The Wealth of Nations
Book 5, Chapter 2
The Sources of General or Public Revenue of a Society
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Chapter 2 Summary
The Funds, or Sources, of Revenue, which may peculiarly belong to the Sovereign or Commonwealth
Contributions paid to the sovereign are either in the form of stock or land. With the Bank of Britain’s ordinary dividend at five and a half per cent, and its capital at ten million seven hundred and eighty thousand pounds, the government could borrow this capital at three per cent interest and expect to make a profit. A mercantile business such as the post office receives an advance from the government to cover the cost of establishing the various offices, which it repays with hefty interest rates.
The Government of Pennsylvania implemented a method of lending at interest on land, via transferable bills of credit that are declared legal tender. This raised about £4,500 annually in government contributions.
The most significant expense for any state is war—contrary to the administration of justice, which is a source of revenue, and farm labor during harvest time, which covers the expense of constructing and maintaining the country’s bridges, highways and other public works.
The revenue derived from land comes mainly from the produce of the land rather than its rent. Britain’s ordinary revenue amounts to over ten million a year. But the land tax, at four shillings, amounts to less than two million a year. Britain’s crown land does not bring in any revenue—which it would if privately owned; if crown land became private property, it would be cultivated, increasing produce and ultimately resulting in population growth and increased revenue for the country.
In this light, it would be preferable for crown land to consist only of parks, gardens, public walks, etc., which cost society rather than bring in a revenue.
Individuals’ income comes from three different sources: rent, profit, and wages—all of which are subject to taxes.
There are four maxims:
Taxes upon Rent—Taxes upon the Rent of Land
Tax on the rent of land can be levied at a blanket rate for each district or a variable rate in proportion to the rent of the land.
A blanket rate land tax for each district, although equal at first, will grow unequal over time. The advantage for landlords in Britain of a fixed, constant rate for land tax is that land has been improved and hence increased in value; consequently the rent for land has also increased.
Economists in France believe the most equitable system is one of land taxes on the rent of land, which vary in line with the rent or in line with the level of cultivation. In Venice, all arable land leased out to farmers is taxed at a tenth of the rent. The leases are recorded in a public register.
Some landlords request a rent in kind rather than a monetary payment; for example, corn, cattle, poultry, wine, oil, etc.; others prefer a rent in service. Such rents are always more harmful to the tenant than beneficial to the landlord, with these tenants tending to be poverty-stricken.
In terms of improving land, landlords should be encouraged to cultivate part of their own land; they can afford to experiment and make a few mistakes—and ultimately this will contribute to improving the land throughout the country.
The expenses incurred for levying a land tax that varies in proportion with rent are greater than those for a tax based on a fixed rent. Land taxes that vary according to the level of cultivation of the land are not advisable because such taxes prompt the landlord to increase the rent, thus making both landlords and tenants less likely to cultivate their land and ultimately discouraging productivity. Land taxes should be managed in such a way as to encourage cultivation of land.
Taxes that are Proportioned not to the Rent but to the Produce of Land Taxes levied on the produce of land are taxes on the rent. When a proportion of the produce is to go towards paying tax, the farmer calculates in advance what this amount is likely to be—just as he calculates the 10% church tithe. The tithe is an unequal tax since the church takes a large share of the profit yet pays nothing towards the farmer’s expenses.
Taxes on the produce of land are levied either in kind or money. The parson of a parish or a man with a small income living on his own estate has the option of being paid in kind, relying on his tithe, or charging rent.
Taxes paid in money can be variable, fluctuating in line with the market, or fixed; for example, a bushel of wheat always valued at the same price.
Taxes on the Rent of Houses
The rent of houses can be taxed either on the rent of the land on which the building is constructed, or on the rent of the building itself.
The rent paid for the building should cover the amount of interest the owner would have made had he lent it upon good security, as well as the maintenance costs. The rent of the building, or the ordinary profit, is therefore regulated by the ordinary interest of money.
Rent of the ground upon which the building is constructed is generally highest in a country’s capital and other regions in which housing demand is high.
A tax on house rent, payable by the tenant in proportion to the rent, does not affect the building rent. Whereas the poor spend the majority of their income on food, the wealthy tend to invest in costly homes. Taxes on house rent therefore affect primarily the wealthy, and are comparable to a tax on a commodity.
Landowners seek to charge as much as possible for renting out their ground. In Britain, the rent of houses is supposed to be taxed in the same proportion as the rent of land, through the annual land tax. This has always proved an extremely unequal taxation system.
Taxes upon Profit, or upon the Revenue arising from Stock
Profit from stock can be divided into two parts: the interest made by the owner of the stock, and a very moderate compensation he receives for the risk and trouble of employing the stock. The employer must receive this compensation, otherwise he would not be able to continue.
