Book 52018-10-23T06:01:16+00:00

THE WEALTH OF NATIONS : BOOK 5

CHAPTER 1: THE EXPENSES OF THE SOVEREIGN OR COMMONWEALTH

PART I: THE EXPENSE OF DEFENSE

The most important duty of a sovereign is to protect his society from violence and invasion. This is ensured by means of military force.

Agricultural workers, used to the rugged life of outdoor labor, are well equipped to prepare themselves for war. Furthermore, if war occurs after the sowing season and before harvest time, farm workers can be spared without too much loss to the business. In a more advanced society, the progress of industry and the evolution of war over time mean that it would be impossible for citizens to go to war at their own expense. In a country in which the majority of the citizens are craftsmen and manufacturers, the majority of the people who go to war must be drawn from these citizens, and therefore maintained by the public.

In a lengthy war, it becomes necessary for the public to maintain those in the army. The number of citizens who can go to war must therefore never exceed what a society can maintain. As a rule of thumb for modern European nations, no more than one-hundredth of the total population of a country can be employed as soldiers.

With the evolution of warfare, the question is raised as to whether the army should be a professional standing army employing a specific class of citizens. Division of labor is implemented in an army to improve its efficiency, as with every other form of employment.

A state may opt to enforce a professional, standing, army or may train its citizens for a limited time and maintain a militia. The practice of military exercises is the sole or principal occupation of the soldiers in a standing army, and they receive maintenance or pay from the state for their subsistence.

A militia that has served during successive wars becomes in every respect a standing army. The soldiers are exercised daily in the use of firearms, and, being constantly under the command of their officers, are used to the same form of strict regime as that in the standing armies.

The most important duty of a sovereign, therefore, grows gradually more expensive as the society develops. The military force of the society, which originally cost the sovereign no expense, must be maintained by him during war as well as times of peace. The introduction of firearms has brought with it much expense, with both arms and ammunition prices on the rise. A musket is more costly than a javelin; a cannon and mortar are not only more expensive but much heavier machines, making them more costly both in terms of purchase price and transportation costs.

PART II: THE EXPENSE OF JUSTICE

The second duty of the sovereign is to protect each member of society from injustice or oppression. This involves two very different degrees of expense.

Inequality between the rich and poor, with the wealthy owning grand properties, incites resentment amongst the poor. In this situation, implementing a civil magistrate provides peace of mind for the owner of the valuable property. The acquisition of property therefore requires the establishment of a civil government, which grants power to educated professionals, particularly older individuals, who command more respect than the young, as well as wealthy individuals and those from established families.

The judicial authority of the sovereign, far from being a cause of expense, was for a long time a source of revenue. Citizens seeking justice were willing to pay for it, with gifts from the requesting party being commonplace. Individuals found guilty were required to compensate both the prosecuting party as well as a fine to the sovereign. With the introduction of compulsory taxes for judicial services, the giving of gifts was prohibited. Judges were paid fixed salaries, and since the taxes more than compensated the sovereign, the justice system was administered gratis.

The expense for justice could have been covered by the court fees, without exposing the administration of justice to potential corruption, but it is difficult to regulate court fees when a person of such high power as the sovereign contributes to them. Court fees were originally the main source of maintenance for Britain’s courts of justice, with each court endeavoring to attract as much business as possible.

Impartial administration of justice is necessary in a society, to protect each individual’s liberty and to provide security. In order to ensure individuals’ rights are respected, the judicial system needs to be separate and independent from executive power. Executive power should not have any authority to remove a judge from office, nor should it control the payment of his salary.

PART III: EXPENSE OF PUBLIC WORKS AND PUBLIC INSTITUTIONS

The third duty of the sovereign is to establish and maintain the public institutions and public works the profit of which does not cover their expenses. Institutions of this kind are chiefly involved in facilitating commerce and promoting education.

The expense involved in building and maintaining public works that facilitate a country’s commerce, such as roads, bridges, canals, harbors, etc., varies. The cost of constructing and maintaining public roads increases in line with the volume and weight of goods transported on them. The strength of a bridge must be suited to the number and weight of vehicles likely to pass over it. The depth and the supply of water for a navigable canal must be appropriate for the number and tonnage of the vessels likely to transport goods on it, and the extent of a harbor will depend on the volume of ships that will dock there.

The majority of public works can be managed so as to bring in revenue sufficient to cover their expenses without burdening society. Transport facilities can be constructed and maintained by charging a small toll on the vehicles using them; coinage provides a small revenue to the sovereign; the post office provides a considerable revenue.

