. This was to the effect that there might be danger in depending too largely, for the financing of the war, upon taxation rather than bond issue because such taxation—so it was alleged—would decrease the available sources of capital for business and lessen the contributions to charity. In truth, of course, to depend on bond issues—if the sums required by gov- ernment are actually secured in the desired amount —will just as greatly diminish the funds for other purposes as if government raises the money needed by taxation. Money which a citizen Jends to govern= ment can no more be invested in business—or given to charity—than money which he pays in taxes to government.* Discouragement to business or to char- itable contributions can only result if the tax method takes a larger proportion of the funds secured than does the bond-issue or borrowing method, from the par- ticular persons who are inclined to business invest- ments or to charity. The taxation method may pos- — sibly, in some cases, take a larger proportion from © those who are charitably minded. It will hardly take 1 The possibility of using the bonds bought, as security for a private loan, and the investing of the money so secured, in busi- ness, with the consequent credit inflation, will be considered in a later section (§5) of this chapter. GOVERNMENT BORROWING—ITS INCIDENCE 37 more, we suspect, from those who are minded to in- vest. The borrowing or bond-issue method would seem more likely to draw the funds of persons who are inclined to save and invest than of those who are inclined to spend as rapidly as they get. As between persons of equal wealth and income, at least, the tax- ation method would not seem likely to do so. $3 Can the Burden of Financing a War be Imposed on Posterity? The preceding discussion may serve somewhat to prepare the reader for an examination of the conten- tion that the financing of a war or other emergency by borrowing, rather than by taxation, puts the burden —or part of it—upon posterity. In examining this contention we shall assume two cases: one, when the borrowing is done outside the borrowing country; two, when the borrowing is done inside the borrow- ing country. In the first case, no denial can be made of the accuracy of the contention, so far as the people of the borrowing country are concerned. Thus, cer- tain of the allied countries borrowed, during the recent war, of the United States. This enabled these coun- tries to have, for the time being, additional supplies of munitions, food, etc., for which their own people 38 THE ECONOMICS OF TAXATION did not have to pay. But if, eventually, the loans are repaid, then the people of these countries must bear a burden in excess of their current governmental ex- penses. And if this repayment, though made, is con- siderably deferred, a burden rests upon another gen- eration, in these allied countries, than those who fought the war. Whether the gains from the war—or the losses prevented by it—are such that they can afford so to pay, or whether they are likely to have new wars of their own and to be overwhelmed with bur- dens and obligations new and old, we shall not in- quire. We need only note that, under the assumed circumstances, it is undoubtedly possible for the peo- ple of a country to impose a burden upon their de- scendants, Consider, now, the other case, when the borrowing nation (or nations) borrows only from its own peo- ple. This case was substantially realized during the World War by the borrowing of the United States. /In this case the contention that the burden of an | i 5 emergency expense can, by borrowing, be thrown upon posterity, must be declared to be altogether false. ‘Thus, to illustrate, we shall suppose the sum borrowed by the United States from its people, ex- clusive of sums borrowed to loan the Allies, to have been, in round numbers, $10,000,000,000. This loan was made by citizens of the war generation, who, in GOVERNMENT BORROWING—ITS INCIDENCE 39 making it, presumably had to curtail their expendi- tures in other directions but who received government bonds as a pledge of repayment. ‘The question is whether they are ever repaid. It can be shown that they are not except if, as a group, they repay them- selves. For if there is no repayment until a new generation has reached maturity, then, obviously, the lending generation never gets repaid since, when re- payment is made, many of the lending generation are dead. While if repayment is made soon, then mem- bers of the lending generation are themselves the bearers of the taxes. Let us discuss the problem in the light of an hypo- thetical concrete case. Smith, living during the World War, buys, we will suppose, $1,000 worth of Liberty bonds in 1918. Suppose repayment to be made in 1928, Smith being still alive, and suppose that Smith’s purchase of bonds was substantially in the same pro- portion to the purchases of others as are his tax obligations to the tax obligations of others. Then when it comes time to pay Smith back the $1,000 of money which he lent, he must contribute $1,000 in taxes to provide the means for such repayment. 1See, for example, Sprague, “Loans and Taxes in War Finance,” The American Economic Review, Supplement, March, 1917, pp. 199-213, especially p. 206, and Davenport, “The War- Tax Paradox,” The American Economic Review, March, 1919, pp. 34-46, especially pp. 37-39. 40 THE ECONOMICS OF TAXATION Or, if the loan is paid back from the proceeds of an amortization fund gradually accumulated, then he has © had to contribute to this fund. In fact, therefore, he never _gets back the $1,000 although in probably ninety-nine cases out of a hundred he does not realize this. So far as Smith is concerned, conditions would have been the same had he been asked to pay the $1,000 as a tax in the first place. For though he ~ ostensibly merely loans it, he is equally deprived of the privilege of spending it for himself; the annual (or semi-annual) interest received is matched by an- nual payments of tax and the final repayment of prin- cipal is, as we have seen, likewise, in effect, a mere taking of money out of one pocket and putting it into another. In practice, of course, the taxes paid by different persons to provide means for redeeming the bonds issued, have no necessary relationship to the value of the bonds bought by these persons. A person who bought few bonds may, if he has, when repayment is made, large taxable income, pay much toward the re- demption of the bonds bought by others; and a per- son who bought many bonds may, if he has, at the time of repayment, only a small taxable income, pay little. Hence, although it can be truly said that the people as a whole have lost as effectually as if the money — GOVERNMENT BORROWING—ITS INCIDENCE 41 had been raised by taxation and, when they are paid back, really have to do the paying themselves, this cannot be said of each individual among them. And so, the person whose patriotism or sense of duty in- clines him to lend money to his government during a war, need not fear that he will have to contribute more towards paying it back than if the lending were done by others. If he does the lending, his later taxes will be largely devoted to paying himself back. , But if he does not do the lending, his later taxes will be devoted to paying others back. As an individual, | then, he may fairly consider that lending does not cost him more than not lending. But the whole peo- ple, considered collectively, might as well contribute frankly by taxation as to camouflage the situation through government bond issues. We shall next suppose, however, that the period of repayment of the bonds is deferred, so that the repaying is done by a later generation. In that case it should be equally clear that the original lenders of the funds are never really reimbursed and it should be clear that the later generation, considered as a whole, is not burdened, Certainly there is no way by which a later generation can reimburse a genera- tion which has passed away. Smith has loaned his $1,000 to the government. He has received only the annual interest paid for by taxes on his own generation, 42 THE ECONOMICS OF TAXATION perhaps on himself. Before the principal is due, he dies. The government bond is inherited by his son. Thus, when redemption is undertaken, and taxes are levied on the new generation to consummate it, the funds so raised are paid to the new generation. Smith’s son—along with his contemporaries—meets the taxes that are required to redeem his bond. If any of the older generation are still living, they will contribute to the repayment, probably in proportion as they re- ceived such repayment. If none of them are living, the new generation will do all the paying but, also, it will do all the receiving. § 4 Are Government Bonds a M origage of the Masses to the Classes? During the recent World War, persons of liberal and radical persuasion were, in large part, advocates of the scheme of having the funds necessary raised entirely or almost entirely by taxation rather than by bond issue. ‘They reasoned that sharply progressive 11t is, of course, admitted that, with many of the older genera- tion still living, a tax discriminating specifically against the newer generation would force them to contribute largely towards the repayment of the original lenders. Also, a non-discriminatory tax, in a country growing rapidly by immigration, would force the immigrants to contribute toward the redemption of bonds owned by the original inhabitants and their offspring. _e - GOVERNMENT BORROWING—ITS INCIDENCE 43 income taxes could be levied on the well-to-do, taking for government purposes practically all their surplus above their reasonable requirements for current con- sumption, that the funds required by government would be more certainly obtained by taxation—a com- pulsory method—than by borrowing and, particularly, that to secure the funds by borrowing would mean heavier later taxation of the poor to provide repay- ment of the bonds. One thing is clear, viz., that if the needed funds are provided at once, by taxation, a large part or most of these funds will necessarily be provided from the incomes of the relatively wealthy. The poor have little to spare. It is not possible to squeeze much from them. such goods any scarcer, their price will not be made 1 Although the capital value is itself affected by the tax and falls as the tax rate rises, while the rental value is relatively inde-— pendent of the tax. It is, therefore, simpler to tax economic rent — than to tax the capitalized value of land. Indeed, a tax on rent of — 100 per cent. would reduce capitalized value to zero, THE INCIDENCE OF TAXES ON LAND 219 higher. In other words, if, before the tax is laid, land- owners are charging for their goods all they can get, the tax will not cause them to charge any more for they cannot get any more. If, then, we look at the matter of general land-value taxation from any point of view whatever, we seem to arrive at the same conclusion, viz., that a tax on land value or land rent is paid by the owner of land and by no one else, that the owner cannot because of such a tax raise either his rent or the prices of his goods, but that, indeed, productive land held out of use by speculators is forced into the market so that, if land rent changes at all, the direction of the change is likely to be downward.* It is, indeed, held by most competent economists that, in general, a tax on land values cannot be shifted. There are, nevertheless, certain qualifications of this — 1In case a tax is levied on the occupiers, instead of on the owners of land, in proportion to the economic rent or the value of the land, the result, in the long run, will be but slightly dif- ferent. Demand for land space will tend to decrease. To get their land used to the same degree as before the imposition of the tax, landowners must reduce their rents to a point such that the rent plus the tax is about the same as the rent alone would be in the absence of the tax. In other words, the landowners must bear the tax. The tax is shifted backward by the tenants. But, in case the tax is levied only on occupiers and does not apply to vacant land, there is more of an inducement to hold land out of use than when owners are taxed on used and unused land alike. Hence, the burden on tenants may be slightly greater and the loss to owners slightly less than if owners are taxed on all their land. 220 THE ECONOMICS OF TAXATION principle, some of which are generally familiar to economists and some of which are ordinarily over- looked. The following brief discussion of the prob- lem is intended to indicate somewhat the importance of these qualifications and their relation to the main principle. It is commonly admitted by economists that a tax on the value of “land” when the so-called land value includes fertility put in and to be put in by owners may be, in part, shifted. For such a tax may dis- courage owners from thus improving their land. They may prefer to invest their surplus labor—i.e., their labor above that used to provide for current con- sumption—in some other way. Hence, less acreage may be well fertilized, the supply of goods produced | on agricultural land may be smaller and the prices of such goods may therefore be somewhat higher. Here, however, we are really dealing with capital, “the produced means to further production,” * rather than with land in the economic sense. The tax, if it applies only to capital of this specific kind (fertility), will tend to make people construct, rather, capital of some other kind. Then the comparative scarcity | of this kind of capital may be coincident with a com- | parative plenty of other kinds of capital. (And the — 1 Phrase used by Seager, “The Impatience Theory of Interest,” j American Economic Review, December, 1912, p. 846. SS Se eee eee ee THE INCIDENCE OF TAXES ON LAND 221 products of such other kinds of capital may be in- creased in quantity and lowered in price.) But if the tax is applicable to all capital, then there will be no special discouragement of land improvement as com- pared with other kinds of investment. Whether or not such a tax will discourage saving and hence cap- ital formation in general, is another matter which was considered in the previous chapter and which need not be reconsidered here. It seems clear, at any rate, that a tax levied upon the value of land exclu- sive of any value put into it by an owner’s fertiliza- tion, drainage, or other improvement would not be likely to operate to prevent or discourage such im- provement and so would not probably be shifted.* But if a tax on land fertility is really a tax on cap- ital value rather than on land value, may this also be true, in some cases, of a tax on the situation value of land? As an almost invariable rule, the situation 1The fact that a tax on fertility value can be sometimes _ shifted, in whole or in part, to consumers, is due to the dependence of such fertility upon the activity of the landowner. Hence, a distinction must be made between agriculture and mining. Fer- tility is maintained and restored by the effort and investment of the farmer. Ore is not restored by the mine owner. A tax on farm fertility does not at once raise the prices of farm products. It does this only when, in consequence of soil exhaustion, such products have become more scarce. Fertility rent may be a necessary inducement to efficient agriculture. But in the case of mines there is no point to providing an inducement to restore any- thing. It is true that a tax might hasten the exploitation of mines. But, unless it were so levied as to promote wasteful methods, it 222 THE ECONOMICS OF TAXATION value of a person’s land is but slightly if at all de- pendent on his own efforts or investment but is a function of natural advantages and of the activities of those around him. An acre of land in Manhattan may be worth millions of dollars though no owner present or past has ever done anything to give it value; while the same amount of land in the Rocky Mountains or even in the center of the middle western plains may be worth much less despite great efforts by one or more owners to give it value. One owner of land may try in every way conceivable, but with- out success, to make the situation value of his land great; while another, doing nothing at all, finds his land increasing in situation value because those about him, aided perhaps by natural conditions, make such improvements or develop such businesses that the local- ity where their activities are carried on comes to be a locality where people desire to settle for business would not decrease the total amount of coal or ore mined. Higher prices might result in the future because of earlier mine exhaus- tion. But, if so, the more active present exploitation of the mines would mean lower prices in the present. If the prices of mine . products are lower while the tax is on and higher when there is no tax because nothing is left to tax, we can hardly say that the tax is “shifted” to consumers. As a matter of fact, heavy taxa- tion of mines need not at all interfere with conservation of mineral resources. If some mines were exploited more rapidly, this would tend to delay the exploitation of marginal mines. Furthermore, such taxation would tend to keep down the capitalized value of mines and to make their purchase by government easier, if special conservation measures seemed desirable. Se oe THE INCIDENCE OF TAXES ON LAND 223 or residence. If it should become obvious that, on a given city lot, a house could be built for $6,000 which would then sell, with the lot, for $10,000, the lot would at once be worth approximately $4,000 without the house. The building of the house does not add to the situation value of the land as such. After the house is built, there is a greater real estate value by the value of the house, but the land, separately con- sidered, is worth the same as before. If, however, several scores of persons build attractive homes in the immediate neighborhood of such a lot, it may come to have a higher situation value whether sold with or without a building upon it, than it would other- wise. Each such builder, while adding to his own real estate a value presumably about equivalent to the cost (including planning and supervision of construc- tion) of his building, may add to the situation value of neighboring real estate by making the location more attractive to others than before. Thus the unforeseen tastes and the consequent building activities of some persons may increase the salable value of the land of other persons. In like manner, if certain business men choose a given block for retail stores, the habit so induced in the buying public of going to that locality to trade may give value as a store site to a lot not purchased or owned by the persons responsible for the new state of affairs. 224 THE ECONOMICS OF TAXATION It may, indeed, conceivably, sometimes happen that development of real estate owned by a score or more of separate persons, which none of them would find it worth while to begin independently on his own land, would seem worth while to a single owner of all the land, or to an association of owners, since the development of each lot might add something to what he or they—and not persons who had not participated —could get from neighboring lots. Thus, a large cor- poration may, in effect, found a city and realize a gain from the resulting increase in the value of its land, as the United States Steel Corporation seems to have done, to a considerable extent, in the case of Gary, Indiana.* But if there were several persons or cor- porations able to finance such a comprehensive im- provement and fully aware of the opportunity avail- able, then the gain imputable to the improvement would be less. For the salable value of the land prior to the improvement would be more. For these various potential improvers would, each, be willing to offer more for the unimproved land, because of their abil- ity profitably to improve it, than it would otherwise be worth or than it would bring if sold, thus improved, in small lots. To forestall possible misunderstanding and objec- 1 See Haig, “The Unearned Increment in Gary,” Political Science Quarterly, Vol. XXXII (March, 1917), pp. 80-94. THE INCIDENCE OF TAXES ON LAND 225 tion, it may be well to explain the fact that buildings are sometimes constructed (e.g., in large cities) al- though the immediate yield on the total investment (land and building) is small, in anticipation of a rise in rental and capital value. As has been noted above, . development through extensive building, etc., may sometimes be undertaken in the belief that site values as such will thus be increased. But if the increase of site values is expected to result rather from the general growth of the community—in the main, the usual condition—then such building will not be pre- vented either by a general tax on site values or by a tax on site value increments. Though the imme- diate yield on land and building together may seem small, the building is constructed because, and only because, it is believed that the net yield in excess of what would be received were it not constructed is as high as the general rate of return on investments of equal risk. Otherwise erection of the building would be postponed. Certainly an expected increase in site value due to the general growth of the community is no inducement to the early construction of a building, since such site value could be realized by holding for later sale, without building. An owner who builds now because he does not wish to forego the present rental yield of his land is not building to get a future increment. And such an owner would be in no less 226 THE ECONOMICS OF TAXATION a hurry to build in order to avoid a present land-value tax. Certainly a tax on community-made site value would not delay construction of a building, since the tax payment to be made by the owner would be as great in case he did not build as in case he did. In- deed, it is to be noted that the very reason immediate returns are low in proportion to total capitalized value of land and building is because the prospective future high value of the land is capitalized into a high present value on which the current rate of return cannot at once be realized. If this future increase were to be taxed at a high rate and if the fact were generally known, the present value of the land would presuma- bly be lower. Even with the tax, therefore, the per- centage yield on present value would be no less.