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3.8 Taxation

Taxation is the appropriation of products from the hands of individuals to those of the government. This is the defining characteristic of a tax, regardless of the means or mechanism by which may be extracted, the name by which it may be called, or the end to which it may be used.

In the scope of economics, we must consider taxation to be a matter of fact, and leave discussion of right and wrong to the field of ethics, though we may consider the effects of taxation on the economy.

We also must separate the use of the funds that are seized by taxation from the act of seizure. It has previously been asserted that the principle of equity maintains that those who enjoy a benefit are responsible for paying it, and those who pay for something are entitled to the privilege of using it - and as such nothing more need be said, or can be said, on justice in regards to the collection and use of tax.

Of the Effect of Taxation in General

A side effect of having a monetary commodity is that it is a desirable to government as to any consumer. Without money, government would need to identify the specific things it wishes to seize and extract them from those who possess them. Where money exists, taxation does not require the seizure of some item of specific value and purpose, but the monetary commodity that can be exchanged for other things it may desire, even if it has no idea what those things might be.

As such, taxation is not zero-sum: the money it uses to pay for goods and labor is not generated by its own activities, but the source of collection is a removal from value that is not recovered by the community. To buy grain from a farmer with coin that has been stolen from him leaves him with no more money and less grain than he had. To buy grain from the son with coin stolen from his father is likewise to leave the farm with a loss of grain and no difference in money.

The only way that a government can return taxation to the citizens is to return it immediately and demand nothing in return: that is, to steal the coin from the farmer, then return it to him as if it were a gift. This would be entirely pointless.

Thus taxation by means of seizing money is no different to taxation by seizure of goods: it deprives a producer of a product, offering nothing of value in return, that may have been consumed productively or unproductively.

Taxation has been said to impel the productive classes to increase their exertion, in order to cover the expense of taxation. Say asserts that exertion alone is not a benefit if there be no product as a result of it - and further, that the consideration of taxation as an added expense makes productive acts unfeasible that might otherwise have been undertaken. As such he considers it "a glaring absurdity to pretend that taxation contributes to national wealth by engrossing part of the national produce."

Another absurd notion is that taxation creates wealth. While it has been observed that nations where men are wealthier pay heavier taxes, coincidence does not mean causation. More likely it is wealth that enables a rich man to bear taxation, not taxes that make people richer.

In productive endeavors, the greater the revenue, the more successful the enterprise - but this principle cannot be applied to government. A productive enterprise earns more revenue by producing more products. A government that taxes more produces nothing to give in exchange for its income, and as such every increase in its revenue is a decrease in the welfare of its subjects.

Say lays out fiver principles that should be considered in taxation, as a means to do the least harm:

  1. Taxes must be moderate in their ratio
  2. Taxes should be collected by the least vexations methods
  3. Taxes should press impartially on all classes
  4. Taxes should be least injurious to production
  5. Taxes should be favorable to national morality.

Each of these points will be considered in more detail.

Taxes must be moderate in their ratio

Since taxation deprives the taxpayer of a product, which in turn deprives him of the benefit of that product (fulfillment of a need or the ability to use it productively), it stands to reason that the lighter the tax, the less he is deprived.

As such, taxation is only sustainable where there is excess production: an individual who has only enough to sustain himself, or a producer who has only enough to sustain his operation, cannot continue to sustain when any measure is taken by taxation.

At an extreme level, taxation impoverishes the individual without enriching the state. This is particularly true when taxation upon productive citizens reduces their productive consumption - i.e., that the state takes from the weaver money that he uses to purchase thread, he then produces less cloth, and when the state seeks to purchase cloth, there is less of it to be had, to the point that there is none.

Where taxation removes the ability of producers to be productive, it is "a kind of suicide" by slow starvation, which over time reduces to nothing the amount of product that is available. Where taxation removes the ability of consumers to obtain the necessities of life, it is a kind of murder by slow starvation in a literal sense, which over time reduces the population.

