28. The Views of Say. While most economists have been content to emphasize more sharply than Hume and McCulloch did the limitations and possible dangers of the proposition that taxes tend to stimulate industry and thrift, Jean Baptiste Say and a few others have denied that the statement contains the least kernel of truth. Say, for instance, said:1

The same causes that we have found to make unproductive consumption unfavorable to reproduction, prevent taxation from at all promoting it. Taxation deprives a producer of a product which he would otherwise have the option of deriving a personal gratification from, if consumed unproductively, or of turning to profit, if he preferred to devote it to a useful employment. One product is a means of raising another; and, therefore, the subtraction of a product must needs diminish, instead of augmenting, productive power.

It may be urged that the pressure of taxation impels the productive classes to redouble their exertions, and thus tends to enlarge the national production. I answer that, in the first

place, mere exertion cannot alone produce; there must be capital for it to work upon, and capital is but an accumulation of the very products that taxation takes from the subject: that, in the second place, it is evident, that the values which industry creates expressly to satisfy the demands of taxation, are no increase of wealth; for they are seized on and devoured by taxation. It is a glaring absurdity to pretend that taxation contributes to national wealth, by engrossing part of the national produce; and enriches the nation by consuming part of its wealth. Indeed, it would be trifling with my reader's time to notice such a fallacy, did not most governments act upon this principle, and had not wellintentioned and scientific writers endeavored to support and establish it.

If from the circumstance that the nations most grievously taxed are those most abounding in wealth, as Great Britain for example, we are desired to infer, that their superior wealth arises

for escape, was the real cause for the improvement. Bastable, Public Finance, 286. - ED.

1 Traité d'économie politique, Bk. III, ch. 8.

from their heavier taxation, it would be a manifest inversion of cause and effect. A man is not rich because he pays largely ; but he is able to pay largely, because he is rich. It would be not a little ridiculous, if a man should think to enrich himself by spending largely, because he sees a rich neighbor doing so. It must be clear that the rich man spends because he is rich, but never can enrich himself by the act of spending.

Cause and effect are easily distinguished, when they occur in succession; but are often confounded, when the operation is continuous and simultaneous.

Hence, it is manifest that, although taxation may be, and often is, productive of good, when the sums it absorbs are properly applied, yet, the act of levying is always attended with mischief at the outset. And this mischief good princes and governments have always endeavored to render as inconsiderable to their subjects as possible, by the practice of economy, and by levying, not to the full extent of the people's ability, but to such extent only as is absolutely unavoidable. That rigid economy is the rarest of princely virtues, is owing to the circumstance of the throne being constantly beset with individuals, who are interested in the absence of it; and who are always endeavoring, by the most specious reasoning, to impress the conviction that magnificence is conducive to public prosperity and that profuse public expenditure is beneficial to the state. It is the object of this third book to expose the absurdities of such representations.

29. The Source of Taxation. Adam Smith declared that taxes are generally paid out of "the revenue of private people " and do not ordinarily occasion "the destruction of any actually existing capital." Loans, however, he believed to be raised out of the previously accumulated wealth of society so that they are derived from capital and not from revenue.1 From this suggestion David Ricardo, a generation later, developed his elaborate argument that income, or revenue, should be the normal source of taxation. He said: 2

1 Wealth of Nations, Bk. V, ch. 3.

2 Principles of Political Economy and Taxation, ch. 8 (1817).

Taxes are a portion of the produce of the land and labor of a country, placed at the disposal of the government; and are always ultimately paid, either from the capital, or from the revenue of the country.

We have already shown how the capital of a country is either fixed or circulating, according as it is of a more or less durable nature. It is difficult to define strictly, where the distinction between circulating and fixed capital begins; for there are almost infinite degrees in the durability of capital. The food of a country is consumed and reproduced at least once in every year; the clothing of the laborer is probably not consumed and reproduced in less than two years; whilst his house and furniture are calculated to endure for a period of ten or twenty years.

When the annual productions of a country more than replace its annual consumption, it is said to increase its capital; when its annual consumption is not at least replaced by its annual production, it is said to diminish its capital. Capital may therefore be increased by an increased production, or by a diminished unproductive consumption.

