Book V, Chapter II, 12

The foreign goods most widely used and consumed in Great Britain today appear chiefly to be foreign wines and brandies; some products of America and the West Indies—sugar, rum, tobacco, cocoa-nuts, etc.—and some products of the East Indies—tea, coffee, china-ware, spices of every kind, several sorts of piece-goods, etc. These articles seem now to provide perhaps the greater part of customs revenue. Most of the current taxes on foreign manufactures, except on the few just listed, were imposed not to raise revenue but to secure a monopoly, giving our merchants an advantage in the home market. If every prohibition were removed and all foreign manufactures subjected to moderate taxes, set according to experience at the rate yielding the greatest public revenue from each article, our workers might still retain a substantial advantage at home. Many goods that now bring government no revenue, or very little, might then bring in a great deal.

High taxes frequently bring government less revenue than more moderate taxes would, sometimes by reducing consumption of the taxed goods, and sometimes by encouraging smuggling.

When reduced consumption causes the loss of revenue, there is only one remedy: lower the tax. When encouragement of smuggling causes it, there may be two remedies: reduce the temptation to smuggle or make smuggling more difficult. Only lowering the tax can reduce the temptation; only the introduction of the administrative system best suited to prevent smuggling can make it more difficult.

Experience shows, I believe, that excise laws obstruct and hamper smugglers far more effectively than customs laws do. Adopting for customs a system of administration as close to that of excise as the different duties permit could make smuggling much more difficult. Many people have supposed that this change could be made quite easily.

It has been proposed that importers of goods subject to customs duties should be free to place them either in their own private warehouses or in warehouses supplied at their own expense or at public expense, but kept under the customs officer's key and opened only in his presence. If an importer chose his own private warehouse, the duties would be paid immediately, with no subsequent drawback; the customs officer could inspect the warehouse at any time to determine whether its contents agreed with the quantity on which duty had been paid. If the importer chose the public warehouse, no duty would be paid until goods were removed for domestic consumption. Goods removed for export would be duty-free, provided proper security was always given that they would indeed be exported. Wholesale and retail dealers in these goods would likewise be subject at all times to the customs officer's inspection, and required to provide suitable certificates proving that duty had been paid on all goods in their shops or warehouses. What are called the excise duties on imported rum are already collected this way. The same administrative system might perhaps be extended to all duties on imports, provided those duties, like excise duties, were restricted to a few goods in the most general use and consumption. Were they to apply to nearly every kind of good, as they do now, sufficiently extensive public warehouses could not easily be supplied. Moreover, merchants could not safely entrust goods of a very delicate nature, or goods requiring much care for their preservation, to any warehouse but their own.

Suppose this administrative system could prevent smuggling on any considerable scale even with fairly high duties, and suppose every duty were raised or lowered from time to time, whichever promised the greatest revenue for the state: taxation would then always serve revenue, never monopoly. It seems quite possible that duties on the import of only a few widely used and consumed goods could bring in at least as much as the present net customs revenue. Customs duties could then attain the same degree of simplicity, certainty, and precision as excise duties. This system would save in full the revenue now lost through drawbacks on re-exported foreign goods subsequently landed again and consumed at home. That saving alone would be very substantial. Add to it the abolition of every bounty on the export of domestic produce except where the bounty actually refunds an excise duty previously advanced, and there can scarcely be any doubt that net customs revenue after such a change could fully equal its former level.

If the public revenue suffered no loss from this change, the nation's trade and manufactures would certainly gain a substantial advantage. Trade in untaxed goods, by far the most numerous, would be wholly free and could be carried on to and from every part of the world on the most favorable terms. These goods would include all the necessities of life and all manufacturing materials. Insofar as free imports of necessities reduced their average money price at home, they would reduce the money price of labor without reducing its real reward in any respect. The value of money depends on the quantity of necessities it can buy. The value of necessities is entirely independent of the quantity of money obtainable for them. A fall in the money price of labor would necessarily bring a proportional fall in the price of all domestic manufactures, giving them an advantage in every foreign market. Free imports of raw materials would reduce the price of some manufactures still further. If raw silk from China and Indostan could be imported duty-free, English silk manufacturers could greatly undersell those of both France and Italy. There would be no need to prohibit foreign silks and velvets. The cheapness of their goods would secure our workers not only the home market but also a very great share of foreign markets. Even trade in taxed goods would be conducted much more advantageously than at present. Goods removed from the public warehouse for foreign export would bear no taxes and could be traded with complete freedom. The carrying trade in every sort of good would enjoy every possible advantage under this system. If the goods were removed for domestic consumption, the importer would not need to advance the tax until he had a chance to sell them to a dealer or a consumer. He could therefore always sell them more cheaply than if he had to advance it upon importation. Even under the same taxes, the foreign trade in goods destined for domestic consumption could thus be conducted far more advantageously than it is now, including trade in the taxed goods.

