The Principles of Political Economy
by John Stuart Mill

Book 5

Chapter 2

On the General Principles of Taxation

    1. The qualities desirable, economically speaking, in a
system of taxation, have been embodied by Adam Smith in four
maxims or principles, which, having been generally concurred by
subsequent writers, may be said to have become classical, and
this chapter cannot be better commenced than by quoting them.(1*)
    '1. The subjects of every state ought to contribute to 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. 
    '2. The tax which each individual is bound to pay ought to be
certain, and not arbitrary. The time of payment, the manner of
payment, the quantity to be paid, ought all to be clear and plain
to the contributor, and to every other person. Where it is
otherwise, every person subject to the tax is put more or less in
the power of the tax-gatherer, who can either aggravate the tax
upon any obnoxious contributor, or extort by the terror of such
aggravation, some present or perquisite to himself. The
uncertainty of taxation encourages the insolence and favours the
corruption of an order of men who are naturally unpopular, even
when they are neither insolent nor corrupt. The certainty of what
each individual ought to pay is, in taxation, a matter of so
great importance, that a very considerable degree of inequality,
it appears, I believe, from the experience of all nations, is not
near so great an evil, as a very small degree of uncertainty. 
    '3. Every tax ought to be levied at the time, or in the
manner, in which it is most likely to be convenient for the
contributor to pay it. A tax upon the rent of land or of houses,
payable at the same term at which such rents are usually paid, is
levied at a time when it is most likely to be convenient for the
contributor to pay; or when he is most likely to have wherewithal
to pay. Taxes upon such consumable goods as are articles of
luxury, are all finally paid by the consumer, and generally in a
manner that is very convenient to him. He pays them by little and
little, as he has occasion to buy the goods. As he is at liberty,
too, either to buy or not to buy, as he pleases, it must be his
own fault if he ever suffers any considerable inconvenience from
such taxes. 
    '4. Every tax ought to be so contrived as both to take out
and to keep out of the pockets of the people as little as
possible over and above what it brings into the public treasury
of the state. A tax may either take out or keep out of the
pockets of the people a great deal more than it brings into the
public treasury, in the four following ways. First, the levying
of it may require a great number of officers, whose salaries may
eat up the greater part of the produce of the tax, and whose
perquisites may impose another additional tax upon the people.
Secondly, it may divert a portion of the labour and capital of
the community from a more to a less productive employment.
Thirdly, by the forfeitures and other penalties which those
unfortunate individuals incur who attempt unsuccessfully to evade
the tax, it may frequently ruin them, and thereby put an end to
the benefit which the community might have derived from the
employment of their capitals. An injudicious tax offers a great
temptation to smuggling. Fourthly, by subjecting the people to
the frequent visits and the odious examination of the
tax-gatherers, it may expose them to much unnecessary trouble,
vexation, and oppression': to which may be added, that the
restrictive regulations to which trades and manufactures are
often subjected to prevent evasion of a tax, are not only in
themselves troublesome and expensive, but often oppose
insuperable obstacles to making improvements in the processes.   
 The last three of these four maxims require little other
explanation or illustration than is contained in the passage
itself. How far any given tax conforms to, or conflicts with
them, is a matter to be considered in the discussion of
particular taxes. But the first of the four points, equality of
taxation, requires to be more fully examined, being a thing often
imperfectly understood, and on which many false notions have
become to a certain degree accredited, through the absence of any
definite principles of judgment in the popular mind. 