* The writer has frequently heard the argument ad- vanced that a prospective increase in the value of their land is necessary to keep farmers in their business— that without this increment they would not get the current rate of return. (Is it equally necessary in every business? Without it would every one leave his own business and go into another business where, also, he could not get it!) In truth, however, were 1 Various views have been presented by different economists on this and related points. A number of these are briefly stated and admirably criticized by Professor H. J. Davenport in “Theoretical Issues in the Single Tax,’ American Economic Review, March, 1917. See, especially, pp. 17-24. THE INCIDENCE OF TAXES ON LAND 227 land values taxed, or even were future increments taxed, the yield to farmers would be as large a per- centage of what their land would then sell for—a larger percentage if we assume a corresponding re- duction of other taxes—and they would be no less inclined to remain in the business, as against selling out (to some one who thereupon comes into the busi- ness?) or otherwise quitting, than before. As a concrete case of improvement where the activi- ties of landowners accomplish something toward the increase of situation value, let us suppose a group of men owning a considerable amount of undeveloped land remote from markets and railroad centers. We shall suppose, further, that potential traffic to and from this territory does not appear large enough to pay the ordinary rate of return on the cost of build- ing a railroad into the territory (or, perhaps, any re- turn whatever) and, hence, that no one is willing to build such a road for the promise of earnings upon it. Let us assume the probable product of the land to be wheat. A railroad into the territory would be worth much more to persons cultivating immediately adjacent land than to persons farther from the rail- road and the former persons could afford to pay higher rates than the latter. If rates for the transportation of the same kind of freight (in our example, wheat) could be made higher for shippers located near the 228 THE ECONOMICS OF TAXATION railroad than for shippers who must bring their wheat longer distances by wagon or truck, then, we may sup- pose, the railroad could be made to pay. But such special rates to different shippers for the same serv- ice would be difficult to adjust even if they were not illegal. Hence, although the railroad may be worth building so far as the owners of the land, as a whole, in the given community are concerned, it may not be to the advantage of any other persons to build it and its building may have to wait upon investment by these owners in rough proportion to their anticipation of gain from it. In such cases, the building of a railroad by these owners corresponds, in a sense, to the fer- tilizing of his acres by a farmer or to the building of a store on his land by the owner of a city lot. It is an improvement on the land, the added value being, in large part, represented by the cost of the improvement.t If there were a thoroughly competi- tive market for the sale of such a large land territory as a whole, then its value, before the construction of the railroad, would be approximately as great as after, except for the cost of construction. (We are here assuming that the railroad would just yield running expenses and could only be built because of the in- creased salable value of the adjacent real estate.) | 1Cf. Marshall, Principles of Economics, sixth edition, London (Macmillan), 1910, p. 444. THE INCIDENCE OF TAXES ON LAND 229 In a sense, therefore, the increased land value must really be regarded, in this case, as capital value, as being merely equivalent to the cost of the capital put into or upon it by the owners. Yet, in practice, prob- ably if the land were under a single ownership and certainly if it were or came to be owned by different persons in separate tracts, these different tracts would be separately valued; and the value of any of them, though enhanced by the presence of the newly con- structed railroad, would seem to be purely situation value—as indeed it really would be in the case of any such piece of land if neither the present nor a pre- vious owner had contributed toward the building of the railroad. But to tax this value when it is brought into existence through capital construction by the owners of the land so improved may operate to pre- vent such capital construction and such a tax may be, in some degree, shifted. On the other hand, the economic consequences of such construction may often be unfortunate, so that the discouragement of it, by land-value taxation, would do no harm. Thus, suppose one very large tract of land under a single ownership and control on which, therefore, any increased situation value due to the construction of (say) a railroad system, will be en- joyed by the same persons who have the railroad built; while in other parts of the country, land is 230 THE ECONOMICS OF TAXATION separately owned in small tracts and no one person is in a position to reap the situation value which might result from similar railroad building. Under such circumstances population and industry might be largely drawn away from the territory held by many small owners into the territory controlled by one large owner; and they might be so drawn even though the latter territory had no natural advantages over the former and even though the former, if not thus de- nuded of population and business, would soon-be able to support a railroad built without the inducement of a prospective situation-value increment. It is not an unreasonable hypothesis that the building of railroads subsidized by the United States government with enor- mous grants of land, thus uneconomically and prema- turely developed the West at the expense of the de- velopment of the East; and this merely because of the greater concentration of ownership of large areas of western land, first in the hands of the Federal gov- ernment and later in the hands, also, of a few rail- road companies.* It is, of course, impossible to say what per cent. of the apparent situation value of land is really, in 1The agricultural pioneer is said by some economists to have had a prospective “unearned increment” as an inducement to settle new territory. And it is quite possible that in the absence of such inducement, settlement in such territory would have been less _rapid. Nevertheless, it by no means follows that the early ap- THE INCIDENCE OF TAXES ON LAND 231 the sense above indicated, capital value. Doubtless there are instances of contributions by landowners in various towns and cities to the building of electric street-railway lines, steam. railroads and other utili- ties (through purchases of stocks and bonds or other- wise), which contributions they would not be quite plication of heavy land-value taxation would, by retarding such settlement, have been shifted upon the general public. Would it have meant less wheat or corn? But undoubtedly some of those who took up western agricultural land in the pioneer days were already farmers and merely raised wheat and corn in the West instead of in the East. If they could not be induced to go West except by the prospect of an increment in land values, can we conclude that their labor in the West was much more productive, that their going increased the volume of produce and that not to have given this encouragement would have made agricultural produce more scarce and its price higher? Some of the western settlers, however, were persons not previ- ously engaged in agriculture. If the offer of land and the pros- pect of a rise in the value of this land made them farmers, it would in so far increase the volume of wheat, corn, etc., and tend to lower their prices. But it would simultaneously decrease the volume of whatever other goods or services these people were producing and raise the prices of such goods or services. Who can say with certainty, therefore, that a tax on land values which removed the incentive to such settlement would necessarily have been shifted upon consumers of goods, in general, in the form of higher prices? But would such a tax have been shifted upon wage-earners in the form of lower wages? ‘The prospect of enjoying a rise in value of land given to settlers by the government is said to have depleted the supply of hired labor and kept wages up. (Clark, The Distribution of Wealth, pp. 85-86.) This effect, however, was only temporary. To-day wages may even be lower because of the policy formerly pursued, if, because of it, less land remains unappropriated. And it is not certain that a policy of land-value 232 THE ECONOMICS OF TAXATION induced to make merely because of their expectation of a return on the utilities as such, from the rates charged, but which they are induced to make because of their hope of an incident increase in the value of their land. They are, as it were, by a common yet voluntary * action, improving their land out of sav- ings; and a special tax upon the increased value so brought into existence might prevent their doing this, tend to diminish the supply of the kind of utility or capital in question, and, perhaps, necessitate higher rates aS an inducement to investors to construct such capital. Thus, in so far, such a tax would be shifted. It is likely, however, that in the case of a regulated monopolistic utility the public would be asked to permit rates—if such rates could be charged and patronage kept—high enough to yield the usual rate of return on investment; and this even if the in- vestors had enjoyed an incident increase in the value of their land. taxation would, even temporarily, have prevented the realization of high wages. For while it would have weakened the incentive to laborers to take up government land far from the centers of population, it would have discouraged speculation in privately owned land and so would have increased opportunities near the centers of population. Exactly what the net effect would have been we cannot, with certainty, determine. But the incident reduction of other taxes could hardly fail to be a benefit to wage-earners, especially when they were ambitious and saving. (See §§3 and 4 of this chapter.) 1 Except as they may act in response to pressure from the local commercial club e¢ al. THE INCIDENCE OF TAXES ON LAND 233 In any case, it is probably true for the most part, as has been frequently and vigorously contended, that the situation value of any given piece of land is due to natural conditions, such as the proximity of bays and inlets, to the stage of the mechanic and other arts which makes one or another location preferable for various lines of productive activity, and to the activi- ties and groupings of large numbers of people, and that what an individual owner decides to do or not to do is but an insignificant factor. The conclusion, therefore, that a tax on the situation value of land cannot be shifted, though it may require some qualifi- cation, is, in the main, hardly open to serious ques- tion. Whether or not it is desirable to take much or all of economic rent by taxation, it should be clear that, under the competitive individualistic system of busi- ness, no other method of preventing the individual receipt of economic rent is possible. If, for example, when the owner and user of a piece of land were dif- ferent persons, the owner could be forbidden to charge as rent the surplus, due to advantageous situation, yielded by that specific piece of land above the ordi- nary returns to labor and capital, the user would pro- ceed to appropriate such surplus. For the fact that the titular owner was not allowed to charge rent would not increase the supply of the goods produced 234 THE ECONOMICS OF TAXATION or marketed on the land, and, since price is fixed by demand and supply, would not lower the price of such goods. ‘The producer or dealer who was fortunate enough to have, for nothing, the use of a piece of land so good or so advantageously situated as to give him a larger return than would cover his outlays for wages and interest (including interest on his own capital) and pay for his own time, would not, on that account, sell his output below the market price charged by competitors. But even if he did, his com- petitors need not lower their price, since there has been no increase in supply or decrease in demand, and since, therefore, the demand on other producers or dealers by consumers remaining unsatisfied, will be as great as before. So, even if the favored producer does lower his price (as it is safe to say he will not), that would merely pass the favor to a privileged few of the consumers of the article. The price could not be re- duced to all consumers unless reduced by all other pro- ducers. Furthermore, some of these other producers are pro- ducing under conditions such that their labor and capi~ tal produce little or no surplus for rent; they may be, for instance, producing on land so poor for the pur- pose that it yields substantially no surplus. For them 1 Or they may be producing on what economists call the intensive margin. ——- THE INCIDENCE OF TAXES ON LAND 235 to reduce their price would be to curtail their wages or interest or both. In that case, the attempt to ter- minate rent would result in lessening other kinds of in- comes of the producers of the goods in question and giving these incomes to the consumers of the goods. But these consumers can be no other than the pro- ducers of other goods. The injured producers would, therefore, under a régime of free choice of industry, change their occupations and the line of their invest- ment. It is perhaps desirable to add an illustration from the economics of railroad transportation. Suppose two cities to be connected by a railroad which runs through a narrow river valley. The traffic is more than this line can handle. Another line is essential but the sec- ond has to follow a winding and hilly route. The cost of carriage of goods on the second road is necessarily higher. The first road has an advantage of situation. It has an exclusive use of the better route, from which it derives a substantial revenue. For it can and will charge rates as high as does the winding hilly road and will still get plenty of traffic. To require rate reduc- tion of the first road will not transfer this excess in- come to the general public. For, since this river-valley road cannot carry all of the traffic, some shippers, at least, must pay rates high enough to make worth while the operation of the other railroad. Otherwise it will 236 THE ECONOMICS OF TAXATION be abandoned—or never built. And to reduce rates only on the river-valley road is merely to transfer to a favored group of shippers, and not to the whole public, this road’s revenue from a natural advantage of situa- tion and from the growth of the community served. The excess income of the river-valley ‘road is situation rent. Taxation of rent by the public can be made to secure, for the general benefit, as much of this income as it is desired to get. Rate regulation cannot. . SPH Taxation and C apitalization A tax on land values or economic rent, like a tax on the net profits of a monopoly, cannot be shifted. But either tax can be capitalized. What, then, is capitaliza- tion and when is a tax capitalized? The process of capitalization is a process of giving a present value to a prospective income. This process involves an applica- tion of the rate of interest. Thus, suppose the rate of interest which can ordinarily be realized from an in- vestment of capital to be 6 per cent. Then the stock of a concern which gave promise of an annual yield of $12,000,000 would have a salable value of $200,- 000,000. Let us suppose the concern in question to be a monopoly doing business on an actual original invest- ment of $100,000,000 on which a normal competitive THE INCIDENCE OF TAXES ON LAND 237 f return would be $6,000,000 a year. The ability to charge a monopoly price and reap a supra-normal re- turn makes the stock of the monopoly, in this case, worth $100,000,000 more than the original investment in wealth-producing equipment. Assume, now, a lump sum tax (or a proportional tax on monopoly profit) taking $4,000,000 of the profit. Then the returns re- maining will be only $8,000,000, and the salable value of the stock will tend to become $133,333,333-33 1/3: For $133,333,333-33 1/3 is that sum of which $8,000,000 is 6 per cent., and investors cannot be ex- pected to pay much more for stock from which they can hope to derive, because of the tax, but $8,000,000 a year, so long as they can invest their funds other- wise with equal security and realize 6 per cent. The expected future income of the monopoly is capitalized into a present salable value. The prospective taxes are capitalized into a subtraction from that value. Or, the future net returns expected to remain after payment of the taxes are capitalized into a present salable value smaller than tus value would be if there were to be no taxes. A tax on land values, like a tax on net monopoly profits, is capitalized. If an increased tax were to be levied on land values or land rent, land would decline in value because the net rent to its owners would be reduced by the tax—a tax which, as we have seen, 238 THE ECONOMICS OF TAXATION cannot be shifted. For the value of land, unlike the value of capital, has no relation to its cost of produc- tion. Land as we are here defining it (to exclude im- provements, which are really capital), has no cost of production. Its value can be arrived at only by know- ing or estimating its future rent (or surplus yield over interest on capital and remuneration for labor), and capitalizing this future rent at the market rate of in- terest. To illustrate, if a piece of land is expected to yield $100 a year, for an indefinite future, in excess of the wages of the labor and the interest on the capital used upon it, and if the market rate of interest is 5 per cent., the land will be valued at $2,000. A tax which should take each year $75 from the $100 previously left to the owner, leaving him a net rent of only $25 a year, would reduce the value of the land in as great a proportion, ie., to $500. The annual yield to the owner after the tax would be as large a percentage as before of the price at which his land could be sold. Hence, he would have no more motive to sell the land than he had - fore and he would continue to do with the land exact what he would do with it if there were no tax. The fact that a:tax upon land values or economic rent is capitalized, thus resulting in lower land prices, constitutes one of the principal arguments commonl advanced in favor of such a tax. Lower land prices THE INCIDENCE OF TAXES ON LAND 239 tend to make land and home ownership easy for per- sons of small means and so are likely to diminish ten- ancy. ‘Taken in connection with an incident decrease of other taxes, and a possible raising of the marginal product of labor and wages through forcing into use land speculatively held out of use, land-value taxation would not only cheapen land but would leave larger than before (because less taxed) the incomes of non- owners who might wish to save and to buy land. Such a tax, so far as all future purchasers of land might be concerned, would be an entirely burdenless tax. For the tax would so lower the salable value of the land that it could be entirely paid out of the interest on the saving in the purchase price. And the reduction in other taxes so made possible would involve a clear net gain to all future purchasers of land, as well as to tenants and laborers. The accumulation of a compe- tence by the industrious and ambitious would be in so far made easier. A change in taxation policy in the direction of taxing the economic rent of land more and other incomes and property, as well as commodities, less, would have some tendency, then, to protect per- sons who through sickness, financial reverses or other- wise have been reduced to poverty, or the descendants of such persons, against the possibility of falling as low in the economic scale as they otherwise might. The obstacles to be surmounted in the process of their 240 THE ECONOMICS OF TAXATION economic rehabilitation would be less. Such a change would be, therefore, in some degree analogous to the abolition of debt slavery and to the establishment of bankruptcy laws. Objection is frequently made, however, to increase of land-value taxation on this same ground, viz., that it would lower the selling value of land. The owners of land at the time the change in tax policy was introduced would not, in every case, pay higher taxes. Many of them would even find themselves paying lower taxes and retaining larger net incomes. For the reduction made possible in their other taxes would make up and more than make up for the increased taxes on their land. Such owners, so long as they continued to hold and to use their land, would not suffer because of the change in tax policy. Even should they sell their land intending to buy other land in its place, their loss as sellers would be compensated by their gain as buyers. But should they sell their land for money to spend in — current enjoyment or in the satisfaction of current needs, they would be worse off because of the tax. Their land would exchange for a less amount of current consumable goods. Owners of vacant land or of land | but slightly improved would not only find the salable © value of this land reduced, but would also, as a rule, © find their net incomes reduced. For in their case a low- ered rate of taxation on other property—since they — Se a a a THE INCIDENCE OF TAXES ON LAND 241 own very little of such property—would not be felt as a compensating advantage. The opponents of in- creased land-value taxation urge, therefore, that such taxation must needs trench on the long-recognized vested rights of landowners, and that society, having permitted individuals to buy land on the assumption that no special tax would be levied on its rent, may not fairly adopt a new policy. The counter argument of an advocate of increased land-value taxation might be to the effect that the general welfare is the end which should be constantly held in view, that so-called private rights which inter- fere with policies favoring this welfare must not be too greatly protected, and that society is not under obliga- tion to maintain an unchanged policy even although such an unchanged policy has been counted on by pur- chasers of land. A purchaser of land, such an advo- cate of greater land taxation might say, in buying the land buys, in effect, merely the previous owner’s claim to the prospective rent, and his purchase must be as- sumed to be made on the understanding that society can make at least gradual tax changes in any direction which may seem wise. The purchaser of land, he might assert, buys a claim not to a definite future rent but to an indefinite future rent subject to the vicissi- tudes of tax changes as well as of changes in popula- tion and situation advantage. It may be reasonable 242 THE ECONOMICS OF TAXATION for him to assume that none of these changes will occur suddenly, but it is perhaps to be doubted whether so- ciety can be regarded as having impliedly pledged it- self that any of them, e.g., a change in tax policy, shall not occur at all. It must, indeed, be admitted that, whether justifiably or not, society has from time immemorial made tax and other changes disappointing the expectations of various persons. ‘Thus, it has made tax laws disap- pointing the expectations of accumulators of fortunes who had expected to transmit them practically entire with no appreciable inheritance tax. It has introduced regulation of the rates of public service industries after investors have bought stock on the basis of past monop- olistic earnings. And it has made laws disappointing the expectations of capitalists engaged in manufactur- ing and distributing spirituous liquors. No opinion is | here expressed as to the justification or the desirability of such regulation and laws. But it can be easily seen how an advocate of increased land-value taxation might draw from them the conclusion that future changes of various sorts are not