Book V, Chapter II, 6

The natural tendency of the window tax, and of all other taxes on houses, is to lower rents. Clearly, the more a person pays in tax, the less he can afford to pay in rent. Since the window tax was imposed, however, house rents have risen to some degree overall in almost every town and village of Great Britain with which I am familiar. The demand for houses has increased so greatly almost everywhere that it has raised rents by more than the window tax could lower them. This is one of many signs of the country’s great prosperity and its inhabitants’ rising revenue. Without the tax, rents would probably have risen still higher.

ARTICLE II.—Taxes on Profit, or on Revenue Arising from Stock.

Revenue or profit arising from stock naturally divides into two parts: the part that pays interest and belongs to the owner of the stock, and the surplus beyond what is required to pay interest.

This latter part of profit clearly cannot be taxed directly. It compensates the person employing the stock for the risk and trouble of doing so, and in most cases provides no more than a very moderate compensation. He must receive it, or he cannot continue to employ the stock consistently with his own interest. If taxed directly in proportion to his total profit, he would therefore have to raise his rate of profit or charge the tax against the interest on the money—that is, pay less interest. If he raised his rate of profit to match the tax, the entire tax, though initially advanced by him, would ultimately be paid by one of two different groups, depending on how he employed the stock under his management. If he employed it as farming stock to cultivate land, he could raise his rate of profit only by retaining a larger share of the land’s produce, or the price of a larger share. As this could be achieved only by reducing rent, the tax would ultimately fall on the landlord. If he employed it in trade or manufacturing, he could raise his rate of profit only by raising the price of his goods, and the entire final burden would fall on their consumers. If he did not raise his rate of profit, he would have to charge the entire tax against the part of that profit set aside to pay interest on money. He could afford to pay less interest on any stock he borrowed, and the entire burden of the tax would ultimately fall on interest. To the extent that he could not escape the tax in one way, he would have to escape it in the other.

At first sight, interest on money seems as suitable for direct taxation as land rent. Like land rent, it is a net produce left after fully compensating the risk and trouble of employing the stock. A tax on land rent cannot raise rents, because the net produce left after replacing the farmer’s stock and paying his reasonable profit cannot be greater after the tax than before. For the same reason, a tax on interest on money could not raise the interest rate, assuming the country’s quantity of stock or money, like its quantity of land, remained unchanged after the tax. As shown in the first book, the ordinary rate of profit is everywhere governed by the amount of stock available to be employed in relation to the amount of employment, or business, there is for it to perform. A tax on interest on money could neither increase nor decrease the amount of employment or business for stock. If it likewise neither increased nor decreased the amount of stock available, the ordinary rate of profit would necessarily stay the same. The portion of profit needed to compensate the employer’s risk and trouble would also remain the same, since that risk and trouble had not changed. The remainder—the portion belonging to the stock’s owner and paying interest on money—would necessarily stay the same too. At first sight, then, interest on money seems as fit for direct taxation as land rent.

There are, however, two circumstances that make interest on money much less suitable for direct taxation than land rent.

First, the amount and value of land someone owns can never be secret and can always be determined with great precision. But the total capital stock he owns is almost always secret and can scarcely ever be determined with reasonable accuracy. Moreover, it is subject to nearly constant change. Rarely a year passes, frequently not even a month, sometimes scarcely a single day, without its rising or falling to some degree. An investigation of everyone’s private affairs that monitored every fluctuation of fortune in order to adjust the tax accordingly would cause such constant and endless harassment that no one could endure it.

Second, land cannot be moved, while stock can readily be moved. The owner of land must belong to the particular country in which his estate lies. The owner of stock is more properly a citizen of the world and is not necessarily bound to any particular country. He would be inclined to leave a country where he was subjected to an intrusive investigation for the sake of a burdensome tax, and move his stock to another country where he could conduct his business or enjoy his fortune more comfortably. By taking his stock away, he would extinguish all the industry it had supported in the country he left. Stock cultivates land; stock employs labor. A tax that tended to drive stock out of a country would consequently tend to dry up every source of revenue for both the sovereign and society. Not only the profits of stock, but land rent and the wages of labor would necessarily fall to some degree when it departed.

Accordingly, nations that have attempted to tax revenue arising from stock have had to settle for a very rough and therefore more or less arbitrary estimate rather than conduct any such rigorous investigation. The extreme inequality and uncertainty of a tax assessed this way can be offset only by its extreme moderation. As a result, everyone finds himself assessed so far below his actual revenue that he is little troubled if his neighbor is assessed somewhat less.