    2. For what reason ought equality to be the rule in matters
of taxation? For the reason, that it ought to be so in all
affairs of government. As a government ought to make no
distinction of persons or classes in the strength of their claims
on it, whatever sacrifices it requires from them should be made
to bear as nearly as possible with the same pressure upon all,
which, it must be observed, is the mode by which least sacrifice
is occasioned on the whole. If any one bears less than his fair
share of the burthen, some other person must suffer more than his
share, and the alleviation to the one is not, caeteris paribus,
so great a good to him, as the increased pressure upon the other
is an evil. Equality of taxation, therefore, as a maxim of
politics, means equality of sacrifice. It means apportioning the
contribution of each person towards the expenses of government,
so that he shall feel neither more nor less inconvenience from
his share of the payment than every other person experiences from
his. This standard, like other standards of perfection, cannot be
completely realized; but the first object in every practical
discussion should be to know what perfection is. 
    There are persons, however, who are not content with the
general principles of justice as a basis to ground a rule of
finance upon, but must have something, as they think, more
specifically appropriate to the subject. What best pleases them
is, to regard the taxes paid by each member of the community as
an equivalent for value received, in the shape of service to
himself; and they prefer to rest the justice of making each
contribute in proportion to his means, upon the ground, that he
who has twice as much property to be protected, receives, on an
accurate calculation, twice as much protection, and ought, on the
principles of bargain and sale, to pay twice as much for it.
Since, however, the assumption that government exists solely for
the protection of property, is not one to be deliberately adhered
to; some consistent adherents of the quid pro quo principle go on
to observe, that protection being required for person as well as
property, and everybody's person receiving the same amount of
protection, a poll-tax of a fixed sum per head is a proper
equivalent for this part of the benefits of government, while the
remaining part, protection to property, should be paid for in
proportion to property. There is in this adjustment a false air
of nice adaptation, very acceptable to some minds. But in the
first place, it is not admissible that the protection of persons
and that of property are the sole purposes of government. The
ends of government are as comprehensive as those of the social
union. They consist of all the good, and all the immunity from
evil, which the existence of government can be made either
directly or indirectly to bestow. In the second place, the
practice of setting definite values on things essentially
indefinite, and making them a ground of practical conclusions, is
peculiarly fertile in false views of social questions. It cannot
be admitted, that to be protected in the ownership of ten times
as much property, is to be ten times as much protected. Neither
can it be truly said that the protection of 1000l. a year costs
the state ten times as much as that of 100l. a year, rather than
twice as much, or exactly as much. The same judges, soldiers, and
sailors who protect the one protect the other, and the larger
income does not necessarily, though it may sometimes, require
even more policemen. Whether the labour and expense of the
protection, or the feelings of the protected person, or any other
definite thing be made the standard, there is no such proportion
as the one supposed, nor any other definable proportion. If we
wanted to estimate the degrees of benefit which different persons
derive from the protection of government, we should have to
consider who would suffer most if that protection were withdrawn:
to which question if any answer could be made, it must be, that
those would suffer most who were weakest in mind or body, either
by nature or by position. Indeed, such persons would almost
infallibly be slaves. If there were any justice, therefore, in
the theory of justice now under consideration, those who are
least capable of helping or defending themselves, being those to
whom the protection of government is the most indispensable,
ought to pay the greatest share of its price: the reverse of the
true idea of distributive justice, which consists not in
imitating but in redressing the inequalities and wrongs of
nature. 
    Government must be regarded as so pre.eminently a concern of
all, that to determine who are most interested in it is of no
real importance. If a person or class of persons receive so small
a share of the benefit as makes it necessary to raise the
question, there is something else than taxation which is amiss,
and the thing to be done is to remedy the defect, instead of
recognizing it and making it a ground for demanding less taxes.
As, in a case of voluntary subscription for a purpose in which
all are interested, all are thought to have done their part
fairly when each has contributed according to his means, that is,
has made an equal sacrifice for the common object; in like manner
should this be the principle of compulsory contributions: and it
is superfluous to look for a more ingenious or recondite ground
to rest the principle upon. 