unlikely, that landowners may be regarded as having purchased somewhat indefinite rather than absolutely definite rights in the future rent of their land, and that society is not estopped from making such future changes in policy as may promise to be generally beneficial. THE INCIDENCE OF TAXES ON LAND 243 The question of what policy is beneficial may be, of course, itself subject to dispute. Even if “the general welfare” is admitted by all disputants to be the goal of public policy, there may still be disagree- ment as to what this welfare consists in and what it is furthered by. Some will think of a considerably stratified society as really the “best”; some will want absolute equality; some will desire to give ‘“oppor- tunity” to all; some will think the general welfare coincident with the welfare of the ‘“‘wage-earning class” or of the “middle class.” And it might even be im- possible to get an agreement that “the general wel- fare,” if seeming to be opposed to some previously accepted ethical standard, should be regarded as an ultimate goal. We have here illustrated the fact that from the same analysis of cause and effect relations, persons of differ- ent sympathies and points of view can draw widely dif- ferent conclusions as to what is desirable public policy. Three students of economics might agree entirely as to the incidence and capitalization of a tax on land values. Yet of the three, one might favor immediate substitu- tion of land-value for other taxation; the second might favor gradual change; and the third might feel that due consideration for the rights of present owners would negative any change at all. Doubtless in some cases persons holding each of these views are convinced 244 THE ECONOMICS OF TAXATION that the policy they favor is right because of its proba- ble effect on the public welfare. In many cases, how- ever, though often unconsciously, the view held is based on a sort of intuitive* philosophy of ethics. Land- value taxation is perhaps supported, by some of its ad- vocates, because of a belief in a ‘natural right” of each person to a share in the land; and it is opposed, fre- quently, because of a belief in a similar kind of sacred right of an owner of property not to have that property reduced in value by a change in public policy. Some economists who have accepted the view that increased general taxation of land values is unjustifia- ble because it decreases the selling value of land and so causes loss to present owners of land, have neverthe- less favored the special taxation of future increases in the value of land. This limited advocacy of increased land-value taxation has, they have believed, freed them from the suspicion of advocating anything which might destroy any “vested rights.” And, indeed, if future increases were never expected or calculated on, this view would be correct. But, in fact, as everybody knows when he is buying or selling real estate—though 1It is admitted, however, that the common-welfare basis of ethics is intuitive, in a sense. To one who has no social sentiments, inborn or acquired, no argument for society-regarding or other- regarding as against purely selfish action can be addressed except such arguments as ostracism, jail, and the hangman’s rope—i.e, only selfish motives can, in such cases, be appealed to. THE INCIDENCE OF TAXES ON LAND 245 many economists and some economists of distinction do not seem to be conscious of it when they are writing economics—the price of any given piece of land to-day is aS much a function of expected future increases in its salable or rental value as it is a function of its pres- ent rental yield. Hence, if it became known and gen- erally believed that a special tax was to be levied on these future increases, the present salable value of land would thereby be reduced. It follows that if increased general taxation of land values involves an illegitimate interference with vested rights, so does any new and hitherto unexpected tax on future land-value incre- ments. For it is mathematically possible to arrange a gradual general increase in land-value taxation, cul- minating in the extremest form of “single tax,’ which would lower the present salable value of land no more than would a prospective tax on future increments. In the long run, of course, the increased general land-value taxation would make land lower in price. But the average loss to present owners would not necessarily be greater. It is not desired, however, in this book, to ex- press opinions as to the “legitimacy” or “illegitimacy,” the “morality” or the “immorality” of any tax. The purpose is merely to set forth, as clearly as possible, the probable incidence and some of the most important probable consequences of taxes of various kinds. It is believed, however, that the setting forth of this inci- 246 THE ECONOMICS OF TAXATION dence and of these probable consequences will be help- ful to those who have no other prejudice or bias than a prejudice—if it can be called such—in favor of the scientific method, and a real concern for the general well-being. 8 4 The Incidence of a Purely Local Land-Value Tax If, in one community, taxes are levied, on land-values, much higher than in neighboring communities, and if the funds so raised are wastefully used and do not con- duce to the reduction of other taxes, the entire burden falls upon the landowners in the community where the increased land-value taxation is levied. Their rental incomes are reduced and, as we have seen, they cannot shift the burden upon tenants by charging higher rents or upon consumers of goods by charging higher prices. And no loss will fall upon landowners in other com- munities where the increased land-value tax has not been applied. But what if the increased land-value taxation results in diminution of taxation on other values? Then the community in question tends to become a more advan- tageous place for people to live and work and to invest their savings. Their untaxed (or less taxed) labor in- comes will tend to be larger than the net labor in- THE INCIDENCE OF TAXES ON LAND 247 comes remaining after the payment of taxes in other communities. Their untaxed (or less taxed) incomes on capital invested will tend to be larger than would be their net incomes from capital in other communities after paying taxes. Although land is taxed at a higher rate, this does not enable owners to charge higher rents and it may conceivably, by discouraging speculative holding of land, make rents lower. Also, to all new buyers of land, the increased tax which they will have to pay on it after purchase, tends to be offset by a lower purchase price. The expected future tax is, as we have seen, capitalized. But these advantages to laborers and investors of capital in the community in question, which they do not enjoy in neighboring communities, may not, there- fore, be permanent. Their purely local existence stimu- lates laborers and investors to move into and invest their capital in the community which taxes land more and other values less. This tends to lower the margin of production and to raise rents and land values in that community. It tends, somewhat, to raise the margin of production and to lower rents and land values in those communities from which the labor and capital are flowing. When equilibrium is restored, the burden of the local land-value tax will have been distributed in part upon the landowners of neighboring communities in the form of lower rents. If, however, the new sys- | 248 THE ECONOMICS OF TAXATION tem were nation-wide such inflow of labor and capital would be very gradual. The inflow of labor, if not de- sired, could be limited by immigration laws. 8 5 When Is a Tax Capitalized? When is a tax capitalized? Does the process of tax capitalization apply to any tax? In the sense in which the term is commonly used, it does not. Thus, it does not, assuming production under conditions of constant cost, apply to a tax on cigars. The producers of the taxed cigars will, in large part, go out of the business of cigar making unless they can charge a higher price than before. If and so far as they thus shift the tax upon consumers, their net returns from the business done are unaffected, the income on investment for those who continue in the business is unaffected and hence, in like degree, the salable value of the land and capital used in the business is unaffected. The tax cannot be capitalized into a smaller value of the business unless the tax decreases the net earnings of the business. If the tax is shifted entirely upon consumers, and net earnings in the business remain as before, there can be no tax to capitalize—at least so far as the business is concerned. THE INCIDENCE OF TAXES ON LAND 249 Can such a tax, then, be capitalized by consumers? Clearly, the real incomes of consumers, as such, would be diminished by the tax. But can the salable value of these incomes be affected? It would appear that, in the type of community with which we are familiar, they cannot—unless by imaginative construction. For such incomes are not currently salable. An individual sells the claim to the future income from his bonds when he sells the bonds; he sells the privilege of enjoy- ing the prospective income from a monopoly in which he owns shares of stock when he sells the stock; he sells the prospective rental yield of a piece of land when he sells the land. But he does not sell the claim to his entire future income and this claim is, therefore, not quoted and has no definitely assignable market value. It can hardly be said that here is capitalization in the usual sense. For practical purposes, therefore, we may say that a tax which is shiftable upon consumers cannot be capitalized. To be capitalized a tax must rest, defi- nitely, upon a salable income. A tax on the net returns of monopoly—as on the economic rent of land—does so rest. Such a tax cannot be shifted; it does clearly diminish the returns of the monopoly—or the land; and, therefore, it diminishes the present salable value of such future returns. It has been authoritatively asserted that, to be capi- 250 THE ECONOMICS OF TAXATION talized, a tax must be exclusive,’ by which is probably meant that it must bear on some incomes from property and not on all. But is it certain that tax capitalization necessarily depends on the exclusiveness of the tax? Let us attempt to reach, on this problem, as definite a conclusion as possible. Suppose, then, first, a non-shiftable tax of 2 per cent., on all income from some special kind of property, e.g., land or the securities of a monopoly, reducing the net income to (say) 4 per cent. of what had been the capi- tal value of the property prior to the tax, while returns on investments in general remain 6 per cent. Then, if the tax, being exclusive, is capitalized, the salable value of the taxed property must fall to such a point that the net income remaining after the tax, is as large a per cent. of this value as can be realized on other invest- ments of equal security. What will happen, however, if the tax applies equally to the income from all property? The argument that such a general tax on property cannot be capitalized is based on the belief that the income from all property 1 Seligman, The Shifting and Incidence of Taxation, fourth edi- tion, New York (Columbia University Press), 1921. But in a recent article on “The Effects of Taxation,” in the Political Science Quarterly for March, 1923 (article running from page I to page 23; specific point here referred to, on page 9), Professor Seligman expresses a different view. THE INCIDENCE OF TAXES ON LAND 251 is reduced to a 4 per cent. basis; * and that the pros- pective buyer of any special kind of property will not require a lower price than before as a condition prece- dent to purchase since he can find no better alternative. But the conclusion that such a tax cannot at all be capitalized depends upon the somewhat questionable and perhaps unconsciously made hypothesis that a tax on capital or the income from capital will not decrease saving. Suppose, however, that as a result of such a tax owners of capital equipment which now yields, net, 4 per cent., instead of 6, most of whom would pre- sumably rather possess their capital for the sake of the 6 per cent. a year than to “‘live it out,” are in large part unwilling to hold it intact for only 4 per cent. as com- pared with selling it for its former value or even some- what less in terms of immediately consumable goods. Suppose, also, that persons who would have been will- ing to save and so make possible further increase of capital for a 6 per cent. return are not in general will- ing to do so for 4 per cent., and that persons who would be willing to produce a surplus of consumable goods be- yond their own needs with which to buy capital yielding 6 per cent. are not willing to do so for the purchase of 1 This does not mean that the more risky investments may not yield more, so compensating for the greater risk; but it does mean that there is no escape from the tax by investing in some other way, because all interest returns are taxable. 352 THE ECONOMICS OF TAXATION capital yielding 4 per cent. If a sufficient number of persons are so affected, the result of the tax must in- evitably be less accumulation and a higher interest rate than otherwise. Accumulation of capital will then de- crease and may come to anend. It is conceivable that the amount of saving done will not even suffice to re- place existing capital as it wears out and that the amount of capital will become absolutely less. Sup- pose that, even with no saving at all being done for the time being, and with all efforts being devoted to the production of immediately consumable goods rather than durable capital, the output of such immediately consumable goods in excess of what the producers keep, is not sufficient to satisfy the demand of owners of capi- tal who are now willing to dispose of their capital at less than its former price in order to get such goods. Then the rate of interest and, therefore, of discount is tem- porarily higher than the ratio of marginal productivity of capital to its cost. In that case all capital would temporarily be of less salable value because of the tax and the tax is, in so far, temporarily capitalized. But such a consequence of a tax on the income of all capital, only remotely possible even temporarily, could not possibly be permanent. If such a tax operates to diminish saving, the amount of capital in existence will come to be less than if the tax did not exist and its marginal productivity will come to be greater. Even- THE INCIDENCE OF TAXES ON LAND 253 tually the rate of capitalization or discount by which a future income is translated into a present value must come to be the same as the ratio of the marginal pro- ductivity of capital (in excess of taxes on it) to its cost. And in the long run capital instruments will not be pro- duced to sell for less than their cost.1_ When the ratio of net marginal productivity of capital to its cost has become large enough so that it seems worth while again to produce it, the value of such capital will again be equal to its cost and will not be less than before the tax was laid unless its cost has become less. But what is the fact regarding the value of the securities of a successful monopoly or regarding the value of land? These values were previously, it is to be supposed, much above cost of production. The land (land in the economic sense as distinguished from improvements) had no cost of production but was a free gift of nature. Its value might fall greatly before reaching the cost of its production, viz., zero. The value of a monopolistic business could also fall greatly before reaching a point at which the entire plant could be duplicated. A per- manently higher interest rate would mean, therefore, capitalization or valuation of the property at a higher rate of discount—or a lower value of the property. 1For a development of the idea of cost of capital goods in this connection see the author’s book, Economic Science and the Com- mon Welfare, Columbia, Missouri (The Missouri Book Company), ro2sPare Li: Ch, IV: 254 THE ECONOMICS OF TAXATION , Since the value of equipment goods produced is fixed eo their cost of production and cannot for long be sw” p- either much more or much less, a tax on such goods is aye \" \”” relatively unlikely, as a long run proposition, to be NY. a a capitalizable. But land and monopoly values may de- > cline greatly as a consequence of taxation which de- creases the net income from such property while simul- taneously causing so great a decrease of capital accu- mulation as to keep the net rate of interest on capital equipment somewhere near its former level. Ii a tax on the income of all property does so operate, i.e., if it _ does tend to decrease capital and so to increase in- ta “ terest, leaving net interest on capital, after the tax is w, 3 subtracted, not much lower than interest prior to the \ (- ery ce, : ate un, tax, but decreasing the net yield of monopoly and of " ee land, then the tax, so far as these latter types of prop- ee 9 erty are concerned, will be capitalized. We may con- clude, therefore, that the fact of a tax being general on all property is at least not conclusive against its capi- talization.* 1Cf. note by H. G. Hayes, in the Quarterly Journal of Eco- nomics, February, 1920, pp. 373-380, entitled “The Capitalization of the Land Tax,” especially p. 376. THE INCIDENCE OF TAXES ON LAND 255 § 6 The Incidence of Taxes on Land According to Quantity We have seen that taxes on land values cannot be shifted and that, therefore, they are capitalized into a lower salable value of the land. But the same conclu- sion would not be justified in the case of a tax on land of a fixed amount per acre regardless of value. Such a tax may be shifted, at least in part, to consumers. | Thus, a tax on land in proportion to area would compel the abandonment of land at the margin of cultivation, so-called marginal or no-rent land. This would limit the output of those goods to the preduction of which the abandoned land had been devoted and would tend to raise the prices of those goods. Some lines of busi- ness are carried on almost exclusively on supra-margi- nal land, e.g., merchandising. These industries would be directly affected relatively little by the tax. A tax of $10 an acre each year on wheat, corn or cotton land would be heavy; on the land used for a department store in a great city it would be insignificant. The tend- ency would be to drive men out of the lines in which large areas of cheap land are used into the lines of activity in which a small area of valuable land goes a long way. The goods produced in the former lines tend 256 THE ECONOMICS OF TAXATION to rise in price. The goods produced in the latter lines, since the tax does not cause more money and credit to be spent, tend to fall in price. And since slightly smaller money incomes are thus received by producers in these latter lines, they will consent to take slightly smaller money incomes in the taxed line than before, the price of the good (or goods) produced in the taxed line (or lines) not rising by quite the whole amount of the tax. But the rent of land will not be depressed in proportion to other money incomes and may even rise. If the tax drives industry to some extent away from near-marginal land, it in so far increases the de- mand for the use of better land and tends to in- crease the proportion of the total output going for rent.* The effect above indicated as likely to result from a tax of a given amount per acre on all land is very nearly what would probably result from a tax per acre on all agricultural land. A fixed tax per acre is so insignifi- cant in relation to any business carried on in a city on a relatively small plot of land that it may almost be ignored anyway. A fixed tax per acre which is not general differs from a general tax in that it may divert some land from the taxed use to other uses. But a fixed tax per acre on all agricultural land, while it may cause some of this land to be diverted to other uses, 1 Lower real wages might eventually affect population, thus causing the burden to be partly shifted back upon landowners. THE INCIDENCE OF TAXES ON LAND 257 will not cause much of it, if any, to be diverted to city uses. Much of what has been said, therefore, in economic discussion, about taxation of agricultural land at a fixed rate per acre, might be said with slight qualification about taxation of al/ land at a fixed rate per acre. A tax of a fixed amount per acre may not be entirely shifted even if demand for the goods produced on marginal land is absolutely inelastic, unless consumers are practically dependent, for a considerable proportion of the supply, on the output from marginal land. Sup- pose, for illustration, a tax of $1 an acre on all land. If the amount of wheat which can be produced to ad- vantage on marginal land is ro bushels an acre, if de- mand for wheat is inelastic, and if a large part of the required output comes from marginal land, then the price of wheat must rise, because of such a tax, by ap- proximately $1 for 10 bushels or 10 cents a bushel. Otherwise the marginal land will be in large part de- serted and the wheat will not be produced.* But if only a small part of the required wheat comes from marginal land, a rise of price of less than 10 cents a bushel—e.g., a rise of 4 cents—may make worth while the more intensive cultivation of supra-marginal land. 1It is admitted that where capital has been invested in, or on this land, the immobility of the capital may operate to delay desertion of the land even though the tax cannot all be shifted, 258 THE ECONOMICS OF TAXATION The increased wheat production on the better land might, therefore, make the entire production sufficient to meet all requirements, without the use of what had been the marginal land. $7 The Incidence of Compound Taxes So far we have discussed the incidence of taxation reduced to its simplest terms. That is to say, we have considered separately the incidence of taxes on com- modities, taxes on monopoly profits, taxes on wages, taxes on capital or its interest and taxes on the economic rent of land. In doing this we have laid the foundation for an understanding of the incidence of taxation as actually levied. As actually imposed taxes are, fre- quently, not simple but complex. Perhaps they should be simple. But whether or not they should be simple, in the main they are not. ‘Thus, in place of a single tax on land values or on capital as distinguished from land, we have the so-called general property tax. This tax, to be sure, is not levied on the wages of labor. But it draws, at any rate in the first instance, from both the interest on the taxed capital and the rent of the — taxed land. In applying, also, to such consumption goods as household furniture it draws from the use- interest of the consumers or owners of it. THE INCIDENCE OF TAXES ON LAND 259 What shall be said of the incidence of such a tax? Merely that its incidence is a compound of the inci- dences of its several component parts. So far as it is a tax on land values, it rests upon the owners of the land and cannot be shifted upon any others in the form of higher rent. So far as it falls upon cap- ital, it diminishes the net per cent. interest received on capital and this may discourage accumulation and so tend in the direction of higher interest. There are other problems connected with the general property tax. It is a well-known fact that where it is in vogue in the various states of the United States a part of it is perpetually evaded. Much personal property— jewelry, stocks, bonds, etc.