Sir Robert Walpole's famous excise scheme aimed to establish for wine and tobacco a system much like the one proposed here. But although the bill introduced into Parliament covered only these two goods, people generally believed it was intended to prepare the way for a broader scheme of the same kind. Party faction joined forces with the interests of smuggling merchants to raise an outcry against the bill so fierce, though so unjust, that the minister saw fit to withdraw it. For fear of arousing a similar outcry, none of his successors has dared revive the proposal.

Duties on foreign luxuries imported for domestic consumption sometimes fall on the poor, but principally on people of middling or more than middling means. Such are, for example, duties on foreign wines, coffee, chocolate, tea, sugar, etc.

Duties on cheaper luxuries produced and consumed at home fall fairly equally on people of every rank in proportion to their expenses. The poor pay duties on malt, hops, beer, and ale consumed by themselves; the rich pay duties both on their own consumption and on that of their servants.

It must be observed that the total consumption of the lower ranks, those below the middle rank, is much greater in every country than that of the middle and upper ranks, not only in quantity but in value. The lower ranks' total expenditure is far greater than the upper ranks'. First, almost all the capital of every country is distributed annually among the lower ranks as wages for productive labor. Second, a large share of the revenue from both land rent and profits of stock is distributed each year among the same ranks as wages and maintenance for domestic servants and other unproductive laborers. Third, some profits of stock also belong to these ranks, as revenue from the use of their small capitals. The annual profits of small shopkeepers, tradesmen, and retailers of every kind are considerable everywhere, and constitute a substantial part of annual produce. Fourth and finally, even some land rent belongs to the same ranks: a considerable portion to people somewhat below the middle rank, and a small portion even to the lowest rank, since ordinary laborers sometimes own an acre or two of land. The expenses of individuals in the lower ranks may thus be very small, but taken together they always form by far the largest part of society's total expenditure. The share of the annual produce of a country's land and labor left for consumption by the upper ranks is always much smaller, both in quantity and in value. Taxes on spending that fall principally on the upper ranks, on the smaller share of annual produce, will therefore probably yield much less than taxes that fall equally on all ranks or principally on the lower ranks—just as taxes on the smaller share yield less than taxes that fall equally on the whole annual produce or principally on its larger share. Accordingly, of all taxes on spending, by far the most productive is the excise on the materials and manufacture of domestically made fermented and spirituous liquors. This branch of excise falls heavily, perhaps principally, on the spending of ordinary people. In the year ending on the 5th of July 1775, its gross yield was £3,341,837:9:9.

It must always be remembered, however, that only the luxuries, never the necessary expenses, of the lower ranks ought to be taxed. The final payment of any tax on their necessities would fall entirely on the upper ranks: on the smaller share of annual produce, not the larger. Such a tax must either raise wages or reduce the demand for labor. It could not raise wages without transferring its final cost to the upper ranks. It could not reduce the demand for labor without reducing the annual produce of the country's land and labor, the fund from which all taxes must ultimately be paid. Whatever level of demand for labor such a tax might produce, it must always leave wages higher than they would otherwise be at that level; the upper ranks must in every case bear the final cost of that higher wage.

In Great Britain, fermented liquors brewed and spirituous liquors distilled for private use rather than sale pay no excise duty. This exemption is meant to spare private families the odious inspection of the tax collector, but it frequently leaves the rich with a much lighter burden from these duties than the poor. Distilling for private use is indeed uncommon, though sometimes practiced. In the countryside, however, many middle-class and almost all wealthy and great families brew their own beer. Their strong beer therefore costs eight shillings a barrel less than it costs an ordinary brewer, who must make a profit on the tax as well as on every other expense he advances. Such families must therefore drink beer at least nine or ten shillings a barrel more cheaply than ordinary people can drink beer of the same quality; for ordinary people it is everywhere more convenient to buy their beer little by little from a brewery or alehouse. Malt made for a private family's use is likewise exempt from inspection by the tax collector, but the family must in this case settle the tax at seven shillings and sixpence per head. Seven shillings and sixpence equals the excise on ten bushels of malt, fully as much as all the members of any sober family—men, women, and children—are likely to consume on average. In rich and great families, however, where country hospitality is widely practiced, the family's own consumption of malt liquors forms only a small part of the household's total consumption. Whether because of this fixed payment or for other reasons, malting for private use is nowhere near as common as brewing for private use. It is hard to imagine any equitable reason why those who brew or distill for private use should not be subject to a similar fixed payment.

