Book V, Chapter II, 11

Sir Matthew Decker famously proposed taxing all goods in this manner, even those consumed immediately or quickly: the dealer would advance nothing, while the consumer would pay a fixed annual sum for a license to consume particular goods. His aim was to encourage every branch of foreign trade, especially the carrying trade, by removing all import and export duties. Merchants could then devote all their capital and credit to buying goods and hiring ships, with none diverted to advancing taxes. The proposal to tax goods of immediate or rapid consumption in this way, however, seems open to four very serious objections. First, the tax would be less equal, less closely proportioned to each contributor's expense and consumption, than the customary method. Taxes on ale, wine, and spirituous liquors advanced by dealers are ultimately paid by consumers in exact proportion to their consumption. If the tax instead took the form of a license to drink these liquors, a sober drinker would pay much more relative to consumption than a drunken one. A family offering lavish hospitality would pay much less than one entertaining fewer guests. Second, an annual, half-yearly, or quarterly license to consume particular goods would largely eliminate one of the chief conveniences of taxes on rapidly consumed goods: paying them little by little. Of the threepence halfpenny now paid for a pot of porter, perhaps three halfpence represents the taxes on malt, hops, and beer, together with the extra profit charged by the brewer for advancing them. If a worker can comfortably spare those three halfpence, he buys a pot of porter. If he cannot, he is content with a pint; and, since a penny saved is a penny earned, his restraint gains him a farthing. He pays the tax in small portions, when and as he can afford it; each payment is entirely voluntary, and he can avoid it if he chooses. Third, such taxes would be less effective as sumptuary laws. Once the license was bought, the tax would be identical whether its owner drank much or little. Fourth, if a worker had to pay at once, in yearly, half-yearly, or quarterly installments, a tax equal to what he now pays with little or no inconvenience on all the pots and pints of porter he drinks during such a period, the sum would often put him under severe strain. It therefore seems clear that this form of taxation could never, without grievous oppression, produce nearly as much revenue as the present method produces without oppression. In several countries, nevertheless, goods consumed immediately or very quickly are taxed in this way. In Holland people pay a fixed per-head amount for a license to drink tea. I have already mentioned a tax on bread that is levied in the same manner insofar as the bread is consumed in farmhouses and country villages.

Excise duties are chiefly imposed on goods produced at home for domestic consumption. They apply only to a few kinds of goods in the most general use. There can never be doubt about which goods are liable or what particular duty each kind bears. Apart from the four duties already mentioned on salt, soap, leather, and candles, and perhaps the duty on green glass, they fall almost wholly on what I call luxuries.

Customs duties are much older than excise duties. They seem to have been called customs because they were customary payments established since time immemorial. Originally, it appears, they were regarded as taxes on merchants' profits. In the barbarous age of feudal anarchy, merchants, like other inhabitants of boroughs, were considered little better than emancipated bondmen, despised for their persons and envied for their gains. The great nobles had agreed to let the king levy tallage on the profits of their own tenants and were not unwilling that he should similarly tax the profits of a class they had much less interest in protecting. In those unenlightened times people did not understand that merchants' profits cannot be taxed directly, or that the final burden of any such tax must fall, with a substantial surcharge, on consumers.

The gains of foreign merchants were regarded with even less favor than those of English merchants, and so it was natural that foreigners should be taxed more heavily. This distinction in the duties paid by foreign and English merchants, born of ignorance, has been maintained in the spirit of monopoly, to give our own merchants an advantage at home and abroad.

Subject to this distinction, the old customs duties applied equally to all kinds of goods: necessities and luxuries, exports and imports. Why, people seem to have reasoned, should dealers in one kind of goods be favored over those in another? Or exporters over importers?

The ancient customs comprised three branches. The first, perhaps the oldest duty of all, was on wool and leather. It appears to have been chiefly, if not entirely, an export duty. When woolen manufacturing became established in England, a similar duty was imposed on woolen cloth lest the king lose any customs revenue on wool exported in that form. Of the other two branches, the first was a duty on wine, called tonnage because it was charged by the ton; the second was a duty on all other goods, called poundage because it was charged by the pound of their estimated value. In the forty-seventh year of Edward III., a duty of sixpence in the pound was imposed on all imported and exported goods except wools, wool-felts, leather, and wines, which bore specific duties. In the fourteenth of Richard II., the duty rose to one shilling in the pound; three years later it fell again to sixpence. It rose to eightpence in the second year of Henry IV., and to one shilling in that prince's fourth year. From then until the ninth year of William III., it remained at one shilling in the pound. Parliament generally granted tonnage and poundage to the king in the same act, calling them the subsidy of tonnage and poundage. Because the poundage subsidy remained at one shilling in the pound, or five per cent., for so long, the word subsidy came to mean, in the language of customs, a general duty of this kind at five per cent. This subsidy, now called the old subsidy, is still collected according to the book of rates established in the twelfth of Charles II. The practice of using a book of rates to determine the value of goods subject to the duty is said to predate James I. The new subsidy, imposed in the ninth and tenth of William III., added five per cent. on most goods. The one-third and two-third subsidies together added another five per cent., of which they were the respective proportional parts. The subsidy of 1747 made a fourth five per cent. on most goods, and that of 1759 a fifth on certain kinds. Besides these five subsidies, many other duties have at times been imposed on particular goods, sometimes to meet the state's needs and sometimes to regulate national trade on the principles of the mercantile system.