—cannot be found by the assessor and is usually declared, if at all, only to a small per cent. of the actual amount owned by the tax- payer. On the other hand, as the taxation of stocks and bonds is usually accompanied by the taxation of the real estate, machinery, stocks of goods and other property of the corporations the stocks and bonds of which are taxed as personal property, there is here a double taxation. The individually owned business is taxed once; the corporation owned business is taxed twice—or would be if the tax on personalty were not so largely evaded. It is not the present purpose to ex- press either satisfaction or regret at these facts, but the general property tax can hardly be adequately de- 260 THE ECONOMICS OF TAXATION scribed without mention of these significant characteris- tics. Consider, now, the income tax. This, again, is a combination from the point of view of incidence, of several distinct taxes, viz., a tax on income from land ownership, a tax on income from capital, and a tax on income from labor. Income, as legally defined, in- cludes also the additional value that land or capital has when sold by any person over its value when bought. increase in the value of property, so occurring, is not necessarily caused by higher income from the property. ‘The greater value may be due, especially in the case of land, to revaluation at a lower interest rate. The seller is to that extent better off and the buyer worse off. But, in any case, such a tax, resting on the seller, must come out of the seller’s income or out of his property accumu- lated in the past; hence, it must be drawn, in the last analysis, from rent, wages or interest, or from two or all three of these. We are brought back, then, to our proposition that a tax on incomes is partly a tax on land rent, partly a tax on the interest of capital and partly a tax on wages (wages in the broad sense, in- cluding the earnings of professional men and business enterprisers). And the most reasonable conclusion with regard to the incidence of a general tax on in- comes would appear to be that so much of it as rests on land rent cannot be shifted at all; that the part THE INCIDENCE OF TAXES ON LAND 261 drawn from interest on capital will or will not be shifted according as it does or does not retard ac- cumulation; and that the part drawn from labor in- come will or will not be shifted according to whether it does or does not affect the supply of the kinds of labor the incomes of which are taxed. The objection may be raised that in the case of a. general tax on all property or all incomes the payer of the tax makes no distinction between the part of the tax resting on the rent of land and the part rest- ing on the interest of capital and that he will be as much discouraged from saving by the one tax as the other. But the reader who had followed carefully and comprehendingly the reasoning presented in this chapter will hardly be misled. So far as the tax rests on the interest of capital, it decreases, at least for a time, the net rate of interest enjoyed by persons who engage in capital accumulation, and may discourage such accumulation. So far as the tax rests on the rent of land it does, indeed, decrease the net rent received by the owner but this does not remove the motive to capital accumulation, for, except as a tax on capital contemporaneously reduces net interest, the per cent. gain from saving is as great as before. It may, instead, merely lower the salable value of the land. This may cause loss to the owner at the time the tax is first levied, but thereafter persons who save 262 THE ECONOMICS OF TAXATION can buy more land with a given accumulated capital than before, and we are not prepared to conclude that this apparent enhancement of the advantage of saving will diminish saving. It seems, then, reason- ably safe to conclude that the law of incidence of a compound tax is best to be arrived at by ascertaining separately the laws of incidence of its component parts. The general income tax, whether or not it is shifted, is likely to be in some degree evaded. For in its ad- ministration it becomes necessary to determine the incomes of many persons who are taxable, by their own declarations. Where the system of stoppage (or information) at source is applied, evasion is reduced to a minimum, but the incomes of a considerable num- ber of persons, even of some whose incomes are fairly large, e.g., many lawyers, doctors, e¢ al., are known only to themselves. § 8 Do All Taxes Discourage Accumulation? Lest some should raise the point as an objection to the whole theory of incidence presented in this study, it may be admitted that, on certain hypotheses, any tax may affect the interest rate by decreasing accumulation and so tending to decrease the supply of capital. Consider, for example, taxes on net mo- THE INCIDENCE OF TAXES ON LAND 263 nopoly profits, and on the economic rent of land. Such taxes, as we have seen, cannot be shifted in higher prices (or rents) because the monopoly will lose more than it will gain if it raises its prices above those which previously yielded the highest net returns and because the tax on economic rent in no way limits the supply of land or goods. Yet, if it be assumed that the state would waste wealth taken by taxation, which monopolists and landowners would have saved and invested in industry, then even such a tax might ultimately rest largely upon the non-propertied masses rather than upon those initially taxed. For the tax would then have the effect of making the volume of capital smaller than it would else be and of so making the equipment of labor poorer, the marginal produc- tivity of capital higher, interest higher and wages lower. (If decreased labor effectiveness lessened the demand for land, rent might fall.) But on this hy- pothesis every tax must diminish accumulation. For every tax takes from citizens wealth a part of which they might and many probably would save and in- vest. If, however, it is assumed rather, as it reasonably or more reasonably may be, that the funds collected by government in taxes are well used and that the performance of the functions of government is prac- tically necessary to provide security of life and prop- 264. THE ECONOMICS OF TAXATION erty, to enforce contracts, to build roads and bridges, etc., then we must suppose that government may and probably does use most of the funds collected by it more advantageously for society than they would otherwise be used. It may be better that an individual should receive wealth which comes to him through no service given by him to those from whom he gets the wealth if to let him receive this wealth will result in its being saved, than for the state to take it in taxation if such taxation will divert it to wasteful ends. This, however, is not the hypothesis from which we usually start in considering tax questions. We assume the state to be a useful and practically neces- sary machine. We cannot overlook the fact that such a machine costs something to run and that the means to run it have therefore to be secured somewhere. We cannot, therefore, in reason, regard every tax as occasioning or tending towards a shortage of capital and so raising the interest rate. We must assume that, in the case of a reasonably intelligent and decent gov- ernment, the wealth diverted from private citizens to the government is used as favorably for capital accumulation as if the taxes had not been levied. But although wealth already gained may be as well used, in this respect, by government as by individuals, the taking of it in taxation may affect the motives of individuals for the saving of capital as a means to THE INCIDENCE OF TAXES ON LAND 26s larger future income. Even though any taxation de- creases the ability of the taxed individuals to save, the taxation may result in more accumulation than would result in the absence of government and of the security which taxation enables government to provide. But that almost any taxation thus makes possible more saving than if there were no taxation at all is beside the point generally emphasized in studies of incidence. The significant fact for public policy is that some taxes do not at all discourage accumulation except in the sense that the individual cannot accumulate what the state takes from him and that other taxes may affect adversely the motive to accumulate. Relatively speaking, then, the latter taxes may be said to be likely to raise the interest rate so that, in the long run, the burden of them falls upon other classes than those on whom they are first imposed. The latter taxes may be shifted. The former are properly enough referred to as taxes which cannot be shifted. 8 9 Summary In this chapter, in spite of what may appear to be digression, we have been mainly interested in the in- cidence and effects of taxes on land. Taxes on land values conditional on a special use or uses of the land 266 THE ECONOMICS OF TAXATION tend to be shifted upon landowners in general by forcing some land out of the taxed use into other uses. ‘Taxes on land values in general are borne by the owners of the land taxed. Such taxes cannot be shifted either in higher rents or in higher prices of goods. To tax vacant land at the same rate as used land may operate to actually reduce rents by increasing somewhat the available supply of supra-marginal land and may increase the output of goods. Taxes on land values are capitalized into a lower price of land. This tends, especially if higher land taxes are contempo- raneous with lower capital and other taxes, to make purchase of land easier and may tend to diminish tenancy. The securing of a competence by the in- dustrious and ambitious is easier. Owners of land at the time the tax goes into effect, may lose if they have to sell out at the resulting lower price. Increased taxes on land in one locality together with reductions of other taxes may cause rapid settlement in that locality, appreciable rise in land rent (though not in net rent to owners), and lower land rent in environing communities. CHAPTER IX THE SHIFTING OF TAXES ON SALES OF LAND AND CAPITAL GOODS AND ON LOANS § 1 Taxes on Sales of Land A tax on commodities is wholly or partly shifted upon consumers according as the taxed goods are pro- duced under conditions of constant or increasing cost, respectively, and according as the demand for these goods—if they are produced under conditions of in- creasing cost—is absolutely inelastic, or is more or less elastic. If the conditions of production of a taxed commodity are those of constant cost, and if the in- dustry is a competitive one, all of those in the business (with their land and capital) would leave and go into some other line or lines of production rather than bear any special tax. If the demand for a taxed article is absolutely elastic, all the consumers will re- fuse to buy rather than pay an appreciably higher price. Usually both demand and supply are some- 1 Obviously those in the industry, along with others, will, as consumers, help pay this or other taxes levied on commodities, 267 268 THE ECONOMICS OF TAXATION what elastic. Some of the persons engaged in pro- ducing the taxed article are unwilling to continue so doing unless they can shift substantially the entire though they can shift but a part or none. Likewise, some buyers will not purchase a taxed good, or will ‘purchase appreciably less of it, if the tax is shifted to them in any noticeable degree; but others will pur- | | ‘tax, but others may be willing to continue producing | chase though they have to pay some or all of the tax in the form of a higher price. A tax on commodities, therefore, or on a given commodity, while it is usually borne chiefly by consumers, may frequently be borne in part by producers of the goods or good taxed. The case of taxes on sales of land or capital goods or on mortgages or loans is analogous. But while taxes on commodities fall upon consumers as such, regardless of the various sources of their incomes, and so rest on interest, wages, and rent,’ we may find that taxes on sales of land or capital goods or on loans have a somewhat different ultimate incidence. Let us begin by asking what would be the incidence of an appreciable tax on sales of land, e.g., 1 per 1 If, there being no more money or bank credit expended, prices of taxed goods rise, other prices tend to fall. If all commodities are taxed, and their prices rise, money incomes tend to fall. Where an extra price has to be paid for an article, because of a tax, the tax money paid tends to be prevented from acting so immediately to make demand for other goods as it might were the tax not required. The present writer discussed this point partially in an SHIFTING OF TAXES ON LOANS 269 cent. of the value of each sale. We may assume that only some buyers and some sellers are marginal, that the remainder of buyers would pay a higher price rather than not buy, and that the remainder of the sellers would accept a lower net price rather than not ‘sell. To illustrate the likely situation, on a small scale and in a simple way, we may suppose a number of pieces of land of equally good quality and location. Five of these tracts are owned by A, B, C, D, and E, respectively, each of whom would sell for a price of $10,000. Of the potential buyers, five, V, W, X, Y, and Z, would purchase at that price. The price of $10,000 is, then, a price at which all the land of the given description can be sold which the owners are willing to sell at that price. It is the price which “equalizes demand and supply” in the absence of any tax on the sales. | But what will be the conditions of equalization of demand and supply if sales of land are obstructed by a i per cent. tax? Since, by hypothesis, some of the buyers are marginal, the price of what land is article in the Journal of Political Economy for June, 1920, entitled “Some Frequently Neglected Factors in the Incidence of Taxa- tion.” Emphasis was then placed se fact that, in the case of indirect taxation, the tax money goés through several hands on its way from consumers to government. But even if consumers, when buying taxed goods, paid the tax directly to government, the money so paid might, for a very short time, be prevented from acting so as to make demand for other goods. 270 THE ECONOMICS OF TAXATION sold can rise by the entire amount of the tax only if several of the sellers are also marginal, i.e., would rather keep their land than to receive for it, after subtracting the tax, less than $10,000 for each tract or plot. If all of the would-be purchasers are mar- ginal, any rise of price whatsoever must result in no sales; and if all of the would-be sellers are marginal, their inability to charge any higher price because of the tax must result in no sales. But if, of the five owners of land who, in the absence of a tax, would sell for $10,000, three would rather take (say) $9,940 net than not to sell; and if, of the five prospective buyers, three would rather pay $10,040 than not to buy, then three sales will take place in spite of the tax, and the tax will be borne $40 by each purchaser and $60 by each seller". Demand and supply will be equalized, assuming a tax of $100 on each sale, with a net sale price of $9,940 and a gross sale price of $10,040. The tax is then divided between buyer and seller. So far, the argument is perhaps obvious and, pos- sibly, commonplace. But further analysis is desirable. From what sort of economic income is the tax paid— or does it come from several sources? Is it drawn 11f the tax is reckoned as 1 per cent. of the net sale price, it is $99.40; if I per cent. of gross sale price, it is $100.40. It has seemed well enough, in the text, to reckon the tax at $100 on each sale. i ie > es am SHIFTING OF TAXES ON LOANS 271 from rent or from interest or from wages? Let us consider, first, whatever part of such a tax is paid by the purchaser. Before we inquire whether, of the part paid by the purchaser, any portion is drawn from economic rent, we may advantageously state our con- ception of rent. The rent of such a piece of land '| as we have in contemplation is to be reckoned as measured and determined by the difference between. the annual product of industry and what that product would be if this specific piece of land were non-existent, | and if, therefore, the labor and capital employed upon it had instead to be used on the margin (extensive or intensive) of production. Those business enterprisers to whom it makes the maximum difference whether or not they secure the use of supramarginal land of a given description, will ordinarily offer enough for it so as to outbid enterprisers to whom its relative ad- vantages are less. The rental value of land of this description is (assuming perfect competition) what that tenant would pay who is a marginal tenant, i.e., who is just induced to hire a piece of this land, and without whom the supply of such land, offered at the given rent, would exceed the demand. Tenants of other plots of land of this description, who are supra- marginal tenants, may produce absolutely more from the land they hire than does the marginal tenant from his, or they may produce merely more relatively to 272 THE ECONOMICS OF TAXATION what they could produce on no-rent land or more than they could earn as hired employees. But whatever these supramarginal tenants get in excess of the rent they pay (and in excess of interest on the capital they use) may fairly be reckoned as their wages or re- muneration for effort, or, as it is sometimes called when the effort is self-directed, their profits.* A tax on land sales may conceivably have an indirect effect on rent although, in the respect we are about to discuss, it is unlikely to. Thus, such a tax may make some would-be purchasers prefer to be tenants and so may tend to increase the demand for land to. rent. But it seems about equally likely that the tax would make some intending sellers prefer to lease their land to tenants, and would so increase the supply of land to be rented. A tax on sales of land may, however, be drawn directly from rent. Suppose, for example, that the supramarginal buyer, who can rather afford to pay a 1If there is a larger number of persons to whom supramarginal land of the given description is relatively much better than the rest, then the person who was a marginal tenant of this land falls below the margin since others outbid him. The new marginal tenant is one who can afford to pay more for it. Under these circumstances the difference between having and not having in the community any given tract of such land is greater than before. Its marginal product is greater. But the marginal product of the tenant who is now just induced to hire such land is less than if there were fewer to bid against him. Worth-while use of this land does not depend so exclusively upon him and a few like him, SHIFTING OF TAXES ON LOANS 273 part of the tax than not to buy, is interested in this land only as a prospective recipient of rent. He does not intend to do any work on it or to improve it in any way, but merely to lease it—perhaps for fifty years—with suitable guaranty of rent payment. He purchases the land, perhaps because a change of resi- dence removes him so far from property he formerly owned as to make him fear loss through lack of over- sight. He therefore sells his former property, but from the rent which his new property yields, a part must be subtracted to reimburse him for the tax. In such a case the tax is drawn, in the last analysis, from rent. But the tax may in other circumstances be drawn from labor income. Consider the case of a supra- marginal buyer, who, as a tenant, could earn for him- self $1,000 a year in excess of rent and interest, and who could invest his funds in bonds or mortgages so as to get as large a per cent. return as the economic rent of the land would be. Such a buyer, however, might be one who, with the freedom and power of initiative of an owner of the land, could get by using it, not only what it would rent for,’ but $1,100 a year besides. In other words, he might be a person whose labor income as such would be $100 a year larger if he could direct his own labor entirely and use his 1 Plus a reasonable interest on the cost of any improvements. 274 THE ECONOMICS OF TAXATION own judgment in managing the land than if he had to work as a tenant or an employee. Such a person could better afford to pay a part or all of the tax than not to become an owner. The tax would be, in ultimate effect, a subtraction from his labor income. He would be able to pay the tax because his labor income as an owner of this land so far exceeds his labor income in any other option. He can pay it because he has a profits or wages surplus above what would be necessary to make him follow the occupa- tion of an independent entrepreneur or enterpriser. In the absence of the tax he would simply enjoy this surplus labor income. But since it is a larger labor income than he can secure in his best alternative, and since he has available funds to invest, he is willing to pay a higher price for his land in order that he may enjoy this surplus. He is willing, if necessary, to purchase the privilege of earning such a surplus. And in that sense the tax, or the part of it which he pays, may be regarded as a capital investment look- ing toward a larger future income than the purchaser could otherwise get from his labor. In passing it may be added that, when land is bought by a consumer as such, e.g., for a home, the supramarginal buyer pays his part of the tax out of his “consumer’s surplus.”” Some would rather rent than pay any tax. They are marginal. Others are willing SHIFTING OF TAXES ON LOANS 275 to pay a tax for the consumer’s satisfaction of owner- ship. Consider, now, the case of the sellers. The mar- ginal seller will pay no tax. Rather than sell for less than $10,000 (to use the figure of our example) he perhaps will prefer to operate the land himself or to lease it and enjoy the rent. But another potential seller may be differently situated. Perhaps he lives so far from the land he owns that he would feel safer to invest in other property, and would so prefer to pay part or all of the tax rather than not sell. Part of the interest or rent, or both, derived from his new investment may then be regarded as drawn upon to pay his loss—though he may simply regard himself as permanently that much poorer. Still another poten- tial seller may prefer to sell in order that he may work as an employee and relieve himself of super- visory functions for which he is relatively unfitted and which he cannot satisfactorily delegate. Such a seller in effect makes good his tax out of the larger labor income which he is thereafter enabled to earn. That a tax on sales of land would prevent some ' exchanges and keep some persons from performing the functions for which they are best fitted is probably true. Efficiency of production might so be decreased. But our present interest is rather with the problem whence comes, in the last analysis, the tax money. 