At first sight, interest made on money seems to be as suitable for tax as the rent of land. There are, however, two different circumstances to consider.
First, the quantity or value of land owned by a man can never be kept secret from the authorities—unlike the capital of stock. Enquiries into individuals’ private circumstances would cause public outrage.
Secondly, land is immovable, whereas stock can be easily moved from one country to another. Owners of stock may opt to move from a country charging hefty taxes to one with tax laws more favorable to his business, thus enabling him to enjoy a better lifestyle. By moving his stock, he puts an end to all the business it maintained in his original country.
Taxes upon the Profit of particular Employments
In some countries, taxes are imposed on particular branches of trade. In Britain, these include hawkers and peddlers, horse-drawn coaches and places in them, and publicans, who are required to purchase a liquor license.
Taxes on the profits of a particular branch of trade are not charged to the traders but to the consumers, with the tax included in the price of the commodity. Consequently, consumers tend to buy large quantities rather than small, which can have a negative affect on the small trader. The tax of five shillings a week charged on every horse-drawn coach, and ten shillings a year on a seat in these coaches is proportionate to their sales volume, and consequently does not encourage bulk buying and harm the smaller trader. The tax of twenty shillings a year for a license to sell ale, forty shillings for a liquor license, and forty shillings more for a wine license, being the same price for all retailers, necessarily favors bulk buying and affects small traders.
The poll taxes charged in the southern provinces of North America and the West India islands are annual taxes charged per Negro, and as such can be viewed as taxes charged on a certain species of stock employed in agriculture. As the majority are planters, both farmers and landlords, the final payment of the tax falls upon them in their capacity as landlord.
Appendix to Articles I and II
Taxes upon the Capital Value of Lands, Houses, and Stock
While property remains in the possession of the same person, taxes will not decrease its capital value; however, when property changes hands—for example, property inherited following death, or property sold to another individual—the taxes imposed will decrease its capital value.
All taxes on the transference of property decrease the capital value of that property and increase the revenue of the sovereign, at the expense of the people.
Stamp duties on cards, dice, newspapers and magazines, etc., are taxes on consumption. Taxes on the transference of property are quite different. The transference of property, be it through inheritance or the sale of land and houses from one individual to another, are public transactions and are taxed directly. The transference of stock from individual to individual is frequently conducted in secret, and is taxed indirectly via a stamp duty on the deed (which is otherwise not valid) as well as a requirement that the transfer be recorded in a register, for which certain duties are charged. Stamp and registration duties are also often imposed on deeds transferring property through inheritance or sale. In Britain, stamp duties are calculated in proportion to the deed, and do not generally exceed six pounds.
Taxes upon the Wages of Labor
A person’s income is regulated by the labor market and average prices of consumer goods.
Employers pay a direct tax for each laborer they employ. A manufacturer will offset this tax by charging a higher price for his goods; consequently, the tax is ultimately paid by the consumer.
A direct income tax results in lower prices for rent of land and higher prices for manufactured goods than would have been the case for tax on the rent of land and consumable commodities.
Direct income tax sometimes results in a significant fall in the labor market, industry decline, lack of jobs for the poor, and a drop in the country’s annual produce of land and labor.
Taxes which it is intended should fall indifferently upon every different Species of Revenue
Since a man's fortune fluctuates, it is difficult to establish an accurate estimate without an official investigation; assessment is therefore arbitrary. Whether a tax is light or heavy, uncertainty always causes grievance.
Poll taxes, when levied rigorously, provide substantial revenue for the state; however, this is a part of the public revenue and therefore not the most beneficial for the people.
Taxes upon Consumable Commodities
The impossibility of levying tax in proportion to revenue led to taxes being levied on commodities. Consumable commodities can be classed as essentials or luxuries.
Essentials are not only the basics indispensable for survival, but also items deemed necessary by a particular culture; for example, a linen shirt is not indispensable for survival but forms an integral part of a businessman’s work attire. Leather shoes are deemed a necessity in Britain; whereas in Scotland they are only deemed necessary for men, and it is not unusual to see women walking about barefoot. Beer and alcohol can be classed as luxury goods; a man can abstain totally from them and in no culture are they viewed as a basic essential.
Wages are regulated by the labor market and the price of basic essentials. A tax on these articles raises their price, and should therefore go hand in hand with a rise in workers’ wages.
This is not the case with taxes on luxury goods. An increase in their price does not incur any rise in workers’ wages. A tax on tobacco will not raise wages, despite the fact that in Britain it is taxed at three times, and in France at fifteen times its original price—likewise with taxes on tea and sugar, which in Britain and the Netherlands have become luxuries amongst the lower classes.
Taxes on luxury goods do not tend to raise the price of any other commodities—whereas taxes on essentials, by raising the wages of labor, automatically raise the price of the commodity, consequently decreasing sale and consumption.
