duty is very small. The object the financier has in view is revenue, and he places duties on imports and more rarely on exports where those duties are likely to fall in with the Smithian canons of certainty, convenience, and economy, and at the same time are not likely to fall very unfairly on any class or classes of the community. Adam Smith indeed reminds us that "in the arithmetic of the Customs two and two, instead of making four, make sometimes only one ".1 1 1 The Wealth of Nations, Book V. chap. ii. part ii. art. iv. Adam Smith quotes Swift, who attributes the remark to an unnamed commissioner of Customs. "One of these gentlemen pleasantly told me that the mistake of parliaments on such occasions was owing to an error of computing two and two make four; whereas in the business of laying impositions, two and two never made more than one (cf. p. 365, vol. ii. of Cannan's edition). CHAPTER XIX THE INCIDENCE OF TAXES ON THE DIFFERENT CONSTITUENTS OF INCOME 1. It is important to examine here the general principles of the incidence of taxes on the chief constituents of income-rent, interest, wages, and profits. For purposes of this discussion we shall assume that the taxes are levied separately on these forms of income, and it will be of interest to see the incidence of the taxes over rent, interest, wages, and profits, taxation being regarded as a certain loss spread over these forms of income. 66 Taxes on the pure rent of agricultural land cannot be shifted. These fall on the proprietors of the rent-yielding property. Since the amount of rent is not a cause of high or low prices of produce, a tax on rent is not a factor affecting that price. Corn", says Ricardo, "is not high because a rent is paid, but a rent is paid because corn is high." In the second chapter of his Principles of Political Economy and Taxation he emphasises the fact that rent does not and cannot enter in the least degree as a component part" of the price of corn, and adds in a footnote, "The clearly understanding of this principle is, I am persuaded, of the utmost importance to the science of political economy ".1 In chapter x. on "Taxes on Rent" he begins by saying that "A tax on rent would affect rent only; it would fall wholly on landlords, and could not be shifted to any class of consumers. The landlord could not raise his rent, because he would leave unaltered the difference between the produce obtained from the least productive land in cultivation, and that obtained from land of every other quality "2 A tax does not affect that particular land 1 Gonner's edition of Ricardo's Works (Bell & Sons), p. 55. 2 Ibid. p. 154. The locus classicus on the Ricardian Theory of Rent is Marshall's Principles of Economics, Book V. chap. ix. ff. Hadley in his which pays no rent, and, therefore, leaves the total amount of rent including the tax as it was. Suppose Government levies a 5 per cent tax on the rent. This will affect neither the total amount of rent nor the supply of the commodity. The supply of the commodity is already fixed to yield a higher aggregate rent than either a less or greater supply would yield. In other words, 95 per cent of the rent is also greater for that supply than for any other scale of supply. The incidence, then, of this 5 per cent tax will be on the proprietors who, while the total rent yielded is the same, receive 95 per cent, or 5 per cent less than hitherto. Were the tax repealed the proprietors of the rent-yielding property would secure a direct money benefit in an increase of income. The incidence of the tax, therefore, is plainly on them. The argument assumes that the receivers of rent are obtaining the highest possible rents from the land. Where the full economic rent is not obtained, the new tax may result in practice in an increase of rents, and in such instances part of the incidence will be on the tenant or occupier. In all discussions on the incidence of a tax on rent it should be remembered that pure economic rent of agricultural land is not infrequently mixed up with forms of income due to capital and labour, and is not confined to the natural qualities of the soil; actual rent, in short, contains an element of profits.1 In Great Britain and similar countries, when the land tax is permanently fixed or of long standing, the tax is "burdenless". The person who purchases the land allows for the tax, paying for the land a price based on the net return after deducting the tax. The first owner pays the burden. Through ignorance or carelessness the landlord may let a tenant have the land for less than might be got by the sharpest bargaining. In a country like England, agricultural land is owned and managed for the satisfaction of social ambition as well as for immediate pecuniary return, and is not infrequently let to farmers on indulgent terms. Under such circumstances an additional tax Economics warns his readers that "The 'economic', i.e. 