Say looks to a dramatic change in 1775 that cut in half the taxes place upon fresh sea-fish sold in Paris. There was great uproar from his administration that this measure would be devastating to tax revenues - but what resulted was instead a dramatic increase, from 10.5m livres to 60m livres, from producers who, relieved of the burden of taxes, could greatly increase their production and price their product such that far more consumers could afford it.

Another example is given of Spain, which witnessed the loss of the American colonies by Britain and decided to reduce the burden of taxes placed on her own colonies. When the burden of taxes was decreased, the revenue from Mexico alone increased by $100m per year. The ratio by which taxes were decreased resulted in an even greater increase of productivity, which is the source from which all public revenue is derived.

Taxes should be collected by the least vexatious methods

Say mentions obliquely, with scant detail, that the cost of collecting taxes is a dead loss both to the taxpaying citizen and the government. He contrasts two historical accounts: one from 1598 in which the citizens were deprived about 30 million for the collection of a tax that generated only 6 million for the government; a second in which a revenue of 110 million required a cost of no more than 10 million.

Some portion of this goes to the salary of a large number of tax collectors (in one instance, it was estimated that there were 250,000 persons so employed). Another portion covers the difficulty of seizing personal property and selling it to collect taxes, in which instance the property is sold at far less than its value by matter of indifference.

To the earlier point, demanding of people more taxes than they can comfortably pay necessitates rigorous oversight to extract from them that which they are unwilling to give.

Say looks to compulsory labor as an example of poor taxation, the corvee system of taxation - as conscripting labor is little different than taking the profit of labor. Simply stated, people who are compelled to work against their inclination and receive no pay in exchange are seldom productive in their work: an example is given of an instance in which the work performed to restore a road under this system involved a sacrifice of 8 million in labor (lost to the farms of the area) for a task that, if hired out, would have cost about two million and would likely have been done quicker and better by paid hands.

Taxes should press impartially on all classes

The principle of equity maintains that an individual who receives a benefit should pay for the provision of that benefit. In the instance of taxation, in which all members of a community benefit from the services of government in equal measure, then they should pay for it in equal measure.

It is considered injustice when government takes from a people while giving nothing in return, which is necessarily the outcome when one party is given exclusive privileges or an exclusive exemption for which others are required to pay. Both are in effect where one party is taxed for the privilege of another.

It is generally reckoned that taxation can be more heavily levied on those with greater resources: the needs of a person for a specific quantity of goods (food, for example) is fixed while the amount of wealth they may have varies. As such an amount of tax that can easily be afforded by one may constitute a deprivation to another.

But how can the line be drawn between necessities and luxuries? To levy a tax on a given amount of income does not consider the amount of expense: given the same wage, a workman who feeds a sizable family has less superfluous income than one who is a bachelor who must feed only himself. Even two men whose families are the same size, but who live in different sections of the same town, pay different amounts for the rent of their homes.

In this sense, taxation cannot be equitable unless its ratio is progressive and there is some estimation or accounting for the needs of a particular taxpayer.

Taxes should be least injurious to production

Taxation that extracts value from unproductive consumption is generally less damaging to the welfare of the people than taxation that extracts value from productive consumption - that capital which would result in the production of additional goods - in that removing capital from production has a cumulative effect in future.

Say refers an analogy given by Sismondi of a tax collected in grain during the planting season instead of at the harvest: it deprives the farmer of the same amount of grain, but in the former case, the grain that is taken removes not only itself, but the bounty of the acreage it would have seeded, and which would have produced far more.

He mentions in this context the tax on the transfer of property: an owner of land (or a seller of merchandize) for which he wishes to gain 20,000 will receive only 19,000 if there is a 5% tax on its transfer. If he wishes to gain the full 20,000, he must add the tax to the price he demands of the buyer.

This isn't strictly related to removing the profit of production, but increasing the cost of consumption - though in instances where the asset in question is intended for use in an act of production, it increases the cost (and decreases the income) of the producer. In any case, the price of an item influences its demand, so any cause that increases price decreases demand and diminishes the aggregate quantity demanded.

Taxes on production are not related merely to the consumption of the revenue, but include any expense necessary to practice production or commerce: the fee for registering a patent, the cost of obtaining a license to undertake an activity, and other costs where a producer must pay for the privilege of undertaking an action he could have undertaken without it are also taxes upon production.