In some parts of Europe, the toll or lock duty on a canal is given to private individuals, who then have a personal interest in the upkeep of the canal since if it is not properly maintained, navigation will cease—and with it their profit. If tolls are managed by commissioners who have no personal interest in them, they may well be less attentive to the maintenance of the works. An example is the tolls for the upkeep of a highway, which cannot be made the property of private individuals; the proprietors of these tolls often neglect the repair and maintenance of the road, yet continue to levy the same tolls. It is therefore preferable for such tolls to be managed by commissioners or trustees. Government, by taking the management of the turnpikes into its own hands, could employ soldiers to keep the roads in good order. If government neglected the reparation of the highways, it would be difficult to impose the turnpike tolls, with the result that the high levies charged to the people would not actually be used for their intended purpose.

Public works that are confined to a particular place or district are better managed by a local administration than by the state. If the streets of London were lit and paved at the expense of the treasury, would they be so well lit and paved as they are at present?

Of the public Works and Institution which are necessary for facilitating particular Branches of Commerce.

The object of public works and institutions is to facilitate commerce in general. But in order to facilitate a particular branch of trade, specific institutions are necessary. When commerce is conducted with barbarous nations, protection is required for those involved. English and French East Indian companies were authorized to erect forts for this purpose. Certain countries, however, did not authorize the building of such fortified places within their territory, and what tended to happen in this situation was that an “ambassador” was elected who mediated disputes between the companies and the natives—his character affording the traders protection. The Turkey Company employed such an ambassador in Constantinople. The first British embassies to Russia were established out of commercial interests.

It seems logical that the considerable expense of this protection for a particular branch of commerce should be paid for through a duty imposed on the commodities involved. This protection of trade, for the most part from pirates and freebooters, is said to have been the origin of what we now know as customs duties.

The protection of trade is viewed as essential to the defense of the Commonwealth, and is the responsibility of the authorities. The collection and application of customs duties has therefore always fallen to the authorities, but some nations have deviated from this, with merchants in parts of Europe persuading the legislature to entrust this responsibility to them, resulting in them subsequently mismanaging or confining the trade.

Regulated companies resemble in every respect the trade corporations that are so common throughout Europe—a sort of enlarged monopoly of the same form. The regulated foreign-trade companies currently operating in Britain are the ancient merchant-adventurers company, now known as the Hamburg Company, the Russia Company, the Eastland Company, the Turkey Company, and the African Company.

Terms of admission into the Hamburg Company are said to be fairly straightforward, and the directors do not have the power to impose restraints or regulations on the trade conducted.

The Turkey Company previously charged an admission fee of twenty-five pounds for persons below the age of twenty-six, and fifty pounds for persons above that age. Only merchants were permitted admission, with a restriction excluding all shopkeepers and retailers. A bylaw stipulated that British commodities could only be exported to Turkey in the company’s ships, and since those ships always sailed from the port of London, this restriction confined the trade to that expensive port, and to traders who lived in and around London. Another bylaw stipulated that no person living within twenty miles of London could become a member. These abuses led to the implementation of the Act of George II, which reduced admission fees, removed age restrictions, and granted merchants and freemen of London the right to export all forms of British goods, from any of Britain’s ports to any port in Turkey, against payment of general customs duties in accordance with the laws of the British ambassador and consuls resident in Turkey, and the company’s bylaws.

Regulated companies never maintained forts or garrisons in countries they traded with, whereas joint-stock companies frequently did. The directors of a joint-stock company do not carry out any trade personally; their interest lies in the success of the company’s general trade, which goes hand in hand with maintaining the forts and garrisons necessary for its defense. The directors of a joint-stock company manage a large amount of capital—the joint stock of the company—a portion of which they employ in building, repairing and maintaining these forts and garrisons. The directors of a regulated company, on the other hand, do not have this capital, their income consisting of revenue from admission fees and corporation duties imposed on the company’s traders.

In 1750, a regulated company was established to maintain all of the British forts and garrisons located between Cape Blanc and the Cape of Good Hope, and later on those located between Cape Rouge and the Cape of Good Hope. The company was prohibited from exporting Negroes from Africa or importing any African goods into Britain; however, since they were responsible for the maintenance of forts and garrisons, they were allowed to export certain commodities from Britain to Africa. Parliament allocated the company an annual sum for the maintenance of the forts—generally about £13,000. The captains of his majesty’s navy and any other commissioned officers appointed by the board of admiralty were allowed to inquire as to the condition of the forts and garrisons, and report their observations to their board. The garrisons of Gibraltar and Minorca were originally established to protect Mediterranean trade.

The trade of a joint-stock company is always managed by a court of directors, but the total exemption from risk beyond a limited sum incited many an entrepreneur to join these companies. The trading stock of the South Sea Company at one time amounted to over thirty-three million eight hundred thousand pounds. The capital of the Bank of Britain amounts at present to ten million seven hundred and eighty thousand pounds. Joint-stock companies for foreign trade have seldom been able to compete against private entrepreneurs. They seldom succeed without the grant of a monopoly – and frequently fail even if they have this.

The Hudson’s Bay Company exclusive charter has not been confirmed by act of parliament. The South Sea Company, as long as they remained a trading company, were granted a monopoly through an act of parliament; so, too, was the United Company of Merchants, which trades to the East Indies.

