The Principles of Political Economy
by John Stuart Mill

Book 5

Chapter 6

Comparison between Direct and Indirect Taxes

    1. Are direct or indirect taxes the most eligible? This
question, at all times interesting, has of late excited a
considerable amount of discussion. In England there is a popular
feeling, of old standing, in favour of indirect, or it should
rather be said in opposition to direct, taxation. The feeling is
not grounded on the merits of the case, and is of a puerile kind.
An Englishman dislikes, not so much the payment, as the act of
paying. He dislikes seeing the face of the tax-collector, and
being subjected to his peremptory demand. Perhaps, too, the money
which he is required to pay directly out of his pocket is the
only taxation which he is quite sure that he pays at all. That a
tax of one shilling per pound on tea, or of two shillings per
bottle on wine, raises the price of each pound of tea and bottle
of wine which he consumes, by that and more than that amount,
cannot indeed be denied; it is the fact, and is intended to be
so, and he himself, at times, is perfectly aware of it; but it
makes hardly any impression on his practical feelings and
associations, serving to illustrate the distinction between what
is merely known to be true and what is felt to be so. The
unpopularity of direct taxation, contrasted with the easy manner
in which the public consent to let themselves be fleeced in the
prices of commodities, has generated in many friends of
improvement a directly opposite mode of thinking to the
foregoing. They contend that the very reason which makes direct
taxation disagreeable, makes it preferable. Under it, every one
knows how much he really pays; and if he votes for a war, or any
other expensive national luxury, he does so with his eyes open to
what it costs him. If all taxes were direct, taxation would be
much more perceived than at present; and there would be a
security which now there is not, for economy in the public
expenditure. 
    Although this argument is not without force, its weight is
likely to be constantly diminishing. The real incidence of
indirect taxation is every day more generally understood and more
familiarly recognized: and whatever else may be said of the
changes which are taking place in the tendencies of the human
mind, it can scarcely, I think, be denied, that things are more
and more estimated according to their calculated value, and less
according to their non-essential accompaniments. The mere
distinction between paying money directly to the tax-collector,
and contributing the same sum through the intervention of the
tea.dealer or the wine-merchant, no longer makes the whole
difference between dislike or opposition, and passive
acquiescence. But further, while any such infirmity of the
popular mind subsists, the argument grounded on it tells partly
on the other side of the question. If our present revenue of
about seventy millions were all raised by direct taxes, an
extreme dissatisfaction would certainly arise at having to pay so
much; but while men's minds are so little guided by reason, as
such a change of feeling from so irrelevant a cause would imply,
so great an aversion to taxation might not be an unqualified
good. Of the seventy millions in question, nearly thirty are
pledged, under the most binding obligations, to those whose
property has been borrowed and spent by the state: and while this
debt remains unredeemed, a greatly increased impatience of
taxation would involve no little danger of a breach of faith,
similar to that which, in the defaulting states of America, has
been produced, and in some of them still continues, from the same
cause. That part, indeed, of the public expenditure, which is
devoted to the maintenance of civil and military establishments,
(that is, all except the interest of the national debt,) affords,
in many of its details, ample scope for retrenchment. But while
much of the revenue is wasted under the mere pretence of public
service, so much of the most important business of government is
left undone, that whatever can be rescued from useless
expenditure is urgently required for useful. Whether the object
be education; a more efficient and accessible administration of
justice; reforms of any kind which, like the Slave Emancipation,
require compensation to individual interests; or what is as
important as any of these, the entertainment of a sufficient
staff of able and educated public servants, to conduct in a
better than the present awkward manner the business of
legislation and administration; every one of these things implies
considerable expense, and many of them have again and again been
prevented by the reluctance which existed to apply to Parliament
for an increased grant of public money, though (besides that the
existing means would probably be sufficient if applied to the
proper purposes) the cost would be repaid, often a hundredfold,
in mere pecuniary advantage to the community generally. If so
great an addition were made to the public dislike of taxation as
might be the consequence of confining it to the direct form, the
classes who profit by the misapplication of public money might
probably succeed in saving that by which they profit, at the
expense of that which would only be useful to the public. 
    There is, however, a frequent plea in support of indirect
taxation, which must be altogether rejected, as grounded on a
fallacy. We are often told that taxes on commodities are less
burthensome than other taxes, because the contributor can escape
from them by ceasing to use the taxed commodity. He certainly
can, if that be his object, deprive the government of the money:
but he does so by a sacrifice of his own indulgences, which (if
he chose to undergo it) would equally make up to him for the same
amount taken from him by direct taxation. Suppose a tax laid on
wine, sufficient to add five pounds to the price of the quantity
of wine which he consumes in a year. He has only (we are told) to
diminish his consumption of wine by 5 l., and he escapes the
burthen. True: but if the 5 l., instead of being laid on wine,
had been taken from him by an income tax, he could, by expending
5 l. less in wine, equally save the amount of the tax, so that
the difference between the two cases is really illusory. If the
government takes from the contributor five pounds a year, whether
in one way or another, exactly that amount must be retrenched
from his consumption to leave him as well off as before; and in
either way the same amount of sacrifice, neither more nor less,
is imposed on him. 
    On the other hand, it is some advantage on the side of
indirect taxes, that what they exact from the contributor is
taken at a time and in a manner likely to be convenient to him.
It is paid at a time when he has at any rate a payment to make;
it causes, therefore, no additional trouble, nor (unless the tax
be on necessaries) any inconvenience but what is inseparable from
the payment of the amount. He can also, except in the case of
very perishable articles, select his own time for laying in a
stock of the commodity, and consequently for payment of the tax.
The producer or dealer who advances these taxes, is, indeed,
sometimes subjected to inconvenience; but, in the case of
imported goods, this inconvenience is reduced to a minimum by
what is called the Warehousing System, under which, instead of
paying the duty at the time of importation, he is only required
to do so when he takes out the goods for consumption, which is
seldom done until he has either actually found, or has the
prospect of immediately finding, a purchaser. 
    The strongest objection, however, to raising the whole or the
greater part of a large revenue by direct taxes, is the
impossibility of assessing them fairly without a conscientious
co-operation on the part of the contributors, not to be hoped for
in the present low state of public morality. In the case of an
income tax, we have already seen that unless it be found
practicable to exempt savings altogether from the tax, the
burthen cannot be apportioned with any tolerable approach to
fairness upon those whose incomes are derived from business or
professions; and this is in fact admitted by most of the
advocates of direct taxation, who, I am afraid, generally get
over the difficulty by leaving those classes untaxed, and
confining their projected income tax to 'realized property', in
which form it certainly has the merit of being a very easy form
of plunder. But enough has been said in condemnation of this
expedient. We have seen, however, that a house-tax is a form of
direct taxation not liable to the same objections as an income
tax, and indeed liable to as few objections of any kind as
perhaps any of our indirect taxes. But it would be impossible to
raise by a house.tax alone, the greatest part of the revenue of
Great Britain, without producing a very objectionable
overcrowding of the population, through the strong motive which
all persons would have to avoid the tax by restricting their
house accommodation. Besides, even a house-tax has inequalities,
and consequent injustices; no tax is exempt from them, and it is
neither just nor politic to make all the inequalities fall in the
same places, by calling upon one tax to defray the whole or the
chief part of the public expenditure. So much of the local
taxation, in this country, being already in the form of a
house.tax, it is probable that ten millions a year would be fully
as much as could beneficially be levied, through this medium, for
general purposes.
    A certain amount of revenue may, as we have seen, be obtained
without injustice by a peculiar tax on rent. Besides the present
land.tax, and an equivalent for the revenue now derived from
stamp duties on the conveyance of land, some further taxation
might, I have contended, at some future period be imposed, to
enable the state to participate in the progressive increase of
the incomes of landlords from natural causes. Legacies and
inheritances, we have also seen, ought to be subjected to
taxation sufficient to yield a considerable revenue. With these
taxes, and a house.tax of suitable amount; we should, I think,
have reached the prudent limits of direct taxation, save in a
national emergency so urgent as to justify the government in
disregarding the amount of inequality and unfairness which may
ultimately be found inseparable from an income tax. The remainder
of the revenue would have to be provided by taxes on consumption,
and the question is, which of these are the least objectionable. 