In Britain, the major essential goods that are taxed are salt, leather, soap, and candles. Salt is taxed at three shillings and four pence a bushel—about three times the original price of the commodity. Leather is a necessity for daily living, as is soap. In countries where the winter nights are long, candles are essential for every business. In Britain, taxes on the price of leather are at about 10%, on soap about 25%, and on candles about 15%. As these commodities are considered basic essentials, such heavy taxes increase expense for the industrious poor, and therefore raise the wages of their labor.
In a country such as Britain, where winters are bitterly cold, fuel is a basic essential, with coal being the cheapest fuel. Most businesses are located in coal counties; in some businesses, coal is a necessary tool of trade—for example, in the glass, iron, and metal industries. Legislature has imposed a tax of three shillings and three pence a ton on coal transported via the coast, which is more than 60% of the price at the pit. Coal transported by land or inland navigation pays no such duty. The bounty on the exportation of corn raises the price of this essential commodity and as such, rather than making a profit, often actually incurs considerable expense to the government. The high duties on the importation of foreign corn, which in years of abundance amount to a prohibition, and the absolute prohibition of the importation of live cattle or salted provisions have all led to taxes being levied on these essential commodities, and provide no revenue to the government.
Taxes on meat are still more common than those on bread—perhaps because meat is not regarded as a necessity.
Consumable commodities, whether essentials or luxuries, are taxed in two different manners: either the consumer pays an annual sum (e.g., coach and plate tax), or the goods are taxed while still in possession of the dealer, before delivery to the consumer (e.g. excise and custom duty).
A coach may last ten or twelve years; it is more convenient for the buyer to pay four pounds a year than a lump sum of forty to forty-eight pounds upon purchase. In the case of housing taxes, it is more convenient to pay these in moderate annual installments than a hefty lump sum at the time of sale.
The term “custom duty” demotes a tax that is paid customarily. These taxes were originally imposed on merchants, who were disliked and whose gains were envied—for example, foreign merchants, who were taxed more heavily than their British counterparts. This distinction between the duties charged to foreigners and those charged to British traders is still practiced today, to give the British traders a competitive advantage.
These duties were first charged on wool and leather in the form of an exportation duty. Other duties included those on wine, which were charged per ton (tonnage) and on other goods, which were charged per pound (poundage).
The exportation of materials produced within a country or its colonies was sometimes prohibited and sometimes subjected to higher duties. The exportation of British wool was prohibited; that of beaver skins was subjected to higher duties (Britain having the monopoly over this commodity following its conquest of Canada).
With a number of goods prohibited altogether, smuggling is rife. Britain’s ban on the importation of foreign woolen goods, and its tight restrictions on foreign silks and velvets not only prevent any revenue being made through customs duties, but encourage people to smuggle these goods in, including merchants who smuggled in as much as they could. This is a perfect example of the mercantile system being used as an instrument of monopoly rather than revenue generation.
The foreign commodities most widely consumed in Britain are wines and brandies, products from America and the West Indies—sugar, rum, tobacco, cocoa-nuts, etc.; and products from the East Indies—tea, coffee, chinaware, spices, piece-goods, etc. The majority of the country’s revenue from custom duties comes from these products.
In Britain, liquor and spirits brewed for private consumption are not subject to excise duty. This exemption favors the wealthy rather than the poor, since almost all wealthy families in the country brew their own beer, which costs them eight shillings a barrel less than it costs the common brewer. As such, the wealthy are able to drink their beer for less than can the poorer classes, who tend to purchase theirs from a pub. In addition to customs and excise duties, there are several other duties, which affect the price of goods more indirectly. An example of this is the duties imposed on the road and waterway tolls that pay for the maintenance of the road or waterway. These are calculated according to the volume or weight of the goods being transported. If Britain’s road or waterway tolls were to become a government resource, with duties imposed on the value of the goods rather than their volume or weight, this inland customs and excise would damage the most important of all branches of commerce: the country’s national trade.
Levying taxes on luxury goods requires a large number of customs officers, whose salaries and benefits contribute nothing to the state treasury; customs officers’ benefit packages tend to amount to much more than their basic salaries—in some ports more than double or triple those salaries. The expense of levying revenue could be as much as an additional twenty or thirty per cent of these salaries and benefits.
Such taxes on commodities raise their price, thus discouraging their consumption and production. In the case of home-produced commodities in particular, this leads to a reduction in labor.
Not many people are scrupulous when it comes to smuggling; generally, if people can find an easy and safe way of doing so, they will. Shoppers are equally unscrupulous when it comes to buying smuggled goods.
Inland trade is practically duty-free, with most goods able to be transported from one end of the country to the other without any license or control by revenue officers. Goods transported from coast to coast require certificates but are for the most part duty-free, with the exception of coal.
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