    3. Setting out, then, from the maxim that equal sacrifices
ought to be demanded from all, we have next to inquire whether
this is in fact done, by making each contribute the same
percentage on his pecuniary means. Many persons maintain the
negative, saying that a tenth part taken from a small income is a
heavier burthen than the same fraction deducted from one much
larger: and on this is grounded the very popular scheme of what
is called a graduated property tax, viz. an income tax in which
the percentage rises with the amount of the income. 
    On the best consideration I am able to give to this question,
it appears to me that the portion of truth which the doctrine
contains, arises principally from the difference between a tax
which can be saved from luxuries, and one which trenches, in ever
so small a degree, upon the necessaries of life. To take a
thousand a year from the possessor of ten thousand, would not
deprive him of anything really conducive either to the support or
to the comfort of existence; and if such would be the effect of
taking five pounds from one whose income is fifty, the sacrifice
required from the last is not only greater than, but entirely
incommensurable with, that imposed upon the first. The mode of
adjusting these inequalities of pressure, which seems to be the
most equitable, is that recommended by Bentham, of leaving a
certain minimum of income, sufficient to provide the necessaries
of life, untaxed. Suppose 50l. a year to be sufficient to provide
the number of persons ordinarily supported from a single income,
with the requisites of life and health, and with protection
against habitual bodily suffering, but not with any indulgence.
This then should be made the minimum, and incomes exceeding it
should pay taxes not upon their whole amount, but upon the
surplus. If the tax be ten per cent, an income of 60l. should be
considered as a net income of 10l., and charged with 1l. a year,
while an income of 1000l. should be charged as one of 950l. Each
would then pay a fixed proportion, not of his whole means, but of
his superfluities.(2*) An income not exceeding 50l. should not be
taxed at all, either directly or by taxes on necessaries; for as
by supposition this is the smallest income which labour ought to
be able to command, the government ought not to be a party to
making it smaller. This arrangement however would constitute a
reason, in addition to others which might be stated, for
maintaining taxes on articles of luxury consumed by the poor. The
immunity extended to the income required for necessaries, should
depend on its being actually expended for that purpose; and the
poor who, not having more than enough for necessaries, divert any
part of it to indulgences, should like other people contribute
their quota out of those indulgences to the expenses of the
state. 
    The exemption in favour of the smaller incomes should not, I
think, be stretched further than to the amount of income needful
for life, health, and immunity from bodily pain. If 50l. a year
is sufficient (which may be doubted) for these purposes, an
income of 100l. a year would, as it seems to me, obtain al1 the
relief it is entitled to, compared with one of 1000l., by being
taxed only on 50l. of its amount. It may be said, indeed, that to
take 100l. from 1000l. (even giving back five pounds) is a
heavier impost than 1000l. taken from 10,000l. (giving back the
same five pounds). But this doctrine seems to me too disputable
altogether, and even if true at all, not true to a sufficient
extent, to be made the foundation of any rule of taxation.
Whether the person with 10,000l. a year cares less for 1000l.
than the person with only 1000l. a year cares for 100l., and if
so, how much less, does not appear to me capable of being decided
with the degree of certainty on which a legislator or a financier
ought to act. 
    Some indeed contend that the rule of proportional taxation
bears harder upon the moderate than upon the large incomes,
because the same proportional payment has more tendency in the
former case than in the latter, to reduce the payer to a lower
grade of social rank. The fact appears to me more than
questionable. But even admitting it, I object to its being
considered incumbent on government to shape its course by such
considerations, or to recognize the notion that social importance
is or can be determined by amount of expenditure. Government
ought to set an example of rating all things at their true value,
and riches, therefore, at the worth, for comfort or pleasure, of
the things which they will buy: and ought not to sanction the
vulgarity of prizing them for the pitiful vanity of being known
to possess them, or the paltry shame of being suspected to be
without them, the presiding motives of three-fourths of the
expenditure of the middle classes. The sacrifices of real comfort
or indulgence which government requires, it is bound to apportion
among all persons with as much equality as possible; but their
sacrifices of the imaginary dignity dependent on expense, it may
spare itself the trouble of estimating. 
    Both in England and on the Continent a graduated property tax
(l'impot progressif) has been advocated, on the avowed ground
that the state should use the instrument of taxation as a means
of mitigating the inequalities of wealth. I am as desirous as any
one, that means should be taken to diminish those inequalities,
but not so as to relieve the prodigal at the expense of the
prudent. To tax the larger incomes at a higher percentage than
the smaller, is to lay a tax on industry and economy; to impose a
penalty on people for having worked harder and saved more than
their neighbours. It is not the fortunes which are earned, but
those which are unearned, that it is for the public good to place
under limitation. A just and wise legislation would abstain from
holding out motives for dissipating rather than saving the
earnings of honest exertion. Its impartiality between competitors
would consist in endeavouring that they should all start fair,
and not in hanging a weight upon the swift to diminish the
distance between them and the slow. Many, indeed, fail with
greater efforts than those with which others succeed, not from
difference of merits, but difference of opportunities; but if all
were done which it would be in the power of a good government to
do, by instruction and by legislation, to diminish this
inequality of opportunities, the differences of fortune arising
from people's own earnings could not justly give umbrage. With
respect to the large fortunes acquired by gift or inheritance,
the power of bequeathing is one of those privileges of property
which are fit subjects for regulation on grounds of general
expediency; and I have already suggested, as a possible mode of
restraining the accumulation of large fortunes in the hands of
those who have not earned them by exertion, a limitation of the
amount which any one person should be permitted to acquire by
gift, bequest, or inheritance. Apart from this, and from the
proposal of Bentham (also discussed in a former chapter) that
collateral inheritance ab intestato should cease, and the
property escheat to the state, I conceive that inheritances and
legacies, exceeding a certain amount, are highly proper subjects
for taxation: and that the revenue from them should be as great
as it can be made without giving rise to evasions, by donation
inter vivos or concealment of property, such as it would be
impossible adequately to check. The principle of graduation (as
it is called,) that is, of levying a larger percentage on a
larger sum, though its application to general taxation would be
in my opinion objectionable, seems to me both just and expedient
as applied to legacy and inheritance duties. 
    The objection to a graduated property tax applies in an
aggravated degree to the proposition of an exclusive tax on what
is called 'realized property', that is, property not forming a
part of any capital engaged in business, or rather in business
under the superintendence of the owner: as land, the public
funds, money lent on mortgage, and shares (I presume) in
joint-stock companies. Except the proposal of applying a sponge
to the national debt, no such palpable violation of common
honesty has found sufficient support in this country, during the
present generation, to be regarded as within the domain of
discussion. It has not the palliation of a graduated property
tax, that of lay. ing the burthen on those best able to bear it;
for 'realized property' includes the far larger portion of the
provision made for those who are unable to work, and consists, in
great part, of extremely small fractions. I can hardly conceive a
more shameless pretension, than that the major part of the
property of the country, that of merchants, manufacturers,
farmers, and shopkeepers, should be exempted from its share of
taxation; that these classes should only begin to pay their
proportion after retiring from business, and if they never retire
should be excused from it altogether. But even this does not give
an adequate idea of the injustice of the proposition. The burthen
thus exclusively thrown on the owners of the smaller portion of
the wealth of the community, would not even be a burthen on that
class of persons in perpetual succession, but would fall
exclusively on those who happened to compose it when the tax was
laid on. As land and those particular securities would
thenceforth yield a smaller net income, relatively to the general
interest of capital and to the profits of trade; the balance
would rectify itself by a permanent depreciation of those kinds
of property. Future buyers would acquire land and securities at a
reduction of price, equivalent to the peculiar tax, which tax
they would, therefore, escape from paying; while the original
possessors would remain burthened with it even after parting with
the property, since they would have sold their land or securities
at a loss of value equivalent to the fee-simple of the tax. Its
imposition would thus be tantamount to the confiscation for
public uses of a percentage of their property, equal to the
percentage laid on their income by the tax. That such a
proposition should find any favour, is a striking instance of the
want of conscience in matters of taxation, resulting from the
absence of any fixed principles in the public mind, and of any
indication of a sense of justice on the subject in the general
conduct of governments. Should the scheme ever enlist a large
party in its support, the fact would indicate a laxity of
pecuniary integrity in national affairs, scarcely inferior to
American repudiation.