    2. There are some forms of indirect taxation which must be
peremptorily excluded. Taxes on commodities, for revenue
purposes, must not operate as protecting duties, but must be
levied impartially on every mode in which the articles can be
obtained, whether produced in the country itself, or imported. An
exclusion must also be put upon all taxes on the necessaries of
life, or on the materials or instruments employed in producing
those necessaries. Such taxes are always liable to encroach on
what should be left untaxed, the incomes barely sufficient for
healthful existence; and on the most favourable supposition,
namely, that wages rise to compensate the labourers for the tax,
it operates as a peculiar tax on profits, which is at once
unjust, and detrimental to national wealth.(1*) What remain are
taxes on luxuries. And these have some properties which strongly
recommend them. In the first place, they can never, by any
possibility, touch those whose whole income is expended on
necessaries; while they do reach those by whom what is required
for necessaries, is expended on indulgences. In the next place,
they operate in some cases as an useful, and the only useful,
kind of sumptuary law. I disclaim all asceticism, and by no means
wish to see discouraged, either by law or opinion, any indulgence
(consistent with the means and obligations of the person using
it) which is sought from a genuine inclination for, and enjoyment
of, the thing itself; but a great portion of the expenses of the
higher and middle classes in most countries, and the greatest in
this, is not incurred for the sake of the pleasure afforded by
the things on which the money is spent, but from regard to
opinion, and an idea that certain expenses are expected from
them, as an appendage of station; and I cannot but think that
expenditure of this sort is a most desirable subject of taxation.
If taxation discourages it, some good is done, and if not, no
harm; for in so far as taxes are levied on things which are
desired and possessed from motives of this description, nobody is
the worse for them. When a thing is bought not for its use but
for its costliness, cheapness is no recommendation. As Sismondi
remarks, the consequence of cheapening articles of vanity, is not
that less is expended on such things, but that the buyers
substitute for the cheapened article some other which is more
costly, or a more elaborate quality of the same thing; and as the
inferior quality answered the purpose of vanity equally well when
it was equally expensive, a tax on the article is really paid by
nobody: it is a creation of public revenue by which nobody
loses.(2*) 

