Book V, Chapter II, 14

Taxes on luxuries, such as most customs and excise duties, fall without distinction on every kind of revenue and are ultimately paid, without reimbursement, by those who consume the taxed goods. Yet they do not always fall equally or proportionately on each person's revenue. Since each person's inclinations determine how much he consumes, he contributes according to those inclinations rather than in proportion to his revenue: the lavish contribute more, the frugal less, than their proper share. While a man of great fortune is a minor, his consumption commonly contributes very little to the support of the state whose protection secures him a great revenue. Those living abroad contribute nothing through their consumption to the support of the government in the country where their revenue originates. If that country has no land tax and no significant duty on the transfer of either movable or immovable property, as is the case in Ireland, such absentees can draw a great revenue under a government's protection without contributing a single shilling to its support. This inequality is likely to be greatest where the government of a country is in some respects subordinate to, and dependent on, another. In that case the owners of the most extensive property in the dependent country will generally choose to live in the governing country. Ireland is precisely in this position, so it is no wonder that a proposed tax on absentees should be so popular there. It might, perhaps, be somewhat difficult to determine what kind or degree of absence would make a person taxable as an absentee, or exactly when the tax should begin and end. Apart from this very particular case, however, any inequality in individual contributions arising from such taxes is far more than offset by the very circumstance that gives rise to it: each person's contribution is entirely voluntary, since he can choose whether or not to consume the taxed commodity. When properly assessed on suitable commodities, therefore, such taxes provoke less complaint than any others. When the merchant or manufacturer advances them, consumers, who ultimately pay them, soon come to confuse them with the prices of the goods and almost forget that they pay a tax at all. These taxes are, or can be, perfectly certain: they can be assessed so as to leave no doubt about either the amount or the time of payment. Whatever uncertainty may sometimes attend customs duties in Great Britain, or similar duties elsewhere, arises not from the nature of the duties but from imprecise or unskillful wording in the laws that impose them.

Taxes on luxuries generally are, and always can be, paid in installments, as contributors have occasion to buy the taxed goods. In both the timing and the manner of payment, they are, or can be, the most convenient of all taxes. Taken as a whole, therefore, such taxes perhaps conform as well as any to the first three of the four general maxims concerning taxation. They violate the fourth in every respect.

Relative to what they bring into the public treasury, these taxes always take or keep more money from the people's pockets than almost any other taxes. They appear to do so in all four possible ways.

First, collecting such taxes, even when they are most judiciously imposed, requires a great many customs and excise officers. Their salaries and fees are a real tax on the people that brings nothing into the public treasury. This expense, admittedly, is more moderate in Great Britain than in most other countries. In the year ending on the 5th of July, 1775, the gross yield of the several duties administered by the excise commissioners in England was £5,507,308:18:8¼, collected at a cost of little more than five and a half per cent. From that gross yield, however, we must deduct the bounties and drawbacks paid on exports of goods subject to excise, reducing the net yield below five millions. [The net yield that year, after all expenses and allowances were deducted, amounted to £4,975,652:19:6.] The collection of the salt duty and excise duty, though under a different administration, is much more expensive. Net customs revenue does not reach two and a half millions, and is collected at a cost exceeding ten per cent. in officers' salaries and other incidental expenses. But customs officers' fees everywhere greatly exceed their salaries; at some ports they are more than double or triple those salaries. If salaries and incidental expenses thus amount to more than ten per cent. of net customs revenue, the entire cost of collecting it, including both salaries and fees, may exceed twenty or thirty per cent. Excise officers receive few or no fees; and as the administration of this branch of revenue is more recently established, it is generally less corrupt than the customs service, where time has introduced and sanctioned many abuses. By charging on malt all the revenue now raised by the various duties on malt and malt liquors, it is thought that more than £50,000 could be saved in annual excise expenses. Restricting customs duties to a few kinds of goods and collecting them under excise laws would probably save much more in annual customs expenses.

Second, such taxes necessarily obstruct or discourage some branches of industry. Since they always raise the taxed commodity's price, they discourage its consumption and therefore its production. If the commodity is grown or made at home, less labor is employed in growing or making it. If it is imported, and the tax thus raises its price, similar goods made at home may indeed gain an advantage in the domestic market, drawing more domestic industry into their production. Yet although a rise in the price of an imported good may encourage domestic industry in one particular branch, it necessarily discourages it in almost every other. The more a Birmingham manufacturer pays for imported wine, the less he must effectively receive for the portion of his hardware with which he buys it, or, equivalently, whose proceeds pay for it. That portion of his hardware is thus worth less to him, and he has less incentive to make it. The more consumers in one country pay for another country's surplus produce, the less they must effectively receive for that portion of their own surplus produce with which they buy it, or whose proceeds pay for it. That portion of their surplus produce becomes less valuable to them, and they have less reason to increase its quantity. All taxes on consumable commodities thus tend to reduce productive labor below the level it would otherwise reach: labor either in producing the taxed commodities, if they are domestic, or in producing the goods used to buy them, if they are foreign. Such taxes also always alter, to a greater or lesser degree, the natural direction of a nation's industry, diverting it into a channel different from, and generally less advantageous than, the one it would have taken of its own accord.