That system has gradually become more fashionable. The old subsidy applied equally to exports and imports. With a few exceptions, all four later subsidies and the other duties subsequently imposed on particular goods have applied solely to imports. Most ancient duties on the export of goods produced and manufactured at home have been reduced or abolished; in most cases they have been abolished. Bounties have even been offered for exporting some of those goods. Drawbacks have also been granted when foreign goods are re-exported, sometimes refunding all and more often part of the duties paid on import. Only half of the import duties imposed by the old subsidy are refunded on export, but for most goods the whole of the duties imposed by later subsidies and other taxes are refunded. This increasing favor for exports and discouragement of imports has admitted only a few exceptions, chiefly for manufacturing materials. Our merchants and manufacturers want these materials to cost themselves as little as possible and their rivals in other countries as much as possible. Foreign materials, such as spanish wool, flax, and raw linen yarn, are therefore sometimes allowed in duty-free. Exports of materials produced at home, and of those peculiar to our colonies, have at times been forbidden and at times subjected to higher duties. The export of English wool has been forbidden; the export of beaver skins, beaver wool, and gum-senega has incurred higher duties, since Great Britain's conquests of Canada and Senegal gave it nearly a monopoly of these goods.

I have tried to show in the fourth book of this Inquiry that the mercantile system has not greatly favored the revenue of the people at large—the annual produce of the country's land and labor. Nor does it appear to have favored the sovereign's revenue, at least insofar as that revenue depends on customs duties.

Under this system, the import of several kinds of goods has been wholly forbidden. In some cases the prohibition has stopped their import entirely; in others it has greatly reduced it by leaving importers no choice but to smuggle. It has stopped the import of foreign woolens altogether and greatly diminished the import of foreign silks and velvets. In both cases it has entirely extinguished the customs revenue that might have been collected on those imports.

High duties imposed on many kinds of foreign goods to discourage their consumption in Great Britain have often merely encouraged smuggling; in every case they have reduced customs revenue below what more moderate duties would have yielded. Dr Swift's saying that in the arithmetic of customs two and two sometimes make only one instead of four holds perfectly true of such heavy duties. They could never have been imposed had the mercantile system not taught us, in many cases, to use taxation as an instrument of monopoly rather than revenue.

Bounties sometimes paid on exports of domestic produce and manufactures, and drawbacks paid when most foreign goods are re-exported, have given rise to many frauds and to a form of smuggling more destructive of public revenue than any other. To obtain the bounty or drawback, it is well known, goods are sometimes put aboard ship and sent to sea, only to be secretly landed again elsewhere in the country soon afterward. The loss to customs revenue from bounties and drawbacks, many of which are obtained fraudulently, is very great. In the year ending on the 5th of January 1755, gross customs receipts came to £5,068,000. Bounties paid out of this revenue amounted to £167,806, though there was no bounty on corn that year. Drawbacks paid on debentures and certificates came to £2,156,800. Together bounties and drawbacks amounted to £2,324,600. After those deductions customs revenue was only £2,743,400; deducting £287,900 for management expenses, including salaries and other incidentals, leaves net customs revenue of £2,455,500 for that year. Management expenses thus amount to between five and six per cent. of gross customs revenue, and to somewhat more than ten per cent. of what remains after payments of bounties and drawbacks.

Since almost every imported good bears a heavy duty, our importing merchants smuggle as much as possible and declare as little as possible. Exporting merchants, by contrast, declare more than they export, sometimes from vanity, to appear substantial dealers in goods on which no duty is payable, or to claim a bounty or drawback. As a result of these several frauds, the customs-house books show our exports greatly exceeding our imports, to the unspeakable comfort of politicians who measure national prosperity by what they call the balance of trade.

All imported goods, unless specifically exempted—and such exemptions are few—are liable to some customs duty. If goods not named in the book of rates are imported, they are taxed at 4s:9¾d. for every twenty shillings of value sworn to by the importer: nearly five subsidies, or five poundage duties. The book of rates is extremely extensive and lists many articles, some little used and consequently not well known. It is therefore often uncertain under which article a particular kind of goods belongs and, in consequence, what duty is due. Errors about this sometimes ruin the customs officer and often cause the importer considerable trouble, expense, and vexation. Customs duties are thus far inferior to excise duties in clarity, precision, and distinctness.