The Royal African Company soon found that they could not maintain competition against private entrepreneurs, and in 1732 they resolved to sell the Negroes they had purchased on the coast to companies trading to America.

The Hudson’s Bay Company had been much more fortunate. No private entrepreneurs ever entered into competition with them to that country.

The South Sea Company had a huge amount of capital divided among a huge number of proprietors. It was naturally to be expected, therefore, that there would be some recklessness and negligence in the management of their affairs. The first trade they engaged in was that of supplying the Spanish West Indies with Negroes, but both Portuguese and French companies had been ruined by this trade. In 1724, the company ventured into the whale fishery business; however, only one of the eight journeys their ships made to Greenland made a profit. In 1722, the company’s immense capital of thirty-three millions pounds was lent to government; an end was put to their trade with the Spanish West Indies, and the company ceased operations as a trading company.

The old English East India Company was established in 1600 by a charter from Queen Elizabeth, after which it traded successfully for many years. In 1698, a new East India company was established. Competition between the two companies and with private traders ended up destroying both. In 1702, the two companies were united by an indenture tripartite, to which the queen was the third party. During the French war that began in 1755, East India shared in the general good fortune of Britain; they defended Madras, took Pondicherry, recovered Calcutta and acquired the revenues of a rich and extensive territory.

The only areas of trade a joint-stock company can carry out successfully without the grant of a monopoly seem to be those in which operations can be standardized, such as banking, insurance against fire, sea and capture during wartime, construction of navigable canals, and water supply businesses.

The Expense of the Institution for the Education of Youth

Educational institutions can be managed in such a way as to largely carry their own costs. In every profession, an individual’s motivation is driven by need; those whose salaries are their only source of survival will be more motivated to perform well. In some universities, teachers’ salaries are supplemented by tuition fees paid by students. Reputation remains important to these teachers, who are motivated towards excellence by the results achieved amongst their students.

In other universities, a teacher is prohibited from receiving any fee from his pupils, and his salary constitutes his entire revenue. If his salary remains the same whether or not he performs well, he is likely to cut corners and work as little as possible. If the school is regulated by a minister of state, he is not likely to abuse his position totally, but all that such superiors can force him to do is give a certain number of lectures.

Europe’s universities were originally instituted to educate churchmen, with theology the principal subject. A corrupted form of Latin had become the common language throughout Western Europe, and was used in church services and translations of the Bible read out in church. Over time, however, this language gradually ceased to be used in Europe.

European universities saw metaphysics as a more useful science than physics. The proper subject of experiment and observation, a subject in which careful attention often led to useful discoveries, was almost entirely neglected. Though universities were originally intended only for the education of churchmen, they gradually opened their doors to other students, most of whom were wealthy gentlemen. The majority of what is taught in universities, however, is not geared towards the world of business. In Britain, it became customary for young people to go off on a sabbatical break after leaving school, travelling abroad in order to widen their horizons. A young man, however, would commonly return home incapable of serious application to either study or business. Spending years away, free of parental control, they often go off the rails. Nothing can have a worse effect on young people than this absurd practice of a sabbatical at this young age.

There are no public educational institutions for women, who tend to be taught just what their parents or guardians believe is necessary. This education generally focuses on useful life skills such as preparing them for marriage and motherhood.

Division of labor, which touches the majority of the population, is such that it is intellectually confining, since a worker will generally repeat just one or two actions all day long and is therefore not mentally stimulated. His dexterity in his trade comes at the expense of his intellectual virtue.

The wealthy are not affected by this phenomenon as they generally do not start their professional lives until the age of eighteen or nineteen, and as such have plenty of time to acquire useful life skills, often supported financially by their parents or guardians. This is not the case for the less wealthy, who are obliged to enter the workforce as early as possible in order to make a living, which leaves them little leisure time. The essential aspects of education, however—reading, writing, math—can be acquired at an early age, before students start their working lives. As such, schools should be established in every parish, in which children can receive education for a small fee, so that even the working classes can afford it. In Scotland, nearly the entire population has been educated in such establishments.

The Expense of the Institutions for the Instruction of People of all Ages

Religious educational institutions traditionally focused not so much on making people good citizens in today’s world, but more on preparing them for the afterlife. Teachers’ salaries were paid either through voluntary contributions from their audience or a fixed salary or stipend. In every hierarchical society, there are always two different systems of morality: one strict, the other liberal. The liberal system favors the pursuit of pleasure—contrary to the austere system, which abhors such behavior. For the common laborer, a single week of such behavior can cost him his job; the wiser among them avoid such excesses.