    4. Whether the profits of trade may not rightfully be taxed
at a lower rate than incomes derived from interest or rent, is
part of the more comprehensive question, so often mooted on the
occasion of the present income tax, whether life incomes should
be subjected to the same rate of taxation as perpetual incomes:
whether salaries, for example, or annuities, or the gains of
professions, should pay the same percentage as the income from
inheritable property. 
    The existing tax treats all kinds of incomes exactly alike,
taking its sevenpence (now fourpence) in the pound, as well from
the person whose income dies with him, as from the landholder,
stockholder, or mortgagee, who can transmit his fortune
undiminished to his descendants. This is a visible injustice: yet
it does not arithmetically violate the rule that taxation ought
to be in proportion to means. When it is said that a temporary
income ought to be taxed less than a permanent one, the reply is
irresistible, that it is taxed less; for the income which lasts
only ten years pays the tax only ten years, while that which
lasts for ever pays for ever. On this point some financial
reformers are guilty of a great fallacy. They contend that
incomes ought to be assessed to the income tax not in proportion
to their annual amount, but to their capitalized value: that, for
example, if the value of a perpetual annuity of 100l. is 3000l.,
and a life annuity of the same amount, being worth only half the
number of years' purchase, could only be sold for 1500l., the
perpetual income should pay twice as much per cent income tax as
the terminable income; if the one pays 10l. a year the other
should pay only 5l. But in this argument there is the obvious
oversight, that it values the incomes by one standard and the
payments by another; it capitalizes the incomes, but forgets to
capitalize the payments. An annuity worth 3000l. ought, it is
alleged, to be taxed twice as highly as one which is only worth
1500l., and no assertion can be more unquestionable; but it is
forgotten that the income worth 3000l. pays to the supposed
income tax 10l. a year in perpetuity, which is equivalent, by
supposition, to 300l., while the terminable income pays the same
10l. only during the life of its owner, which on the same
calculation is a value of 150l., and could actually be bought for
that sum. Already, therefore, the income which is only half as
valuable, pays only half as much to the tax; and if in addition
to this its annual quota were reduced from 10l. to 5l., it would
pay, not half, but a fourth part only of the payment demanded
from the perpetual income. To make it just that the one income
should pay only half as much per annum as the other, it would be
necessary that it should pay that half for the same period, that
is, in perpetuity. 
    The rule of payment which this school of financial reformers
contend for, would be very proper if the tax were only to be
levied once, to meet some national emergency. On the principle of
requiring from all payers an equal sacrifice, every person who
had anything belonging to him, reversioners included, would be
called on for a payment proportioned to the present value of his
property. I wonder it does not occur to the reformers in
question, that precisely because this principle of assessment
would be just in the case of a payment made once for all, it
cannot possibly be just for a permanent tax. When each pays only
once, one person pays no oftener than another. and the proportion
which would be just in that case, cannot also be just if one
person has to make the payment only once, and the other several
times. This, however, is the type of the case which actually
occurs. The permanent incomes pay the tax as much oftener than
the temporary ones, as a perpetuity exceeds the certain or
uncertain length of time which forms the duration of the income
for life or years. 
    All attempts to establish a claim in favour of terminable
incomes on numerical grounds - to make out, in short, that a
proportional tax is not a proportional tax - are manifestly
absurd. The claim does not rest on grounds of arithmetic, but of
human wants and feelings. It is not because the temporary
annuitant has smaller means, but because he has greater
necessities, that he ought to be assessed at a lower rate. 
    In spite of the nominal equality of income, A, an annuitant
of 1000l. a year, cannot so well afford to pay 100l. out of it,
as B who derives the same annual sum from heritable property; A
having usually a demand on his income which B has not, namely, to
provide by saving for children or others; to which, in the case
of salaries or professional gains, must generally be added a
provision for his own later years; while B may expend his whole
income without injury to his old age, and still have it all to
bestow on others after his death. If A, in order to meet these
exigencies, must lay by 300l. of his income, to take 100l. from
him as income tax is to take 100l. from 700l., since it must be
retrenched from that part only of his means which he can afford
to spend on his own consumption. Were he to throw it rateably on
what he spends and on what he saves, abating 70l. from his
consumption and 30l. from his annual saving, then indeed his
immediate sacrifice would be proportionately the same as B's: but
then his children or his old age would be worse provided for in
consequence of the tax. The capital sum which would be
accumulated for them would be one-tenth less, and on the reduced
income afforded by this reduced capital, they would be a second
time charged with income tax; while B's heirs would only be
charged once. 
    The principle, therefore, of equality of taxation,
interpreted in its only just sense, equality of sacrifice,
requires that a person who has no means of providing for old age,
or for those in whom he is interested, except by saving from
income, should have the tax remitted on all that part of his
income which is really and bona fide applied to that purpose. 
    If, indeed, reliance could be placed on the conscience of the
contributors, or sufficient security taken for the correctness of
their statements by collateral precautions, the proper mode of
assessing an income tax would be to tax only the part of income
devoted to expenditure, exempting that which is saved. For when
saved and invested (and all savings, speaking generally, are
invested) it thenceforth pays income tax on the interest or
profit which it brings, notwithstanding that it has already been
taxed on the principal. Unless, therefore, savings are exempted
from income tax, the contributors are twice taxed on what they
save, and only once on what they spend. A person who spends all
he receives, pays 7d. in the pound, or say three per cent, to the
tax, and no more; but if he saves part of the year's income and
buys stock, then in addition to the three per cent which he has