276 THE ECONOMICS OF TAXATION It is perhaps hardly necessary to remark that sim- ilar conclusions would apply in the case of a tax on the sale or transference of any capital equipment. § 2 Taxes on Mortgages and on Loans in General But perhaps a more interesting problem—and one which may be discussed in a very similar way—is the problem of the taxation of mortgages and of loans in general, and the shifting of such taxation. Econ- omists in the field of taxation are wont to state that a tax on mortgages is shifted upon borrowers, al- though sometimes they qualify the statement slightly, — admitting that there may be cases where not quite all of the tax is so shifted. But the usual analysis is incomplete and, therefore, unsatisfactory. The as- sumption is generally made that most lenders are marginal and will refuse to lend unless they can add practically the entire tax to the interest charged the borrower. This may be ordinarily true in jurisdictions where evasion of mortgage taxatien is prevented, be- cause practically every potential lender has an alterna- tive almost, if not quite, as good in his ability to in- vest in bonds or to invest in mortgages on property in another jurisdiction or state. If, and where, the potential lenders, however, through unfamiliarity with SHIFTING OF TAXES ON LOANS 277 their other possible options, or through prejudice, are excluded from taking advantage of such options, these lenders are likely to bear part of such a tax, for most of them will prefer, perhaps, to receive somewhat lower net interest than not to lend. We can perhaps get a clearer glimpse of the theory of the subject if we suppose the alternatives of lend- ing through some other method—such as bond-buying —to be shut off by making the tax general on all loans. Let us suppose, then, a federal tax of (say) 2 per cent. on loans of every kind, so that the lender may not avoid the tax by making a different kind of loan, or a loan in a different jurisdiction, and let us suppose that information or stoppage at source is so effective as to prevent evasion. Would the whole of such a tax be shifted to borrowers? A proper solution of the problem requires a con- sideration of the various alternatives ef borrowers and lenders. Undoubtedly some borrowers would be mar- ginal. Such would refuse to borrow should the charge on loans rise by one iota. Some corporations which had intended to borrow by selling their bonds would instead sell stock. Some individuals who otherwise would have sought to get title to their homes, by pur- chasing on mortgage, would now prefer to remain tenants. Some business men who might have bor- rowed, and so purchased the premises they use, would 278 THE ECONOMICS OF TAXATION instead rent their premises. Some persons who, in the absence of the tax, would have purchased farms on borrowed money, giving mortgage security, would instead become tenants, hired managers, or laborers. On the other hand, some borrowers are supramar- ginal. The prospective home-owner who would pur- chase rather than rent, even if a tax on mortgages adds to his interest rate, the business man to whom ownership of the premises he occupies and the result- ing freedom to make what changes he desires with- out let or hindrance means much in larger annual income, the farm tenant to whom the difference be- tween being an owner and being a tenant is likewise significant enough in prospective larger income to make. borrowing at a higher rate still preferable to continued tenancy—these are supramarginal borrowers. If all borrowers were thus supramarginal, and if some of the lenders were marginal, the borrowers would clearly pay much or all of the tax. But some of the lenders are also likely to be supra- marginal. For if, as on our present hypothesis, all loans are taxed, lenders cannot avoid the tax by merely changing the form of the loan or by loaning to a corporation instead of to an individual. Those owners of funds who do not wish to lend must either invest their funds in corporation stock, with the greater risk of such investment, or must invest still more directly SHIFTING OF TAXES ON LOANS 279 under their own entrepreneurship or must use up their wealth in current gratifications. But some of them will be persons who would readily take less interest than before—perhaps 2 per cent. less—in preference to investing where the risk is greater. Some, also, may prefer to take lower interest and be free of the necessity of personally directing their investments rather than to have to work as business enterprisers or entrepreneurs. And some lenders can employ their capital so inefficiently themselves that they can better afford to lend it at a considerably lower net interest than before, perhaps then engaging in work under another’s superintendence, than themselves to direct the use of their own capital. Under such circumstances it is reasonable to suppose that part of a tax on loans might fall upon lenders. If to add the entire tax to the interest borne by borrowers would cause some borrowers—the marginal ones—not to borrow, and if many of the lenders would rather lend for less than not to lend, then a part of the burden of the tax is likely to fall upon lenders. On what sorts of income does such a tax on loans finally rest? So far as borrowers bear it, it will be likely to come out of their surplus labor incomes above what they would earn as tenants or employees. The supramarginal borrower is willing to pay a part of the tax just because he can produce more and get a 280 THE ECONOMICS OF TAXATION larger labor incomé as a self-directing titular owner than otherwise. Supramarginal borrowers, at least, who thus borrow in spite of the tax, will not be likely because of it to do less work or produce fewer goods. And marginal borrowers, though the tax prevents them from borrowing, will not therefore be prevented from working. We need not conclude, therefore, that con- sumers, as such, will have to pay the tax in higher prices of goods. Other borrowers—those, for example, who borrow for the pleasure of having title to their homes—pay their part of the tax out of consumers’ surplus. In the case of the ordinary tax on mortgages, when loans and investments of other sorts are not reached, the lenders’ options are so numerous and good that they will usually pay next to nothing of the tax; but bor- rowers who want funds to purchase farms or homes will frequently be unable to borrow the required amounts except on mortgage security, and, therefore, if they are supramarginal, are likely to pay the entire tax. In the case of a tax on all loans, lenders are likely to pay a part. But out of what incomes or classes of income will they pay it? Can it be said that they will pay it out of interest? Clearly the net returns these lenders receive on the capital they loan is re- duced by the tax. In this case the tax does not come SHIFTING OF TAXES ON LOANS 281 out of wages, and it certainly does not appear to be drawn from rent as such.* It comes, definitely, from interest. Whether, in the long run, such a tax may affect saving adversely, decrease the supply of and increase the marginal productivity of capital, and, by so doing, injure other classes, we shall not here in- quire. Indeed, it is doubtful whether we could reach on this point, with confidence, any conclusion. Suffice it to say that we have shown the incidence of a tax on loans, so far, to be partly on income from labor (when borne by borrowers who borrow for ownership and production), partly on consumers’ surplus (when borne by persons who borrow to get title to their homes), and partly on interest (when borne by lend- ers). We have not yet, however, sufficiently discussed the question whether a tax on mortgages or a tax on all loans could be shifted upon consumers. If there are some industries which make a larger proportionate use of loans than others—the others depending on direct investment or on stock sales rather than bond issues —then the tax may tend slightly to divert capital out of the former industries and into the latter (those not making use of loans). This would somewhat in- crease the prices of some commodities, but it would 1 Though the lender’s interest may be paid out of the rent of land which the borrower has purchased with the funds loaned to him. 282 THE ECONOMICS OF TAXATION lower the prices of other commodities. Consumers, as a whole, would not, perhaps, lose on the one hand more than they would gain on the other. But so far as the tax affects all industries equally, it does not tend to drive capital out of any one business into others. Furthermore, persons who are prevented, by the tax, from becoming owners of property, have still to earn a living and will often produce as tenants, hired managers, or laborers, the same kind or kinds of goods they would produce as owners. If and when this is not the case, and the would-be purchaser of land and capital, being prevented from purchasing, does not produce the kind of goods to the production of which the property is adapted, the would-be seller who might have ceased to produce those goods may instead continue to produce them. A tax on loans or on mortgage loans is distinctly not a tax on commodi- ties, and its incidence is not on consumers as such. It may have evils in preventing property from getting into the hands of persons who can do relatively the best with it. It may thus affect the efficiency and earning power of those who are prevented from buy- ing or selling. But these do not pay the tax since the threat of it prevented their intended transactions. And there can be no shifting of a tax where there is no tax to shift. If labor efficiency is reduced, those who are therefore unable to earn so much suffer in SHIFTING OF TAXES ON LOANS 283 their wages or profits. Neither they nor others suffer as consumers. While it is interesting to discuss the incidence of taxes on loans in general or on mortgages in partic- ular, supposing such taxes to be levied and effectively collected, it is well known that, in general, it has proved impossible to collect them. Such taxes are, in the United States, a part of the so-called “general property tax” levied by many American states and cities. Stocks, bonds, money, and mortgages are easily concealed. The owner, declaring his property for pur- poses of taxation, ordinarily understates his property in these forms by about 90 per cent.1_ Hence, such property is, in fact, but lightly taxed and there is little burden to be shifted. It is interesting to note—and we may note the fact here without attempting either praise or blame—that the general property tax as actually applied in present- day America is a system under which the attempt is made to tax some property twice while other property is taxed but once. This is probably due to our com- plicated system of property owning coupled with a failure on the part of the ordinary citizen to under- stand the fundamental similarity of ownership in cases 1See Gephart, “The Operation of the General Property Tax in Missouri,” Washington University Studies, Vol. VI, Humanistic Series, No. I, 1918, pp. 20-23. 284 THE ECONOMICS OF TAXATION which are superficially different. Thus, to illustrate, suppose that a farmer owns a farm. He is taxed on it under the general property tax at some assessed value. If three or more brothers own it in partner- ship, each is liable for part of such a tax depending upon his proportionate share of the total value. But what if the brothers organize a corporation to hold the farm, each of them owning his proportionate share in the stock of such corporation. Then a tax may be levied on the farm owned by the corporation and also on the stock of the corporation owned by the brothers. The ownership of the stock is merely the ownership of a part of the value of the farm indirectly. But the case is treated as if the actual property were doubled. The individual farmer might conceivably be taxed in a similar way, i.e., on his farm and also on his deed — of ownership of the farm. This, in fact, is not done, ~ but if his ownership is evidenced through the posses- sion of certificates of stock in a corporation instead of © through a private deed or through articles of partner- ship, then there are two taxes instead of one—or would ~ be if the tax on the stock could be collected. § 3 Taxes on Sales of Corporation Securities The taxation of sales of corporate securities is an © SHIFTING OF TAXES ON LOANS . 285 analogous problem. ‘There are marginal and supra- marginal buyers, marginal and supramarginal sellers. The supramarginal buyers would be willing to pay some tax in the form of a higher price for stocks and bonds rather than to adopt the option of not saving, of lending to private persons, or of directly managing their own funds. So far as a supramarginal buyer pays such a tax, he pays it in effect from the income of the investment in excess of that necessary to induce him so to invest his funds. The supramarginal sellers are those who would rather take less for corporate securi- ties they have to sell than to be deprived of the chance to spend or “live out” their capital or than to be un- able to lend to private persons or than to be prevented from investing directly under their own direction. So far as they pay this tax it comes out of the surplus labor income which they expect to be able to get if they can superintend their own capital, or—if they intend to spend it in personal consumption—out of the excess of consumers’ utility above what is neces- sary to make them choose that option. So far we have seen no reason to suggest that such a tax will diminish saving. The buyer who is margi- nal between investing in corporate securities or using up his savings may be induced to do the latter. But the seller who is marginal between holding his securi- ties and using up his wealth may be induced by the 286 THE ECONOMICS OF TAXATION tax to do the former. When, however, we come to consider, not the transfer of long-issued securities from person to person, but the sale of new securities to provide funds for corporate business, there may be significance in a tax which reduces the net per cent. return to the potential investor. Conceivably accumu- lation will be adversely affected, the supply of capital diminished, the marginal productivity of capital in- creased, and the rate of return on capital raised. Or, if the marginal investor is not marginal between in- vesting in corporate securities and spending for cur- rent consumption, but instead is marginal between in- vesting in corporate securities and investing under his own management as an entrepreneur, then such a tax will diminish corporate enterprise, and may so dimin- ish it and substitute private enterprise in its place, even where corporate enterprise somewhat better serves the purpose. : | Finally, any considerable tax on sales of corporate securities would of course negative their frequent trans- fer. A supramarginal buyer, of the sort we have de- scribed, might prefer to pay such a tax in order that his money might be invested in corporate securities over a fairly long period. But he could not so well afford to pay even a small part of such a tax if he were likely to need to liquidate his investment—i.e., sell the securities—a day or two after buying them. SHIFTING OF TAXES ON LOANS 287 A tax of 1 per cent. on the market value of securities sold might be relatively unimportant to the long-time investor. But if a security were active and sold every day, the taxes on it during a year would be several times its total value. Assuming no market fluctua- tions, every buyer would have to sell it for less than he paid for it, by the amount of the tax. The seller, as such, might bear a part of the tax and the buyer a part, but the buyer who was also a seller would pay all of the tax. And only a speculative motive would be likely to induce any one deliberately to put himself into such a position. $4 Summary We have seen, in this chapter, that a tax on sales of land (or capital) may, like a tax on commodities, rest partly on persons connected with the supply side of the market and partly on buyers, according to the elasticity or inelasticity of demand and of supply. Similarly, a tax on loans may rest in part on lenders despite the frequent insistence of some economists that such a tax falls, in the last analysis, on borrowers. Doubtless in practice borrowers do pay most of a tax on mortgages when such a tax is levied, e.g., by one of our American state governments, and when vigorous 288 THE ECONOMICS OF TAXATION attempts are made to discover mortgage ownership and to collect the tax, because lenders can so easily invest in securities the ownership of which cannot be dis- covered or in mortgages in other jurisdictions. The incidence of a tax on sales of securities is also likely to be partly on buyers and partly on sellers. The funds secured by such taxes as have been discussed in this chapter are, according to the varying circum- stances of each case, drawn from the labor incomes, interest or rent of the persons on whom the taxes rest. CHAPTER X THE INCIDENCE OF IMPORT AND EXPORT TARIFFS Sr Revenue versus Protective Tariffs Taxes may be levied either on goods coming into or on goods going out of a country. The former are — spoken of as import duties or tariffs. The latter are export duties. Of the two, import duties are much more common and, therefore, ordinarily receive more attention in economic discussions. A protective tariff is a schedule of import duties on various articles. But import duties are not necessarily protective. They may be levied solely for the purpose of securing rev- enue. In practice, import duties are often the result of acompromise. They indicate a desire to “straddle.” They provide some protection and yield some revenue. They try to combine two opposing principles. They give less protection than a purely protective tariff would give and they yield less revenue than a purely revenue tariff would yield. A tariff might be levied, strictly for protection, which would so discourage im- 289 290 THE ECONOMICS OF TAXATION porting as to yield no revenue. Likewise, a tariff might be levied, strictly for revenue, which would provide no protection. Tariffs of this latter kind, at least, have actually been levied, for example by Great Britain. § 2 The Nature and Purpose of a Protective Tariff The specific purpose of a protective tariff, so-called, is to prevent or restrict importation. The advocates of protection hope, by this means, to enable the home producer to sell his goods in the domestic market un- hindered by foreign competition and, therefore, pre- sumably, at a higher price than he could secure if not so “protected.” For indeed protection is not a necessary means of giving home producers the domes- tic market. It is only a necessary means of giving them this domestic market while they are nevertheless charging relatively high prices for their goods. The home producers of any given commodity (or com- modities) could have the domestic market without any protective tariff, to the practical exclusion of foreign producers of the same sort of good, if they would sell it for a low enough price. Such a low price could of course be charged if the land, labor and capital required for producing the good could be secured for IMPORT AND EXPORT TARIFFS 291 low rent, wages and interest respectively, as they could if there were no alternative industry more profitable. Likewise, labor, land and capital could find ample em- ployment in such an industry, without protection, if they would offer themselves at sufficiently low rates. What the protective tariff really does is to enable labor, land and capital to get more in such an industry than they could get without protection, by making possible the charging of a higher price for the output than the unrestricted competition of imported goods would per- mit. It may fairly be said, then, that a protective tariff is a device for enabling the home producers of the goods protected to charge higher prices than could be charged without protection. To illustrate, let us suppose that woolen cloth of a given quality can be produced abroad and sold in the United States at a price of 20 cents a yard. Let us suppose, also, that the so-called cost of producing such cloth in the United States is 40 cents a yard. Then a tariff of 20 cents or something more, per yard, would enable the home producers of woolen cloth to sell for 40 cents a yard, whereas, without such a tariff, they would have to meet the price of their foreign competi- tors, 20 cents, or keep out of the business. But if 40 cents a yard is the cost of producing in the United States, is it possible for a domestic manu- facturer to produce cloth and sell for less than cost? 292 THE ECONOMICS OF TAXATION Does he not ‘‘need” a tariff which will enable him — to charge for the cloth at least what it costs to make it? In order to answer this question intelligently we need to recur to our analysis of cost of production. When demand and supply are equal, the cost of pro- duction of the marginal unit produced is, under condi- tions of competition, just equal to the price. Cost of production we have seen’ to be resolvable into what the factors engaged in producing a given article could secure if each such factor were directed to another in- dustry. To say, therefore, that the cost of production of cloth is 40 cents a yard is to say that the amount which could be secured elsewhere by the labor, the capital and the land which is required to produce, jointly, a yard of cloth is 40 cents. If all the labor, capital and land which is needed for the business of manufacturing woolen cloth in the United States can be secured for a Jess amount per yard produced than 40 cents, then it is nonsense to say that the cost is 40 cents per yard. If the best that the labor and other factors required can get in another no less agree- able industry is 19 cents, then a price of little more than 19 cents a yard will be enough to draw labor and other factors into cloth manufacturing, and the 1 Chapter III, §§ 2, 3 and 6. See also the author’s book, Eco- nomic Science and the Common Welfare, Columbia, Mo, (The Missouri Book Co.), 1923, Part II, Ch, II, §§ 2-5. IMPORT AND EXPORT TARIFFS 293 home product will be able, without any tariff, to under- sell the foreign product in the home market. And if enough such cloth can be produced, at 19 cents, to satisfy the entire domestic demand, a tariff will not, in the absence of monopoly control, raise the domes- tic price. It may happen, of course, that some labor, land and capital can be secured at 19 cents while other labor, land and capital, being relatively better adapted to other industries, cannot be drawn into woolen cloth production for less than 25, 30, 35 and 40 cents. Or perhaps some labor, while not able to secure larger returns elsewhere, may find work in textile mills so relatively disagreeable that only a high wage and a correspondingly high price of cloth will draw it in. If then, the desired woolen cloth cannot be secured, at home, without drawing into the business labor, land and capital which will not come at less than 40 cents and if the demand, at that price, is sufficient to take all that can be produced by drawing in such labor, land and capital, then the result of a high protective tariff must be to make the price of the cloth 40 cents a yard. The cloth would cost 4o cents a yard at the