indirect taxation has increased even in greater proportion. This is due mainly to higher taxation in excise and to the spread of protection in import duties. In India before the War indirect taxation was 53.1 per cent of the total tax revenue; to-day it is 55 per cent, owing to a large increase in customs duties and in excise duties. The preceding tables show the distribution of indirect taxation in the United Kingdom and India. It will be seen that in India for the most recent year 45.0 per cent of tax revenue was from direct taxation and 55.0 per cent from indirect taxation. In Great Britain the corresponding figures were 59-8 per cent and 40-2 per cent. If indirect taxation be divided into (a) that derived from necessaries, and (b) luxuries or sumptuary articles, the 55-0 per cent for India under indirect taxation would show that 9.9 per cent came from taxes on luxury, and 45.1 per cent from necessaries. In Great Britain the figures are 6.7 per cent and 33-5 per cent. There was no rule that there should be 50 per cent direct taxation and 50 per cent indirect. Attention must be given to local circumstances, especially the ability to pay taxation. The reduction, for example, of indirect taxation often gave more spending power to the generality of the population, and this might lead to investment of money or capital as if the reduction was made in direct taxation. If the reduction was spent in increased spending power it meant, ceteris paribus, more trade. As compared with the pre-War year, indirect taxation is now of less importance on account of the development of direct taxation in the following countries : 3 Great Britain. Australia. Canada. New Zealand. France. U.S.A. Japan. 1 See Table XXIV. App. 2 Only tea, coffee, sugar, and salt have been included. • See Table XXIV. App. THE CASE FOR INDIRECT TAXATION 3. To the financier indirect taxes are invariably tempting. By these he can reach the poorer classes on whom it is difficult, if not altogether impossible, to levy direct taxes. That is one great argument in favour of indirect taxes. In the second place, many indirect taxes have great financial virtues: they are productive, and to the Finance Minister, who has to get revenue with as little fuss as possible, that is of first importance. They are also convenient and less irritating than direct taxes. Thus a large revenue can be raised with little protest. This sometimes tends to promote extravagance. Thirdly, it is expedient to have balance between direct and indirect taxation. Indirect taxation, therefore, prevents exclusive concentration on the important direct taxes and preserves the golden rule that the collection of a State's revenue should be on as broad a basis as possible. Too heavy taxation, direct or indirect, at any point or points will tend to evasion, and to the interference with and the crippling of industry. When Sir Robert Peel abolished over 600 customs duties and reduced over 1000, the decrease in the annual customs revenue of the United Kingdom was in the long run comparatively small. The taxation of raw materials and of goods that aided production was gradually done away with, as these were hard to collect and expensive in their effects on the consumer, who has to pay in addition to price for the tax and the interest on the tax advanced by the producer. An excise on iron and steel would raise the price of one of the essential articles of production, and should for revenue purposes be avoided in favour of articles ready for direct consumption. In short, the greater the complexity of indirect taxation, the greater the evasion, and the greater the tendency to a large part of the yield being swallowed up in the cost of collection. Direct taxes are on the whole cheaper to collect than indirect taxes.1 The cost of collection of income tax is especially low. Thus in India it was 1.2 per cent of the receipts in 1921-22, while indirect taxes were more expensive to collect. Customs in the same year formed 1.8 per cent and excise 7·1 per cent. The cost of collection of customs in the United States was 3.04 per cent as against 1.03 per cent for internal revenue, 70 per cent of which was direct taxation in the year ended 30th June 1922. 1 Sect. 10, Chapter XXII. INDIRECT TAXES REGRESSIVE 4. In a workman's family budget the expenditure on articles indirectly taxed, such as tea, sugar, salt, and spirits, is relatively greater than in the family budgets of the well-to-do. No allowance is of course made, as in the case of direct taxation, for family responsibility. The head of a family has to pay more than the bachelor and no differentiation can be made between earned and investment income. Indirect taxation is regressive in character, and ordinarily falls more heavily on the poor than on the rich, because the poor are the largest consumers. The burden then varies inversely with ability. If a specific duty is levied, say at so much per lb. regardless of quality, there may be double differentiation against the poor. Thus a tax of eightpence on each pound of imported tea would be 33 per cent on tea valued at two shillings, and only 13 per cent on tea valued at five