paid on the principal, and which diminishes the interest in the
same ratio, he pays three per cent annually on the interest
itself, which is equivalent to an immediate payment of a second
three per cent on the principal. So that while unproductive
expenditure pays only three per cent, savings pay six per cent:
or more correctly, three per cent on the whole, and another three
per cent on the remaining ninety-seven. The difference thus
created to the disadvantage of prudence and economy, is not only
impolitic but unjust. To tax the sum invested, and afterwards tax
also the proceeds of the investment, is to tax the same portion
of the contributor's means twice over. The principal and the
interest cannot both together form part of his resources; they
are the same portion twice counted: if he has the interest, it is
because he abstains from using the principal; if he spends the
principal, he does not receive the interest. Yet because he can
do either of the two, he is taxed as if he could do both, and
could have the benefit of the saving and that of the spending,
concurrently with one another. 
    It has been urged as an objection to exempting savings from
taxation, that the law ought not to disturb, by artificial
interference, the natural competition between the motives for
saving and those for spending. But we have seen that the law
disturbs this natural competition when it taxes savings, not when
it spares them; for as the savings pay at any rate the full tax
as soon as they are invested, their exemption from payment in the
earlier stage is necessary to prevent them from paying twice,
while money spent in unproductive consumption pays only once. It
has been further objected, that since the rich have the greatest
means of saving, any privilege given to savings is an advantage
bestowed on the rich at the expense of the poor. I answer, that
it is bestowed on them only in proportion as they abdicate the
personal use of their riches; in proportion as they divert their
income from the supply of their own wants, to a productive
investment, through which, instead of being consumed by
themselves, it is distributed in wages among the poor. If this be
favouring the rich, I should like to have it pointed out, what
mode of assessing taxation can deserve the name of favouring the
poor. 
    No income tax is really just, from which savings are not
exempted; and no income tax ought to be voted without that
provision, if the form of the returns, and the nature of the
evidence required, could be so arranged as to prevent the
exemption from being taken fraudulent advantage of, by saving
with one hand and getting into debt with the other, or by
spending in the following year what had been passed tax-free as
saving in the year preceding. If this difficulty could be
surmounted, the difficulties and complexities arising from the
comparative claims of temporary and permanent incomes, would
disappear; for, since temporary incomes have no just claim to
lighter taxation than permanent incomes, except in so far as
their possessors are more called upon to save, the exemption of
what they do save would fully satisfy the claim. But if no plan
can be devised for the exemption of actual savings, sufficiently
free from liability to fraud, it is necessary, as the next thing
in point of justice, to take into account in assessing the tax,
what the different classes of contributors ought to save. And
there would probably be no other mode of doing this than the
rough expedient of two different rates of assessment. There would
be great difficulty in taking into account differences of
duration between one terminable income and another; and in the
most frequent case, that of incomes dependent on life,
differences of age and health would constitute such extreme
diversity as it would be impossible to take proper cognizance of.
It would probably be necessary to be content with one uniform
rate for all incomes of inheritance, and another uniform rate for
all those which necessarily terminate with the life of the
individual. In fixing the proportion between the two rates, there
must inevitably be something arbitrary; perhaps a deduction of
one-fourth in favour of life-incomes would be as little
objectionable as any which could be made, it being thus assumed
that one-fourth of a life-income is, on the average of all ages
and states of health, a suitable proportion to be laid by as a
provision for successors and for old age.(3*)
    Of the net profits of persons in business, a part, as before
observed, may be considered as interest on capital, and of a
perpetual character, and the remaining part as remuneration for
the skill and labour of superintendence. The surplus beyond
interest depends on the life of the individual, and even on his
continuance in business, and is entitled to the full amount of
exemption allowed to terminable incomes. It has also, I conceive,
a just claim to a further amount of exemption in consideration of
its precariousness. An income which some not unusual vicissitude
may reduce to nothing, or even convert into a loss, is not the
same thing to the feelings of the possessor as a permanent income
of 1000l. a year, even though on an average of years it may yield
1000l. a year. If life.incomes were assessed at three-fourths of
their amount, the profits of business, after deducting interest
on capital, should not only be assessed at three-fourths, but
should pay, on that assessment, a lower rate. Or perhaps the
claims of justice in this respect might be sufficiently met by
allowing the deduction of a fourth on the entire income, interest
included. 
    These are the chief cases, of ordinary occurrence, in which
any difficulty arises in interpreting the maxim of equality of
taxation. The proper sense to be put upon it, as we have seen in
the preceding example, is, that people should be taxed, not in
proportion to what they have, but to what they can afford to
spend. It is no objection to this principle that we cannot apply
it consistently to all cases. A person with a life-income and
precarious health, or who has many persons depending on his
exertions, must, if he wishes to provide for them after his
death, be more rigidly economical than one who has a life-income
of equal amount, with a strong constitution, and few claims upon
him; and if it be conceded that taxation cannot accommodate
itself to these distinctions, it is argued that there is no use
in attending to any distinctions, where the absolute amount of
income is the same. But the difficulty of doing perfect justice
is no reason against doing as much as we can. Though it may be a
hardship to an annuitant whose life is only worth five years'
purchase, to be allowed no greater abatement than is granted to
one whose life is worth twenty, it is better for him even so,
than if neither of them were allowed any abatement at all. 

