Book V, Chapter II, 2

The revenue that the great body of the people obtains from land is proportional not to its rent but to its produce. Except for what is reserved as seed, the entire annual produce of a country's land is either consumed by the great body of its people each year or exchanged for something else they consume. Anything that holds the land's produce below the level it might otherwise attain reduces the revenue of the people even more than that of the landowners. The rent of land, the portion of produce belonging to its owners, is hardly anywhere in Great Britain thought to exceed one-third of the total produce. Suppose land that in one state of cultivation yields a revenue of ten millions sterling a year would in another yield a rent of twenty millions, with rent assumed to be one-third of produce in both cases. The proprietors' revenue would then be ten millions a year less than it might be; but the revenue of the great body of the people would be thirty millions a year less than it might be, after deducting only what was needed for seed. The country's population would be smaller by the number of people that thirty millions a year, always deducting seed, could support under the particular living standards and expenses of the different classes among whom the remainder was distributed.

No civilized European state today draws most of its public revenue from rent on state-owned lands. Yet all the great European monarchies still possess large tracts of crown land. These are generally forests—and sometimes forests where one can travel for several miles and hardly find a single tree—mere wastes of country in terms of both produce and population. In every great European monarchy, selling the crown lands would bring in a very large sum. Applied to the public debts, it would free from mortgage a revenue far greater than the crown has ever received from those lands. In countries where highly improved and cultivated land, yielding at the time of sale about as much rent as it readily can, commonly sells for thirty years' purchase, unimproved, uncultivated crown lands with low rents might well sell for forty, fifty, or sixty years' purchase. The crown could immediately enjoy the revenue released from mortgage by that large sale price. Within a few years it would probably enjoy another revenue. Once the crown lands became private property, they would soon be well improved and cultivated. Their increased produce would enlarge the country's population by increasing the people's revenue and consumption. The revenue the crown draws from customs and excise duties would necessarily rise along with the people's revenue and consumption.

The revenue that the crown derives from crown lands in any civilized monarchy appears to cost individuals nothing, but in fact costs society more, perhaps, than any equal revenue the crown receives. Society would always benefit if some other equal revenue replaced it for the crown and the land were distributed among the people. Perhaps no better way to do that would be to offer it for public sale.

Land devoted to pleasure and splendor—parks, gardens, public walks, etc.—possessions everywhere considered causes of expense rather than sources of revenue, seems to be the only land that should belong to the crown in a great and civilized monarchy.

Public stock and public land, then, are the two sources of revenue that may belong especially to the sovereign or commonwealth; both are unsuitable and insufficient to meet the necessary expenses of any great and civilized state. Most of those expenses must therefore be paid through taxes of one kind or another: the people contribute a portion of their private revenue to furnish public revenue to the sovereign or commonwealth.

Part II. On Taxes.

As shown in the first book of this Inquiry, individuals' private revenue ultimately arises from three sources: rent, profit, and wages. Every tax must finally be paid out of one or another of these three sources, or out of all of them without distinction. I shall try to give the best account I can, first, of taxes intended to fall on rent; second, of those intended to fall on profit; third, of those intended to fall on wages; and fourth, of those intended to fall without distinction on all three sources of private revenue. Separate treatment of these four kinds of tax will divide this second part of the present chapter into four articles, three of them requiring further subdivisions. The review that follows will show that many of these taxes are not finally paid from the fund, or source of revenue, on which they are intended to fall.

Before examining particular taxes, I must set out the following four maxims concerning taxes in general.

1 The subjects of every state should contribute to the support of government as nearly as possible in proportion to their respective abilities—that is, in proportion to the revenue each enjoys under the state's protection. The cost of government to the individuals of a great nation resembles the management expense borne by the joint tenants of a large estate: all must contribute in proportion to their respective interests in it. Whether this maxim is observed or neglected determines what is called equality or inequality of taxation. It should be noted once and for all that any tax that finally falls on only one of the three kinds of revenue mentioned above is necessarily unequal insofar as it leaves the other two unaffected. In examining particular taxes below, I shall seldom dwell further on inequality of that kind. Instead I shall usually confine my observations to the inequality caused when a particular tax falls unevenly on the particular kind of private revenue it affects.