A duty levied on any material used in production is also a tax. In the same way, any tax levied upon the producer of a raw material is visited on those who require that material for their own production, as the original producer must recover his tax expense through revenue.

Taxes should be favorable to national morality

Taxation is considered to influence the habits of a nation by increasing the cost of any product on which taxes are leveraged, and decreasing its utilization as a result. It is therefore sometimes claimed that taxation is a method of discouraging unwholesome activities or encouraging wholesome ones.

Say dismisses this notion as propaganda: vice has always been a profitable industry, and those governments that derive a profit from taxing vice are seldom seen to do anything else to discourage it - and as such merely wish to derive revenue from the most disgraceful and detrimental behavior of its people.

It is also common for the taxation of a specific kind to discourage wholesome activities. One example is the tax on all lands devoted to farming and livestock, which gave discouragement to those industries - such that those who had estates were inclined to discontinue farming on a portion of their fields, letting them go fallow or converting them to pleasure-grounds.

Napoleon levied a tax upon each scholar educated in a private academy to find the establishment of public universities, which resulted in fewer scholars being able to afford education.

Exorbitant and inequitable taxation itself breeds immorality: those who are subjected to an unbearable tax will resort to fraud, falsehood, and perjury in order to avoid it and honesty puts a producer at a disadvantage to competitors whose behavior is dishonest.

Modes of Assessment and Their Effect on Different Classes

Government takes as it wants, and pretensions of justice or equity is an idle luxury that it entertains when its want is not pressing. When its desires are acute and its needs are emergent, the government of a civilized nation drops such pretenses and becomes as brutal as any overtly totalitarian regime in seizing property and conscripting citizens into service.

Where the desired items are directly seized from citizens, the taxation falls directly on those from whom the goods have been taken, and the amount of the tax can be assessed as the cost to produce them, or the amount that would have been gained by their private sale.

This is considered to be the most primitive and callus method of tax-collection, but it is at the same time the least detrimental to society as a whole, as a government that seizes that which it desires generally takes only what it can make use of; a government that taxes in a more oblique manner often collects more than it needs, and incurs costs of collection that must also be recovered by an additional measure of seizure.

Where taxation is moderate, the subject can pay his taxes out of his revenue and have enough remaining to subsist. Where taxation is ongoing, it removes from the public welfare not only that capital which it consumes, but any that is set aside with the expectation of future taxation.

Where taxation is excessive, the payment of taxes draws not only on revenue, but on the means by which revenue is generated. This also diminishes the public welfare, but also decreases productivity - such that in each year the same level of taxation devours incrementally more of the productive capacity of a nation that, by deprivation of its capital, produces incrementally less.

Where taxation falls unevenly on the subject, it is found that it eventually exceeds the limits of some classes while others are scarcely touched at all, and this is the source of conflict among the classes.

Say considers taxation on production to be a direct tax, which itself becomes an indirect tax on the consumer because it is taken as an expense of production, and results in an increase in the price of the product. Ultimately, the source of all taxation is the prosperity of the public: the amount of the necessities and luxuries they are able to enjoy as a benefit of their effort is diminished by taxation, regardless of whom the original payer happens to be.

He mentions the voluntary payment of taxes, such was the method in Hamburg at one time ("before that city fell into misfortune") in which each person was asked his annual revenue. The taxation, being equitable and affordable, was readily paid and individual honesty could be relied upon. While laudable, this was an unusual instance, and is likely to be practiced only in a small territory where taxes are very moderate.

In most instances, taxes must be collected, with some degree of harshness and rigor on the citizens who must be made to pay. In spite of the efforts to make taxation equitable, and fall heaviest upon those who have the capability to bear them, each method of taxation has peculiar advantages and disadvantages that cause the tax to fall unequally on various citizens

For most instances, a government that means to be assess taxes proportionately must develop some method of estimating revenue that is more or less accurate. The French land-tax has been based on various methods over time: reviewing the written leases, assuming revenue is based on land value; a count of inhabitants, servants, livestock, and the like; an estimation of the proceeds of a given use of the land or profession of the owner; etc.