    3. In order to reduce as much as possible the inconveniences,
and increase the advantages, incident to taxes on commodities,
the following are the practical rules which suggest themselves.
1st. To raise as large a revenue as conveniently may be, from
those classes of luxuries which have most connexion with vanity,
and least with positive enjoyment; such as the more costly
qualities of all kinds of personal equipment and ornament. 2ndly.
Whenever possible, to demand the tax, not from the producer, but
directly from the consumer, since when levied on the producer it
raises the price always by more, and often by much more, than the
mere amount of the tax. Most of the minor assessed taxes in this
country are recommended by both these considerations. But with
regard to horses and carriages, as there are many persons to
whom, from health or constitution, these are not so much luxuries
as necessaries, the tax paid by those who have but one riding
horse, or but one carriage, especially of the cheaper
descriptions, should be low; while taxation should rise very
rapidly with the number of horses and carriages, and with their
costliness. 3rdly. But as the only indirect taxes which yield a
large revenue are those which fall on articles of universal or
very general consumption, and as it is therefore necessary to
have some taxes on real luxuries, that is, on things which afford
pleasure in themselves, and are valued on that account rather
than for their cost; these taxes should, if possible, be so
adjusted as to fall with the same proportional weight on small,
on moderate, and on large incomes. This is not an easy matter;
since the things which are the subjects of the more productive
taxes, are in proportion more largely consumed by the poorer
members of the community than by the rich. Tea, coffee, sugar,
tobacco, fermented drinks, can hardly be so taxed that the poor
shall not bear more than their due share of the burthen.
Something might be done by making the duty on the superior
qualities, which are used by the richer consumers, much higher in
proportion to the value (instead of much lower, as is almost
universally the practice, under the present English system); but
in some cases the difficulty of at all adjusting the duty to the
value, so as to prevent evasion, is said, with what truth I know
not, to be insuperable; so that it is thought necessary to levy
the same fixed duty on all the qualities alike: a flagrant
injustice to the poorer class of contributors, unless compensated
by the existence of other taxes from which, as from the present
income tax, they are altogether exempt. 4thly. As far as is
consistent with the preceding rules, taxation should rather be
concentrated on a few articles than diffused over many, in order
that the expenses of collection may be smaller, and that as few
employments as possible may be burthensomely and vexatiously
interfered with. 5thly. Among luxuries of general consumption,
taxation should by preference attach itself to stimulants,
because these, though in themselves as legitimate indulgences as
any others, are more liable than most others to be used in
excess, so that the check to consumption, naturally arising from
taxation, is on the whole better applied to them than to other
things. 6thly. As far as other considerations permit, taxation
should be confined to imported articles, since these can be taxed
with a less degree of vexatious interference, and with fewer
incidental bad effects, than when a tax is levied on the field or
on the workshop. Custom-duties are, caeteris paribus, much less
objectionable than excise: but they must be laid only on things
which either cannot, or at least will not, be produced in the
country itself; or else their production there must be prohibited
(as in England is the case with tobacco), or subjected to an
excise duty of equivalent amount. 7thly. No tax ought to be kept
so high as to furnish a motive to its evasion, too strong to be
counteracted by ordinary means of prevention: and especially no
commodity should be taxed so highly as to raise up a class of
lawless characters, smugglers, illicit distillers, and the like. 
    Of the excise and custom duties lately existing in this
country, all which are intrinsically unfit to form part of a good
system of taxation, have, since the last reforms by Mr Gladstone,
been got rid of. Among these are all duties on ordinary articles
of food, whether for human beings or for cattle; those on timber,
as fall. ing on the materials of lodging, which is one of the
necessaries of life; all duties on the metals, and on implements
made of them; taxes on soap, which is a necessary of cleanliness,
and on tallow, the material both of that and of some other
necessaries; the tax on paper, an indispensable instrument of
almost all business and of most kinds of instruction. The duties
which now yield nearly the whole of the customs and excise
revenue, those on sugar, coffee, tea, wine, beer, spirits, and
tobacco, are in themselves where a large amount of revenue is
necessary, extremely proper taxes; but at present grossly unjust,
from the disproportionate weight with which they press on the
poorer classes; and some of them (those on spirits and tobacco)
are so high as to cause a considerable amount of smuggling. It is
probable that most of these taxes might bear a great reduction
without any material loss of revenue. In what manner the finer
articles of manufacture, consumed by the rich, might most
advantageously be taxed, I must leave to be decided by those who
have the requisite practical knowledge. The difficulty would be,
to effect it without an inadmissible degree of interference with
production. In countries which, like the United States, import
the principal part of the finer manufactures which they consume,
there is little difficulty in the matter: and even where nothing
is imported but the raw material, that may be taxed, especially
the qualities of it which are exclusively employed for the
fabrics used by the richer class of consumers. Thus, in England a
high custom-duty on raw silk would be consistent with principle;
and it might perhaps be practicable to tax the finer qualities of
cotton or linen yarn, whether spun in the country itself or
imported. 