What is called the land tax in England was meant to tax stock in the same proportion as land. When land was taxed at four shillings in the pound, or one-fifth of its estimated rent, stock was meant to be taxed at one-fifth of its estimated interest. When the present annual land tax was first introduced, the legal rate of interest was six per cent. Each hundred pounds of stock was therefore supposed to be taxed at twenty-four shillings, one-fifth of six pounds. Since the legal interest rate was reduced to five per cent., each hundred pounds of stock is supposed to be taxed at only twenty shillings. The sum raised by what is called the land tax was divided between the countryside and the principal towns. Most of it was imposed on the countryside; of the part imposed on the towns, most was assessed on houses. The remainder to be assessed on the stock or trade of the towns—for stock employed on the land was not meant to be taxed—was far below the actual value of that stock or trade. Whatever inequalities existed in the original assessment therefore caused little distress. Every parish and district continues to be assessed on its land, houses, and stock according to that original assessment. The country’s almost universal prosperity, which in most places has greatly increased the value of all three, has made those inequalities less important still. Since each district’s assessment also always remains the same, the uncertainty of the tax insofar as it might fall on an individual’s stock has been greatly reduced and made much less consequential. If most English land is not assessed for the land tax at even half its actual value, most English stock is perhaps assessed at scarcely a fiftieth of its actual value. In some towns the whole land tax is assessed on houses, as in Westminster, where stock and trade are exempt. London is different.

Every country has carefully avoided any rigorous investigation into private individuals’ affairs.

At Hamburg, [Memoires concernant les Droits, tom. i, p.74] each resident is required to pay the state one fourth per cent. of everything he owns. As the wealth of Hamburg’s people consists principally of stock, this may be considered a tax on stock. Each man assesses himself and annually places in the public treasury, in the magistrate’s presence, a sum of money that he swears is one fourth per cent. of everything he owns. He need not declare the value of his possessions or submit to any examination about it. The tax is generally believed to be paid with great honesty. In a small republic whose people have complete confidence in their magistrates, are convinced that the tax is needed to support the state, and believe it will faithfully be used for that purpose, such conscientious and voluntary payment may sometimes be expected. It is not unique to Hamburg’s people.

The canton of Underwald in Switzerland is often ravaged by storms and floods, leaving it with extraordinary expenses. On these occasions the people assemble, and each is said to declare his worth with the utmost candor so that he can be taxed accordingly. At Zurich, the law requires everyone, when necessary, to be taxed in proportion to his revenue, the amount of which he must declare under oath. It is said that they do not suspect any of their fellow citizens of deceiving them. At Basil, the state draws its principal revenue from a small customs duty on exported goods. All citizens swear to pay every three months all taxes imposed by law. Merchants, and even innkeepers, are trusted to keep their own accounts of goods they sell within or outside the territory. At the end of each three-month period they send the account to the treasurer, with the calculated amount of tax written at its foot. No one suspects that this trust causes the revenue to suffer. [Memoires concernant les Droits, tom. i p. 163, 167,171.]

It seems that in those Swiss cantons requiring each citizen to declare the amount of his fortune publicly under oath is not considered a hardship. At Hamburg it would be considered the greatest hardship. Merchants undertaking the hazardous ventures of trade all tremble at the thought of having to expose the true state of their affairs at all times. They foresee that their credit would be ruined and their ventures too often defeated. Sober, frugal people unfamiliar with such ventures have no need, in their view, for such concealment.

In Holland, soon after the elevation of the late prince of Orange to the stadtholdership, a tax of two per cent., called the fiftieth penny, was imposed on each citizen’s entire property. Each citizen assessed himself and paid as at Hamburg, and the tax was generally believed to have been paid with great honesty. At the time the people had the deepest affection for their new government, which they had just established by a general insurrection. The tax was to be paid only once, to help the state through a particular emergency. It was indeed too heavy to be permanent. In a country where the market interest rate seldom exceeds three per cent., a tax of two per cent. amounts to thirteen shillings and four pence in the pound on the highest net revenue ordinarily drawn from stock. Very few people could pay such a tax without drawing to some degree on their capital. In a particular emergency, public zeal may lead people to make a great effort, surrendering even part of their capital to help the state. But they cannot possibly continue doing so for any considerable time; if they did, the tax would soon ruin them so completely that they would be wholly unable to support the state.

Although the English land tax bill assesses its tax on stock in proportion to capital, the tax is not intended to reduce or take away any of that capital. It is intended only as a tax on interest on money, proportional to the tax on land rent, so that when the latter is four shillings in the pound, the former may also be four shillings in the pound. Likewise, the Hamburg tax, and the still more moderate taxes of Underwald and Zurich, are intended to tax not capital but interest or net revenue from stock. The Dutch tax was intended as a tax on capital.

Taxes on the Profit of Particular Employments.

Some countries impose extraordinary taxes on the profits of stock, sometimes when it is used in particular branches of trade and sometimes when it is used in agriculture.