Another method is to lay a tax on a given good, as the evidence of production and the vehicle by whose sale profit will be assessed. Say mentions the taxes on salt, silver, theater tickets, tobacco, cotton, paper, and other articles. The tax may be levied when the item is produced, purchased, or transported.

And then, there is direct taxation, collected from individuals for their mere existence. It is generally paid with reluctance and must be enforced with considerable harshness and tends to be highly inequitable: a head tax on merchants is placed on persons of that profession regardless of how much revenue they make from their profession, such that the richest merchant and poorest street-vendor pay the same amount, easily affordable by the former but insurmountable by the latter.

Indirect taxation is generally easier to assess and levy and tends to be borne with "less apparent" vexation or hardship. Whereas a direct tax is placed on mere existence, indirect tax is accounted based on some specific thing, an article of product or an action of production or trade, where individuals can imagine or be presented with a plausible rationale that connects the item taxed with the benefits they receive of the government that levies the tax upon it.

Where citizens surrender their property to government without violence being done upon them, it creates the illusion that taxation is voluntary. Indirect taxation also contributes to this perception, as a tax that falls on certain items falls only upon those who choose to consume them: consider the American objection to the British taxes on tobacco, tea, sugar, and other commodities. The perspective of the British Parliament was that those who objected to taxation could refrain from consuming these items - and conversely, that consumption of these items was a consent to taxation.

As an aside, consumption of goods is not strictly a function of revenue, so a tax on consumption does not equal a tax on production. Say uses the example of salt: if a person increases his income tenfold, he does not consume tenfold as much salt. Hence a tax on this particular commodity does not meet the criterion of being visited on subjects in proportion to their ability to pay.

A criticism of indirect taxation is that it entails a heavy expense of collection, but this is not necessarily so: Say mentions that the cost of excise and stamp duties in England cost 3.25% of their revenue, which is more economical than many direct taxes.

Another criticism is that indirect taxation does not produce dependable and steady revenue. Taxation of a specific commodity leads to a decrease in the production and consumption of that commodity, decreasing tax revenues. To maintain the income, the ratio of tax must be increased, which further damages the health of the industry until it is wrecked, at which point the government must seek a fresh and healthy host to feed upon.

Another criticism is that indirect taxation is incentive to commit fraud from both collectors (who can easily forge their journals to embezzle taxes that have been collected) and taxpayers (who forge their own ledgers to decrease their tax bill). However, this is true of all taxation - and it is not the method of collection, but the reasonableness of the amount, that provide incentive and opportunity for fraud.

Say returns to the concept of the origin of tax payments, in that we would be wrong to suppose that the person who surrenders his property to the public authority is the sole victim of taxation. Where the taxation on consumption of a commodity is imposed, it is assumed that this has no effect on anyone except the consumer of that commodity. If their consumption is productive, then the tax falls on the consumers of their product.

Where a tax is placed on an object of unproductive consumption, it falls immediately on the consumer of the object - but ultimately, it is vested upon others: a tax upon the workman's bread causes him to demand greater wages of his employer, which causes his employer to raise the price of his goods to afford to pay a livable wage, which is paid by consumers to obtain those goods, and so on.

In that way, a tax on a single individual is shared out among all in the community: no single party makes a sacrifice of the whole amount of the tax: the worker eats a little less bread, his employer pays a little more wages, the customers pay a little higher price.

The taxation also echoes up the supply chain as well: where a taxes is placed on wool clothing, their price decreases and the quantity demanded decreases. The tailor buys less of the weaver, the weaver less of the spinner, and the spinner less of the shepherd.

(EN: These chains of causation, while seemingly reasonable, are also difficult to defend. One need only pick at the weakest link in the chain to collapse the argument.)

It may not be that the taxes result in any change in price, but diminish the quality that can be had for the same price: the worker bakes a little more sawdust into his bread, his employer uses materials that are a little cheaper, and the consumer gets a product of a little lower quality. While the nominal prices and wages may remain the same, the sacrifices are made in the quality of life.