If the consumption of the government, when increased by the levy of additional taxes, be met either by an increased production, or by a diminished consumption on the part of the people, the taxes will fall upon revenue, and the national capital will remain unimpaired; but if there be no increased production or diminished unproductive consumption on the part of the people, the taxes will necessarily fall on capital; that is to say, they will impair the fund allotted to productive consumption.1

In proportion as the capital of a country is diminished, its productions will be necessarily diminished; and, therefore, if the same unproductive expenditure on the part of the people

1 It must be understood that all the productions of a country are consumed; but it makes the greatest difference imaginable whether they are consumed by those who reproduce, or by those who do not reproduce another value. When we say that revenue is saved, and added to capital, what we mean is, that the portion of revenue, so said to be added to capital, is consumed by productive instead of unproductive laborers. There can be no greater error than in supposing that capital is increased by non-consumption. If the price of labor should rise so high, that notwithstanding the increase of capital, no more could be employed, I should say that such increase of capital would be still unproductively consumed.

and of the government continue, with a constantly diminishing annual reproduction, the resources of the people and of the state will fall away with increasing rapidity, and distress and ruin will follow.

Notwithstanding the immense expenditure of the English government during the last twenty years, there can be little doubt but that the increased production on the part of the people has more than compensated for it. The national capital has not merely been unimpaired, it has been greatly increased, and the annual revenue of the people, even after the payment of their taxes, is probably greater at the present time than at any former period of our history.

For the proof of this we might refer to the increase of population to the extension of agriculture-to the increase of shipping and manufactures to the building of docks-to the opening of numerous canals, as well as to many other expensive undertakings; all denoting an increase both of capital and of annual production.

Still, however, it is certain that but for taxation this increase of capital would have been much greater. There are no taxes which have not a tendency to lessen the power to accumulate. If they encroach on capital, they must proportionably diminish that fund by whose extent the extent of the productive industry of the country must always be regulated; and if they fall on revenue, they must either lessen accumulation, or force the contributors to save the amount of the tax, by making a corresponding diminution of their former unproductive consumption of the necessaries and luxuries of life. Some taxes will produce these effects in a much greater degree than others; but the great evil of taxation is to be found, not so much in any selection of its objects, as in the general amount of its effects taken collectively.

Taxes are not necessarily taxes on capital, because they are laid on capital; nor on income, because they are laid on income. If from my income of £1000 per annum, I am required to pay £100, it will really be a tax on my income, should I be content with the expenditure of the remaining £900; but it will be a tax on capital, if I continue to spend £1000.

The capital from which my income of £1000 is derived may 1 (1793-1815.)

be of the value of £10,000; a tax of one per cent on such capital would be £100; but my capital would be unaffected, if after paying this tax, I in like manner contented myself with the expenditure of £900.

The desire which every man has to keep his station in life, and to maintain his wealth at the height which it has once attained, occasions most taxes, whether laid on capital or on income, to be paid from income; and therefore as taxation proceeds, or as government increases its expenditure, the annual enjoyments of the people must be diminished, unless they are enabled proportionally to increase their capitals and income.

It should be the policy of governments to encourage a disposition to do this in the people, and never to lay such taxes as will inevitably fall on capital; since by so doing, they impair the funds for the maintenance of labor, and thereby diminish the future production of the country.

In England this policy has been neglected, in taxing the probates of wills, in the legacy duty, and in all taxes affecting the transference of property from the dead to the living. If a legacy of £1000 be subject to a tax of £100, the legatee considers his legacy as only £900 and feels no particular motive to save the £100 duty from his expenditure, and thus the capital of the country is diminished; but if he had really received £1000, and had been required to pay £100 as a tax on income, on wine, on horses, or on servants, he would probably have diminished, or rather not increased his expenditure by that sum, and the capital of the country would have been unimpaired.

In 1848 John Stuart Mill criticised Ricardo's doctrine at several points.1 He said:2

In addition to the preceding rules, another general rule of taxation is sometimes laid down, namely, that it should fall on income, and not on capital. That taxation should not encroach upon the amount of the national capital, is indeed of the greatest importance; but this encroachment, when it occurs, is not so much a consequence of any particular mode of taxation, as 1 In a subsequent chapter (sec. 77) a further criticism of Smith and Ricardo is presented. 2 Principles of Political Economy, Bk. V, ch. 2, § 7.