It has often been said that a much lighter tax on malt could raise more revenue than all the heavy taxes now imposed on malt, beer, and ale. Opportunities to defraud the revenue are much greater in a brewery than in a malt-house; and people who brew for private use are exempt from all duties or payments in their place, unlike those who malt for private use.

The foreign goods now most widely used in Great Britain appear to be wines and brandies; American and West Indian products such as sugar, rum, tobacco, cocoa-nuts, etc.; and East Indian products such as tea, coffee, china-ware, spices of every kind, several kinds of piece-goods, etc. These goods probably supply most customs revenue at present. Apart from taxes on the few foreign manufactures on this list, most current taxes on foreign manufactures aim not to raise revenue but to create a monopoly. They give our merchants an advantage in the home market. We could remove every import ban and tax all foreign manufactures at moderate rates found through experience to yield the most public revenue for each good. Our workers could still have a substantial advantage at home. And many goods that now yield little or no government revenue could yield a great deal.

High taxes often bring the government less revenue than moderate ones. Sometimes they cut consumption of the taxed goods; sometimes they encourage smuggling.

If revenue falls because consumption falls, the only solution is to lower the tax. If it falls because smuggling increases, there may be two solutions: reduce the incentive to smuggle or make smuggling harder. Only a lower tax reduces the incentive. Only a system of administration best suited to preventing smuggling makes it harder.

Experience, I believe, shows that excise laws hinder smugglers much more effectively than customs laws do. Customs could make smuggling much harder by adopting an administrative system as much like the excise system as the different types of duties allow. Many people think this change could be made quite easily.

They propose giving importers of goods subject to customs duties a choice. They could put the goods in their own private warehouse. Or they could place them in a warehouse provided at their expense or the public's, locked by a customs officer and opened only in that officer's presence. Importers choosing their own warehouses would pay duty at once, with no later refund. Customs officers could inspect those warehouses at any time to check that the amount of goods present matched the amount on which duty had been paid. Importers choosing the public warehouse would pay no duty until they removed goods for domestic use. Goods removed for export would be duty-free, provided proper security was given that they would actually be exported. Wholesale and retail dealers in these goods would also face inspections at any time. Certificates would have to show that duty had been paid on all the goods in their shops or warehouses. The duties called excise on imported rum are already collected this way. Perhaps the same method could apply to all duties on imports, as long as those duties, like excise, covered only a few kinds of goods in wide use. If duties still covered almost all goods, public warehouses big enough for them would be hard to provide. Merchants could not safely entrust delicate goods, or goods needing careful storage, to warehouses other than their own.

Suppose this system could prevent substantial smuggling even when duties were fairly high. Suppose each duty was raised or lowered as needed to maximize government revenue, and taxes were used only to raise revenue, never to create a monopoly. Then it seems possible that duties on only a few widely used imports could bring in at least as much as today's net customs revenue. Customs duties would become as simple, certain, and precise as excise duties. The government would stop losing the refunds it now pays when foreign goods supposedly exported are secretly brought back and used at home. That saving alone would be substantial. Add the removal of all bounties on exports of domestic goods, except those bounties that really refund excise duties previously paid, and there is little doubt that net customs revenue after this change could be at least as high as ever.

If this change caused no loss of public revenue, the country's trade and manufacturing would gain considerably. The vast majority of goods would be untaxed and could be traded freely with all parts of the world. That group would include every necessity of life and every manufacturing material. Free imports of necessities would lower their average money price in the home market. That would lower money wages without lowering workers' real pay at all. Money's value depends on how many necessities it can buy; the value of necessities does not depend on the amount of money received for them. Lower money wages would bring a corresponding drop in the prices of all domestic manufactures, giving them an advantage abroad. Free imports of raw materials would lower the prices of some manufactures even further. If raw silk from China and Indostan could enter duty-free, English silk manufacturers could sell much more cheaply than manufacturers in both France and Italy. There would be no need to ban foreign silks and velvets. Our workers' cheaper goods would secure both the home market and a large share of foreign markets. Even trade in taxed goods would work much better than it does now. When those goods left a public warehouse for export, they would pay no tax and their trade would be completely free. The carrying trade in all goods would have every possible advantage. For goods released for domestic use, importers would not have to advance the tax until they could sell to a dealer or consumer. They could therefore always sell for less than if they had paid the tax on import. Even under the same taxes, foreign trade supplying domestic consumers with taxed goods could operate much more effectively than it does now.