Say suggests that a tax that affects and entire value-chain in the manner described above will fall most greatly on those who furnish the greatest part of the value of the product. Just as the price of a product can be portioned out to the various steps in the chain, so can the detriment of taxation.

When foreign products are taxed, the entire burden of the tax falls on domestic consumers. This is true when the product is partly of foreign origin, such as a tax on imported cotton that is an input to the domestic manufacture of cloth (the tax on cotton increases the price of cotton).

A tax on exportation is likewise a tax on the producers of goods: while the goods are purchased abroad, the profit that could have been the producer's is taken instead by the tax collector. Also, the increased price a foreign consumer must pay decreases their demand of product, and makes the domestic producer less competitive against other sources unless he decrease his price.

The ability of citizens to avoid taxation depends on the nature of the tax and the method of collection. Where tax is placed on land, the owner of the land cannot escape it while his tenant, protected by the term of his lease, wholly escapes it and has the ability to relocate should his landlord increase his rent in a following term to recover the tax. Those who invest in methods of production in which capital is frozen are also less able to escape taxation: a cotton-farmer may seed his fields with another crop at the turn of the season, whereas the operator of a vineyard or orchard would be hard-pressed to demolish vines and trees many years in the making to sow a different crop.

Laborers, merchants, and capitalists find it much easier than the producers of goods to escape taxation by simply moving themselves, their inventory, or their investments to other areas. Where a particular commodity is taxed, they may transfer their attention to others that are not. Where all commodities are taxed in a market, they may transfer their attention, and themselves, to other markets.

Where escaping from taxation requires the liquidation of assets, some sacrifice of value will be made. Where an exorbitant tax is placed on wine, the buyer of a vineyard decreases his expected profit, and decreases the offer he will make of the land. The same may be seen when a master-agent seeks to sell a loom to escape a tax upon cloth.

From all that has been described, it is clear that one cannot confidently assert that any tax falls exclusively on any specific class or group of individuals - and while we can grasp the means by which it is theoretically portioned out to many, there is no single set of calculations that will precisely determine this in all instances. We can say that any tax decreases in equal measure the degree to which citizens enjoy the necessities and conveniences of life, but cannot trace it effectively to the particular deprivations of particular citizens.

Say unleashes a flurry of analogies about the way in which taxation of one part of society is to the detriment of all of society - e.g., blood drawn from the arm diminishes the supply of the entire body - as many seem to be unable to make the connection. They desire to have public goods, but that someone else should be taxed to pay for them, failing to recognize that the price charged of others will be visited on themselves in some measure.

It is also quite often ignored that taxes in small amounts accumulate through the process of production that is common to his era, n which a product increases in value progressively. For a state to place a 50% tax on the purchase of a shirt would draw outrage. If the state taxed 10% to the cotton-farmer, 10% to the spinner, 10% to the waver, 10% to the dyer, and 10% to the merchant, it has still increased to cost of the article by 50% in the end.

In most instances, time is required for the effects of taxation to ripple through an economic system, during which time the class on whom a tax is levied suffer the greatest hardship, which takes time to be shared out. The laborer whose wages are taxed struggles to fill his own needs for a time before his employer will consent to increase his wages (by increasing the price of products).

An aside: it cannot be accurately said that the employer gains at the cost of his employees during the interval: he makes no additional revenue on his goods for the deprivation of his workers. If they do not inform him of their suffering, and make no demand of higher wages, he may even be unaware.

The problem of taxation is also aggravated by a government that does not seem to recognize the changes that have taken place in the economy, and as such make decisions that are based on an agricultural rather than a manufacturing economy.

To enumerate some of the principals that should be considered, given the state of the economy in Say's time:

There is also the effect of taxation upon the monetary system: where a tax is collected in money, it is then used to purchase goods and services needed by government. The amount of coin remains the same, but the amount of goods and services is diminished (to steal the farmer's coin and use it to purchase his grain leaves him with the same amount of money but less grain) - which results in the devaluation of money: the amount of money remains fixed while the amount of goods that may be purchased with it is diminished.