Almost all religious sects are started by the lower classes, from whom they generally draw their earliest proselytes. These sects exercise an austere system of morality. Whereas a common laborer living in a small country village is likely to be known and respected by his fellow villagers, in a large city he will just be one of the masses, unnoticed and uncared for. Individuals in this situation often seek a sense of belonging and respect by joining a religious sect. They will be required to adhere to strict moral codes within the sect, and failure to do so resulting in expulsion. One way of decreasing the unsocial and extreme behaviors promoted by these sects is through the study of science and philosophy, or encouraging people to pursue cultural activities such as painting, poetry, music, etc., which dissipate melancholy and gloom.

The clergy of every established church constitute a great corporation. Their interest as an incorporated body is never the same as that of the sovereign, and is sometimes directly opposed to it. Their main concern is to maintain their authority over the people, which the do by promoting faith as a means of avoiding eternal misery. The authority of religion is superior to every other authority, with the fears it instigates conquering all other fears.

In the ancient state of Europe, the wealth of the clergy gave them the same sort of influence over the common people as that of the great barons over their subordinates. The estates granted to the church established jurisdictions that did not fall under the king’s authority.

The church’s revenues exceeded what the clergy could consume, and the surplus was employed in charity work. With the gradual advancement of the arts, business and commerce, however, the church’s charity work and hospitality gradually decreased. Their tenants started to grow independent of them, with the lower classes no longer reliant on them as they had been in the past. The power of the church was reduced to their spiritual authority, which itself was greatly weakened as its charity work diminished. The reformation began in Germany and soon spread through every part of Europe. The followers of Luther, together with what was known as the Church of Britain, exercised episcopal government. This system of church government promoted peace, good order, and respect of the civil sovereign. The followers of Calvin, on the contrary, allowed the people of each parish to elect their own pastor and established equality among the clergy.

In Presbyterian churches, where patronage is respected, the clergy endeavor to gain the respect of their superiors through their knowledge, irreproachable lifestyle and diligent work. Indeed, the Presbyterian clergy of the Netherlands, Geneva (Switzerland) and Scotland are some of the most respectable men in the Europe.

Benefices (the income and property provided for pastoral duties) are on the whole equal and minimal, which has a positive effect in that only exemplary morals can give dignity to a man of low income. People tend to view a pastor with the kindness with which we normally view someone in similar circumstances to our own, but whom we think ought to be in a higher position. Their kindness naturally encourages his kindness, and he strives to assist them.

In countries in which church benefices are very moderate, a chair in a university is generally a better establishment than a church benefice. The universities have, in this case, the picking of their members from all the churchmen of the country, who are all highly educated. Where church benefices are more substantial, the church naturally draws their educated clergy from the universities. In Britain, the church continually drains universities of their most educated members; whereas in protestant countries, the most educated men will have been professors in universities.

PART IV: THE EXPENSE OF SUPPORTING THE DIGNITY OF THE SOVEREIGN

The expense of supporting the majesty or dignity of the sovereign is naturally high, since we expect the king to live in splendor.

CHAPTER 2: THE SOURCES OF GENERAL OR PUBLIC REVENUE OF A SOCIETY

PART I: THE FUNDS, OR SOURCES, OF REVENUE, WHICH MAY PECULIARLY BELONG TO THE SOVEREIGN OR COMMONWEALTH

Contributions paid to the sovereign are either in the form of stock or land. With the Bank of Britain’s ordinary dividend at five and a half per cent, and its capital at ten million seven hundred and eighty thousand pounds, the government could borrow this capital at three per cent interest and expect to make a profit. A mercantile business such as the post office receives an advance from the government to cover the cost of establishing the various offices, which it repays with hefty interest rates.

The Government of Pennsylvania implemented a method of lending at interest on land, via transferable bills of credit that are declared legal tender. This raised about £4,500 annually in government contributions.

The most significant expense for any state is war—contrary to the administration of justice, which is a source of revenue, and farm labor during harvest time, which covers the expense of constructing and maintaining the country’s bridges, highways and other public works.

The revenue derived from land comes mainly from the produce of the land rather than its rent. Britain’s ordinary revenue amounts to over ten million a year. But the land tax, at four shillings, amounts to less than two million a year. Britain’s crown land does not bring in any revenue—which it would if privately owned; if crown land became private property, it would be cultivated, increasing produce and ultimately resulting in population growth and increased revenue for the country.

In this light, it would be preferable for crown land to consist only of parks, gardens, public walks, etc., which cost society rather than bring in a revenue.

PART II: TAXES

Individuals’ income comes from three different sources: rent, profit, and wages—all of which are subject to taxes.

There are three maxims:

  1. Inhabitants of a state must contribute towards the support of its government by paying income tax.
  2. Taxes are fixed and not arbitrary.
  3. Taxes should be levied at a time and in a manner convenient to the contributor.

Article I: Taxes upon Rent

Taxes upon the Rent of Land

Tax on the rent of land can be levied at a blanket rate for each district or a variable rate in proportion to the rent of the land.

A blanket rate land tax for each district, although equal at first, will grow unequal over time. The advantage for landlords in Britain of a fixed, constant rate for land tax is that land has been improved and hence increased in value; consequently the rent for land has also increased.