Third, the hope of escaping these taxes through smuggling frequently leads to forfeitures and other penalties that utterly ruin the smuggler. Though plainly much to blame for breaking his country's laws, he may often be incapable of violating the laws of natural justice, and would have been an excellent citizen in every respect if his country's laws had not made a crime of something nature never intended to be one. In corrupt governments, where there is at least a general suspicion of much unnecessary spending and grave misuse of public revenue, the laws protecting that revenue command little respect. Few people have scruples about smuggling when they can do it easily and safely without committing perjury. In most countries, professing scruples about buying smuggled goods, though such purchases plainly encourage violations of revenue laws and the perjury that almost always accompanies them, would be regarded as a pedantic hypocrisy. Far from earning anyone's respect, it would only expose the person professing it to suspicion of being a greater rogue than most of his neighbors. Public indulgence thus often encourages the smuggler to continue in a trade he has learned to regard as partly innocent; and when the severity of the revenue laws threatens him, he is often inclined to defend by force what he has come to regard as his rightful property. Perhaps more reckless than criminal at first, he too often ends as one of society's boldest and most determined lawbreakers. When the smuggler is ruined, his capital, formerly used to support productive labor, is absorbed either into state revenue or into that of the revenue officer. It then supports unproductive labor, reducing society's general capital and the useful industry that capital could otherwise have supported.

Fourth, these taxes subject at least the dealers in taxed commodities to frequent visits and offensive inspections by tax collectors. This sometimes exposes them, no doubt, to a measure of oppression, and always to much trouble and vexation. Though vexation, as already noted, is not strictly an expense, it is surely equivalent to the amount anyone would willingly spend to free himself from it. Excise laws, though more effective for their intended purpose, are more vexatious in this respect than customs laws. Once a merchant has imported goods subject to customs duties, paid the duties, and stored the goods in his warehouse, he is in most cases spared further trouble or vexation from the customs officer. Not so with goods subject to excise. Dealers have no respite from excise officers' continual visits and inspections. For this reason excise duties are more unpopular than customs duties, as are the officers who collect them. It is alleged that, although excise officers generally perform their duties perhaps as well as customs officers do, the need to trouble some of their neighbors so frequently tends to give them a certain hardness of character that the others often lack. This observation, however, may very well be nothing more than a claim by dishonest dealers whose smuggling these officers' diligence has prevented or detected.

The inconveniences perhaps to some degree inseparable from taxes on consumable commodities nevertheless fall as lightly on the people of Great Britain as on those of any other country whose government costs nearly as much. Our system is not perfect and could be improved; but it is as good as, or better than, that of most of our neighbors.

Because duties on consumable goods were thought to be taxes on merchants' profits, some countries have imposed them again at every successive sale. If the profits of an importing merchant or manufacturing merchant were taxed, fairness appeared to demand that the profits of all the intermediate buyers between either merchant and the consumer should also be taxed. The famous Spanish alcavala seems to have been founded on this principle. Originally a tax of ten per cent., later fourteen per cent., it now stands at only six per cent. on the sale of every kind of property, movable or immovable, and is collected each time the property is sold. [Memoires concernant les Droits, etc. tom. i, p. 15] Collecting this tax requires enough revenue officers to police the movement of goods not merely between provinces but between shops. It subjects dealers in every kind of good, not just certain kinds—every farmer, manufacturer, merchant, and shopkeeper—to constant visits and inspections from tax collectors. Throughout most of a country with such a tax, nothing can be produced for sale at a distance. What each district produces must be proportionate to what its neighborhood consumes. Ustaritz accordingly attributes the ruin of Spanish manufacturing to the alcavala. He might also have attributed the decline of agriculture to it, since it falls not only on manufactured goods but also on the raw produce of the land.

In the kingdom of Naples, a similar tax of three per cent. is levied on the value of all contracts, and consequently on all contracts of sale. Besides being lighter than the Spanish tax, it allows most towns and parishes to pay a fixed composition instead. They raise this payment however they please, generally without disrupting the locality's internal commerce. The Neapolitan tax is therefore nowhere near as ruinous as the Spanish one.