Sir Robert Walpole's famous excise scheme aimed to set up a similar system for wine and tobacco. Though his bill in Parliament covered only those two goods, people generally believed it was the start of a wider scheme. Political factions, joined by merchants who profited from smuggling, stirred up fierce but unjust public opposition. The minister dropped the bill. Fear of similar opposition has kept every successor from bringing the plan back.

Duties on foreign luxuries imported for domestic use sometimes fall on poor people, but mainly on people of middle or higher means. Examples include duties on foreign wines, coffee, chocolate, tea, sugar, etc.

Duties on cheaper domestically produced luxuries for domestic use fall fairly evenly on all ranks according to their spending. Poor people pay the duties on malt, hops, beer, and ale that they consume. Rich people pay them on both their own consumption and their servants'.

In every country, the total consumption of people below the middle rank is much greater than that of the middle and upper ranks, both in amount and in value. Their total spending is much greater too. First, almost all a country's capital is paid out every year to the lower ranks as wages for productive labor. Second, a large share of the revenue from land rent and profits of stock goes to the same ranks as wages and support for domestic servants and other unproductive workers. Third, some profits of stock also belong to lower-ranking people, earned through their small amounts of capital. The combined annual profits of small shopkeepers, tradespeople, and retailers of every kind are substantial everywhere. They make up a substantial share of annual output. Fourth, even some land rent belongs to these people: a considerable share goes to people a little below the middle rank and a small share even to the lowest rank. Ordinary workers sometimes own an acre or two of land. Each lower-ranking person may spend very little, but together they always account for by far the largest share of society's spending. What remains of the country's annual output from land and labor for consumption by the upper ranks is much smaller, both in amount and in value. Taxes on spending that fall mainly on the upper ranks therefore affect the smaller portion of annual output. They are likely to raise much less than taxes that fall on all ranks or mainly on the lower ranks, affecting all annual output or its larger portion. Among all taxes on spending, excise on the ingredients and production of domestically made fermented drinks and spirits is therefore by far the most productive. Much of it, perhaps most, falls on ordinary people's spending. In the year ending on the 5th of July 1775, this branch of excise yielded £3,341,837:9:9 before deductions.

We must remember, however, that only lower-ranking people's luxuries should ever be taxed, not their necessities. Upper-ranking people would ultimately pay the whole of any tax on necessities bought by the lower ranks. It would fall on the smaller, not the larger, portion of annual output. Any such tax would either raise wages or reduce demand for labor. If it raised wages, upper-ranking people would ultimately pay it. If it reduced demand for labor, it would reduce the country's annual output from land and labor, the fund that ultimately pays all taxes. However far the tax reduced demand for labor, wages would still be higher than they would otherwise be at that level of demand. Upper-ranking people would ultimately pay for that increase too.

In Great Britain, fermented drinks brewed and spirits distilled for private use rather than sale pay no excise duties. This exemption aims to spare private households the unwelcome inspection of tax collectors. It often makes these duties much less burdensome for the rich than for the poor. Distilling at home is not very common, though it sometimes happens. But in the countryside, many middle-ranking families and nearly all rich and prominent families brew their own beer. A barrel of their strong beer therefore costs them eight shillings less than it costs a commercial brewer, who needs to earn a profit on the tax as well as on his other expenses. Such families drink beer at least nine or ten shillings a barrel cheaper than ordinary people can buy beer of equal quality. Ordinary people find it more convenient to buy small amounts from a brewery or alehouse. Malt made for private household use is likewise not inspected by the tax collector. In that case, though, the family must pay a fixed tax of seven shillings and sixpence per person. Seven shillings and sixpence equal the excise on ten bushels of malt, fully as much as the men, women, and children of any sober family are likely to consume on average. Yet in large, rich households that frequently entertain country guests, family members drink only a small share of the household's total malt liquor. Whether because of this fixed payment or for other reasons, making malt privately is nowhere near as common as brewing privately. It is hard to see any fair reason why people brewing or distilling for private use should not have to make a similar fixed payment.

It has often been said that a much lighter tax on malt could raise more revenue than all the present heavy taxes on malt, beer, and ale. A brewery offers far more chances to cheat the government than a malt-house does. And people brewing privately are exempt from all duties and fixed payments in place of duties, while people making malt privately are not.