NOTES:

1. Some argue that the materials and instruments of all
production should be exempt from taxation; but these, when they
do not enter into the production of necessaries, seem as proper
subjects of taxation as the finished article. It is chiefly with
reference to foreign trade, that such taxes have been considered
injurious. Internationally speaking, they may be looked upon as
export duties, and, unless in cases in which an export duty is
advisable, they should be accompanied with an equivalent drawback
on exportation. But there is no sufficient reason against taxing
the materials and instruments used in the production of anything
which is itself a fit object of taxation. 

2. 'Were we to suppose that diamonds could only be procured from
one particular and distant country, and pearls from another, and
were the produce of the mines in the former, and of the fishery
in the latter, from the operation of natural causes, to become
doubly difficult to procure, the effect would merely be that in
time half the quantity of diamonds and pearls would be sufficient
to mark a certain opulence and rank, that it had before been
necessary to employ for that purpose. The same quantity of gold,
or some commodity reducible at last to labour, would be required
to produce the now reduced amount, as the former larger amount.
Were the difficulty interposed by the regulations of
legislators... it could purposes of make no difference to the
fitness of these articles to serve the vanity.' Suppose that
means were discovered whereby the physiological process which
generates the pearl might be induced ad libitum, the result being
that the amount of labour expended in procuring each pearl, came
to be only the five hundredth part of what it was before. 'The
ultimate effect of such a change would depend on whether the
fishery were free or not. Were it free to all, as pearls could be
got simply for the labour of fishing for them, a string of them
might be had for a few pence. The very poorest class of society
could therefore afford to decorate their persons with them. They
would thus soon become extremely vulgar and unfashionable, and so
at last valueless. If however we suppose that instead of the
fishery being free, the legislator owns and has complete command
of the place, where alone pearls are to be procured; as the
progress of discovery advanced, he might impose a duty on them
equal to the diminution of labour necessary to procure them. They
would then be as much esteemed as they were before. What simple
beauty they have would remain unchanged. The difficulty to be
surmounted in order to obtain them would be different, but
equally great. and they would therefore equally serve to mark the
opulence of those who possessed them.' The net revenue obtained
by such a tax 'would not cost the society anything. If not abused
in its application, it would be a clear addition of so much to
the resources of the community.' -- Rae, New Principles of
Political Economy, pp. 369-71.