Of the former kind in England are the tax on hawkers and peddlers, the tax on hackney coaches and chairs, and the tax alehouse keepers pay for a license to sell ale and spirituous liquors by retail. During the recent war, a further tax of the same kind was proposed on shops. As the war had been undertaken in defense of the country’s trade, it was said that the merchants who stood to profit from it ought to help pay for it.

A tax on the profits of stock employed in any particular branch of trade, however, can never ultimately fall on the dealers. In ordinary cases they must earn their reasonable profit, and where competition is free they can seldom earn more. Instead it always falls on consumers, who must pay in the goods’ price the tax advanced by the dealer, generally with some additional charge.

The window tax, like every other tax on houses, naturally tends to reduce rents. Clearly, the more someone pays in tax, the less he can afford in rent. Nevertheless, since the window tax began, house rents have generally risen to some extent in almost every British town and village I know. In almost every place, demand for houses has increased enough to raise rents by more than the window tax could lower them. This is one of many signs of the country's great prosperity and its residents' rising revenue. Without the tax, rents would probably have risen even more.

ARTICLE II.—Taxes on Profit, or on Revenue from Stock.

The revenue or profit from stock naturally has two parts. One pays interest and belongs to the owner of the stock. The other is the surplus above what is needed to pay that interest.

This surplus cannot in practice be taxed directly. It pays for the risk and trouble of employing stock, and usually provides only modest compensation. Whoever employs the stock needs this payment, or it would not be in his interest to keep employing it. If he were taxed directly in proportion to his entire profit, he would therefore have to raise his rate of profit or pass the tax on to the interest on borrowed money by paying less interest. If he raised his profit to cover the tax, he might pay the tax first, but one of two other groups would pay it in the end, depending on how he used the stock. If he used it as farming stock to cultivate land, he could raise his profit only by keeping more of the land's produce, or the price of more of that produce. He could do that only by paying less rent. The landlord would then ultimately pay the tax. If he used the stock in trade or manufacturing, he could raise his profit only by raising the price of his goods. The buyers of those goods would then pay the entire tax in the end. If he did not raise his profit, he would have to take the whole tax out of the part of profit reserved for interest. He could pay less interest on the stock he borrowed, and the tax would ultimately fall entirely on interest. If he could not escape the tax one way, he would have to escape it the other.

At first glance, interest on money seems as suitable for direct taxation as land rent. Like land rent, it is net produce left after all the risk and trouble of employing stock have been fully paid for. A tax on land rent cannot raise rents. After a farmer has recovered his stock and reasonable profit, the net produce left cannot be greater with the tax than without it. For the same reason, a tax on interest could not raise the interest rate, assuming the country's amount of stock or money remains the same after the tax, just as its amount of land does. As shown in the first book, the usual profit rate everywhere depends on how much stock is available to employ compared with the amount of work or business available for it to do. A tax on interest cannot change that amount of work or business. So if it does not change the amount of stock either, the usual profit rate must stay the same. The share of profit needed to compensate the employer for risk and trouble must also stay the same, since the risk and trouble have not changed. The remainder, which belongs to the stock's owner and pays interest, must therefore stay the same too. At first glance, then, interest seems just as suitable for direct taxation as land rent.

Two circumstances, however, make interest a much less suitable subject for direct taxation than land rent.

First, the amount and value of someone's land can never be secret and can always be measured quite accurately. His total capital stock, by contrast, is almost always secret and can hardly ever be measured with reasonable accuracy. It also changes almost constantly. It rarely stays the same for a year, often changes within a month, and sometimes changes within a single day. Investigating everyone's private affairs, and then tracking every change in their wealth to adjust the tax, would cause constant and endless harassment that no one could bear.

Second, land cannot be moved, while stock can move easily. A landowner must be a citizen of the country where his estate lies. The owner of stock is more properly a citizen of the world, with no necessary attachment to one country. He would be inclined to leave a country that subjected him to intrusive investigations for a heavy tax. He would move his stock somewhere else, where he could do business or enjoy his wealth more comfortably. Moving that stock would end all the work it had supported in the country he left. Stock cultivates land; stock employs labor. A tax that tended to drive stock out of a country would therefore tend to drain every source of revenue for both the ruler and society. Not only profits on stock but land rents and wages of labor would inevitably fall to some extent when it left.

Countries that have tried to tax revenue from stock have therefore avoided these harsh investigations. They have had to settle for rough and thus somewhat arbitrary estimates. A tax assessed this way is so unequal and uncertain that only a very low rate can make it tolerable. Each person is then assessed so far below his real revenue that he is not much troubled if his neighbor is assessed a little lower.