    5. Before leaving the subject of Equality of Taxation, I must
remark that there are cases in which exceptions may be made to
it, consistently with that equal justice which is the groundwork
of the rule. Suppose that there is a kind of income which
constantly tends to increase, without any exertion or sacrifice
on the part of the owners: those owners constituting a class in
the community, whom the natural course of things progressively
enriches, consistently with complete passiveness on their own
part. In such a case it would be no violation of the principles
on which private property is grounded, if the state should
appropriate this increase of wealth, or part of it, as it arises.
This would not properly be taking anything from anybody; it would
merely be applying an accession of wealth, created by
circumstances, to the benefit of society, instead of allowing it
to become an unearned appendage to the riches of a particular
class. 
    Now this is actually the case with rent. The ordinary
progress of a society which increases in wealth, is at all times
tending to augment the incomes of landlords; to give them both a
greater amount and a greater proportion of the wealth of the
community, independently of any trouble or outlay incurred by
themselves. They grow richer, as it were in their sleep, without
working, risking, or economizing. What claim have they, on the
general principle of social justice, to this accession of riches?
In what would they have been wronged if society had, from the
beginning, reserved the right of taxing the spontaneous increase
of rent, to the highest amount required by financial exigencies?
I admit that it would be unjust to come upon each individual
estate, and lay hold of the increase which might be found to have
taken place in its rental; because there would be no means of
distinguishing in individual cases, between an increase owing
solely to the general circumstances of society, and one which was
the effect of skill and expenditure on the part of the
proprietor. The only admissible mode of proceeding would be by a
general measure. The first step should be a valuation of all the
land in the country. The present value of all land should be
exempt from the tax; but after an interval had elapsed, during
which society had increased in population and capital, a rough
estimate might be made of the spontaneous increase which had
accrued to rent since the valuation was made. Of this the average
price of produce would be some criterion: if that had risen, it
would be certain that rent had increased, and (as already shown)
even in a greater ratio than the rise of price. On this and other
data, an approximate estimate might be made, how much value had
been added to the land of the country by natural causes; and in
laying on a general land-tax, which for fear of miscalculation
should be considerably within the amount thus indicated, there
would be an assurance of not touching any increase of income
which might be the result of capital expended or industry exerted
by the proprietor. 
    But though there could be no question as to the justice of
taxing the increase of rent, if society had avowedly reserved the
right, has not society waived that right by not exercising it? In
England, for example, have not all who bought land for the last
century or more, given value not only for the existing income,
but for the prospects of increase, under an implied assurance of
being only taxed in the same proportion with other incomes? This
objection, in so far as valid, has a different degree of validity
in different countries; depending on the degree of desuetude into
which society has allowed a right to fall, which, as no one can
doubt, it once fully possessed. In most countries of Europe, the
right to take by taxation, as exigency might require, an
indefinite portion of the rent of land, has never been allowed to
slumber. In several parts of the Continent, the land-tax forms a
large proportion of the public revenues, and has always been
confessedly liable to be raised or lowered without reference to
other taxes. In these countries no one can pretend to have become
the owner of land on the faith of never being called upon to pay
an increased land-tax. In England the land-tax has not varied
since the early part of the last century. The last act of the
legislature in relation to its amount, was to diminish it; and
though the subsequent increase in the rental of the country has
been immense, not only from agriculture, but from the growth of
towns and the increase of buildings, the ascendancy of
landholders in the legislature has prevented any tax from being
imposed, as it so justly might, upon the very large portion of
this increase which was unearned, and, as it were, accidental.
For the expectations thus raised, it appears to me that an amply
sufficient allowance is made, if the whole increase of income
which has accrued during this long period from a mere natural
law, without exertion or sacrifice, is held sacred from any
peculiar taxation. From the present date, or any subsequent time
at which the legislature may think fit to assert the principle, I
see no objection to declaring that the future increment of rent
should be liable to special taxation; in doing which all
injustice to the landlords would be obviated, if the present
market-price of their land were secured to them; since that
includes the present value of all future expectations. With
reference to such a tax, perhaps a safer criterion than either a
rise of rents or a rise of the price of corn, would be a general
rise in the price of land. It would be easy to keep the tax
within the amount which would reduce the market value of land
below the original valuation: and up to that point, whatever the
amount of the tax might be, no injustice would be done to the
proprietors.

