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The comparative exclusiveness of the several trades operating on scarcity of supply will determine the divergence from the equal costs ratio.

$ 9. Now reflection on the nature of these premiums will show that they are not “quasi-rents” (as they are sometimes termed), but real rents, in the sense that they constitute surpluses over and above the necessary costs and expenses of production, and that they cannot evade the incidence of a direct tax imposed upon them.

In theory it would be possible to devise, in the interests of the whole society constituted by these non-competing groups, a scientific system of direct taxation which, by taking the whole of these scarcity gains or “rents," should remove the entire motive of exclusiveness, so far as it was artificial; and using the taxes to secure equality of opportunity for the entire body of citizens, should re-establish the ratio of exchange upon its natural footing and secure the full, free flow of capital and labour conducive to the maximum productivity of the community.

This theory of taxation of "rents” in order to furnish a public income to be expended in providing equality of opportunity through free education, cheap transit, and other public services, underlies our modern progressive policy of social reform. The theoretical and practical conditions of its success require, however, to be carefully observed.

The first condition is, that if a tax is imposed

either upon a commodity produced under conditions of “scarcity," or upon incomes derived from such a trade or profession, it must be imposed upon all the businesses or persons contributing to the supply of the commodity. If, for instance, there were two or more non-competing groups contributing to the same supply (closed so far as flow of capital and labour was concerned, and only competing in the sale of commodities), a tax imposed upon the product of one group, or upon the incomes of one group, would only strengthen the scarcity or monopoly power of the other group, and would not remove the surplus value or premium enjoyed by the commodity in the processes of exchange. Nor would it throw open the industry to the free flow of capital and labour. If, for example, a tax were imposed upon the cheques or other bank money of joint-stock banks from which private banks were exempt, or vice versa, it is plain that any scarcity gains or “rents” derived from the profitable exclusiveness of the banking business would not disappear under this unfair and unprofitable discrimination. Again, in applying such a theory of taxation, the law of substitution would have to be taken into due account. A tax directed to secure the surplus profits of gas works would, of course, be frustrated in large measure if oil were not subject to a similar tax. Unless the capitalistic structure of these industries was built absolutely water-tight, so that the unequal condition of the

two did not draw any capital into the one which otherwise would have been invested in the other, it is plain that the object of the tax will be progressively defeated, and that one industry will be favoured at the expense of another, and to the detriment of the public, which will be confronted by one tighter instead of two looser "monopolies," or "restricted trades." The closer one goes into the physiology of industry, the wider and more intricate become the applications of the law of substitution, the more intricate the interaction of what at first sight seem separate supplies or “markets."

Thus the theory that the scarcity gains of special trades, regarded as relatively non-competing groups, can be safely and profitably taken by specific measures of taxation, becomes less and less tenable as the basis of a fiscal policy.

In a few large instances where natural limitations operate, as in the case of land values, or legally conferred privileges, as in banking, brewing, and perhaps certain "protected” professions, it may be safe and profitable to direct a special tax at a particular class of commodities, or at the trades which produce them; but the general tendency of rational fiscal policy is likely to go more in the direction of increased taxation of large incomes or large properties, irrespective of their particular origins or uses.

I first sight remote from the issues of international

CHAPTER IV
NATIONS AS TRADING GROUPS

$ 1
HE analysis of our last chapter may appear at

exchange. But in reality the principles and policy towards which we have been working are of direct and tolerably obvious application to this wider sphere.

For it is only in so far as nations constitute noncompeting groups, between which there is not free flow of capital and labour, that special problems of international fiscal policy arise. If the trading relations between members of two or more nations were such that capital and labour were free to flow from one nation into any industry of the other nation, the mere fact of a political distinction would not, of course, prevent such a distribution of industrial energy from taking place as would form the basis of an equal exchange of commodities between industries in the two countries. If one of the nations possessed a monopoly or a superiority of soil or other natural resources, limited in extent, which enabled some

commodity wanted by both nations to be produced exclusively in one, even this fact, though it would give rise to economic rents paid to the owners of the soil, would not enable the capital and labour engaged therein to enjoy any special gain in the value or rate of exchange between this class of commodities and others freely produced by both nations. How far this “natural monopoly" can be made amenable to a tax on imports we will consider presently. Just now we are concerned to mark the limits of the application of the theory of non-competing groups.

The general disposition of economists who have confronted the question is to assume that the theory will have more stringent application to the conditions of international trade than to inter-group trade within the several nations. They base this view apparently on the belief that capital and labour are less impeded in their flow between the several occupations in the same country than in their flow between similar occupations in different countries. Now it is very

doubtful whether, or how far, this assumption is warrantable. It is a commonplace that capital is becoming cosmopolitan, that is to say, it flows with great freedom over national barriers into large fields of investment, not merely into public loans and into railroad and other public or semi-public occupations, but into a great variety of agricultural, manufacturing, and commercial businesses conducted for profit. Of course, this cos

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