§ 3. Practical rules for indirect taxation.

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: 1. To raise as large a revenue as conveniently may be, from those classes of luxuries which have most connection with vanity, and least with positive enjoyment; such as the more costly qualities of all kinds of personal equipment and ornament. 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. 2. 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. 3. 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 burden. 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; but in some cases the difficulty of at all adjusting the duty to the value, [pg 589] 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. 4. 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 burdensomely and vexatiously interfered with. 5. 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. 6. 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, cæteris paribus, much less objectionable than excise: but they must be laid only on things which either can not, 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. 7. 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.

The experience of the United States is pregnant with lessons in this direction. During the war we imposed an internal-revenue tax on distilled spirits of so large an amount that it not only produced less revenue than a smaller tax would have done, but it created gigantic frauds, public corruption, and infinite devices to escape the payment. The following table will show how the production, as indicated by the tax, fell off when the tax was excessive. It forced evasions by distillers. It has been found by various experiences that with a less rate the revenue is largely increased.

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The actual amount reached by taxation is very much less than that known to be actually used by from ten to fifteen millions of gallons, or nearly one half the product. The openness of the frauds can be judged by the fact that proof spirits were “openly sold in the market, and even quoted in price-currents, at from five to fifteen cents less per gallon than the rate of tax and the average cost of manufacture.”348

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.