    6. But whatever may be thought of the legitimacy of making
the State a sharer in all future increase of rent from natural
causes, the existing land-tax (which in this country
unfortunately is very small) ought not to be regarded as a tax,
but as a rent-charge in favour of the public; a portion of the
rent, reserved from the beginning by the State, which has never
belonged to or formed part of the income of the landlords, and
should not therefore be counted to them as part of their
taxation, so as to exempt them from their fair share of every
other tax. As well might the tithe be regarded as a tax on the
landlords: as well, in Bengal, where the State, though entitled
to the whole rent of the land, gave away one-tenth of it to
individuals, retaining the other nine-tenths, might those
nine-tenths be considered as an unequal and unjust tax on the
grantees of the tenth. That a person owns part of the rent, does
not make the rest of it his just right, injuriously withheld from
him. The landlords originally held their estates subject to
feudal burthens, for which the present land-tax is an exceedingly
small equivalent, and for their relief from which they should
have been required to pay a much higher price. All who have
bought land since the tax existed have bought it subject to the
tax. There is not the smallest pretence for looking upon it as a
payment exacted from the existing race of landlords. 
    These observations are applicable to a land-tax, only in so
far as it is a peculiar tax, and not when it is merely a mode of
levying from the landlords the equivalent of what is taken from
other classes. In France, for example, there are peculiar taxes
on other kinds of property and income (the mobilier and the
patente), and supposing the land-tax to be not more than
equivalent to these, there would be no ground for contending that
the State had reserved to itself a rent-charge on the land. But
wherever and in so far as income derived from land is
prescriptively subject to a deduction for public purposes, beyond
the rate of taxation levied on other incomes, the surplus is not
properly taxation, but a share of the property in the soil,
reserved by the state. In this country there are no peculiar
taxes on other classes, corresponding to, or intended to
countervail, the land-tax. The whole of it, therefore, is not
taxation, but a rent-charge, and is as if the state had retained,
not a portion of the rent, but a portion of the land. It is no
more a burthen on the landlord, than the share of one joint
tenant is a burthen on the other. The landlords are entitled to
no compensation for it, nor have they any claim to its being
allowed for, as part of their taxes. Its continuance on the
existing footing is no infringement of the principle of Equal
Taxation.(4*) 
    We shall hereafter consider, in treating of Indirect
Taxation, how far, and with what modifications, the rule of
equality is applicable to that department. 

