form of administration. It is logical, for example, that they who represent monarchial governments should accept the necessities of the state as the true measure of legitimate expenditures, without having very much regard for the concurrent needs of individuals. It is easy, also, under such a social theory, for the spirit of paternalism to show itself in many of the items of a budget, and for the thought that the state is an industrial corporation as well as a political organization to swell the proportion of public expenditures.

The view of social relations which underlies English common law, on the other hand, works upon national expenditure in quite another manner, at least so far as those appropriations are concerned which minister to pride and foster bureaucracy, or which are related to the exercise of paternal functions. According to this theory a condition of liberty is conceived to be a heritage of the individual. The state is not regarded as an organism in the sense that it possesses soul, conscience, and sensibilities of its own; it is rather a form of association, and differs mainly from ordinary associations in the character of the service it has to perform, and in the fact that these services are of such a sort as require the state to be the depository of coercive power. Public concessions are judged from the point of view of the interest of the individual, and are approved or disapproved according as they bear upon his prospects. The result of this philosophy of social relations among peoples who practice self-government is to insist that the government prove its case beyond the possibility of a doubt whenever it demands increased. expenditures for approved services or the approval of expenditures for an unusual service. Greater reliance is placed upon voluntary association for the attainment of collective interests than upon coercive association. And this results inevitably in charging the cost of many lines of service to the income account of private corporations rather than to that of the state. In this manner, therefore, public expenditures are curtailed by virtue of individualistic philosophy applied to governmental affairs.

338. Taxation as a Means of Social Control2

BY ADOLPH WAGNER

The modern science of economics not only recognizes the mutual dependence of public and private economic activity, and their mutually complementary character; it also renounces the optimistic view of the present organization of private industry, and recognizes the Adapted from Finanzwissenschaft, I, paragraph 27, and II, paragraph Translated in Bullock, Selected Readings in Public Finance, 178-181

159.

(1883)

great evils in the system of free competition. It has come to know that the organization of productive industry by private initiative, and the distribution of wealth which takes place upon this basis have a decisive social influence. It knows that through this process the power and relations both of individuals and of classes are determined in modern economic society. At the same time our science recognizes the influence which the state exercises directly and indirectly upon the distribution of wealth and position of social classes, by the form which its activity takes, by the manner in which it spends its revenues, by the kinds of taxation it adopts, and by the creation of public debts.

From the knowledge of our science have developed two demands. In the first place, the state should so order its expenditures, tax system, and loans as to remove certain economic and social evils which have attended them in the past. And in the second place, the state, by adopting appropriate policies, should remedy evils which are not due to its previous action in financial and other matters. From this second demand it follows that, in the domain of public finance, expenditures should increase in order to enable the state to assume new functions; and that taxation should be employed for the purpose of bringing about a different distribution of wealth from that which would result from the action of free competition upon the basis of the present social order. It is the modern social problem which is here beginning to work this transformation in the science of finance.

One who considers the present system unconditionally just, as the liberal school did, must logically consider the existing distribution of wealth, which results from this order, as the only righteous and just distribution. This conclusion the keener thinkers of the school have formulated. For a person of this school the existing distribution of wealth is a fact admitting of no further discussion. It follows then that taxation should not alter the existing distribution. In this view of the case, therefore, taxation should be con fined to the purpose of raising sufficient revenue; and the sociopolitical theory of taxation should be rejected.

But, if one disputes the premises underlying the teachings of the liberal school, he can insist that the conclusion that the distribution established by competition is not to be disturbed by taxation is not universally true. We need beside the purely fiscal theory of taxation, to establish a second,—the socio-political, by which a tax becomes something more than a means of raising revenue, and is considered a means of correcting that distribution of wealth which results from competition.

339. Taxation and Technical Development

BY J. R. MC CULLOCH

It is unnecessary to travel beyond the limits of financial history for examples of the powerful influence of taxes in stimulating ingenuity and invention. Previous to 1786 the duties on spirits distilled in Scotland were charged according to the quantities supposed to be actually produced. But as this mode of assessing the duty was found to open a door to extensive frauds, it was resolved in its stead to substitute a license duty proportioned to the size of the still used by the distiller. Stills being all of the same shape, and the quantity of spirits that each could produce in a year according to its cubic contents having been accurately calculated, it was supposed that this plan would effectually prevent smuggling, and that the officers would have nothing to do but inspect the stills that had been licensed, to prevent their size being increased. On the first introduction of this apparently well-considered system, the license duty on each still was fixed at the rate of 30s per gallon of its contents.