Economists in France believe the most equitable system is one of land taxes on the rent of land, which vary in line with the rent or in line with the level of cultivation. In Venice, all arable land leased out to farmers is taxed at a tenth of the rent. The leases are recorded in a public register.

Some landlords request a rent in kind rather than a monetary payment; for example, corn, cattle, poultry, wine, oil, etc.; others prefer a rent in service. Such rents are always more harmful to the tenant than beneficial to the landlord, with these tenants tending to be poverty-stricken.

In terms of improving land, landlords should be encouraged to cultivate part of their own land; they can afford to experiment and make a few mistakes—and ultimately this will contribute to improving the land throughout the country.

The expenses incurred for levying a land tax that varies in proportion with rent are greater than those for a tax based on a fixed rent. Land taxes that vary according to the level of cultivation of the land are not advisable because such taxes prompt the landlord to increase the rent, thus making both landlords and tenants less likely to cultivate their land and ultimately discouraging productivity. Land taxes should be managed in such a way as to encourage cultivation of land.

Taxes that are Proportioned not to the Rent but to the Produce of Land Taxes levied on the produce of land are taxes on the rent. When a proportion of the produce is to go towards paying tax, the farmer calculates in advance what this amount is likely to be—just as he calculates the 10% church tithe. The tithe is an unequal tax since the church takes a large share of the profit yet pays nothing towards the farmer’s expenses.

Taxes on the produce of land are levied either in kind or money. The parson of a parish or a man with a small income living on his own estate has the option of being paid in kind, relying on his tithe, or charging rent.

Taxes paid in money can be variable, fluctuating in line with the market, or fixed; for example, a bushel of wheat always valued at the same price.

Taxes on the Rent of Houses

The rent of houses can be taxed either on the rent of the land on which the building is constructed, or on the rent of the building itself.

The rent paid for the building should cover the amount of interest the owner would have made had he lent it upon good security, as well as the maintenance costs. The rent of the building, or the ordinary profit, is therefore regulated by the ordinary interest of money.

Rent of the ground upon which the building is constructed is generally highest in a country’s capital and other regions in which housing demand is high.

A tax on house rent, payable by the tenant in proportion to the rent, does not affect the building rent. Whereas the poor spend the majority of their income on food, the wealthy tend to invest in costly homes. Taxes on house rent therefore affect primarily the wealthy, and are comparable to a tax on a commodity.

Landowners seek to charge as much as possible for renting out their ground. In Britain, the rent of houses is supposed to be taxed in the same proportion as the rent of land, through the annual land tax. This has always proved an extremely unequal taxation system.

Article II: Taxes upon Profit

Taxes upon Profit, or upon the Revenue arising from Stock

Profit from stock can be divided into two parts: the interest made by the owner of the stock, and a very moderate compensation he receives for the risk and trouble of employing the stock. The employer must receive this compensation, otherwise he would not be able to continue.

At first sight, interest made on money seems to be as suitable for tax as the rent of land. There are, however, two different circumstances to consider.

First, the quantity or value of land owned by a man can never be kept secret from the authorities—unlike the capital of stock. Enquiries into individuals’ private circumstances would cause public outrage.

Secondly, land is immovable, whereas stock can be easily moved from one country to another. Owners of stock may opt to move from a country charging hefty taxes to one with tax laws more favorable to his business, thus enabling him to enjoy a better lifestyle. By moving his stock, he puts an end to all the business it maintained in his original country.

Taxes upon the Profit of particular Employments

In some countries, taxes are imposed on particular branches of trade. In Britain, these include hawkers and peddlers, horse-drawn coaches and places in them, and publicans, who are required to purchase a liquor license.

Taxes on the profits of a particular branch of trade are not charged to the traders but to the consumers, with the tax included in the price of the commodity. Consequently, consumers tend to buy large quantities rather than small, which can have a negative affect on the small trader. The tax of five shillings a week charged on every horse-drawn coach, and ten shillings a year on a seat in these coaches is proportionate to their sales volume, and consequently does not encourage bulk buying and harm the smaller trader. The tax of twenty shillings a year for a license to sell ale, forty shillings for a liquor license, and forty shillings more for a wine license, being the same price for all retailers, necessarily favors bulk buying and affects small traders.

The poll taxes charged in the southern provinces of North America and the West India islands are annual taxes charged per Negro, and as such can be viewed as taxes charged on a certain species of stock employed in agriculture. As the majority are planters, both farmers and landlords, the final payment of the tax falls upon them in their capacity as landlord.

Appendix to Articles I and II: Taxes upon the Capital Value of Lands, Houses, and Stock

While property remains in the possession of the same person, taxes will not decrease its capital value; however, when property changes hands—for example, property inherited following death, or property sold to another individual—the taxes imposed will decrease its capital value.