For most members of a society to contribute to public revenue in proportion to their expenses, it does not seem necessary to tax every single item of those expenses. Excise revenue is supposed to fall as equally on contributors as customs revenue, yet excise duties apply only to a few goods in the most general use and consumption. Many have held that with proper management customs duties too could be confined to a few articles, without loss of public revenue and with great benefit to foreign trade.

Sir Matthew Decker famously proposed taxing all goods this way, even goods used immediately or quickly. Dealers would pay nothing in advance. Consumers would pay an annual fee for a license to use certain goods. He wanted to promote every branch of foreign trade, particularly the carrying trade, by removing import and export duties. Merchants could then use all their capital and credit to buy goods and pay for shipping instead of setting some aside to advance taxes. But this way of taxing goods consumed quickly has four serious problems. First, it would distribute the tax less evenly according to each person's spending and consumption than the usual method does. Taxes on ale, wine, and spirits are advanced by dealers but ultimately paid by consumers in exact proportion to how much they drink. With a license to drink, a moderate drinker would pay far more tax relative to consumption than a heavy drinker. A family that entertained many guests would pay much less tax relative to consumption than one that entertained fewer. Second, an annual, half-yearly, or quarterly license would largely remove a major convenience of taxes on goods consumed quickly: paying little by little. A pot of porter now costs threepence halfpenny. Taxes on malt, hops, and beer, plus the brewer's extra profit for advancing them, may account for about three halfpence of that price. A worker who can spare those three halfpence buys a pot. If not, he settles for a pint. Since a penny saved is a penny gained, this moderation saves him a farthing. He pays the tax in small amounts when he can afford to. Every payment is entirely voluntary, and he can avoid it if he chooses. Third, licenses would do less to discourage luxury. Once a buyer had paid, the tax would be the same whether he drank a lot or a little. Fourth, a worker who could easily pay small taxes on his pots and pints of porter over a year, half-year, or quarter might be badly strained by paying the same total all at once. It seems clear that this method could never raise nearly as much revenue as the present one without severe hardship, while the present method causes none. Still, some countries tax quickly consumed goods this way. In Holland, people pay a set amount per person for a license to drink tea. As noted earlier, bread eaten in farmhouses and country villages is taxed there in the same way.

Excise duties are mainly placed on domestic goods meant for domestic use. They apply only to a few widely used kinds of goods. There is never any doubt about which goods are taxed or the rate that applies to each kind. Almost all the duties fall on what I call luxuries. The exceptions are the four duties already mentioned on salt, soap, leather, and candles, and perhaps the duty on green glass.

Customs duties are much older than excise duties. They seem to have been named for payments established by long custom. At first they appear to have been viewed as taxes on merchants' profits. During the violent disorder of feudal times, merchants, like other town dwellers, were regarded as barely above freed serfs. People looked down on them personally and envied their earnings. Great nobles had agreed that the king could tax their tenants' profits. They were even more willing to let him tax merchants, whom they had less reason to protect. People then did not understand that merchants' profits cannot be taxed directly in this way. Nor did they understand that consumers ultimately pay such taxes, with a substantial extra charge.

Foreign merchants' earnings were regarded even less favorably than English merchants' earnings, so the foreigners were naturally taxed more heavily. Ignorance created this difference in duties. The desire for monopoly kept it in place, giving our merchants an advantage at home and abroad.

Apart from this distinction, ancient customs duties fell equally on every kind of good: necessities and luxuries, exports and imports. Why, people apparently thought, should dealers in one good be favored over dealers in another, or exporters over importers?

The old customs duties had three branches. The first, perhaps the oldest, taxed wool and leather, apparently mainly or entirely on export. Once clothmaking took root in England, woolen cloth exports were taxed too, lest the king lose wool duties when wool was exported as cloth. Another branch taxed wine by the ton and was called tonnage. The third taxed all other goods by the pound of their presumed value and was called poundage. In the forty-seventh year of Edward III., a duty of sixpence in the pound was placed on all imports and exports except wools, wool-felts, leather, and wines, which had separate duties. In the fourteenth of Richard II., the duty rose to one shilling in the pound. Three years later it returned to sixpence. It rose to eightpence in the second year of Henry IV. and to one shilling in his fourth year. From then until the ninth year of William III., it remained one shilling in the pound. Parliament usually granted tonnage and poundage to the king in the same act, calling the combined grant the subsidy of tonnage and poundage. Since poundage stayed at one shilling in the pound, or five per cent., for so long, customs officials came to use “subsidy” to mean a general duty of five per cent. This original charge, now called the old subsidy, is still levied under the book of rates established in the twelfth of Charles II. Valuing taxed goods by a book of rates is said to predate James I. The new subsidy, imposed in the ninth and tenth of William III., added five per cent. on most goods. The one-third and two-third subsidies together added another five per cent., with each supplying its stated fraction. The subsidy of 1747 added a fourth five per cent. on most goods, and that of 1759 added a fifth on certain goods. Beyond these five subsidies, many other duties have sometimes been placed on particular goods, partly to meet government needs and partly to regulate trade according to the mercantile system.