2 The tax each individual must pay should be certain, not arbitrary. The time and manner of payment and the amount due should all be clear to the contributor and to everyone else. Otherwise anyone liable for the tax is placed to some extent in the power of the tax collector, who can increase the charge on any contributor he dislikes or use the threat of an increase to extort a gift or fee for himself. Uncertainty in taxation encourages the insolence and favors the corruption of a class of men naturally unpopular even when neither insolent nor corrupt. Certainty about what each individual owes is so important in taxation that, as the experience of all nations seems to show, a very considerable degree of inequality is a much lesser evil than even a slight degree of uncertainty.

3 Every tax should be collected at the time or in the manner most likely to make payment convenient for the contributor. A tax on the rent of land or houses, due when those rents are customarily paid, is collected when the contributor is most likely to find it convenient to pay, or most likely to have the means. Taxes on luxury goods intended for consumption are all finally paid by the consumer, generally in a way very convenient for him. He pays little by little whenever he buys the goods. Since he is also free to buy or not buy as he chooses, it is his own fault if such taxes ever cause him serious inconvenience.

4 Every tax should be designed to take and keep as little as possible out of the people's pockets beyond what it brings into the public treasury of the state. A tax can take or keep much more from them than it brings into that treasury in four ways. First, collection may require many officers, whose salaries consume most of the proceeds and whose fees impose an additional tax on the people. Second, the tax may hamper the people's industry and discourage them from entering lines of business that could support and employ great numbers. While requiring people to pay, it may thus reduce or even destroy some of the resources that would help them pay. Third, forfeitures and other penalties incurred by those unfortunate people who try and fail to evade it may ruin them, ending the benefit the community might otherwise have drawn from the employment of their capital. An ill-judged tax strongly tempts people to smuggle, while penalties for smuggling must increase in proportion to that temptation. Contrary to every ordinary principle of justice, the law first creates the temptation and then punishes those who succumb to it; it commonly makes the punishment more severe in proportion to the very circumstance that ought certainly to mitigate it—the temptation to commit the offense. [See Sketches of the History of Man page 474, and Seq.] Fourth, by exposing people to frequent visits and detestable inquiries from tax collectors, it may subject them to much needless trouble, harassment, and oppression. Though harassment is not strictly an expense, it is certainly equivalent to what anyone would willingly pay to be free of it. In one or another of these four ways, taxes are frequently much more burdensome to the people than beneficial to the sovereign.

The evident justice and usefulness of these maxims have brought them, to a greater or lesser degree, to the attention of every nation. Each has tried, as best it could judge, to make its taxes as equal as it could devise; as certain and as convenient for the contributor in both time and manner of payment; and, relative to the revenue they brought the prince, as little burdensome to the people as possible. The following brief review of some principal taxes in different ages and countries will show that nations have not been equally successful in these efforts.

Article I.—Taxes on Rent—Taxes on the Rent of Land.

A tax on the rent of land may be levied according to a fixed assessment, with each district valued at a certain rent that is never subsequently revised; or it may be made to change with every change in the land's actual rent, rising or falling as cultivation improves or declines.

A land tax assessed, like Great Britain's, on every district by an unchanging valuation inevitably becomes unequal over time, even if equal when first imposed, because cultivation improves or is neglected to differing degrees across the country. In England, the valuation on which the different counties and parishes were assessed under the 4th of William and Mary was very unequal from its introduction. In this respect the tax violates the first of the four maxims above. It conforms perfectly to the other three. It is entirely certain. Since payment falls due when rent does, the time could hardly be more convenient for the contributor. Although the landlord is always the one who actually bears the tax, the tenant usually advances it, and the landlord must credit it against the rent. This tax is collected by far fewer officers than any other bringing in nearly as much revenue. As a district's tax does not rise when rents rise, the sovereign takes no share of the gains from a landlord's improvements. Such improvements may sometimes reduce the burden on other landlords in the district. But any resulting increase in tax on a particular estate is always so small that it cannot discourage improvements or hold the land's produce below the level it might otherwise attain. Since the tax does not reduce the quantity of produce, it cannot raise its price. It does not obstruct the people's industry; and beyond the unavoidable need to pay, it imposes no inconvenience on the landlord. The benefit the landlord has gained from the unchanging valuation by which Great Britain's lands are assessed for land tax, however, has arisen chiefly from circumstances quite unrelated to the nature of the tax.