All taxes on the transference of property decrease the capital value of that property and increase the revenue of the sovereign, at the expense of the people.

Stamp duties on cards, dice, newspapers and magazines, etc., are taxes on consumption. Taxes on the transference of property are quite different. The transference of property, be it through inheritance or the sale of land and houses from one individual to another, are public transactions and are taxed directly. The transference of stock from individual to individual is frequently conducted in secret, and is taxed indirectly via a stamp duty on the deed (which is otherwise not valid) as well as a requirement that the transfer be recorded in a register, for which certain duties are charged. Stamp and registration duties are also often imposed on deeds transferring property through inheritance or sale. In Britain, stamp duties are calculated in proportion to the deed, and do not generally exceed six pounds.

Article III: Taxes upon the Wages of Labor

A person’s income is regulated by the labor market and average prices of consumer goods.

Employers pay a direct tax for each laborer they employ. A manufacturer will offset this tax by charging a higher price for his goods; consequently, the tax is ultimately paid by the consumer.

A direct income tax results in lower prices for rent of land and higher prices for manufactured goods than would have been the case for tax on the rent of land and consumable commodities.

Direct income tax sometimes results in a significant fall in the labor market, industry decline, lack of jobs for the poor, and a drop in the country’s annual produce of land and labor.

Article IV: Taxes which it is intended should fall indifferently upon every different Species of Revenue

Capitation Taxes

Since a man’s fortune fluctuates, it is difficult to establish an accurate estimate without an official investigation; assessment is therefore arbitrary. Whether a tax is light or heavy, uncertainty always causes grievance.

Poll taxes, when levied rigorously, provide substantial revenue for the state; however, this is a part of the public revenue and therefore not the most beneficial for the people.

Taxes upon Consumable Commodities

The impossibility of levying tax in proportion to revenue led to taxes being levied on commodities. Consumable commodities can be classed as essentials or luxuries.

Essentials are not only the basics indispensable for survival, but also items deemed necessary by a particular culture; for example, a linen shirt is not indispensable for survival but forms an integral part of a businessman’s work attire. Leather shoes are deemed a necessity in Britain; whereas in Scotland they are only deemed necessary for men, and it is not unusual to see women walking about barefoot. Beer and alcohol can be classed as luxury goods; a man can abstain totally from them and in no culture are they viewed as a basic essential.

Wages are regulated by the labor market and the price of basic essentials. A tax on these articles raises their price, and should therefore go hand in hand with a rise in workers’ wages.

This is not the case with taxes on luxury goods. An increase in their price does not incur any rise in workers’ wages. A tax on tobacco will not raise wages, despite the fact that in Britain it is taxed at three times, and in France at fifteen times its original price—likewise with taxes on tea and sugar, which in Britain and the Netherlands have become luxuries amongst the lower classes.

Taxes on luxury goods do not tend to raise the price of any other commodities—whereas taxes on essentials, by raising the wages of labor, automatically raise the price of the commodity, consequently decreasing sale and consumption.

In Britain, the major essential goods that are taxed are salt, leather, soap, and candles. Salt is taxed at three shillings and four pence a bushel—about three times the original price of the commodity. Leather is a necessity for daily living, as is soap. In countries where the winter nights are long, candles are essential for every business. In Britain, taxes on the price of leather are at about 10%, on soap about 25%, and on candles about 15%. As these commodities are considered basic essentials, such heavy taxes increase expense for the industrious poor, and therefore raise the wages of their labor.

In a country such as Britain, where winters are bitterly cold, fuel is a basic essential, with coal being the cheapest fuel. Most businesses are located in coal counties; in some businesses, coal is a necessary tool of trade—for example, in the glass, iron, and metal industries. Legislature has imposed a tax of three shillings and three pence a ton on coal transported via the coast, which is more than 60% of the price at the pit. Coal transported by land or inland navigation pays no such duty. The bounty on the exportation of corn raises the price of this essential commodity and as such, rather than making a profit, often actually incurs considerable expense to the government. The high duties on the importation of foreign corn, which in years of abundance amount to a prohibition, and the absolute prohibition of the importation of live cattle or salted provisions have all led to taxes being levied on these essential commodities, and provide no revenue to the government.

Taxes on meat are still more common than those on bread—perhaps because meat is not regarded as a necessity.

Consumable commodities, whether essentials or luxuries, are taxed in two different manners: either the consumer pays an annual sum (e.g., coach and plate tax), or the goods are taxed while still in possession of the dealer, before delivery to the consumer (e.g. excise and custom duty).

A coach may last ten or twelve years; it is more convenient for the buyer to pay four pounds a year than a lump sum of forty to forty-eight pounds upon purchase. In the case of housing taxes, it is more convenient to pay these in moderate annual installments than a hefty lump sum at the time of sale.