margin, i.e., to the marginal producing factors. It may be worth while to point out here that what it might be necessary to pay the marginal labor and other factors to bring such factors into the business, 204 THE ECONOMICS OF TAXATION all labor, land and capital of corresponding efficiency engaged in the business would tend to get. Thus, if one carpenter, A, has to be paid $1,000 a year because he can make as much in another job, the services of another carpenter, B, who is equally efficient, will command as much. If they did not, employers would prefer to hire B, and would bid against each other for B’s services. Competition must inevitably tend— although, of course, it is often imperfect—in the direc- tion of giving to those who can easily be induced to enter work in any given line, as much as those get who are barely induced to enter it. If, then, the marginal cost of producing woolen cloth in the United States is 40 cents a yard, the typical cloth manufac- turer, reckoning up his actual or prospective expenses for wages, interest and rent (including returns for his own time, capital and land) will say that the cloth costs him 40 cents a yard to produce. Doubtless a price somewhat less than 4o cents a yard would, though reducing wages, etc., in the industry, leave some labor, capital and land still in the business. Nevertheless, such a manufacturer would probably say that he “needed” a tariff of at least 20 cents a yard to enable him to compete. Consider the matter now from the viewpoint of the national income. ‘The protective tariff, by preventing the sale of the foreign cloth here, except at 40 cents IMPORT AND EXPORT TARIFFS 205 /or more per yard, enables the domestic producer to _charge 40 cents. It enables him to charge what the cloth “costs” him. But to say this is merely to say that it enables him to charge enough so that he and those he hires and the land and capital used can get -as much as, where they are marginal, they could in -any case get in other lines. The consuming public must, however, pay 40 cents for its cloth instead of 20. In other words, the consuming public must pay 20 cents more for every yard of cloth it buys, not in order that home cloth producers may be 20 cents better off than they would otherwise be but merely in order that they may be as well off (where they are marginal) as they could be without the tariff if they would go into or remain in the industries for which they are respectively best adapted. To express still differently the same thought, the general public in- evitably loses more than the protected producers gain. For the general public loses 20 cents on every yard of cloth. But the cloth producers do not gain by this entire amount—if, indeed, they gain at all. So far as it is true that producers must have 40 cents to keep them in the business, this is because there are other lines in which they can engage where they will be as well off as if producing cloth at 40 cents a yard. If so, they gain nothing by protection. And even if other lines would not be as profitable for them as 2096 THE ECONOMICS OF TAXATION producing cloth at 40 cents a yard, nevertheless their gain from the tariff is less than the general public’s loss. Only if those connected with the cloth-producing business would rather produce cloth, even at 20 cents a yard, than devote their labor, land and capital to anything else, can it be said that the surplus 20 cents is all net gain to them in excess of what they could get in the next best line open to them. Only in that case does the tariff benefit the protected interests as much as it hurts the public. But even in that case, the gain of the protected interests cannot possibly ex- ceed the loss of the purchasing public. For without a tariff they could still engage in the industry—if they chose—for a return of 20 cents per yard, or whatever price might be necessary to insure a market for their goods. And to whatever extent the tariff might en- able them to increase their price, to just that extent, at least, it would be a burden upon consumers. Up to this point, in our discussion of the protective tariff policy, we have considered the cost of produc- tion of the protected cloth as the amount necessary to bring into the business the marginal labor, land and capital necessary to supply the public. Let us, however, center our attention, for a while, on labor alone, assuming the other costs to be non-existent. So far as labor alone is concerned, the cost of produc- tion of the cloth is the amount per yard necessary IMPORT AND EXPORT TARIFFS 297 to bring labor into this line from other lines of pro- duction or to keep it from going into other lines. If the labor necessary to produce woolen cloth of the given grade can earn, in the United States, $4 a day at other work and if it can produce but 1o yards of cloth per day, per person employed, then the cloth must sell for not less than 40 cents a yard in order that the 10 yards produced may bring an equal wage in the cloth industry. It is said, however, that protection is necessary in order that the domestic woolen cloth industry may exist, in order that those engaged in it may have em- ployment, and in order to keep up wages-in-general. The woolen cloth industry might not exist without protection, but if so, this is only because the persons engaged in it could do better in something else than they could then do in this industry. Protection keeps them in the industry only at the expense of others. The statement that protection keeps the industry in existence may be true, but it does not indicate any advantage of protection. And the other two alleged advantages of protection are simply non-existent. The persons engaged in the industry can have all the employment they want, without any tariff, if they will take for their services what these services would be worth, i.e., they can have the entire domestic market for their domestic cloth, and as much employment in 298 THE ECONOMICS OF TAXATION producing cloth as with the tariff, and can have it without tariff protection, if they will only sell the cloth for a low price and take as wages what such a price will yield. They will, perhaps, prefer to follow other lines rather than do this. But to say this is to say that there are opportunities of employment in such other lines. Indeed, to let cloth consumers buy their cloth abroad at 20 cents a yard, would save them the other 20 cents which they could then spend on other things. Also, it would enable foreigners to buy more American goods. Thus, in two ways would such pur- chase abroad contribute to the demand for American labor. We come, then, to the contention so familiar to our American public, that protection makes wages high. In the sort of case we are considering it may possibly raise the wages of some persons. But it can do so, if at all, only at the expense—normally the much greater expense—of other persons. Those cloth- producing wage-earners who could do no better in any other line than they could do in woolen cloth produc- tion under conditions of free trade, who could not earn in any other line more than $2 per day, would gain, by virtue of the tariff, 20 cents additional a yard or $2 additional a day. But this they would gain by the corresponding loss of those other workers, e.g., carpenters, brick-layers, iron-molders, mechanics and IMPORT AND EXPORT TARIFFS 299 farmers, who have to buy the cloth at the increased price. We may safely assert, then, that no protective tariff on goods which can be imported more cheaply than they can be produced at home, and as to which this condition remains indefinitely true, can possibly raise the wages of those producing such goods with- out taking an equal amount away from the consumers, who are, in the large, equally likely to be wage-earners. We have already found reason to believe, however, that average wages are actually lowered by a tariff. Most of the protected wage-earners, if protection were removed, would not need to stay in the woolen cloth industry and get only 20 cents a yard or $2 a day. They would be able to engage in other industries yield- ing more than this; some of them, perhaps, could earn $4 a day and under free trade the $4 would buy more. Under these circumstances the result of the tariff is to give much less—if anything—to the workers in the protected industry than it takes away from other workers. The tariff is a means by which some gain relatively littl—if anything at all—and by which others lose much. It is a means by which part of the people of the protectionist country get more than their services would otherwise command in the pro- 1Tf it be true, in practice, that part of the loss falls upon land- owners and capitalists in other lines, it may also be true that not all the gain from the protective tariff goes to wage-earners, 300 THE ECONOMICS OF TAXATION tected work and get it at the expense of their fellow citizens who have to buy goods at prices enhanced by protection. There is no intention to assert that there are not any respectable arguments for protection. The infant industry argument has been put forth as sometimes justifying protection. When fairly stated this argu- ment admits the economic loss from diverting people out of lines where they work most effectively, into other lines. But it asserts that the industries so started at a loss, may soon develop to a point where they need no protection. (Unfortunately, those in such industries seem seldom willing to admit that the industries have reached such a point.) If it were politically possible to select industries for protection solely on the basis of their chance of so developing, this argument for a protective tariff might have con- EE ee ee —— siderable weight. And perhaps as much or more may be said in favor of the development at home, at an economic loss if need be, of industries which seem essential to national defense. Nevertheless it remains true, in general, that a pro- tective tariff, as such, is a means of shutting out goods rather than of raising revenue; that, if completely effective in shutting out imports, it raises no revenue whatever for government; that it does raise the price of goods to consumers and that, therefore, the tax (if * i Ti = IMPORT AND EXPORT TARIFFS 301 the protective tariff be regarded as a tax) is collected from consumers by the protected producers rather than the government. § 3 When “the Foreigner Pays the Tax’ One minor qualification, however, it is necessary to make. The claim is sometimes advanced by protec- tionists who have not analyzed the phenomena of in- ternational trade, that “the foreigner pays the tax.” The fact is, as we have just seen, that, in general, the tax is paid by the domestic consumers in higher prices of the protected goods, that the tax goes to the domes- tic producers of these goods rather than to the taxing government, and that the domestic producers of these goods gain less—where they gain anything—than the consumers lose. Nevertheless, there is a theoretically possible case, not at all understood by most protec- tionists, under which the burden of a protective duty might be chiefly borne by foreign producers. Let us suppose that woolen cloth can be produced in the United States for 21 cents a yard and that cost of production of such cloth in the United States is constant (i.e., it costs no more per yard to produce a billion yards a day than to produce 50,000 yards). Then a tariff shutting out foreign cloth would not, 302 THE ECONOMICS OF TAXATION assuming no monopoly to be established, raise the price of cloth above 21 cents a yard. If, however, domestic industry is thus so far diverted into this line as to provide for the entire domestic demand, the government will receive no revenue. In order that the government should receive revenue some of the article must still be imported despite the tariff. Suppose, now, that the tariff is 10 cents a yard and that the cost of production abroad is 20 cents a yard. Then, if this foreign cost of production is constant, any or all of the foreign producers would go out of the business rather than sell in the United States for 20 or 21 cents a yard and so have only 10 or 11 cents a yard for themselves after paying the tax. But if production abroad is under conditions of increasing cost, part of the tax may be paid by for- eigners. Thus, suppose the first ro million yards of cloth produced abroad cost 11 cents a yard, the next million 13 cents, the twelfth million yards 15 cents, the thirteenth million yards 16 cents and so on up to 20 cents or more, the cost per yard of the last mil- lion yards necessary to supply the American market. Then a tax of 10 cents a yard, coupled with the pos- 7 sibility of production at home of any quantity of the cloth at 21 cents a yard (i.e., constant cost at home), would result in all land, Pe and capital abroad ceas- ing to produce cloth for export to the United States, | | | ; IMPORT AND EXPORT TARIFFS 303 except such land, labor and capital as could be kept in the industry at a net price of 11 cents a yard. On our present supposition there is enough land, labor and capital which could be kept in the business for that price, to make a total of 10 million yards. If, therefore, the American public can be supplied with domestically-produced cloth at 21 cents a yard and if 10 million yards can be secured from abroad for 21 cents (including the tax of 10 cents) or slightly less a yard, whereas to completely supply American needs from abroad would bring the marginal cost up to 30 cents a yard (net price 20 cents plus tax of ro cents), then after the tax the price to the American public could still not exceed 21 cents. ‘Those foreign pro- ducers who continued to be willing to turn their land, labor and capital into cloth production despite the decreased net return (only 11 cents after paying the tax) would be getting about 9 cents less per yard than before. So far as such a tariff might cause Americans to buy home-produced cloth instead of imported cloth, the government would get no revenue even though the price of the cloth was raised somewhat by the tariff. But so far as cloth was still imported, at a price as low as that of the domestically-produced cloth (viz., 21 cents a yard), the government would secure 10 cents on each yard and would secure it chiefly at the expense of the foreigners, whose net price received 304 THE ECONOMICS OF TAXATION would be 9 cents less per yard than if there were no tariff. It should be reasonably obvious, however, to the un- prejudiced student of international trade, that a tariff which at the same time protects a home industry, raises prices of the protected goods hardly at all and secures large revenue for government, is rather a theoretical possibility than a practically attainable goal. For it will hardly ever occur, if it ever occurs, that goods which can be produced at home under conditions of constant cost up to a large output, for nearly as little as their former price when imported, are produced abroad under conditions of increasing cost such that they will continue to be imported in large quantities at almost the same price after the tax is levied as before. In general, a tariff which protects is likely to raise considerably the price of the protected goods. Even if it does not, it is at least likely to substitute home production of these goods for foreign production to such an extent that the government gets no appre- ciable revenue. If, as a consequence of higher prices, revenue is received by the home producers of these goods, from the consumers, this revenue does not go to the government.’ 1For further consideration of the problems of international trade and protective tariffs and the various possible effects of protection on rent, wages, etc., the reader is referred to books dealing especially with these subjects, eg, the author’s book, Principles of Commerce, New York (Macmillan), 1916. IMPORT AND EXPORT TARIFFS 305 $ 4 Import Duties Levied Purely for Revenue The characteristic of an import duty levied strictly for revenue is that it is intended to get revenue rather than to protect. A strictly revenue duty would not provide any protection at all. It would not divert domestic industry into producing the kinds of goods on which the import duty was levied. The writer recalls once hearing the argument advanced by a per- son not familiar with economic principles, that a pro- tective tariff is necessary as a means of raising revenue. This view would be, of course, entirely erroneous even if the government had no sources of revenue but tariffs. So far as a protective tariff serves its primary purpose of keeping out foreign goods, it prevents the collection of duties on such goods. Even if foreign goods are not entirely excluded and there is some incidental revenue, this revenue could in every case be greatly increased by adjusting the tariff on a purely revenue basis. A tariff purely for revenue is not ~ necessarily a lower tariff than a protective one. But it is levied in such a way as to avoid, so far as possible, shutting out foreign goods, in order that the maximum revenue may be secured from the tax upon them. In order that a tariff may not exclude foreign goods, 306 THE ECONOMICS OF TAXATION it may be levied on either of two principles. It may, first, be levied only on goods which cannot, practically, be produced in the levying country, or—which comes to nearly the same thing—it may be levied on goods which cannot be domestically produced except at con- siderably greater cost than the price of the imported goods. In the latter case, the purely revenue tariff must be low enough so as not to offset the greater cheapness of the imported goods. ‘Thus, if a given kind of cloth can be imported into the United States for 20 cents a yard and can be manufactured in the United States for 50 cents, a tariff of 5 cents or 10 cents a yard would presumably not cause people to buy such cloth from domestic producers. It would, therefore, be a revenue tariff. But, second, a tariff might be levied on goods which had been imported for only a little less than the cost of producing them at home and the tariff might be very high; yet it might give no protection whatever but be strictly a revenue tariff. Such a tariff would be one accompanied by an equal tax on goods domes- tically produced. ‘Thus, if the cloth which could be imported at a price of 20 cents a yard (untaxed) would cost 25 cents if produced at home, a tariff of 5 cents or more a yard without any corresponding tax on the home-produced cloth would be protective. Such a tariff would cause production of the cloth at home _ OE . IMPORT AND EXPORT TARIFFS 307 even though some other industry or industries could be carried on to greater advantage, i.e., even though the cloth could be got in larger quantities for the same amount of work by trading for it other goods produced at home. But the tariff can be made for 10 cents or 20 cents a yard or any amount more without being protective provided the same amount of tax is im- posed on the cloth domestically produced. If the imported cloth is 20 cents a yard before the tax is levied and the tax (of, say, 20 cents) makes it cost 4o cents, it will still have an advantage over the do- mestically-produced cloth provided a like tax on the latter makes it cost 45 cents. High import duties, when similarly high taxes are levied on the domesti- cally-produced goods, presumably leave the choice of consumers between domestic and foreign goods, just as it was before.* 1The question may be raised, however, whether this result is quite as exactly achieved if a fixed amount is added, by the tax, to the price of both imported and domestic articles, as it would be by a tax of a fixed proportion of their former values. And, of course, a tariff ostensibly intended solely for revenue may conceivably provide protection for the domestic producers of a substitute article. 308 THE ECONOMICS OF TAXATION 8 5 Conditions Under Which a Duty Levied Purely for Revenue is Borne Exclusively by the People of the Levying Country The incidence of an import duty is comparable to the incidence of a tax on output of goods. The bur- den must fall upon the consumers if the goods are produced under conditions of absolutely constant cost * or if demand is absolutely inelastic. Thus, suppose a duty levied by the United States, for revenue, upon bananas. If any amount of the goods can be had at a price (excluding the tax) of 20 cents a dozen and if none of the producers of bananas will remain in the business at any lower price—i.e., if cost of produc- tion is constant—a tariff of 10 cents a dozen must raise the price by an exactly equal amount, viz., to 30 cents. But even if production is, as it most likely is in the case of bananas, under conditions of increasing cost, the entire tax will still be shifted upon consumers - if the demand is inelastic. For if a lower net price to consumers would cause even a slight decrease in the number of persons and the amount of land and capital devoted to producing bananas, and if demand 1 See, however, discussion in §6 of this Chapter (X). IMPORT AND EXPORT TARIFFS 309 is absolutely inelastic, then demand would exceed sup- ply at any price which failed to give producers the same net returns as if the tariff were not levied. In other words, given inelastic demand the consumers must bear the entire tax. | The money collected through such a tax is, of course, expended by the government which levies it. The tax does not add to the amount of money owed to foreign countries. It presumably does not appre- ciably affect the relative amounts of money in differ- ent countries.