The principle, however, on which the duty was assessed was very soon subverted. The stills in use down to this period were very deep in proportion to their diameter, so that after being charged they required at an average about a week before the process of distillation was completed. But the new mode of charging the duty had no sooner been introduced than it occurred to two ingenious persons, Messrs. John and William Sligo, distillers, Leith, that by lessening the depth of the still and increasing its diameter, a larger surface would be exposed to the action of the fire, and they would be enabled to run off its contents in considerably less time. Having adopted this plan, they found that it answered their expectations, and that they were able to distil the same quantity of spirits in a few hours that had previously occupied a week. Messrs. Sligo kept this important invention secret for about a year; but it was too valuable to be long concealed, and the moment it transpired, the plan was adopted by other distillers. In consequence government raised, in 1788, the license duty on the still from 30s to £3 a gallon.

This increase having redoubled the activity of the distillers, the duty was raised in 1793 to £9 a gallon, in 1795 to £18, and in 1797 it was carried to the enormous sum of £54 a gallon. Still, however, the ingenuity of the distiller outran the increase of the tax; and it was proved before a committee of the House of Commons in 1798 that distillation had been carried to such perfection that stills had

Adapted from Treatise on Taxation, ed edition, 151-152 (1852).

occasionally been filled and discharged once every eight minutes. This, it was supposed, must be the maximum of velocity, and a new license duty was laid on the still on the hypothesis that it could, at an average, be run off in that time, or that it could be filled and emptied once every eight minutes during the season. But the ingenuity of the distillers was not yet tasked to the highest. And it was ascertained that, toward the latter end of the license system, stills of forty gallons had been, at an average, filled and run off in the almost incredibly short space of three minutes, being an increase of 2,880 times on the rapidity of distillation that had obtained when the license system was introduced in 1786!

Now it will not be alleged, at least with any appearance of probability, that had a duty of 5 or 10 per cent been laid on their income or capital, Messrs. Sligo would have been half so likely to make this important discovery. But being assessed on the still, the duty had the double effect of fixing attention especially on it, and of operating as a powerful incentive to its improvement.

B. THE THEORY OF TAXATION

340. Canons of Taxation⭑

BY ADAM SMITH

It is necessary to premise the four following maxims with regard to taxes in general:

I. The subjects of every state ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation, is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists, what is called, the equality or inequality of taxation.

II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not nearly so great an evil as a very small degree of uncertainty.

'Adapted from The Wealth of Nations, Book V, chap. ii, part II (1776).

III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. A tax upon the rent of land or of houses, payable at the same term at which such rents are usually paid, is levied at the time when it is most likely to be convenient for the contributor to pay; or when he is most likely to have wherewithal to pay. Taxes upon such consumable goods as are articles of luxury are all finally paid by the consumer, and generally in a manner that is very convenient for him. He pays them by little and little, as he has occasion to buy the goods. As he is at liberty too, either to buy, or not to buy, as he pleases, it must be his own fault if he ever suffers any considerable inconvenience from such taxes.

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

341. The Burden of Taxation

BY S. J. CHAPMAN

As regards taxation, the first thing to settle is the principle according to which its burden should be distributed. It is commonly agreed at the present time that taxation should be designed so as to cause equal proportional sacrifice among the taxpayers. When there is equality of proportional sacrifice, people are left in the same relative positions after being taxed as before.

This principle has been called the principle of equality of sacrifice. It is better, however, to call it the principle of proportional sacrifice, because equality of sacrifice might be interpreted to mean equality of absolute sacrifice and not of proportional sacrifice. If the utility of income were constant and the same for all-as it is not—and a man with £1,000 a year and a man with £500 a year contributed £10 a year each in taxes, equal amounts of sacrifice would be entailed, but the man with £500 would be involved in a greater proportional sacrifice. The proportional sacrifice of the man with £500 a year would be the same as that made by a man with £1,000 a year who paid £10 in taxes, if the former paid not £10 but £5, on the assumptions made as regards the utility of income.

It is repeatedly affirmed that the right theory of taxation is the faculty theory. Generally speaking, the faculty theory lays it down that a person should pay taxes in proportion to his power to do so. Whether the faculty theory is the correct theory or not, according

"Adapted from Outlines of Political Economy, 376-379. Published by Longmans, Green, & Co. (1911).