The term “custom duty” demotes a tax that is paid customarily. These taxes were originally imposed on merchants, who were disliked and whose gains were envied—for example, foreign merchants, who were taxed more heavily than their British counterparts. This distinction between the duties charged to foreigners and those charged to British traders is still practiced today, to give the British traders a competitive advantage.

These duties were first charged on wool and leather in the form of an exportation duty. Other duties included those on wine, which were charged per ton (tonnage) and on other goods, which were charged per pound (poundage).

The exportation of materials produced within a country or its colonies was sometimes prohibited and sometimes subjected to higher duties. The exportation of British wool was prohibited; that of beaver skins was subjected to higher duties (Britain having the monopoly over this commodity following its conquest of Canada).

With a number of goods prohibited altogether, smuggling is rife. Britain’s ban on the importation of foreign woolen goods, and its tight restrictions on foreign silks and velvets not only prevent any revenue being made through customs duties, but encourage people to smuggle these goods in, including merchants who smuggled in as much as they could. This is a perfect example of the mercantile system being used as an instrument of monopoly rather than revenue generation.

The foreign commodities most widely consumed in Britain are wines and brandies, products from America and the West Indies—sugar, rum, tobacco, cocoa-nuts, etc.; and products from the East Indies—tea, coffee, chinaware, spices, piece-goods, etc. The majority of the country’s revenue from custom duties comes from these products.

In Britain, liquor and spirits brewed for private consumption are not subject to excise duty. This exemption favors the wealthy rather than the poor, since almost all wealthy families in the country brew their own beer, which costs them eight shillings a barrel less than it costs the common brewer. As such, the wealthy are able to drink their beer for less than can the poorer classes, who tend to purchase theirs from a pub. In addition to customs and excise duties, there are several other duties, which affect the price of goods more indirectly. An example of this is the duties imposed on the road and waterway tolls that pay for the maintenance of the road or waterway. These are calculated according to the volume or weight of the goods being transported. If Britain’s road or waterway tolls were to become a government resource, with duties imposed on the value of the goods rather than their volume or weight, this inland customs and excise would damage the most important of all branches of commerce: the country’s national trade.

Levying taxes on luxury goods requires a large number of customs officers, whose salaries and benefits contribute nothing to the state treasury; customs officers’ benefit packages tend to amount to much more than their basic salaries—in some ports more than double or triple those salaries. The expense of levying revenue could be as much as an additional twenty or thirty per cent of these salaries and benefits.

Such taxes on commodities raise their price, thus discouraging their consumption and production. In the case of home-produced commodities in particular, this leads to a reduction in labor.

Not many people are scrupulous when it comes to smuggling; generally, if people can find an easy and safe way of doing so, they will. Shoppers are equally unscrupulous when it comes to buying smuggled goods.

Inland trade is practically duty-free, with most goods able to be transported from one end of the country to the other without any license or control by revenue officers. Goods transported from coast to coast require certificates but are for the most part duty-free, with the exception of coal.

CHAPTER 3: PUBLIC DEBTS

In a commercial country, the sovereign spends a large portion of his revenue on luxury goods—often to the detriment of the state’s military power. His expenditures will often outweigh his revenue, sometimes requiring him to borrow from his subjects. During wartime, most states are required to go into debt, with investments being made in increasing the size of the army, equipping fleets, and preparing garrisoned towns for defense, including the purchase of arms, ammunition and provisions. Vast amounts of capital are therefore required fast in order to prepare for war—which will not wait for the gradual returns on new taxes. The government therefore secures this capital through borrowing.

Commercial countries are home to many wealthy merchants and manufacturers, who are in a position to be able to advance large sums of money to the government. These people trust the government, since the government provides them with security and a legal system that enable them to operate their businesses. This fact, coupled with the extremely favorable loan terms offered by the government for such loans, disposes people to lend to them.

Aware that they will be able to borrow in times of need, governments of such countries often cease to manage the country’s economy effectively. This results in major debts, which are likely in the long term to ruin Europe. Nations, like private men, have generally started to borrow through personal credit, without assigning or mortgaging specific funds for the reimbursement of this debt. When this system has failed them, they have started to borrow against the assignment of specific funds or a mortgage. Britain’s so-called “unfunded debt” consists of a debt that is partly at zero interest and partly at full interest—very much like a private person’s contract against a promissory note. The Bank of Britain maintains their value and facilitates their circulation, which enables government to contract these large debts when needed. When this resource is exhausted, the government turns to specific branches of public revenue in order to raise the capital it needs to repay this debt. It raises this money either as a short-term or a perpetuity mortgage. Money raised from a short-term loan is known as anticipation; that raised through a perpetuity mortgage is known as perpetual funding.

In Britain, annual taxes on loans are anticipated according to the terms stipulated in the loan’s borrowing clause. The Bank of Britain lends at interest rates of between 8% and 3%. If there is a deficiency, which there always is, it is provided for in the funds for the ensuing year; the only major branch of public revenue that is still unmortgaged is therefore regularly spent before it comes in. Like an extravagant spendthrift whose social engagements do not allow him to wait for his regular salary, the state constantly borrows from its own agents, paying interest for the use of its own money.

