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33: Taxes and Legal Restrictions on Manufacturing

Taxation constitutes a cost for which there is no benefit to the payer, and as such as soon as any tax is invented, people seek ways to avoid it. The window tax in Britain is mentioned, which led to the reduction in the number of windows in new houses and the bricking up of existing windows.

For manufacturers, the cost of a tax is added to the price of their products, and because effort is generally taken to ensure the tax is equally imposed on all producers. Thus, the primary effect is simply to make things more expensive for the consumer, hence they can afford less of them. If the same taxes are applied to goods that are exported, domestic manufacturers suffer a disadvantage selling their wares overseas where them must compete with manufacturers in other locations that do not pay the same taxes.

In other instances, taxation degrades the quality of goods. For example, a tax placed upon paper by weight caused manufacturers to reduce the thickness of paper until it became "extremely thin." A tax placed upon barley used in the preparation of whiskey caused producers to use less barley in their fermentation process, substituting cheaper grains, and distilling their product to a lower level of purity, effectively watering down the whiskey.

The effects on duties on imported goods likewise causes damage to the consumer - as any good that cannot be made domestically must be imported. Even when there are domestic manufactures, the tax is seen as a license to raise their prices to the level of imports, hence this produces neither savings for the consumer nor the development of domestic manufacturing beyond a certain level.

He considers a number of examples, and ultimately asserts that "in almost all cases" a tax, duty, or prohibition has been both ineffective and injurious, and tend to encourage deception and fraud perpetrated both upon the government and the consumer. Moreover, government is far too casual in devising a new tax scheme and far too reluctant to repeal or reform one that is shown in practice to be harmful.

Bounties and subsidies, which are instituted to encourage the growth of domestic industry by providing a reward for producing certain items, are "of a very questionable nature." It is the natural inclination of business to seek the greatest profit from their investment, and the consideration of offering payment other than the purchase of products is a clear indication that a given line of business is unsustainable.

The motive for providing incentive to manufacture something that cannot normally done profitable is often political in nature - typically to produce a product locally that can be made more efficiently somewhere else, out of fear of the stability of foreign sources. The notion that any good is a critical necessity is often irrational and false: most goods that are subsidized are luxury items that are dispensable or for which there are ample substitutes.

The damages of a bounty are numerous: they encourage fraud and deception, harm competition of substitute goods, discourage the development of efficient manufacturing techniques, and must be funded by the exploitation of more profitable industries. Simply stated, if a given industry cannot be profitable without assistance, it is not a viable industry until a sustainable method is discovered.

There's an extended account of a subsidy provided for the making of "bobbin net" in the textile industry. The small profit of that trade attracted little investment until it received government support, at which time there was a great boom in the industry - the supply of products swelled, diminishing their cost; workers abandoned sustainable businesses to profit from increased wages; supporting industries ramped up production; and other dramatic shifts in economic and productive activity occurred to take advantage. The problem was the sudden and enormous expense to government (hence taxpayers) in supporting an unsustainable industry, as well as the sudden collapse when the bounty could not be financed. Many were left in "utter ruin" whether when the bounty was instituted or when it was cancelled.

There is then a shift to patents and copyrights, which are used to encourage creators by giving them a temporary monopoly over their inventions in order to recover the costs of research and development. Strictly speaking, this is harmful to competition because the inventor has the ability to sell his article at a significantly higher price than the costs of its fabrication rather than accepting the "ordinary profits" of manufacturing. There is a delicate balance to be struck between giving incentive to inventors and giving privilege to them.

He then speaks in support of limited partnerships - those in which certain "partners" in an undertaking risk only the capital they invest and assume no further liability for the actions of the company. This is particularly important to manufacturing, as well as to giving the power of investment to those who have modest amounts - and it makes perfect sense that if they have no control over the management of a firm that they should not be held liable for its actions. The banker who loans money risks only the non-repayment of the money it lent, and has no further obligations to the firm nor liabilities for its actions, and it stands to reason that the non-participating partners who provide only financial support should have the same legal protections.

In general, Babbage is a proponent of the notion that government ought to interfere as little as possible in manufacturing and commerce, except to prevent fraud and deception and to hold individuals to the promises they have made to others. He concedes some instances in which workers are abused, but this requires only small and temporary involvement to alleviate problems such as child or slave labor when the manufacturers have an unusual amount of power in negotiations.