The uniform system of taxation prevailing, with a few unimportant exceptions, throughout the united kingdom of Great Britain leaves its internal commerce, both inland and coastal, almost entirely free. Inland trade is almost perfectly free. Most goods can be carried from one end of the kingdom to the other without any permit or pass and without questioning, visits, or inspection by revenue officers. There are a few exceptions, but none can disrupt any important branch of the country's inland commerce. Goods shipped along the coast do require certificates or coast-cockets; apart from coal, however, almost all are duty-free. This freedom of internal commerce, made possible by uniform taxation, is perhaps one of the chief causes of Great Britain's prosperity: every great country is necessarily the best and largest market for most products of its own industry. If the same uniformity could bring the same freedom to Ireland and the plantations, both the greatness of the state and the prosperity of every part of the empire would probably be greater still.

Taxes on luxuries, including most customs and excise duties, can be paid out of every kind of revenue. Whoever consumes the taxed goods ultimately pays them and gets no reimbursement. Yet they do not always take an equal or proportional share of each person's revenue. People choose how much to consume according to their tastes. So they contribute more according to taste than income: free spenders pay more, and frugal people less, than their proportionate share. A young heir to a large fortune usually contributes very little through consumption to the state that protects the source of his large revenue. People living abroad contribute nothing through consumption to the government of the country where their revenue originates. Suppose that country has no land tax and no substantial duty on transfers of movable or immovable property, as in Ireland. Absentee owners can then receive large revenues under the government's protection without paying a single shilling toward its support. This inequality is likely to be greatest where one country's government is partly subordinate to and dependent on another's. Owners of the most extensive property in the dependent country will generally prefer to live in the governing country. That is exactly Ireland's position, so it is no wonder that taxing absentee owners is a very popular proposal there. It might be somewhat difficult to decide what kind or length of absence makes someone taxable as an absentee, or exactly when the tax begins and ends. Outside this special situation, though, any inequality in what individuals contribute through luxury taxes is more than offset by the very thing causing it: each person's contribution is entirely voluntary. Everyone can choose whether to buy the taxed goods. When such taxes are properly assessed on suitable goods, people therefore complain about them less than about any others. A merchant or manufacturer pays the tax up front, and the consumer ultimately pays it. Soon the consumer treats it as part of the price and almost forgets it is a tax. These taxes are, or can be, entirely certain. They can be assessed so there is no doubt about the amount due or the time to pay it. Any uncertainty in British customs duties or similar duties elsewhere does not come from the nature of the duties. It comes from the imprecise or poorly drafted law imposing them.

Taxes on luxuries generally are, and can always be, paid little by little, as people buy the taxed goods. In both timing and method of payment, they are or can be the most convenient taxes of all. Overall, then, they may satisfy the first three of the four general principles of taxation as well as any tax can. They violate the fourth in every way.

For the amount they bring into the state treasury, these taxes always take or keep more money out of people's pockets than almost any other taxes. They appear to do so in all four possible ways.

First, even wisely designed taxes of this kind require many customs and excise officers. Their salaries and extra payments impose a real cost on the people without bringing anything into the state treasury. This cost, it must be admitted, is lower in Great Britain than in most other countries. In the year ending on the 5th of July, 1775, the gross revenue from duties administered by England's excise commissioners was £5,507,308:18:8¼. The cost of collecting it was only a little over five and a-half per cent. But bounties and drawbacks paid on exports of excisable goods must be subtracted from this gross amount, bringing net revenue below five millions. [The net revenue that year, after all costs and allowances were deducted, was £4,975,652:19:6.] Collecting the salt duty, also an excise duty but administered separately, is much more expensive. Net customs revenue is less than two millions and a-half, and officers' salaries and other expenses of collecting it exceed ten per cent. But customs officers everywhere receive extra payments far greater than their salaries. At some ports these are more than double or triple their salaries. So if salaries and other expenses exceed ten per cent. of net customs revenue, total collection costs, including both salaries and extra payments, may exceed twenty or thirty per cent. Excise officers receive few or no extra payments. The excise administration is also newer and generally less corrupt than customs administration, where long practice has brought in and legitimized many abuses. It is thought that putting all the revenue now collected on malt and malt drinks onto malt alone could save more than £50,000 in yearly excise costs. Limiting customs duties to a few kinds of goods, and collecting them under excise laws, could probably save much more in yearly customs costs.

Second, these taxes necessarily hinder or discourage some branches of industry. They always raise the taxed product's price and thus discourage its consumption and, in turn, its production. If the product is grown or made at home, less labor is used to grow or make it. If it is an imported product, raising its price by tax may indeed help similar goods made at home compete in the home market. More domestic workers might then be employed in making those goods. But while the higher imported price can encourage one branch of domestic industry, it necessarily discourages almost every other branch. The more a Birmingham manufacturer pays for foreign wine, the less he effectively receives for the hardware he exchanges for it, or sells to get the money to buy it. That hardware is worth less to him, giving him less reason to make it. Likewise, the more consumers in one country pay for another country's surplus products, the less they effectively receive for the part of their own surplus products they exchange for them or sell to pay for them. Their own surplus is worth less to them, giving them less reason to produce more. Taxes on consumer goods therefore tend to reduce productive labor below the level it would otherwise reach. They do so either in making the taxed goods, if those are domestic, or in making the goods exchanged for them, if they are foreign. Such taxes also shift the natural direction of national industry to a different, usually less advantageous, course than it would have followed on its own.

