to the consensus of expert opinion, depends upon the exact meaning that we read into it. Let us take an example from a primitive community. The state needs a particular piece of work to be done. Then, some say, for the whole community to turn out to do the work, and for each person to work according to his strength would be for each to contribute to the service of the state according to faculty. But would this be the equitable thing? If all worked ten days, the man of great capacity would be doing absolutely more for the state than the man of little capacity. But the latter would be making a greater proportional sacrifice than the former. He would be doing so because the man of great capacity, who could make much in a year, in yielding up ten days of his time would be surrendering comparative superfluities, whereas the man of little capacity in yielding up ten days of his time would be surrendering comparative necessities. The force of this argument will be more fully appreciated when it is put in terms of money. Equal sacrifices of time are equivalent to proportional sacrifices of money income, but proportional sacrifices of money income are not equivalent to proportional sacrifices of real income, that is of the utility of income, which is the thing that ultimately counts. However, the faculty theory may be interpreted in such a way as to be made identical with the theory of proportional sacrifice.

The so-called ability theory is either the faculty theory in the form first analyzed above, or the theory of proportional sacrifice. If we mean by any theory that proportional sacrifice alone is equitable, it is best to call it the "theory of proportional sacrifice" so as to prevent any misunderstanding.

Taxation which embodies the principle of proportional sacrifice must be progressive. By the principle of progression is meant in general that the higher the clear net income of a person the greater must be the rate at which he is taxed. The need of progression is derived from the known facts as regards the variation of the utility of income with its amount. In view of the rate at which the marginal utility of income falls, it is practically certain that taxation proportional to income exacts a greater proportional sacrifice from the poorer of any two persons, other things being equal.

The great obstructions in the way of applying the principle of progression with scientific accuracy are (1) that utility varies with income differently for different persons, and even for the same person at different times, and (2) that the variations of utility with income cannot be accurately measured.

C. THE INCIDENCE OF TAXATION

342. Incidence and Industrial Organization®

BY A. W. FLUX

There is one feature connected with the selection of forms of taxation which is of very great importance. It is that the tax may be collected from one person and its pressure be really made to rest on another. This can be illustrated by taking the case of a duty on tea imported into the country. It is somewhat obvious that the importer pays the duty, but that he has no intention of bearing the burden. He expects and, speaking generally, contrives to pass on the charge to those to whom he sells, who pass it on in turn till the final resting-place of the burden of the tax is on the consumer. Some increase of the burden is, in fact, generally produced in such a course of transference from one to another. None of the dealers who advance, or become responsible for, the duty do so gratuitously, and the charges, made as a recompense for making such advances, are added to the burden which the duty imposes on the consumer. In distinguishing between the original person who pays a tax and those who finally bear the burden, it is convenient to refer to the former by speaking of the impact of the tax, to the latter by speaking of its ultimate incidence. The incidence may or may not differ from the impact. Where it does differ, the tax is called an indirect one; where it is the same the tax is called direct, as the levy is then made directly from the person who ultimately bears the burden of the tax. The problems connected with the determination of the real incidence of various forms of taxation are among the most difficult problems of economics.

It is useful to examine generally the effect of taxation of the chief forms of income, namely, rent, interest, wages, profits. Take first the case of taxes on rent. Inasmuch as the amount of rent is not a cause of high or low price for the commodity in whose production the rent-yielding agent is employed, a tax on rent is not an influence affecting that price. If the government, for example, claims 10 per cent of rent, that fact does not influence the total of the rent or the supply of the commodity concerned. This latter is, presumably, already arranged on a basis calculated to yield a rent larger in the aggregate than either a less or greater supply would yield. If that be so, then 90 per cent of the rent is also greater for that scale of supply than that same percentage would be for

Adapted from Economic Principles; An Introductory Study, 281–286. Published by E. P. Dutton & Co. (1905).

any other scale, whether larger or smaller. Consequently, the incidence of such a tax is on the receivers of rents. The total rent yielded is unchanged, but the proprietors of rent-yielding property receive only 90 per cent of the amount instead of the whole. They cannot improve their position by modifying the total rent-yield, for anything which would add to it would have been a source of gain independent of the tax, and cannot, therefore, be brought into existence by the introduction of the tax. If they adopt changes lowering the total of the rent-yield, they will thereby lower their share, viz., 90 per cent of that total. Thus the burden of a tax on rent cannot be shifted.