* It merely takes something from the consumers of the taxed article (or articles) and trans- fers it to the state. § 6 Conditions Under Which an Import Revenue Duty Might Rest in Whole or in Part upon Another Country or Countries than the One Levying the Duty There are, however, other circumstances, under which the burden may rest, in part, upon persons 1 The rise of the price of the taxed article might, according to a logical deduction from the theory of the relation between money and prices, lower, almost infinitesimally, the prices of other goods in the taxing country. This, in turn, might lead to a slight tem- porary increase of exports until the prices of these goods were in the same relation to the foreign prices as before. But the con- sumers in the taxing country would still, after this inappreciable readjustment, be paying the entire tax, 310 THE ECONOMICS OF TAXATION in the exporting country or countries. Consider our supposed duty on bananas. Suppose, also, demand to be elastic in the taxing country. Then the result of the tariff will be to reduce, somewhat, the net return received by the factors of production in producing countries. So long as consumers pay any part of the tax, their demand will be less than before. This means that the marginal men and the marginal land devoted to banana raising will be turned to other purposes or, in the case of some of the land, perhaps abandoned. But all those who would rather produce bananas or devote their land (or the land they hire) to the production of bananas even at a lower return than before, rather than turn to anything else, will continue to produce bananas even though such a lower return is received. Nevertheless the lower is the net return the smaller will be the output. If the price to consumers rises by the whole amount of the tariff, demand will be reduced and supply must ex- ceed demand. If the net price received by the pro- ducers falls by the whole amount of the tax, supply will be reduced and demand must exceed supply. Supply and demand will be equal only if consumers pay more and producers receive less than if the tariff were not levied. Just how the burden would be di- vided will depend on the conditions of demand and cost in the specific case. IMPORT AND EXPORT TARIFFS 311 - Even, however, if the cost of production of bananas were not an increasing cost in the sense above as- sumed, some of the tax—conceivably, indeed, more than the tax—might be abstracted from the people of the producing country (or countries). The condi- tions under which this might happen are somewhat complex and require careful attention. Let us suppose that the persons and the land en- gaged in banana production could be diverted to an- other line (or lines) the product of which would be domestically consumed, and could be so diverted to an indefinite extent without loss (constant cost) if these other goods could be marketed in larger quanti- ties at the prevailing price (or prices). But let us also suppose that practically the only external market for the bananas (or any other goods of the banana- producing country or countries) is the United States. And let us further suppose that the demand for bananas in the United States is extremely elastic— i.e., sensitive to price changes. The tax, by raising the price, diminishes ‘the American demand for bananas. The addition to the price, constituting the tax, goes to the United States government. It does not, therefore, involve any additional obligation in money to the sellers in the banana-producing country (or countries). And since the tax causes a decrease of American demand for the bananas, it must mean 312 THE ECONOMICS OF TAXATION an actual decrease of money obligation to the people of the banana-producing country (or countries). Less money is owed to them, but if their demand for Amer- ican goods is inelastic and these goods are unobtain- able elsewhere—save, perhaps, at much greater ex- pense—they may continue to buy from the United States even though their bananas sell in the United States in diminished quantities. This would mean, in time, relatively more gold and higher prices in the United States and relatively less gold and lower prices in the banana-producing territory. Since the amount of money securable for other goods and in other occu- pations in the banana-producing territory would now be less than before, banana producers would accept less than before and still remain in the business. Hence, Americans would be getting more for goods exported to the banana-producing territory and pay- ing less for their bananas. Part or all of the tax burden, or more,’ would rest on the people of the banana-producing areas.’ If any one objects to this mode of argument and 1See Mill, Principles of Political Economy, Book V, Ch. IV, § 6. 2Tf, in the United States, or the other country or countries, or both, the gold standard is not in effect, nevertheless the same results would be reached as regards relative exchange value of goods. See the author’s Principles of Commerce, New York (Macmillan), 1916, Part I, Ch. VI, §§ 6, 7, 8, and 9, and Part II, Ch. III, $3 (especially p. 47). IMPORT AND EXPORT TARIFFS S13 wishes to trace price changes directly to the change in American demand, we shall still reach the same final conclusion. The decreased demand for the taxed bananas will force either a lowering of their price or a reduced sale or both. The latter must drive some of the banana producers into other lines of pro- duction. The former will cause some of them to prefer other lines. But this will force down the prices re- ceived in these other lines—unless the money which would have been sent to America for American goods is now spent in the banana-producing region, so off- setting the decreased American demand for bananas. Unless this money is so spent, prices will fall in the banana-producing country or countries. But it is clear that this result (viz., a fall of prices in the banana-producing country, or countries) depends upon the people of the banana-producing areas continuing to buy American goods i.e., upon a flow of gold to America. American prices, on the contrary, would rise. Americans producing the goods wanted in the banana-producing areas would find money earnings in general in America and prices in general becoming higher than before and would be unwilling to remain producers of these specific goods except at higher prices than before. With prices in the banana-pro- ducing country or countries falling and prices in the United States rising, the amount of bananas that 314 THE ECONOMICS OF TAXATION Americans could get for a given quantity of the ex- ported goods exchanged for them might become greater by enough to partly pay the import duty or to entirely pay it or to more than pay it. In other words, the tax is partly paid, wholly paid, or more than paid by the people of the banana-producing region. The conclusion above arrived at can be established the more certainly, perhaps, if we assume the trade to be carried on by means of barter and if we assume the payment of the duty to be made in kind.* Let us suppose the trade to be of American cloth for Central American bananas and let us suppose it to be, before the tariff is levied, at the rate of 1 yard of cloth (of a given quality) for one dozen bananas, or 10 yards for 10 dozen. But the American demand for bananas is assumed to be elastic and the demand of the Central — Americas for cloth made in the United States is as- sumed to be inelastic. Suppose, now, a duty of 20 per cent. to be levied on the imported bananas and | payment to be demanded in kind. If American de- mand for the bananas is very elastic, sales of bananas 1 Under these circumstances, Professor F. Y. Edgeworth has concluded, mistakenly so in the view of the present writer, that ~ more loss than the amount of the tax could not be imposed by the tariff-levying country on the other or others. See Economic — Journal, Vol. VII, p. 307. See, also, criticism by the present — writer in Principles of Commerce, New York (Macmillan), 1916, © pp. 48 and 49, note. . IMPORT AND EXPORT TARIFFS 315 for cloth would greatly decrease provided any attempt were made to shift the burden of the duty upon the American banana consumers. But this means that the people of Central America would not secure the cloth for which their demand is assumed to be inelastic. To secure their cloth they might offer for it, not only the old price of 10 dozen bananas for 1o yards of cloth but also 2 dozen more of the bananas in pay- ment of the 20 per cent. tax. They would then be offering to Americans as individual buyers as many dozen bananas for a given quantity of cloth as before so that Americans should not, it may appear, hesitate to buy these bananas. But what is to become of the extra 2 dozen on each 10 dozen, the 2 dozen collected as a tax by the United States government? If the government needs other things rather than bananas, it must sell these bananas in order to get such other things. But if it sells them, its doing so will increase the available amount of bananas in the country be- yond what it would be without the duty. There are now available, therefore, not only the bananas sent in by Central America in exchange for cloth but also the additional bananas paid by the Central Americans to the United States government as a tax in kind in order that they may have the privilege of exchanging their bananas for cloth. But the availability of these additional bananas means that the marginal utility of 316 THE ECONOMICS OF TAXATION bananas to American consumers is less than if bananas were relatively scarce. Even though American demand is elastic in the sense that a higher price would greatly decrease sales, it may not be greatly responsive, by way of increased sales, to a reduced price. In any case, the larger number of bananas cannot be marketed on quite as good terms as could a smaller number. The bananas offered in payment of the tax enter into competition in the American market with the other imported bananas. Bananas will, therefore, have to sell at a lower price than if the tax-collected bananas were not also on the market. The offer of 10 dozen bananas, plus 2 dozen to pay the tax, will fail to secure for the Central Americans the desired 10 yards of cloth. The 2 dozen paid to meet the tax, by enter- ing into competition with the 10 dozen sent over to pay for the ro yards of cloth, will probably bring it about that the 10 dozen bananas will buy less than ro yards, e.g., 9% yards of cloth. If, then, demand. for the cloth is inelastic, even more bananas may have to be offered in order to purchase the desired amount of cloth. Whether, therefore, the tax is paid in money or in kind, the people of the banana-producing areas may, conceivably, have to pay the entire tax and, in addition, may have to pay more than before for their cloth. Our conclusions would be the same if the taxing IMPORT AND EXPORT TARIFFS 317 government wanted bananas for its own use. Getting these bananas by means of the tax it would not have to buy them with the proceeds of income taxes or other internal taxes. It would not have to bid against other consumers to get the bananas. Both individual American consumers and the American government had been, before, offering something for bananas. But after the tax is laid, only individual consumers would be offering anything for bananas and they would not buy as much as they and the government together had been buying. Indeed, with their demand elastic, they would buy even less than before if the cost of the bananas should be at all added to by the tax. The bananas paid to the American government in tax have to be paid by the people of the banana-producing regions else the elastic American demand for bananas would be cut down and the inelastic demand of the banana-producing population for Ameriean cloth would not be satisfied. But the bananas wanted by the gov- ernment had previously to be paid for, by taxes on the American people,’ presumably through the export of cloth. For this part of their banana export, the banana-producing population would no longer get cloth. But since their demand for cloth is assumed to 1 Since these taxes need no longer be collected it may be argued that individual consumers could afford to buy more bananas than before. But it is doubtful if most of their saving on taxes would go to satisfy this one desire among many. 318 THE ECONOMICS OF TAXATION be inelastic, they would try to get as much cloth as before and to do this they would have to offer more bananas. They might, therefore, have to offer these bananas at a slightly lower price in terms of cloth, besides paying the tax, thus really paying to the United States and its people more than the tax.* It should be emphasized that the assumed conditions under which the burden of an import duty would be paid mostly—or more than paid—by the people of the exporting country are conditions highly unlikely to be realized in practice. That the banana-importing country should have an extremely elastic demand which would contract greatly at slightly increased prices, while the other country (or countries) should have an inelastic demand for the products of the tax- ing country, is improbable. If this means that the — banana-producing country (or countries) is practi- cally limited to the duty-levying country for the sale of its bananas and the purchase of cloth—and it means — very nearly such a state of affairs—the improbability becomes almost an impossibility. For the people of any country to expect, then, that an import duty levied to produce revenue will be a burden chiefly on some 1 Should the government, having collected the tax in kind, de- stroy the bananas or use them for some new purpose, so that they did not come into competition either directly or indirectly with — the other imported bananas, then not more than the amount of the — tax could be lost by the people of the banana-producing areas. IMPORT AND EXPORT TARIFFS 319 other country or countries trading with it, would be foolish. And yet, under the assumed conditions of demand, such a consequence might conceivably be realized. In passing, attention may be directed to a like con- ceivable result in the case of the protective tariff. Restriction of imports by (say) the United States, by means of a protective tariff, might tend towards a temporary excess of exports and an inflow of gold. The consequent rise of American prices and slight fall of foreign prices might mean that Americans would get somewhat higher prices for goods still exported and would be able to buy such foreign goods as were not taxed by the protective system, at somewhat lower prices. But the main result would probably be that foreigners would purchase much more largely of each other rather than of us and that, by such restriction, we would lose a valuable trade. And, indeed, as to goods which seemed producible in the United States, such gain from lower foreign prices would probably tend to a demand for an extension of the protective tariff to them also. 1See Taussig, Principles of Economics, third edition, New York (Macmillan), 1921, Vol. I, pp. 523-526; cf. Brown, Principles of Commerce, Part II. 320 THE ECONOMICS OF TAXATION §7 The Incidence of Revenue Duties on Exports Let us now consider the possible incidence of duties on the exports of any country. Export duties have not, as a rule, been popular, perhaps because of the common notion that prosperity is gained by discour- aging imports but is lost by discouraging exports. What would be the incidence of a duty on exports, levied solely for revenue? Clearly, if the demand in foreign countries for the goods the export of which is taxed, is very elastic, most of the burden of the tax must fall upon the people of the taxing country. If the taxed goods exported are produced under con- ditions of increasing cost, a lower net price will drive out some of the marginal production factors. The production factors sufficiently above the margin will remain in even at such lower net returns.* But even if each unit of every factor of production is as ready to leave the industry as each other, the burden of the tax will rest on the people of the tax levying country provided foreign demand for the taxed goods is sufficiently elastic. Suppose the tax to be levied by the United States (after an amendment to 1Cf. Bastable, The Theory of International Trade, fourth edi- tion, London (Macmillan), 1903, p. 114. IMPORT AND EXPORT TARIFFS 321 the constitution permitting it) on exports of cloth. Such a tax would cause fewer sales abroad. The pur- chase, by Americans, of goods from the cloth-buying areas, e.g., of bananas, might for a time continue, es- pecially if American demand for these goods were inelastic. The outflow of money would mean that the - American cloth would sell at a lower price while the bananas might sell at a higher price because of the somewhat larger amount of money in the banana- producing territory. Then the people of the United States would be, indirectly, paying their own tax in part or in whole. But the burden would not be ex- clusively on the producers of the cloth. Indeed, this industry might conceivably be carried on under con- ditions such that, at any lower return than before relatively to returns in other lines, the factors en- gaged in it would all withdraw. But the smaller amount of money in the United States would mean lower money returns in all lines carried on there, while higher prices than before would have to be paid for the imported bananas. The lower money income of Americans would be compensated, so far as they con- sumed American goods, by lower prices of these goods. The burden of the tax would fall upon them in pro- portion as they were consumers of bananas. Leaving out the flow of gold and assuming the trade to be barter we would reach a like conclusion. A 322 THE ECONOMICS OF TAXATION tax on the exported cloth would have to be paid, in large part, by the exporting country, else the inelastic demand of its people for bananas would not balance against the elastic demand of the people of the banana- producing areas for cloth. But more than this tax would not have to be paid by the people of the United States. For if the tax were all paid by the people of the cloth-producing country, i.e., the United States, the people of Central America would be getting their cloth at the same price as formerly in relation to their bananas and might reasonably be expected to buy as much of the cloth as if there were no tax. Except that the general level of prices would be, in Central America, slightly higher than before, conditions would be for them the same as if there were no tax. Part or the whole of the burden would, in these circum- stances, fall on the people of the levying country. More than the cost of the tax could not so fall. Consider, now, the case of an export duty when there is an inelastic demand abroad for the goods so taxed. Such an inelastic demand for American cloth might be due, partly, to an American monopoly of cloth production and partly to the existence of a total demand which would be almost the same through a considerable range of prices. Then a tax on the ex- ported cloth might impose a burden on the people of the buying country or countries more than the IMPORT AND EXPORT TARIFFS 323 amount of the tax. If this taxed cloth is produced, in the United States, by labor, capital and land, most of which would be withdrawn to other industries should the net yield diminish, then in order that the cloth should still be produced, the price must rise so that these factors would get about as much net as before, despite the tax. Otherwise, the inelastic foreign demand would not be satisfied. But such a rise in the price of the cloth would mean an increased flow of gold to the United States and higher money prices and incomes. Hence, a price for cloth higher than before by more than the tax would be necessary in order to keep cloth producers in the business. The people of the United States would then be getting the export tax paid by foreigners and would be get- ting, in addition, perhaps, more of other goods, e.g., bananas, for their cloth than before. Money prices in the banana-producing areas would tend to be some- what lower because of the flow of gold consequent on the tax,’ and this would mean that Americans might get their bananas slightly cheaper than before. But if American demand for bananas proved to be very sensitive to price reduction or to the increased money incomes of Americans, so that more bananas were 1 This effect would in practice be minimized for Central America by being spread over all the rest of the world outside of the taxing country. 324 THE ECONOMICS OF TAXATION purchased than prior to the tax, then any considerable flow of money into the United States would not take place. If, on the other hand, although higher banana prices might discourage American buying, lower prices would not increase it, then such a tax on the ex- portation of cloth might make the price of bananas in terms of cloth very favorable indeed to American purchasers of the bananas.* Putting our problem in terms of barter economy, let us suppose that the people of the banana-pro- ducing areas, having an inelastic demand for American cloth, pay the entire tax. To do so they will have to sell more bananas. But this will lower the mar- ginal utility of bananas to the American consumers. Hence, that the desired cloth may be secured, more bananas may have to be sent than the number pre- viously sent plus the number sent to pay the tax. A government levying an export duty on a product not securable in any appreciable amounts in other countries is in a position somewhat analogous to a monopolist fixing a price on his product. It is true that the fact of some commodity being produced only in one country does not in itself mean monopoly or a high price for the commodity. The different pro- ducers and producing factors within such a country 1 Note discussion in Mill, Principles of Political Economy, Book Vell VO; IMPORT AND EXPORT TARIFFS 325 may compete actively for export sales. A price to yield higher returns than are yielded in other lines in that country would tend to divert industry into such a relatively remunerative line; and such diver- sion would tend to keep down the price of the output of such a line. But a high export tax levied by a government tends to raise the price of the goods to foreign buyers—particularly if they have an inelastic demand for such goods and cannot secure them else- where—without increasing, or even while decreasing, the output. It is not the producers of the exported goods who get the money from the tax, but their government. If the tax is, in the last analysis, paid by foreign purchasers of the taxed goods, there is a clear gain to the people of the exporting country. For they receive the benefit of government services the cost of which they do not bear. But this gain is general to the people of such a country. It gives the producers of the goods on which an export duty is laid no relative advantage. We need not suppose, therefore, that it increases the output of these goods in relation to the country’s other products. Indi- vidual producers of such exported goods have no monopoly. But the government, by virtue of an ex- port tax, may, under the assumed conditions, reap a gain analogous to monopoly profit. And the same problem may conceivably face such a government that 326 THE ECONOMICS OF TAXATION faces a monopolist, the problem of deciding what rate will yield the largest net gain. There may be many cases where a government could get something from foreigners through the levy of an export tax. Even if the taxed goods are securable elsewhere, they may not be securable elsewhere in considerable quantities except at an appreciably higher cost. But it is unlikely that there are any consider- able number of cases where a government can thus realize large amounts at the expense of foreign con- sumers. For there are, usually, alternative sources of supply significant enough so that any considerable export tax—if the burden could not be borne by the home producers—would cost the taxing country most of its export trade. If it were easy and practicable for governments to raise money by imposing taxes the burden of which would rest on foreigners and if this were generally understood, the game would be one at which all might play with, perhaps, net advantages to none. The actual possibilities, however, are not very promising. § 8 Summary In this final chapter we have considered taxes on imports and taxes on exports. Taxes on imports are IMPORT AND EXPORT TARIFFS 327 frequently levied for protection rather than for rev- enue. They are then intended to prevent or greatly to curtail the importation of the foreign goods subject to the tax and to give the home market to home pro- ducers. Industry is thus diverted out of the lines. it would otherwise follow, into less profitable lines. There is a net loss of productive power and of total consumption. An import duty levied only to secure revenue for government may be on goods not produced in the levying country or may be levied at an