Third, the hope of avoiding these taxes through smuggling often leads to confiscations and other penalties that completely ruin smugglers. A smuggler is certainly blameworthy for breaking his country's laws. Yet he is often someone who could never violate natural justice and would have been an excellent citizen in every way if his country's laws had not made a crime of something that nature never meant to be one. Under corrupt governments widely suspected of needless spending and serious misuse of public revenue, people have little respect for the laws protecting that revenue. Few people have moral objections to smuggling when they find a safe, easy opportunity to do it without lying under oath. In most countries, someone who claims to object to buying smuggled goods would be seen as pompously hypocritical. Buying them plainly encourages both violations of revenue laws and the perjury that almost always accompanies those violations. But claiming to object would win no one's respect; it would only make others suspect the person of being a bigger crook than most neighbors. This public tolerance often encourages smugglers to continue a trade they have learned to see as somewhat innocent. When harsh revenue laws threaten them, they are then often willing to defend violently what they have come to regard as their rightful property. A person who began by being perhaps more imprudent than criminal too often ends up among society's boldest and most determined lawbreakers. When a smuggler is ruined, his capital, formerly used to support productive labor, is absorbed into either state revenue or a revenue officer's income. It then supports unproductive people instead, reducing society's total capital and the useful work it could have supported.

Fourth, these taxes expose dealers in the taxed goods to frequent visits and intrusive inspections by tax collectors. The dealers sometimes suffer oppression and always suffer considerable trouble and annoyance. As noted earlier, annoyance is not technically an expense, but it is worth whatever people would willingly pay to escape it. Excise laws are more effective at their intended purpose than customs laws but more burdensome in this respect. Once a merchant has imported goods subject to customs duties, paid those duties, and stored the goods in a warehouse, customs officers usually cause no further trouble. Excisable goods are different. Their dealers get no break from constant visits and inspections by excise officers. This is why excise duties and the officers who collect them are less popular than customs duties and officers. People claim that excise officers, though perhaps as conscientious as customs officers, usually acquire a certain harshness of character that the others often lack, because their duties require them to bother their neighbors so often. That claim may, however, simply come from dishonest dealers whose smuggling has been prevented or discovered by diligent officers.

Still, any difficulties that may be partly unavoidable with taxes on consumer goods weigh as lightly on the people of Great Britain as on those of any other country with a government nearly as expensive. Our system is not perfect and could improve, but it is at least as good as most of our neighbors' systems.

Some countries have repeatedly taxed consumer goods at each successive sale, based on the belief that duties on these goods tax merchants' profits. If the profits of importers or manufacturers were taxed, fairness seemed to demand taxing the profits of every middle buyer between them and consumers as well. Spain's famous alcavala seems to rest on that idea. Originally ten per cent., later fourteen per cent., it is now only six per cent. on the sale of every kind of movable or immovable property. It is charged every time the property changes hands. [Memoires concernant les Droits, etc. tom. i, p. 15] Collecting it requires enough revenue officers to watch goods moving not just between provinces but between shops. Tax collectors constantly visit and inspect dealers in every kind of goods, not just some, along with every farmer, manufacturer, merchant, and shopkeeper. In most areas subject to such a tax, nothing can be produced for sale far away. Each area's output has to match its neighbors' consumption. Ustaritz accordingly blames the alcavala for destroying Spanish manufacturing. He could also have blamed it for agriculture's decline, since it taxes raw farm products as well as manufactured goods.

The kingdom of Naples has a similar tax of three per cent. on the value of all contracts, including every sales contract. It is lower than Spain's tax, and most towns and parishes may pay an agreed sum instead. They raise that sum however they wish, generally in ways that do not interfere with local trade. The Neapolitan tax is therefore nowhere near as destructive as the Spanish one.

Except for a few minor differences, the same tax system applies throughout Great Britain. As a result, trade within the country, by land and along the coast, is almost entirely free. Inland trade is nearly completely free. Most goods can travel from one end of the kingdom to the other without a permit or travel pass and without questioning, visits, or inspection by revenue officers. There are a few exceptions, but none disrupts an important part of the country's inland trade. Goods carried along the coast do need certificates or coast-cockets. Apart from coal, however, almost all are duty-free. This freedom of domestic trade, made possible by uniform taxes, may be one of the main causes of Great Britain's prosperity. Every large country is necessarily the best and largest market for most goods made by its own industry. If Ireland and the plantations gained the same freedom through the same uniformity, both the state's greatness and prosperity throughout the empire would probably grow even greater.