PART SIX PUBLIC FINANCE Which has to do with the revenues of government and the utilization of those revenues by government A great part of the study of public finance has to do with the technical details of the administration of taxing systems and the control of public expenditures. Therefore only the general principles of taxation are discussed in this book, which is a book for beginners. CHAPTER XLIII TAXATION Classification of revenues. The government as distinct from the people has needs of its own and must have revenue out of which to supply those needs. There are various sources of public revenue, but in modern times the chief source is taxation. Henry C. Adams, in his work on finance,1 gives the following classification of public revenue: In former times the public domain was made to supply a large part of the revenue for the government. In fact, under the feudal system, property in land and something resembling public office went together. The king had his own demesne ; so likewise did his retainers and all members of the nobility. The nobility formed the chief fighting class and likewise the administrators of local government, each deriving his income from the lands which were granted to him. Public industries have not figured very largely as sources of public revenue, unless royalties from mines could be put in this 1 The Science of Finance, p. 227. New York, 1899. class. A number of European cities have derived portions of their revenue from their own water, gas, and electric-light plants. Gratuities and gifts, as well as treasure-trove, are negligible sources nowadays. Confiscations and indemnities belong to a lower stage of civilization, where militancy and the lust for conquest prevail. In all civilized governments taxes have become the chief source of revenue, fees, assessments, fines, and penalties forming subsidiary sources. What is a tax? A tax is a compulsory payment to the government for which the government does not return to the individual payer a commodity or a service. The money, for example, which one pays for a postage stamp is not a tax; it is rather a purchase of a service. Where a municipality owns its own water supply and charges water rates, these rates are not in any proper sense taxes; they are, like the purchase of postage stamps, payments for service. The same is true of the price paid for any direct service which the public renders. To be sure, the public renders general services for all its taxes; but in the case of a tax there is no attempt to apportion the payment exacted of the individual to the benefit which he as an individual receives. Doubtless everyone receives some advantages from the existence of an army or a navy, of courts, or of policemen; but his tax is not of the nature of a purchase, since he must pay the tax whether he thinks he is getting anything in return for it or not, and the amount of the tax bears no relation whatever to what he thinks the value of the service of the State may be to him. Some taxes are absolutely compulsory. Others are compulsory only conditionally. An income tax, an inheritance tax, or a poll tax is absolutely compulsory. The individual has no choice in the matter. An excise or a tariff duty may be avoided by avoiding the use of the articles on which these duties are levied. One may avoid the excise duty on tobacco, for example, by refraining from the use of tobacco. And yet when one pays this tax, he is not receiving from the government a service, since the government did not produce the tobacco but only charges the manufacturer or the dealer for the privilege of manufacturing and selling. So-called indirect taxes. The taxes just described are generally called indirect taxes. In case of a tariff duty, for example, the importer of the dutiable article pays the tax directly to the government. From his point of view it is just as direct as any tax. It is the general theory, however, that the consumers of the imported articles pay the tax in the form of higher prices. In cases where that happens the consumers may be said to pay the tax indirectly. This is by no means always the case, however, and it is not always easy to determine who does actually pay the tariff duty. It is therefore doubtful whether or not the term indirect taxation should be retained in economics. All real taxes are direct in the sense that the payers pay their money directly to the government. In some cases, however, the payer is able to shift the tax to somebody else by charging a higher price for a product or by paying a lower price to the one from whom he himself buys the product. The manufacturer of alcoholic liquor pays his excise duty as directly to the government as any other tax; but if he charges the consumer a higher price for the liquor, the consumer is then said to pay the tax indirectly; but he may also pay the producer of the raw materials a lower price, and in that case it is the producer who pays the tax, in part at least; and if the manufacturer carries a part of the burden which he is unable to shift to someone else, he himself bears that burden directly, not indirectly. Taxes and monopoly price. A common abuse of the word taxation is to apply it to monopoly price by saying that the monopoly taxes the people. It is sufficient in a case of this kind to say that the monopoly charges too high a price, or a monopoly price; it does not add anything to the clarity of the discussion to bring in the word tax. Where the monopoly sells a commodity or a service, even though it sells it above cost, the individual gets what he thinks ought to |