One reason is the widespread prosperity of nearly every part of the country: since the valuation was first fixed, the rents of nearly all British estates have steadily risen, and hardly any have fallen. Consequently, almost all landlords have gained the difference between the tax they would have paid on their estates' present rents and the tax they actually pay under the old valuation. If conditions had been different, and rents had gradually fallen as cultivation declined, almost all landlords would have lost that difference. Under the conditions that have prevailed since the revolution, the fixed valuation has helped landlords and harmed the sovereign. Under different conditions it might have helped the sovereign and harmed landlords.

What most people earn from land depends not on its rent but on its produce. Every year, almost all the land’s produce in any country, apart from what is kept for seed, is either consumed by the people or traded for something they consume. Anything that reduces the land’s produce below its potential reduces the revenue of most people even more than it reduces the landowners’ revenue. Rent—the landowners’ share of the produce—is thought to be no more than a third of the total produce almost anywhere in Great Britain. Suppose land that yields ten millions sterling a year in rent under one method of cultivation could yield twenty millions under another. If rent is a third of the produce in both cases, landowners lose only ten millions a year in potential revenue. The rest of the people lose thirty millions a year, after deducting only what is needed for seed. The country’s population would be smaller by the number of people that thirty millions a year, again after deducting seed, could support. That number depends on the way people in the different ranks receiving the remaining produce live and spend.

No civilized European state today gets most of its public revenue from land owned by the state. Yet all Europe’s great monarchies still own large areas of crown land. These are usually called forests, though in some you can travel for miles without seeing a single tree. They are simply wasted land, in terms of both produce and population. Selling the crown lands in any great European monarchy would bring in a very large sum. If used to pay public debts, that sum would free up far more revenue than the lands have ever paid the crown. In countries where well-improved and highly cultivated land already yielding nearly its highest possible rent commonly sells for thirty years’ rent, neglected, uncultivated crown lands with low rents could reasonably sell for forty, fifty, or sixty years’ rent. The crown could immediately receive the revenue freed from debt by this large sale price. Within a few years, it would probably receive another source of revenue. Once privately owned, those lands would soon be improved and well cultivated. Their greater produce would increase the population by raising people’s revenue and consumption. As their revenue and consumption grew, the crown’s revenue from customs duties and excise would necessarily grow too.

The revenue a crown gets from its lands in any civilized monarchy seems to cost individuals nothing. In reality, it probably costs society more than any other equal amount of crown revenue. Society would always benefit if some other equal revenue replaced it and the land was divided among the people. A public sale would perhaps be the best way to do that.

The only land that should belong to the crown in a large, civilized monarchy seems to be land kept for pleasure and display: parks, gardens, public walks, and so on. Everywhere, such property is treated as an expense, not a source of revenue.

Public stock and public land are thus the two possible sources of revenue belonging specifically to the sovereign or commonwealth. Neither is adequate or suitable for paying the necessary expenses of a large, civilized state. Most of those expenses must instead be paid through taxes of one sort or another. People must contribute part of their private revenue to provide the sovereign or commonwealth with public revenue.

Part II. Taxes

As shown in the first book of this Inquiry, individuals’ private revenue ultimately comes from three sources: rent, profit, and wages. Every tax must ultimately be paid from one of these sources or from all three without distinction. I will try to explain taxes intended to fall, first, on rent; second, on profit; third, on wages; and fourth, on all three sources of private revenue without distinction. These four kinds of tax divide this second part of the chapter into four articles. Three of them need further subdivisions. As the following review will show, many taxes are not ultimately paid from the source of revenue on which they are intended to fall.

Before looking at individual taxes, I must set out four general principles of taxation.

1 The subjects of every state should support the government as nearly as possible in proportion to their ability to pay. That means in proportion to the revenue each enjoys under the state’s protection. The government’s cost to the people of a large nation is like the management costs paid by joint tenants of a large estate: each must contribute in proportion to his interest in the estate. Following or ignoring this principle determines what we call equality or inequality in taxation. Any tax ultimately paid from only one of the three sources of revenue just mentioned is necessarily unequal insofar as it does not affect the other two. In discussing the different taxes below, I will rarely say much more about this kind of inequality. Mostly, I will focus on the inequality caused when a tax falls unevenly on the particular source of private revenue it does affect.