shillings. In such cases indirect taxation is doubly regressive. THE IMPOSITION OF INDIRECT TAXES 5. The general rules governing the imposition of indirect taxes are as follows: The taxes should be laid on articles which are largely consumed and for which the demand is inelastic, i.e. an increase in the tax should not curtail to any large extent consumption. The tax, moreover, should be easily collected. The production of the goods should not be scattered in the hands of small producers, as the administration of the tax would then be too difficult and too burdensome. If these conditions obtain, the net yield of the tax should be great. During the Napoleonic Wars, and before Huskisson's views gained general support in England, these simple canons were frequently forgotten. It is true that the number of commodities capable of satisfying all these conditions, or even two of them, is not large. In most countries they are confined to such articles as tea, sugar, tobacco, spirits, wines, salt, and, as in Germany before the War, on food-grains imported. The articles taxed will vary from country to country according to the consumption of the inhabitants of the country. Otherwise the productivity of these taxes would suffer and the State would not get the maximum revenue with the minimum effort. During the War, attempts were made to tax all kinds of luxuries, but it was found extremely difficult to define luxuries. Clothing, shoes, etc., become articles of luxury when bought by the individual for his own use in large numbers. When the expensive grades of goods were taxed, it forced consumers to buy the cheaper ones. Cost of collection and evasion had also to be considered. In France luxury taxation has not been successful, and the turnover tax on all expenditure, whether on necessary or unnecessary articles, has taken its place. The main criticism of the taxation of necessaries, including conventional necessaries, is that the burden falls more heavily on the poor than on the rich, just as taxes on luxuries press heavily on the rich. If the taxation of necessaries is extended too far the poorer classes will suffer, and it is for this reason that Labour Governments favour direct rather than indirect taxation. The first Labour Government in Great Britain reduced in its first Budget (1924) indirect taxes, including all the food duties, especially those on tea, coffee, chicory, sugar, dried fruits, sweetened table waters, and abolished others, such as the inhabited house duty, while leaving the main direct taxes-income tax and death dutiesas they were. The Corporation Profits Duty was, however, repealed. SUMMARY 6. All things considered, indirect taxes are good taxes in tax systems when they are productive, convenient, and approximately equitable. They are paid with less irritation than direct taxes. Revenue can be raised in multifarious ways by indirect taxation, and the basis of taxation is thus broadened, the concentration on the main direct taxes becoming unnecessary. As already noted, the taxation of necessaries may be quite justified, especially in less wealthy countries. Their exemption should only be permitted if other objects equally good from the point of view of productivity and convenience are available. The policy underlying this taxation must vary with the conditions of each country. Italy's salt monopoly is undoubtedly taxation, and her octrois on food, etc., even for State purposes, are on necessaries. Similarly, the taxation of sugar, salt, and matches in France is of this category. 1 See below, Chapter XXVII. sect. 4. CHAPTER XXVI CUSTOMS DUTIES 1. GENERAL ECONOMIC CONSIDERATIONS SEA and land customs duties are earlier in origin than excise duties. In Adam Smith's words, "The duties of customs are much more ancient. They seem to have been called customs, as denoting customary payments which had been in use from time immemorial. They appear to have been originally considered as taxes upon the profits of merchants." In the Roman Empire we read of customs duties in the provinces which usually did not exceed 5 per cent ad valorem. In mediaeval Europe we find export duties and later import duties as a source of revenue. For a long time special customs were levied on goods passing between England and Scotland. The transit duty may, in fact, be regarded as it is to-day between British India and Native States as a customs duty. The ruling prince or chief charges duties on goods passing into his state, not merely for services rendered, such as protecting the goods of the importer or exporter, but as a source of indirect taxation. In Anglo-Saxon England we know that the king made a levy on goods through his sheriffs for the maintenance of the Royal Household, and he probably had some revenue from foreign trade. The merchant, speaking of the dignity of his profession, mentions that he is "useful to the king and his nobles, to rich men and to common folk". In later years, subsequent to the Norman period, the king fixed duties on the export of wool fells (i.e. skins with the wool on them) and on leather. In the Magna Charta these were called the ancient 1 Book V. chap. ii. part ii. art. iv. |