of its excessive amount. Overtaxation, carried to a sufficient extent, is quite capable of ruining the most industrious community, especially when it is in any degree arbitrary, so that the payer is never certain how much or how little he shall be allowed to keep; or when it is so laid on as to render industry and. economy a bad calculation. But if these errors be avoided, and the amount of taxation be not greater than it is at present, even in the most heavily taxed country of Europe, there is no danger lest it should deprive the country of a portion of its capital.

To provide that taxation shall fall entirely on income, and not at all on capital, is beyond the power of any system of fiscal arrangements. There is no tax which is not partly paid from what would otherwise have been saved; no tax, the amount of which, if remitted, would be wholly employed in increased expenditure, and no part whatever laid by as an addition to capital. All taxes, therefore, are in some sense partly paid out of capital; and in a poor country it is impossible to impose any tax which will not impede the increase of the national wealth. But in a country where capital abounds, and the spirit of accumulation is strong, this effect of taxation is scarcely felt. Capital having reached the stage in which, were it not for a perpetual succession of improvements in production, any further increase would soon be stopped-and having so strong a tendency even to outrun those improvements, that profits are only kept above the minimum by emigration of capital, or by a periodical sweep called a commercial crisis; to take from capital by taxation what emigration would remove, or a commercial crisis destroy, is only to do what either of those causes would have done, namely, to make a clear space for further saving.

I cannot, therefore, attach any importance, in a wealthy country, to the objection made against taxes on legacies and inheritances, that they are taxes on capital. It is perfectly true that they are so. As Ricardo observes, if £100 are taken from any one in a tax on houses or on wine, he will probably save it, or a part of it, by living in a cheaper house, consuming less wine, or retrenching from some other of his expenses: but if the same sum be taken from him because he has received a legacy of £1000, he considers the legacy as only £900, and feels no more inducement than at any other time (probably feels

rather less inducement) to economize in his expenditure. The tax, therefore, is wholly paid out of capital: and there are countries in which this would be a serious objection. But in the first place, the argument cannot apply to any country which has a national debt, and devotes any portion of revenue to paying it off; since the produce of the tax, thus applied, still remains capital, and is merely transferred from the taxpayer to the fundholder. But the objection is never applicable in a country which increases rapidly in wealth. The amount which would be derived, even from a very high legacy duty, in each year, is but a small fraction of the annual increase of capital in such a country; and its abstraction would but make room for saving to an equivalent amount: while the effect of not taking it, is to prevent that amount of saving, or cause the savings, when made, to be sent abroad for investment. A country which, like England, accumulates capital not only for itself but for half the world, may be said to defray the whole of its public expenses from its overflowings; and its wealth is at this moment as great as if it had no taxes at all. What its taxes really do is, to subtract from its means, not of production but of enjoyment; since whatever any one pays in taxes, he could, if it were not taken for that purpose, employ in indulging his ease, or in gratifying some want or taste which at present remains unsatisfied.

CHAPTER IX

JUSTICE IN TAXATION: PROPORTIONAL VS. PROGRESSIVE TAXATION

30. The Views of Say and McCulloch. Adam Smith, it will be remembered, had laid it down, as the first canon of taxation, that 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. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation." His successors carried on a lively debate as to what constitutes equality, and, particularly, whether a progressive or proportional rate of taxation corresponds. most nearly to the demands of justice. Jean Baptiste Say, for instance, argued for progressive rates of taxation. He said:1

Taxation, being a burden, must needs weigh lightest on each individual when it bears upon all alike. When it presses inequitably upon one individual or branch of industry, it is an indirect, as well as a direct, incumbrance; for it prevents the particular branch or the individual from competing on even terms with the rest. An exemption, granted to one manufacture, has often been the ruin of several others. Favor to one is most commonly injustice to all others.

The partial assessment of taxation is no less prejudicial to the public revenue than unjust to individual interests. Those who are too lightly taxed are not likely to cry out for an increase; and those who are too heavily taxed are seldom regular in their payments. The public revenue suffers in both ways.

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

It has been questioned whether it be just to tax that portion of revenues which is spent on luxuries more heavily than that 'spent on objects of necessity. It seems but reasonable to do so; for taxation is a sacrifice to the preservation of society and of social organization, which ought not to be purchased by the /destruction of individuals. Yet the privation of absolute necessaries implies the extinction of existence. It would be somewhat bold to maintain, that a parent is bound in justice to stint the food or clothing of his child to furnish his contingent to the ostentatious splendor of a court or the needless magnificence of public edifices. Where is the benefit of social institutions to an individual whom they rob of an object of positive enjoyment or necessity in actual possession, and offer nothing in return but the participation in a remote and contingent good which any man in his senses would reject with disdain?

But how is the line to be drawn between necessaries and superfluities? In this discrimination there is the greatest difficulty; for the terms, necessaries and superfluities, convey no determinate or absolute notion, but always have reference to the time, the place, the age, and the condition of the party; so that, were it laid down as general rule, to tax none but superfluities, there would be no knowing where to begin and where to stop. All that we certainly know is, that the income of a person or a family may be so confined as barely to suffice for existence; and may be augmented from that minimum upward by imperceptible gradation, until it embrace every gratification of sense, of luxury, or of vanity; each successive gratification being one step further removed from the limits of strict necessity, until at last the extreme of frivolity and caprice is arrived at; so that, if it be desired to tax individual income, in such manner as to press lighter in proportion as that income approaches to the confines of bare necessity, taxation must not only be equitably apportioned, but must press on revenue with progressive gravity.

In fact, supposing taxation to be exactly proportionate to individual income, a tax, let us say, of 10 per cent, a family possessed of 300,000 francs per annum would pay 30,000 francs in taxes, leaving a clear residue of 270,000 francs for the family expenditure. With such an expenditure, the family could not

only live in abundance, but could still enjoy a vast number of gratifications by no means essential to happiness. Whereas another family, with an income of 300 francs, reduced by taxation to 270 francs per annum, would, with our present habits of life and ways of thinking, be stinted in the bare necessaries of subsistence. Thus a tax merely proportionate to individual income would be far from equitable; and this is probably what Smith meant, by declaring it reasonable, that the rich man should contribute to the public expenses not merely in proportion to the amount of his revenue, but even somewhat more. For my part, I have no hesitation in going further, and saying that taxation cannot be equitable unless its ratio is progressive.

Upon the other hand, John Ramsay McCulloch contended vigorously for proportional taxation, and was inclined to minimize the importance of considerations of abstract justice in matters of taxation. McCulloch wrote: 1

There can be no doubt that, were it practicable, the burden of taxation should be made to press on individuals in proportion to their respective revenues. A, with an income of £1000 a year, ought to pay ten times the tax paid by B, who has only £100 a year, and the latter ten times as much as C, who has only a pittance of £10.2 The state has been ingeniously compared by M. Thiers to a mutual insurance company, where the payments by the members are exactly proportioned to the sums they have insured, or to their interests in the company. And so it should be with the subjects of government. It is established for the common benefit of all of those who labor with the hand, and of those who labor with the head; of those to whom property has descended, and of those by whom it has been acquired; and is alike indispensable to their well-being and prosperity. And being so, it necessarily follows that every individual should contribute to its support according to his stake in the society, or to his means. This is a plain as well as a sound rule; and it is one that should never be forgotten or overlooked.

1 Treatise on Taxation, 17-21 (second edition).

2 It is, perhaps, needless to say that the incomes of the different parties are supposed to be perpetual, or of the same duration.