2 The amount of tax each person must pay should be certain, not arbitrary. The time, method, and amount of payment should all be clear to the taxpayer and everyone else. Otherwise, every taxpayer is more or less at the mercy of the tax collector. The collector can raise the tax on someone he dislikes or threaten to do so to extort a gift or fee for himself. Uncertain taxes encourage the arrogance and corruption of tax collectors, who tend to be unpopular even when they are neither arrogant nor corrupt. Knowing exactly what each person owes is so important in taxation that, judging from the experience of all nations, even considerable inequality does much less harm than a little uncertainty.

3 Every tax should be collected at the time, or in the way, that makes payment most convenient for the taxpayer. A tax on land or house rent, due when the rent itself is usually paid, falls due when the taxpayer is most likely to have the money to pay it. Taxes on luxury goods that people consume are ultimately paid by their consumers, usually in a very convenient way. Consumers pay small amounts as they buy the goods. They are also free to buy or not buy them. If such a tax seriously inconveniences a consumer, therefore, it must be his own fault.

4 Every tax should be designed to take and keep as little money as possible out of people’s pockets beyond what it puts into the public treasury. A tax can cost people much more than the treasury receives in four ways. First, collection may need many officers. Their salaries may consume most of the tax’s proceeds, while their extra fees act as another tax on the people. Second, the tax may obstruct people’s work and deter them from entering businesses that could support and employ large numbers. It can demand payment while shrinking or even destroying the resources that would help people pay. Third, confiscations and other penalties on people who try and fail to evade the tax may ruin them. The community then loses the benefit of their capital at work. A poorly designed tax strongly tempts people to smuggle, yet smuggling penalties must rise with that temptation. Contrary to ordinary justice, the law creates the temptation, then punishes those who give in. It generally increases the punishment in proportion to the very thing that should lessen it: the temptation to commit the offense. [See Sketches of the History of Man page 474, and Seq.] Fourth, frequent visits and intrusive inspections by tax collectors can cause people needless trouble, distress, and oppression. Distress is not literally an expense, but it is equivalent to what anyone would willingly pay to escape it. In one or another of these four ways, taxes often burden the people much more than they benefit the sovereign.

The clear justice and usefulness of these principles have drawn the attention of every nation to some degree. Each has tried, as best it could judge, to make its taxes equal and certain, convenient to pay in both timing and method, and as little burdensome to the people as possible for the revenue they bring the prince. This short review of some major taxes in different times and countries will show that nations have had differing success in these efforts.

Article I—Taxes on Rent—Taxes on the Rent of Land

A tax on land rent can use a fixed assessment. Each district is assigned a particular rental value that is never changed. Alternatively, the tax can change whenever the actual rent changes, rising or falling as cultivation improves or declines.

A land tax such as Great Britain’s is assessed in each district at a fixed rate. Even if it were equal when first established, it must become unequal over time because cultivation improves or declines at different rates in different places. In England, the valuations used to assess the counties and parishes under the land tax of the 4th of William and Mary were very unequal from the start. So the tax violates the first principle above. It fully meets the other three. Its amount is certain. Its payment date coincides with rent day, the most convenient time for the taxpayer. The landlord is always the person who really pays, though the tenant usually pays first and deducts the amount from the rent he owes. Many fewer officers collect this tax than collect any other that brings in nearly as much revenue. Because the district’s tax does not rise as rents rise, the sovereign takes no share of a landlord’s gains from improvements. Such improvements can sometimes lower the share of tax paid by other landlords in the district. But any resulting increase in the tax on a particular estate is always too small to discourage improvements or hold down the land’s produce. Since the tax does not reduce the quantity of produce, it cannot raise its price. It does not obstruct people’s work or inconvenience the landlord except by requiring him to pay it. The landlord’s benefit from the permanently fixed valuation used for Britain’s land tax, however, has mainly resulted from circumstances unrelated to the nature of the tax itself.

Part of that benefit comes from the prosperity of almost the entire country. Since the valuation was first set, rents on almost all British estates have risen steadily, and hardly any have fallen. Nearly all landlords have therefore gained the difference between what they would pay on today’s rents and what they actually pay on the old valuation. If conditions had been different and rents had steadily fallen because cultivation declined, almost all landlords would have lost that difference. Given what has happened since the revolution, the fixed valuation has helped landlords and hurt the sovereign. Under different conditions it could have helped the sovereign and hurt landlords.