The taxation of interest stands on a very different footing. It reduces the yield due to ownership of capital, and thus influences the supply of capital. There is reason for believing that the lowering of the net yield rendered by capital to its owner would discourage accumulation, and thus reduce the volume of the supplies of new capital. This reduction of volume would modify the marginal productivity of capital, for the application of capital to some of the less productive purposes would be restrained by the scantier volume of new supplies. Thus the marginal productivity of capital would be raised in a way which reduced the total productivity of industry. This rise of marginal productivity would correspond to a higher loan-value of capital, and thus, at any rate in part, the burden of the tax would be shifted from the owner of the capital to its users. This shifting would, in the course of time, transfer the burdens to the consumers of the commodities in the production of which capital is employed, that is, practically remove the burden of the tax, on the revenue yielded by capital, to the consumers of goods. It is not contended that no part of the burden would remain on the owners of capital as such, or that, as consumers, they would not bear some part of the diffused burden, but that that chief part of the tax placed on owners of capital, as receivers of interest, would not permanently remain on that class of the community.

If the tax on the interest does not fall equally on the interestyield of all kinds of capital, there will result a preferential investment of capital in forms which escape taxation, and an avoidance of taxed forms. This will tend to lower the marginal productivity of untaxed forms of capital and raise that of the taxed forms, till the net yield to the owners approaches equality. Further, if land, and the revenues from land ownership, remained unaffected by a tax which fell on revenues from capital, and no corresponding burden were placed on the revenues from land, land values would rise relative to capital, and the ownership of land would gain in attractiveness

from the investment point of view, so long as the rise of its value had not counterbalanced the freedom from taxation of the revenues derived from it. Inasmuch as it is practically impossible to subject to equal taxation the revenues from trade capital, estimated in money, and those derived from the use of consumption capital, which are, for the most part, not estimated in that form, the effect of taxes on interest might be, in part, to encourage the creation and ownership of consumption capital rather than of trade capital.

Taxation of interest must, in practice, take the form of taxation of revenues derived from the ownership of capital, and is likely, therefore, to touch some other classes of revenue in addition to interest.

The particular class of revenue most likely to be included with interest is the remuneration for risk-taking. In so far as a reduction, in the gains derivable from undertaking the risks of industrial and other business operations, would operate to diminish the willingness of owners of capital to accept the risks, the taxation of profits would tend to divert capital and enterprise to the less risky openings for their employment. This would increase the competition in such lines and operate to reduce the general return to capital and check the rate of accumulation. The taxation of profits, therefore, except in the degree in which they proceed from monopoly, or from rent-yielding differential advantages in production, is not, in the long run, taxation the burden of which remains where it first. falls. It is gradually diffused over the community as a whole.

Turning to the subject of taxes on wages, the same kind of problem is again presented. If a reduction of the net receipts of the wage-earner left unchanged the amount and quality of his work, and had no influence on the increase of numbers seeking to earn wages, the burden of the tax would rest wholly on the wage-earner. He would, in that case, give as much and receive less, that is to say, less for the use of himself and family. In general, however, the influence of such a reduction in net remuneration would be found in a reduction in efficiency of the worker. Thus the cost of his product would be raised, and some share of the tax burden thrown on other classes. The consumers of the goods would have to pay more for them, without the entire additional payment becoming available for raising the remuneration of the labor. A part of such increased cost of commodities might go to provide an addition to the laborer's wages, thus modifying the burden of the tax on the wages. In view, too, of the fact that the net remuneration of labor influences, in general, the rate of increase of the numbers of the population, a gradual modification of the supply of labor might operate, as in the case of

capital, to produce the result contemplated above, namely, some increase of the rate paid for labor, thus reducing the net burden of the tax so far as the laborer is concerned, and distributing a share of it among other classes than wage-earners. In so far as the diffusion of the burden throws it on consumers as such, the wage-earning classes will not escape the burden, since they include so large a part of the consuming public. Whether they, or other classes, will be most affected will turn on what kind of commodities are most affected. If it be commodities chiefly consumed by the wealthier classes, these classes, will, as consumers, bear part of the burden of a tax on wages. If it be commodities chiefly consumed by the wageearning classes, these classes may bear as consumers part of the burden which they throw off as recipients of wages.

As in the case of interest, so also in that of wages, taxation affecting special kinds of wages only will influence the distribution of labor in the various industries, and be a cause affecting the relation of the wages in taxed and untaxed employments to each other.

343. The Burden of the Tariff Tax"

SEE HOW TARIFFS TAX AMERICAN WORKMEN The following is a list of some of the taxes which American workmen have to pay:

IF WE HAVE TARIFF REFORM YOU WILL BE TAXED IN THE SAME WAY. IT MUST ALL COME OUT OF YOUR WAGES

SEE HOW TARIFFS TAX THE CHILDREN
IN AMERICA

IF WE HAVE TARIFF REFORM THE TAXES WILL

FALL ON THE CHILDREN

The children's clothing, toys, and school things are all taxed by the tariffs in America.

'Adapted from The Perils of Protection, a pamphlet used by the Liberal party in the English Parliamentary elections in 1909-10.