That system has gradually become more fashionable. The old subsidy applied equally to imports and exports. With a few exceptions, the next four subsidies and later duties on particular goods applied only to imports. Most old duties on exports of domestic products and manufactures have been lowered or removed; usually they have been removed entirely. Some exports have even received bounties. When foreign goods are re-exported, the importer can also get back all or part of the duties paid on import. Only half the old subsidy's import duties are returned on export. But for most goods, all the duties imposed by the later subsidies and other charges are returned. There are only a few exceptions to this growing encouragement of exports and discouragement of imports. They mainly concern materials used in manufacturing. Our merchants and manufacturers want these materials as cheap as possible for themselves and as expensive as possible for rivals abroad. For that reason, foreign materials such as spanish wool, flax, and raw linen yarn can sometimes enter duty-free. Exports of domestic materials and materials produced particularly in our colonies have sometimes been forbidden and sometimes taxed more heavily. Exports of English wool have been forbidden. Beaver skins, beaver wool, and gum-senega face higher export duties, since the conquests of Canada and Senegal gave Great Britain almost a monopoly of these goods.

I tried to show in the fourth book of this Inquiry that the mercantile system has not helped the revenue of the people as a whole: the country's annual output from land and labor. It seems no more helpful to the sovereign's revenue, at least where that revenue comes from customs duties.

Under this system, imports of several kinds of goods have been banned outright. Sometimes this has stopped imports entirely; in other cases it has greatly reduced them by forcing importers to smuggle. It has stopped all imports of foreign woolens and greatly reduced imports of foreign silks and velvets. In both cases it has wiped out the customs revenue that could have been collected on these imports.

High duties on many foreign imports, meant to discourage their use in Great Britain, have often done nothing but encourage smuggling. In every case they have produced less customs revenue than moderate duties would have done. Dr Swift's saying that in customs arithmetic two and two sometimes make only one rather than four is exactly right for these heavy duties. They would never have been imposed had the mercantile system not taught us to use taxes to create monopolies rather than revenue.

Bounties for exporting domestic goods and refunds of duties when most foreign goods are re-exported have led to many frauds. They have also encouraged a kind of smuggling more damaging to public revenue than any other. Goods are sometimes loaded on ships and sent to sea to claim a bounty or refund, then secretly brought ashore elsewhere in the country. The resulting loss of customs revenue is very large, since much of the money paid in bounties and refunds is obtained fraudulently. Gross customs receipts for the year ending on the 5th of January 1755 were £5,068,000. Bounties paid from these receipts, although there was no bounty on corn that year, were £167,806. Refunds paid on debentures and certificates were £2,156,800. Together bounties and refunds were £2,324,600. After those deductions, customs revenue was only £2,743,400. Subtract £287,900 for administration, including salaries and other costs, and net customs revenue was £2,455,500. Administration thus cost between five and six per cent. of gross customs receipts, and more than ten per cent. of what remained after bounties and refunds.

Because heavy duties apply to almost every import, our importing merchants smuggle as much as they can and declare as little as possible. Exporters, in contrast, declare more than they actually ship. Sometimes they do it out of vanity, to look like large dealers in untaxed goods; sometimes they do it to claim a bounty back. Because of both types of fraud, the customs records show exports far exceeding imports. This greatly pleases politicians who judge national prosperity by what they call the balance of trade.

All imports are subject to some customs duties unless specifically exempted, and few are exempt. Goods absent from the book of rates are taxed at 4s:9¾d. for every twenty shillings of value sworn to by the importer. That is nearly five subsidies, or five poundage duties. The book of rates is extremely long. It lists many articles that are rarely used and thus little known. Often it is unclear which entry covers a given good and therefore which duty it owes. A mistake can sometimes ruin a customs officer and often causes the importer trouble, expense, and frustration. Customs duties are therefore far less clear, exact, and distinct than excise duties.

Most members of society can contribute to public revenue in proportion to their spending without taxing every item they buy. Excise revenue is thought to fall just as evenly on contributors as customs revenue does, although excise duties apply only to a few widely used goods. Many people believe that, with proper administration, customs duties too could be limited to a few goods. This could benefit foreign trade greatly without reducing public revenue.