'Ricardian' sense of the word rent must not be confounded with its ordinary commercial sense. Commercial rent represents a price paid for the use of land and improvements. A large part of it is interest rather than rent. If we deduct the interest on improvements from the commercial rent, the remainder is economic rent" (p. 287). 1 Rent in practice consists not only of pure economic rent, but also of some return to capital invested in or on the land. levied on the landholder will probably lead him to look sharply at his rentals. The incidence on any other form of pure rent falls on the person who pays the tax. This is certainly so in the case of rent of ability. TAXES ON BUILDING RENTS Adam Smith and Ricardo each analysed separately the incidence of taxes on houses.1 Adam Smith divides the rent of a house into building and ground rents. "The building rent is the interest or profit of the capital expended in building the house. In order to put the trade of a builder upon a level with other trades, it is necessary that this rent should be sufficient first to pay the same interest which he would have got for his capital, if he had lent it upon good security; and, secondly, to keep the house in constant repair, or, what comes to the same thing, to replace within a certain term of years the capital which had been employed in building it." A tax on the rent of houses may fall on the occupier or on the ground landlord or on the building landlord. Ordinarily the tax would be paid "immediately and finally ", as Ricardo phrases it, by the occupier. Ricardo dissents from Adam Smith's view that ground rents and the ordinary rent of land are the species of revenue which can best bear to have a peculiar tax imposed upon them ", believing "it would surely be very unjust to tax exclusively the revenue of any particular class of a community ". He shows that such taxation is contrary to one of the four Smithian maxims which should govern all taxation. The transfer of the burden is not so easy a matter as in the case of goods readily marketable. It may fall on the owner, the occupier, and also the builder. When taxes on buildings and on the gross rent of the house are levied on the occupier, the incidence usually is on the occupier and not on the owner. There is, however, considerable friction, and the readjustment of burdens takes place slowly. If the occupier desires to shift the burden to the owner, a new lease has usually to be made. He 1 Cf. The Wealth of Nations, Book V. chap. ii. part ii. art. i., "Taxes upon the Rent of Houses." Ricardo, Principles, chap. xiv., "Taxes on Houses." Royal Commission on Local Taxation, Cd. 638, London, 1901; and C9528 (1899), which contain the memoranda of various authorities. may, however, prefer to remain where he is and bear the tax, as the expense of removing and the convenience of his present house may compel him to remain where he lives. If he does remove he will select a house, having the tax in view. He may, then, succeed in shifting the tax to his new landlord. The tendency, however, is for the tax to remain where its impact took place, at least for a considerable time. This is not necessarily always the case. The occupier, if engaged in trade such as a dry goods store, may shift part of the tax to his customers, especially when the customers are of the poorer classes and unable to make their purchases outside the locality. The demand for the goods on the part of the customers in their neighbourhood is not so elastic as when they can purchase outside the area, e.g. from large stores centrally situated. Before it can be said that the tax falls on the occupier or on the owner or otherwise, the elasticity or inelasticity of the supply should be examined. If the tax be on the owners it will check the increase of the supply of rentable houses, as it will, ceteris paribus, reduce profits. It may also reduce the expenditure on construction, as occupiers will tend to take slightly smaller houses rather than pay the increased rent as a result of the tax. The checking of housebuilding in turn may check the demand for sites. The owners for the time being may pay the tax, as they cannot raise the rents during the currency of the lease, the supply of and the demand for houses remaining constant. If they sell their property, the new owners will purchase with the tax in view. These new purchasers aim at making their investments similar in yield to others with corresponding risks. Owners may find that tenants prefer to take less accommodation than pay the higher rent. Tenants may even be able to go to neighbouring districts, so that the owners may again be prevented from raising rents. After a period, however, rents may rise, and the owners may shift the taxes on to occupiers because the supply of houses may be adjusted to meet the changed circumstances. Thus it is clear that a tax on annual rental values is frequently only imperfectly readjusted, and that too only after a period of friction. The incidence, in short, may fall partly on the owner, partly on the occupier, and also on the builder. In some cases the occupier if in trade may shift part of the incidence from his shoulders to those who purchase his products. Occupiers bear a considerable |