Over time, various acts have been passed under which taxes that had previously been anticipated only in the short term were rendered perpetual, to be used to pay only the interest on the borrowed amount.

There are two other loan methods: annuity loans—either for a specific period of time or an entire lifetime. During the reigns of King William and Queen Anne, large sums were frequently borrowed in annuities for a specific period of time, both short and long term. In 1691, an act was passed enabling a million to be borrowed as a lifetime annuity (a form of group life annuity devised by Tonti) at 14%; however, such was the supposed instability of government that even these favorable terms resulted in few purchasers.

In modern governments, peacetime expenses are largely equal to peacetime revenues. When war occurs, the government is both unwilling and unable to increase its revenue in proportion to the increased expense. Increasing revenue would mean increasing taxes—which is not an option since an increase in taxes would cause major disillusionment amongst the people, with regard to the war. The government is, however, able to borrow from individuals—which enables it to raise sufficient money to fund the war, with just a moderate tax increase. Through perpetual funding, they are able to raise large amounts of money with very moderate tax increases.

Any new tax is always immediately felt by the people and will generally be faced with opposition and resistance. The more taxes are increased, the more the people object; the more loudly they object to each new tax brought in, the more difficult it becomes to implement new taxes or raise current rates.

In Britain, from the time of the first recourse to borrowing, to the ruinous practice of perpetual funding, the reduction of public debt during peacetime has come nowhere near to paying off the debt accumulated during wartime. Indeed, Britain’s current huge debt dates way back to the 1668 war, which concluded with the Treaty of Ryswick in 1697.

When government expense is paid for using annual revenue from the produce of free or unmortgaged taxes, a portion of the people’s revenue is just being redirected from maintaining one form of unproductive labor towards another. When public expense is paid for through funding, this draws on capital that already exists in the country—redirecting a portion of the annual produce destined for the maintenance of productive labor towards that of unproductive labor.

The latter method of funding, although depleting this existing capital, is more favorable to the accumulation or acquisition of new capital than the method of defraying public expense through revenue raised throughout the year. Under the funding system, some careful spending and diligence amongst a country’s people can more easily repair the damage caused by a government’s waste and extravagance.

It is said that payment of the interest on public debt is like the right hand paying the left; the money does not leave country—it is one group of inhabitants’ income being transferred to another. This view suggests that the whole public debt is owing to the inhabitants of the country, which is in fact not the case; the Dutch, as well as several other foreign nations, have a considerable share in our public funds.

Land and capital stock are the two original sources of all revenue, both private and public. Although it is in a landowner’s interest to maintain his estate in as good a condition as he can, the various land taxes often leave him with insufficient revenue to do so. With landowners unable to maintain their land, the country’s agricultural industry inevitably declines.

When national debt accumulates beyond a manageable level, the country’s economy spirals out of control, often culminating in bankruptcy and the need to tap into public revenue. Countries often disguise public bankruptcy as a “pretend payment” by increasing inflation rates. When a state or individual is forced to declare themselves bankrupt, the best policy is to do so openly and transparently; this result in the least dishonor to the debtor and the least damage to the creditor.

Almost all states, however, both in the past and today, when faced by this situation, have attempted to redress the situation through inflation: gradually decreasing their currency below its original value so that the same nominal amount gradually contains less and less silver.

Britain’s public revenue can never be completely liberated since the surplus remaining after payment of annual expenses is so small as to be insignificant. The liberation of public revenue can never be brought about without considerably increasing public revenue or reducing public expense.

Commerce within the United States is conducted exclusively in banknotes rather than gold and silver, with any gold and silver that does come into their system being sent to Britain in exchange for commodities. But without gold and silver, there is no means of charging taxes; Britain receives all of the US’s gold and silver—how is it possible to draw from them what they do not have?

The present scarcity of gold and silver in America is not due to poverty in the country or the inability of American citizens to purchase it. In a country where wages are significantly higher and the price of provisions much lower than in Britain, the majority of the population are in a position to be able to purchase large quantities of gold and silver should they so wish. In reality, the scarcity of gold and silver is through choice, not necessity.

Any country’s domestic business can be conducted using banknotes, with nearly the same degree of convenience as using gold and silver money. The use of banknotes has proven convenient for the Americans, who are able to invest the profit made on surplus produce from the land in purchasing tools of trade, clothing, furniture, and iron needed to further improve, build and extend their settlements and plantations. Colonies’ governments find it in their interest to supply their people with sufficient banknotes to maintain their domestic business. Pennsylvania derives revenue from lending money to its subjects. Others, like Massachusetts, fund extraordinary emergencies by advancing banknotes to defray public expense, which are redeemed at a later date, when convenient for the colony, at the depreciated value to which it gradually falls.