    7. 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
of its excessive amount. Over-taxation, 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 100l. 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
l000l., he considers the legacy as only 900l., 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 probably 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.

NOTES:

1. Wealth of Nations, Bk V, Ch. 2.

2. This principle of assessment has been partially adopted by Mr
Gladstone in renewing the income-tax. From 100l., at which the
tax begins, up to 200l., the income only pays tax on the excess
above 60l. 

3. Mr Hubbard, the first person who, as a practical legislator,
has attempted the rectification of the income tax on principles
of unimpeachable justice, and whose well-conceived plan wants
little of being as near an approximation to a just assessment as
it is likely that means could be found of carrying into practical
effect, proposes a deduction not of a fourth but of a third, in
favour of industrial and professional incomes. He fixes on this
ratio, on the ground that, independently of all consideration as
to what the industrial and professional classes ought to save,
the attainable evidence goes to prove that a third of their
incomes is what on an average they do save, over and above the
proportion saved by other classes. 'The savings' (Mr Hubbard
observes) 'effected out of incomes derived from invested property
are estimated at one-tenth. The savings effected out of
industrial incomes are estimated at four-tenths. The amounts
which would be assessed under these two classes being nearly
equal, the adjustment is simplified by striking off one-tenth on
either side, and then reducing by three-tenths, or one.third, the
assessable amount of industrial incomes.' Proposed Report (p. xiv
of the Report and Evidence of the Committee of 1861). In such an
estimate there must be a large element of conjecture; but in so
far as it can be substantiated, it affords a valid ground for the
practical conclusion which Mr Hubbard founds on it. 
    Several writers on the subject, including Mr Mill in his
Elements of Political Economy, and Mr M'Culloch in his work on
Taxation, have contended that as much should be deducted as would
be sufficient to insure the possessor's life for a sum which
would give to his successors for ever an income equal to what he
reserves for himself; since this is what the possessor of
heritable property can do without saving at all: in other words,
that temporary incomes should be converted into perpetual incomes
of equal present value, and taxed as such. If the owners of
life-incomes actually did save this large proportion of their
income, or even a still larger. I would gladly grant them an
exemption from taxation on the whole amount, since, if practical
means could be found of doing it, I would exempt savings
altogether. But I cannot admit that they have a claim to
exemption on the general assumption of their being obliged to
save this amount. Owners of life-incomes are not bound to forego
the enjoyment of them for the sake of leaving to a perpetual line
of successors an independent provision equal to their own
temporary one; and no one ever dreams of doing so. Least of all
is it to be required or expected from those whose incomes are the
fruits of personal exertion, that they should leave to their
posterity for ever, without any necessity for exertion, the same
incomes which they allow to themselves. All they are bound to do,
even for their children, is to place them in circumstances in
which they will have favourable chances of earning their own
living. To give, however, either to children or to others, by
bequest, being a legitimate inclination, which these persons
cannot indulge without laying by a part of their income, while
the owners of heritable property can; this real inequality in
cases where the incomes themselves are equal, should be
considered, to a reasonable degree, in the adjustment of
taxation, so as to require from both, as nearly as practicable,
an equal sacrifice.

4. The same remarks obviously apply to those local taxes, of the
peculiar pressure of which on landed property so much has been
said by the remnant of the Protectionists. As much of these
burthrens as is of old standing, ought to be regarded as a
prescriptive deduction or reservation, for public purposes, of a
portion of the rent. And any recent additions have either been
incurred for the benefit of the owners of landed property, or
occasioned by their fault: in neither case giving them any just
ground of complaint.