equal rate on imported and on the competing domestically-pro- duced goods. Such a duty on imports will, if demand for the imported goods is relatively inelastic or if there are other available markets of importance for them, rest almost wholly on the consumers of these goods in the tax-levying country. If demand for the taxed goods is very elastic, if they cannot easily be marketed elsewhere, if the goods exported by the levy- ing country are not easily obtainable from other places and if the foreign demand for these goods is com- paratively inelastic, then a considerable part or all of such a tax may conceivably rest on foreigners. Indeed, it is conceivable—though highly improbable— that the people in the foreign country or countries concerned may suffer a loss greater than the tax. A duty on exports may also, under various assumed 328 THE ECONOMICS OF TAXATION conditions, rest chiefly on the people of the levying country or on foreigners. Here, too, it is conceivable that foreigners may bear a loss in excess of the tax. But, in practice, the people of each country are likely to have to bear, in the main, the expense of their Own government and are not likely, either by import or by export duties, to be able to impose these expenses In any great degree upon foreign consumers of their products. Instead, either import or export duties | would be likely in nearly all cases, to rest on con-— sumers, in the tax-levying country, of imported goods. _ Such duties therefore are, in effect, like commodity taxation in general. Consumers are almost certain to bear them in large part and may bear them almost wholly. : CHAPTER XI CONCLUSION We began our inquiry into the probable effects of the adoption of various revenue-raising policies, by considering the incidence and effects of government finance through monetary inflation. Such inflation we saw to be, really, a sort of concealed taxation. Next we examined into the nature and endeavored to com- prehend the principal consequences of government borrowing. The remainder of the book was devoted to a consideration of the incidence and effects of taxes generally recognized as such. We considered taxes on commodities or sales under conditions of competi- tive and monopolistic production and under conditions of constant, increasing and decreasing cost. We then discussed the ultimate incidence of taxes levied di- rectly upon or shifted to labor incomes or wages, and, immediately after this, the incidence of compulsory workmen’s insurance. Taxes on capital and on the income of capital were next considered; then taxes on land and taxes on sales of land and capital and 329 330 THE ECONOMICS OF TAXATION on loans. Finally, the possible incidence of import and export duties was studied and, in that connec- tion, brief consideration was given to the purposes and effects of a so-called “protective’’ tariff. Are we prepared to make any positive application of our investigations? The intention of the author is to make no such application, but to leave for the reader the making of whatever application may seem to him proper. One comment of a negative nature in regard to this matter may, however, be hazarded, for the purpose of bringing out with greater distinct- ness the point of view from which this book has been written. | The comment in question is that there is no obvious support in the argument of the book for the so-called “ability” or “equal sacrifice” theory of taxation. Whether there is, in the book, any not obvious but nevertheless discoverable support for this theory, we need not here attempt to say. Our purpose has been to arrive at cause and effect relations, to find out, so far as we could, what effects various kinds of taxes would be likely to produce. We have considered pos- sible effects on production and prices, on capital ac- cumulation, on population, on land values, on trade. No study of this sort can possibly, in and of itself, determine for us what sort of tax system we want. We may desire that commodity prices shall be raised, © CONCLUSION aor that capital accumulation shall be furthered or re- tarded, that trade shall be discouraged, that land values shall be high—or low. We may desire a society in which there is a comparatively equal or a compara- tively unequal distribution of wealth. We may desire a society in which the obstacles in the way of the ambitious poor who are anxious to get a start in life and to acquire some property are very great or a society in which these obstacles are reduced to a min- imum. We may desire a society in which incomes received are in some proportion to services rendered, or a society in which they are inversely proportional to services rendered, or a society in which they de- pend upon position or prescription, or a society in which they are in proportion to needs. To say that taxation ought to impose “equal sacrifice” on all citi- zens—ought to be in proportion to “ability” —may be to assume, not only that possible effects on the rate of accumulation are of relative unimportance, but also that nothing should be changed of the general con- ditions determining the distribution of wealth and in- comes, or, at least, that taxation should never be levied with any regard to effecting or contributing to any such change. In short, the kind of taxation a given person will favor depends both upon what sort of results he wants accomplished—what kind of economic society seems to 332 THE ECONOMICS OF TAXATION him ideal—and upon his understanding of cause and effect relationships in the field of taxation. Some- times persons disagree regarding the kind of taxation they favor because they disagree regarding the re- sults which they wish to secure. But, in other cases, there is disagreement regarding the desirability of vari- ous taxes because some or all of the parties to the controversy do not understand what effects these taxes would tend to produce. They support or oppose taxes of various kinds, ignorantly, favoring what would produce effects the reverse of those they desire, and opposing what would produce the very consequences they profess to want. The present volume is not intended to lay down ideals of the organization of economic society. Else- where the author has indicated, somewhat, his own point of view.t Here he has endeavored to keep his point of view in the background, avoiding not only any pronouncement as to how welfare is to be secured, but, even, any pronouncement as to whether the com- mon welfare, or the welfare of some limited group (vested rights?) or no welfare at all, should be a goal of effort. The purpose, here, has been to combat only 1See relevant passages and chapters in Economic Science and the Common Welfare, Columbia, Mo. (The Missouri Book Com- pany), 1923. See, also, The Taxation of Unearned Incomes (The Missouri Book Company), 1921. erg CONCLUSION B39 ignorance and fallacious logic in the realm of cause and effect. Indeed, science, as such, can, in this field,* do no more. If this purpose has been accomplished, though imperfectly and in but a limited degree, the study made will not, perhaps, have been wholly use- less. 1 In some inquiries, laws of coexistence are sought after as well as laws of sequence. a“ ry oi cay Tah sate Wa eb a ay , ve (0 ae a rimt | A i a y INDEX A Ability, theory of taxation ac- cording to, 198-201, 330-333 Accumulation, do all taxes dis- courage, 262-265 Adams, H. C., Finance, criti- cized, 107-8n. Adams, T. S., article by, cited, 183 Anderson, F. F., article by, cited, 31 n. Austria, monetary inflation in, 17 n. B Bastable, The Theory of Inier- national Trade, cited, 320 Bias, influence of, even on trained economists, 8-9 Bonds, of government, are they a mortgage of the masses to the classes, 42-46 Borrowing, by government, and inflation, 46-50; by govern- ment, the nature of, 28-30; by government, the ultimate incidence of, 28-52 Brown, article by, cited, 268- 9n.; Economic Science and the Common Welfare, cited, 68, 253, 202, 332; Principles of Commerce, cited, 304, 312, 314, 319; The Taxation of Unearned Incomes, cited, 332 _ Budget, nature of problems concerning, 7-8 Business, “as usual,’ in war time, 30-37 c Capital, the incidence of taxes on, in general, as distin- guished from taxes on when used in some but not all in- dustries, 184-198; incidence of taxes on, when used in some as distinguished from all industries, 178-184; inci- dence of taxes on, and on the income from, 178-212; levy on, to pay off war debts, dis- cussed, 45; possible net loss to community from tax on, 201 Capital goods, shifting of taxes on sales of land and, and on loans, 267-288 Capitalization, taxation and, 236-246; of taxes on future increases in value of land, 244-246; of a tax, when does it take place, 248-254 Carver, War Thrift, cited, 30 n. Cassell, The Nature and Neces- sity of Interest, cited, 186 Clark, The Distribution of Wealth, cited, 180; criticized, PRE ORR Te 337 338 Commodity, long-run incidence of a tax on, when produced by a monopoly under condi- tions of diminishing cost, 123-132. See Commodities Commodities, competitively pro- duced, taxes on, 53-96; in- cidence of a tax on, when produced by monopoly, in the short run, 118-123. See Com- modity Competition, taxes on com- modities produced under con- ditions of, 53-96 Compound taxes, incidence of, 258-262 Constant cost, incidence of a tax on commodities competi- tively produced under condi- tions of, 59-63, 67; incidence of a tax on commodities monopolistically produced un- der conditions of, 102-108 Consumers, how paper-money inflation taxes, 14-20 Corporations, discriminated against, by the Federal “ex- cess-profits” tax of 1919, 206- 207 ; taxes on sales of securi- ties of, 284-287 Cost, constant, or elastic sup- ply, nature of, 56-59; inci- dence of a tax on commodi- ties competitively produced under conditions of constant, 59-63, 67; incidence of a tax on commodities monopolisti- cally produced under condi- tions of constant, 102-108; in- cidence of a tax on commod- ities competitively produced under conditions of decreas- ing, 86-94; incidence of a tax on commodities competitively produced under conditions of INDEX increasing, 73-86; incidence of a tax on the output of a monopoly under conditions of increasing, 110-118; long-run incidence of a tax on a commodity produced by a monopoly under conditions of diminishing, 123-132; increas- ing, the nature of, 68-73; monopoly and increasing, 108- 109, 109-I2n.; production by a monopoly under conditions of diminishing, 118-123; short-run incidence of a tax on the output of a monopoly under conditions of diminish- ing, I2I-123 D Davenport, cited, 30n.; article by, cited, 39, 44; article by, cited, 226; article by, criti- cized, 217n.; suggestion by and article by, cited, 183; The Economics of Enterprise cited, 68 Decreasing cost, incidence of a tax on commodities competi- tively produced under condi- tions of, 86-94. See Dimin- ishing cost Demand, elastic, for the prod- ucts of lines of industry in which there is compulsory in- surance of labor, in connec- tion with the incidence of such insurance, 170-176; in- elastic, for the products of lines of industry in which there is compulsory insurance of labor, in connection with the incidence of such insur- ance, 165-169 INDEX Diminishing cost, long-run in- cidence of a tax on a com- modity produced by a mo- nopoly under conditions of, 123-132; production by a monopoly under conditions of, 118-123; short-run inci- dence of a tax on the output of a monopoly under condi- tions of, 121-123. See De- creasing cost Duty, on imports, for revenue, when its incidence is purely upon the people of the levy- ing country, 308-309; on im- ports, for revenue, conditions under which it may rest upon another than the levying country, 309-319. ties, Tariff Duties, import, levied purely for revenue, 305-307; for revenue, on exports, inci- dence of, 320-326. See Duty, Tariff E Edgewerth, III; article by, criticized, 314 n. Effect, possible, in decreasing utilities, of a tax on com- modities competitively pro- duced, 95; in loss of utility, from permitting high prices in order to tax monopoly, 133. See Effects Effects, of taxes, will they dis- courage accumulation regard- less of what the taxes are, 262-265; of taxation, aside from shifting and incidence, importance of considering, article by, cited, cited and See Du- 339 11-13; in the way of possible net loss to community, from tax on capital, 201; of taxes on sales of corporation se- curities, 285-287; of taxes on sales of land, 276. See Ef- fect Excess profits, evasion of taxes on, 207-208; incidence of taxes on, 202-208; taxes on, as discriminating against cor- porations, 206-207 Evasion, of “excess tax, 207-208; of taxes on mortgages and other per- sonal property, 283-284 Expenditures, of government, relation of revenues to, 5-8 Export, and import tariffs, in- cidence of, 289-328. See Ex- ports Exports, incidence of revenue duties on, 320-326 profits” F Finance, significance of taxa- tion in public, 3-13 Financing war, can burden of, be imposed on posterity, 37- 42 Fisher, The Purchasing Power of Money, cited, 21 Functions, of the state, 3-5 G Gephart, article by, cited, 283 Germany, tonetary inflation in, 16n., 17n., 20 Government, borrowing of, 28- 30; borrowing of, and its ulti- mate incidence, 28-52 340 INDEX Government bonds, are they a mortgage of masses to classes, 42-46 H Haig, R. M., article by, cited, 224 Hayes, H. G., article by, cited, 254 I Import, duty for revenue, when its incidence is on the people of the levying country, 308- 309; duty for revenue, condi- tions under which it may rest upon another than the levy- ing country, 309-319; and export tariffs, incidence of, 289-328 Incidence, of compulsory insur- ance of workmen, 158-177; of compulsory insurance of workmen, statement of the problem of, 158-160; of com- pulsory insurance of work- men when insurance is re- quired in all trades or occupations, 160-163; of com- pulsory insurance of work- men when insurance is re- quired in some lines and advantages are realized by workmen, 164-165; of com- pulsory insurance of work- men when insurance is re- quired in some lines and advantages are not realized by workmen and when de- mand for the products of these lines is inelastic, 165- 169; of compulsory insurance of workmen when insurance is required in some lines and advantages are not realized by workmen and when de- mand for the products of these lines is elastic, 170-176; shifting and, of taxation, 9- Il; of compound taxes, 258- 262; of government borrow- ing, 28-52; of taxes on capital and the income from capital, 178-212; of taxes on capital in general as distinguished from taxes on capital when used in some but not all in- dustries, 184-198; of taxes on capital used in some as dis- tinguished from all indus- tries, 178-184; of a tax on commodities competitively produced under conditions of constant cost, 50-63, 67; of a tax on commodities competi- tively produced under con- ditions of decreasing cost, 92-94; of a tax on commodi- ties competitively produced under conditions of increas- ing cost, 73-86; extreme pos- sibilities of, in the case of a tax on commodities monopo- listically produced, 97-102; of a tax on goods produced by a monopoly under condi- tions of regular demand and constant cost, 102-108; in the long run, of a tax on a com- modity produced by a monop- oly under conditions of di- minishing cost, 123-132; in the short run, of a tax on the output of a monopoly under conditions of diminish- ing cost, I2I-123; of a tax on INDEX 341 the output of a monopoly operating under conditions of increasing cost, 110-118; of taxes on “excess profits,” 202-208 ; of taxes on inherited wealth, 208-210; of taxes on labor incomes, I41-157; of taxes on surplus or unusually high labor incomes, 153-155; of taxes on land, 213-266; of taxes on land used for specific defined purposes, 213- 215; of taxes on land values or economic rent, 215-236; of taxes on land according to quantity, 255-258; of a tax on monopoly in proportion to gross returns, 135-140; of a tax on monopoly net profits, 132-133; of taxes on mort- gages and on loans in gen- eral, 276-283; of monetary in- flation considered as a kind of taxation, 14-20; of a rev- enue import duty, when purely on the people of the levying country, 308-309; of a revenue import duty, when it rests upon another than the levying country, 309-311; of import and export tariffs, 289-328; of revenue duties on exports, 320-326; of taxes on sales of land, 267-276; of taxes on sales of corporation securities, 284-285; of taxes on wages in general, 141-147; of taxes on all wages in any ~one line, 47-153. See Shift- ing Income, incidence of taxes on the, from capital, 178-212. See Incomes Incomes, of labor, incidence of taxes on surplus or unusually high, 153-155; incidence of taxes on labor, 141-157. See Income, Capital, Labor, Land, Wages Increasing cost, incidence of a tax on commodities competi- tively produced under con- ditions of, 73-86; incidence of a tax on the output of a monopoly operating under conditions of, 110-118; mo- nopoly and, 108-100, 109- I2n.; the nature of, 68-73 Increments, of land _ values, capitalization of tax on, 244- 246 Inflation, borrowing of govern- ment and, 46-50; monetary, a species of taxation, 14-27; of paper money, how it taxes consumers, 14-20; unequal ef- fects of, on the welfare of different economic classes, 2I- 26 Inheritance, incidence of taxes on, 208-210 Insurance, advantages of com- pulsory, of workmen, against accident, 174-175; incidence of compulsory, of workmen, 158-177; incidence of com- pulsory, of workmen, when insurance is required in all trades or occupations, 160- 163; incidence of compulsory, of workmen, when insurance is required in some lines and advantages are realized by workmen, 164-165; incidence of compulsory, of workmen, when insurance is required in some lines and advantages are not realized by workmen and when demand for the products of these lines is in-~ 342 elastic, 165-169; incidence of compulsory, of workmen, when insurance is required in some lines and advantages are not realized by workmen and when demand for the prod- ucts of these lines is elastic, 170-176; statement of the problem of incidence of com- pulsory, of workmen, 158- 160 L Labor, incidence of taxes on incomes from, I4I-I57; inci- dence of taxes on surplus or unusually high incomes of, 153-155. See Wages Land, capitalization of taxes on future increases in value of, 244-246; incidence of taxes on, 213-266; incidence of taxes on, when land used for specific defined purposes, 213- 215; incidence of taxes on, according to quantity, 255- 258; incidence of taxes on, according to value, 215-236; the shifting of taxes on sales of, on sales of capital goods and on loans, 267-288; taxes on sales of, 267-276, See Rent Loans, in general, taxes on mortgages and, 276-284; the shifting of taxes on sales of land and capital goods and on, 267-288 M Marshall, Principles of Eco- nomics, cited, 88, 102, 228 INDEX Mill, Principles of Political Economy, cited, 150, 312, 324 Monetary inflation, a species of taxation, 14-27 Money, paper, how inflation by, taxes consumers, 14-20 Monopoly, and increasing cost, 108-109, I09-I2n.; when a tax on goods produced by, causes a price rise of just half the tax, 102-108; inci- dence of a tax on output, un- der conditions of diminishing cost, in the short run, 12I- 123; long-run incidence of a tax on a commodity produced by a, under conditions of di- minishing cost, 123-132; inci- dence of a tax on output of, under conditions of increasing cost, 110-118; incidence of a tax on, in proportion to gross returns, 135-140; possible ef- fect in loss of utility to would-be buyers, from per- mitting high prices in order to tax, 133; production by a, under conditions of diminish- ing cost, 118-123; taxes on commodities produced under conditions of, 97-140; a tax on the net profits of, 132-133 Mortgage, are government bonds a, of the masses to the classes, 42-46. See Mort- gages Mortgages, evasion of taxes on, and on other personal property, 283-284; taxes on, and on loans in general, 276- 284; taxes on, and on other evidences of ownership, a case of double taxation, 283- 284. See Mortgage INDEX iS Paper-money inflation, how it taxes consumers, 14-20 Posterity, can the burden of financing a war be imposed on, 37-42 Prices, commodity taxation and the general level of, 63-67 Production, by a monopoly un- der conditions of diminishing cost, 118-123 Profits, discrimination against corporations from taxes on “excess,” 206-207; evasion of taxes on “excess,” 207-208; incidence of taxes on “ex- cess,” 202-208 Protective tariffs, nature and purpose of, 290-301; revenue tariffs versus, 289-290; when “the foreigner pays the tax,” 301-304 Public finance, significance of taxation in, 3-13 R Rent, arguments for and against the taxation of eco- nomic, 238-244; incidence of taxes on economic, 215-236; the taxation of economic, as the only way of preventing individual receipt of it under the competitive individualistic system of business, 233-236. See Land Revenue, incidence of duties on exports for, 320-326; import duties levied purely for, 305- 307; import duty for, when its incidence is upon the peo- ple of the levying country, 308-309; import duty for, 343 conditions under which it may rest upon another than the levying country, 309-319; versus protective, tariffs, 289- 290. See Revenues Revenues, of government, rela- tion of, to expenditures, 5-8 S Sales, of corporation securities, taxes on, 284-287; of cor- poration securities, effects of taxes on, 285-287; of land, taxes on, 267-276; of land and capital goods, shifting of taxes on, and on loans, 267- 288 Seager, article by, cited, 220 Securities, taxes on sales of corporation, 284-287; of cor- porations, effects of taxes on sales of, 285-287 Seligman, article by, cited, 250; The Shifting and Incidence of Taxation, cited, 67, 150, 250; The Shifting and Inci- dence of Taxation, criticized, 249-254, 7I-2n. 76n., 770, 83 n., 86-7 n., 92 n. Shifting, of a tax on commodi- ties competitively produced, in the long and short run, 81-86; of taxes on sales of land and capital goods and on loans, 267-288; and inci- dence of taxation, significance of study of, 9-11. See Inci- dence Sprague, O. M. W., cited, 30n.; article by, cited, 39 State, functions of, 3-5 Supply, elastic, nature of con- stant cost or, 56-59 3.44 fh Taussig, Principles of Eco- nomics, cited, 158, 161, 319 Turgot, Reflections on the Ori- gin and Distribution of Riches, cited, 146 Tariff, incidence of import and export, 289-328; nature and purpose of a protective, 290- 301; revenue versus protec- tive, 289-290. See Duties, Duty U Utilities, possible effect of a tax on commodities competi- tively produced in decreas- ing, 95. See Utility INDEX Utility, possible effect in loss of, from permitting high prices in order to tax monop- oly, 133. See Utilities W Wages, in general, incidence of taxes on, I4I-147; in any one line, incidence of taxes on, 147-153. See Income, In- comes, Labor War, “business as usual” in time of, 30-37; can burden of financing a, be imposed on posterity, 37-42 Workmen, incidence of com- pulsory insurance of, 158- 177. See Incidence, Insur- ance mae Hi ly . i, ra it 9 l i Tal : Ni he i peal an bed Dis 7% i i Dag 7 Ny 5 a J . ; 7 bee ’ f j mea ‘ 1 ! 1 | if i, 4 L@ iy iy 4) Aa Na) ‘he iw ks) AAR A ae ' > i Pi Me | Lay Sn ‘ Ni ee Aue Lyne, Lane 4, «iin