While much is said of what is fair and right in collecting taxes, the method of collection is ultimately less important than the amount that is collected. A tax that is unjust and moderate is easier to bear, and does less damage to the prosperity of the people, than a justly administered tax that consumes so much of the product of a nation that little is left to satisfy the needs of the people.

Taxation in Kind

Taxation "in kind" involves the seizure of property by a government - whatever happens to be handy - in lieu of coin. While the direct seizure of property seems callus, it enables the taxpayer to pay without the added task of converting his property to money.

While it may seem equitable to seize an equal portion of the assets of each citizen, this fails to consider the value of that which is seized. To take one-tenth of the grain grown by one farmer is to seize from him less value than to take one-tenth of a herdsman's cattle. In that manner, the citizens of a nation that practices taxation in kind are motivated to produce that which can be produced most cheaply and holds the least value.

This method of taxation also ignores the cost of production. The expenses of production must be paid by the revenue of production, and if a portion of gross product is seized without consideration of the expenses, what remains may not suffice to maintain a productive operation. In that regard, the production of goods where the expenses are significant in proportion to the value of the product becomes unprofitable.

Various systems have attempted to rectify the inequity of this method of taxation, considering the nature of the product and its method of production to derive a scale on which taxes in kind could be collected: one producer might pay one part in ten, another one part in fifteen, to ensure their contribution was equitable.

As testament to the ineffectiveness of this practice, civilizations that practice taxation in kind are marked by a failure to progress. The fact that this method of taxation has long been common in China, a nation of vast population and significant natural resources, but which remains in a primitive state of agriculture.

And while it seems a benefit that the taxpayer is relieved of the burden of converting his goods to money to pay a tax in coin, it remains necessary for the tax-collector to do so in instances where government has no need of the particular article that is taken, necessitating in turn a higher rate of taxation to cover the cost of this conversion.

Various other objections to taxation in kind have been raised, which say considers "useless and tedious to enumerate" - though he does consider that where taxation in kind requires government to liquidate assets seized to obtain that which it desires to have, it is a competitor in trade to its own people and, having the means to seize as much as it pleases, is not particularly attentive to haggling, further diminishing the ability of the producer to sell his product at a sufficient price to provide for his income and the sustenance of his operation.

Taxes that Encourage Production

It has been reckoned that taxation gives citizens encouragement to be more productive - that they will work harder to supply the taxation demanded by the state and maintain their current level of prosperity. The notion is that man's labor is undertaken in response to his wants and, when his desires are fulfilled, he will labor no further and sit idle rather than produce in excess of his needs.

There is some reason to that premise, that it is rational behavior to stop laboring toward a goal once that goal has been achieved; and man accounts for leisure time among the things that can be purchased by his effort: he may choose to work at a leisurely pace for twelve hours each day, or achieve the same results by vigorous work for six hours and enjoy six of leisure.

A tax on land was instituted in England in 1692 that demanded four shillings per pound (about 20%) of the income that it was believed the land was capable of providing. The amount of tax was fixed: it was not adjusted for the improvement of neglect of the land thereafter - and as such the owner of a plot of land paid no additional tax if he improved it to increase its rent, but also paid no less tax if the land were allowed to go fallow.

It has been suggested that is tax is to be credited with the agricultural development of England: for fear of losing their land, the farmers became more productive. But this is not necessarily so: even if a tax is an incentive to production, it does not provide the means for production: agricultural production can only be increased if there is additional land to farm, additional seeds and equipment, and additional workers to perform the necessary tasks. It also requires there to be additional consumers for the output, if the effort is to be at all profitable. Taxation creates none of these things.

Where a tax is substituted for another method of taxation that was more discouraging to production, it may take the appearance of having given encouragement - but it is the removal of the former discouragement that is to be credited. That is, a tax is not encouraging, but merely less discouraging than the previous system of taxation.

Returning to the example of England, the progress in trade and manufacture has far outpaced that of agriculture - but a similar method of taxation is not applied. The taxation laid upon non-agricultural industries is scaled based on production: the more that a manufacturer produces, the more taxation he pays. Were the premise that a flat tax encourages production true, the scaled tax on other industries would have prevented their emergence.

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