England's so-called land tax was intended to tax stock at the same rate as land. When the land tax was four shillings in the pound, or one-fifth of the estimated rent, stock was meant to be taxed at one-fifth of its estimated interest. When the current annual land tax was first introduced, the legal interest rate was six per cent. A hundred pounds of stock was therefore supposed to pay twenty-four shillings in tax, one-fifth of six pounds. Since the legal interest rate fell to five per cent., a hundred pounds of stock is supposed to pay only twenty shillings. The total to be collected under the so-called land tax was divided between rural areas and the main towns. Most was assigned to rural areas, and most of the towns' share was assessed on houses. The amount left to be assessed on town stock or trade—the stock used on land was not meant to be taxed—was far below that stock or trade's real value. Any inequalities in the original assessment therefore caused little concern. Each parish and district is still assessed for its land, houses, and stock under the original valuation. General prosperity has raised their values greatly in most places, making the old inequalities even less important. Because each district's assessment also stays the same, uncertainty about how the tax might be assessed on any individual's stock has been much reduced and matters much less. If most English land is assessed for land tax at less than half its actual value, most English stock is perhaps assessed at barely a fiftieth of its actual value. In some towns, such as Westminster, the entire land tax is assessed on houses, leaving stock and trade untaxed. London is different.

Every country has carefully avoided a harsh investigation into private citizens' affairs.

At Hamburg, [Memoires concernant les Droits, tom. i, p.74] every resident must pay the state one fourth per cent. of everything he owns. Since Hamburg's wealth consists mainly of stock, this can be considered a tax on stock. Each person assesses himself. Once a year, in a magistrate's presence, he puts money into the public treasury and swears that it equals one fourth per cent. of everything he owns. He does not disclose his total wealth and is not subject to questioning about it. People generally believe this tax is paid very honestly. Such conscientious, voluntary payment can sometimes be expected in a small republic where people have full confidence in their officials, believe the tax is necessary to support the state, and believe it will be faithfully used for that purpose. Hamburg is not unique in this respect.

The Swiss canton of Underwald is often hit by storms and floods, bringing unusual expenses. On such occasions, the people gather and each person is said to state his wealth with complete openness so he can be taxed accordingly. At Zurich, the law requires everyone in times of need to be taxed according to revenue, whose amount each must declare on oath. People there are said not to suspect any fellow citizen of cheating. At Basil, the state's chief revenue comes from a small customs duty on exported goods. All citizens swear to pay every legally imposed tax every three months. Merchants and even innkeepers are trusted to keep their own records of goods sold, whether inside or outside the territory. At the end of each three-month period, they send their accounts to the treasurer, with the tax calculated at the bottom. No one suspects that this trust costs the state revenue. [Memoires concernant les Droits, tom. i p. 163, 167,171.]

In those Swiss cantons, publicly declaring one's wealth on oath does not seem to be considered a hardship. At Hamburg, it would be considered the greatest hardship. Merchants engaged in risky ventures dread having to reveal the true condition of their finances at any time. They expect such exposure would often destroy their credit and ruin their ventures. A careful and frugal people who have no such ventures do not feel a need for that secrecy.

In Holland, soon after the late prince of Orange was raised to the office of stadtholder, a tax of two per cent., called the fiftieth penny, was imposed on each citizen's entire property. Each citizen assessed himself and paid as in Hamburg. It was generally believed that people paid very honestly. At the time, the people were strongly devoted to the new government they had just established through a general uprising. The tax was a one-time payment to help the state meet a particular emergency. It was too heavy to last. Where market interest seldom exceeds three per cent., a tax of two per cent. of capital is equal to thirteen shillings and four pence in the pound on the highest net revenue usually earned from stock. Very few could pay it without using up some of their capital. In an emergency, public enthusiasm may lead people to make a great effort and sacrifice even part of their capital to help the state. But they cannot keep doing so for long. If they did, the tax would soon ruin them so thoroughly that they could no longer support the state.

The tax on stock in England's land tax bill is based on capital, but is not meant to reduce or take any of that capital. It is intended as a tax only on interest, matching the tax on land rent. When the latter is four shillings in the pound, interest can also be taxed at four shillings in the pound. The Hamburg tax, and the still smaller taxes of Underwald and Zurich, are likewise intended to tax interest or the net revenue of stock, not capital. The Dutch tax was intended to tax capital.

Taxes on the Profit of Particular Employments.

In some countries, special taxes are imposed on profits from stock, sometimes in particular branches of trade and sometimes in farming.

English examples of taxes on particular trades include those on hawkers and peddlers, on hired coaches and chairs, and the license fee paid by keepers of alehouses to sell ale and spirituous liquors. During the recent war, a similar tax on shops was proposed. The argument was that the war had been fought to defend the country's trade, so the merchants who would gain from it ought to help pay for it.

A tax on profit from stock employed in a particular trade, however, can never ultimately fall on its dealers. Ordinarily they need a reasonable profit and, where competition is free, can rarely earn more. The tax instead falls on buyers, who must pay in the price of the goods the tax that dealers paid in advance, usually with some extra charge on top.