THE SHIFTING OF TAXATION.
§ 245. The connection between the tax-object, on which the tax is levied, and the tax-source which the law is intended to reach is, under the circumstances of modern industrial life, a problematical one.
In a consistent socialistic organization of society in which there were no free exchange of the products of private industry, each individual producer being rather an organ of the national productive organization, the tax-object and the tax-source might both be reached with some certainty. For the absence of exchange would deprive each individual of the ability to shift the taxes demanded by the state to the buyer of his products as part of their cost of production.
But given the freedom of exchange between individual pro ducers, and given the prevalence of an economic organization in which the great body of private industrial establishments pro duce for all other establishments, we have also given the possi bility of treating any tax levied by state or commune as part of the cost of production and of the producer's recouping himself for this cost of production in the price demanded of the buyer.
Tax legislation and administration have here to do with proc esses which, as being constituent elements of the process of price determination in the private competitive system, are essentially independent of any interference from the side of the govern ment. It is impossible, under this economic system, to be sure that the tax which the law imposes and which the tax adminis tration collects is borne by the man from whom it is collected. The only alternative would be to adopt a system of measures, which has no place in this field at all.
What measures can government take to hinder a person engaged in industry and paying a heavy income tax, from following his natural bent and adding the amount of this tax to the cast of production of his goods ? This may traverse the intention of the legislator whose aim is to reach precisely this profit of industry that accrues to the taxpayer, but which is beyond the reach of the government. The taxpayer may meet with opposition in his efforts, but opposition of quite a different nature from that which the legislator can exert.
246. There are certain classes of taxes, of considerable extent, with respect to which the legislator himself proceeds on the expectation that the person who pays the tax to the state will consider it simply in the light of an outlay, and will suc ceed in recouping himself and so realizing this view of the tax. It even happens that the tax is refunded in cases where it is manifestly impossible to shift it.
This happens in the case of those taxes which, by reason of convenience in collecting the tax, regularly avoid demanding the amount required directly from the tax-source, but require it of some third party who is expected to take care that the tax is ultimately paid from the source intended. By a prevalent usage, to some extent also adopted in the science (Rau, and later Adolph Wagner), these taxes are called " indirect " in contrast to the " direct " taxes which it is intended shall be borne by the person by whom the law requires the tax to be paid.
For example : if the legislator sets out from the assumption that the consumption of coffee, taken in conjunction with other articles of consumption, affords a fair indication of ability to pay taxes he will not attempt to put this (in point of fact widely accepted) view in practice by levying a tax directly on the individual households which, as consumers of coffee, the tax is intended to strike. This arrangement would be so burdensome for all parties that the tax might better be abandoned if there were no more feasible method of collecting it. The law conse quently adopts the more convenient method of levying the tax on the goods when they enter the country, and since the importation is only to a slight extent effected directly by the consumers, but almost entirely by the trade, the result is that the importer pays the amount of the tax in a lump sum which is ultimately added to the retail price paid by the consumers, who thereby become the actual payers of the tax This feature of this class of tax legislation is so fully recog nized that in cases where it is impossible for the original payer of the tax to recoup himself, the sum paid as taxes is refunded. So, for example, in the case of the tax on the consumption of sugar. At the very beginning of the beet-sugar industry this tax was levied on the quantity of beets. It is quite uncertain whether the consumption of the sugar so taxed takes place within the geographical limits which define the field within which the tax legislation applies. Now since the law intends to tax consumption only within the limits of its own country, and since the tax paid in neither should nor can be shifted to the foreign consumers, the law refunds the tax wherever and to the extent to which the fact of exportation is proven.
§ 247. There are still other cases where the tax required by the law is in fact regarded as a part of the cost of production, and is therefore classed as outlay which the producer paying the . tax is expected to demand of his customers in the price of his goods.
An undertaker may pay a tax to the state or commune because certain public expenditures have been incurred which have bene fited his industry. Justice demands that expenditures of this kind should be paid for, just as the same undertaker would pay for any other expenditures made in his interest by anybody else. We have accordingly a further class of cases in which, for simple reasons of equity, the legislator regards the tax simply as a busi ness outlay on part of the taxpayer. The tax itself in this case is of a different character from the taxes on consumption. This tax does not aim to reach the income from which the tax pay ment is ultimately drawn, through the medium of exchange and consumption ; it does not seek a general payment on the part of individual households for benefits of a general character rendered to these households by the state or the commune ; all it seeks is payment by the individual producer for the increase of his pro ductive capacity. If the service rendered and the payment required for it, in such cases, do not accurately balance each other, the fact is due to external circumstances, not to the requirements of equity. In itself considered it would be perfectly just and fair to require payment for the use of a road by wagons or for the pollution of streams by refuse from factories, pay ment to be made to the public organization that has to repair the damage done. It is only the difficulty in the way of computing the proportionate cost that leads to the abandonment of this method of exact payment and the adoption of certain approxi mately exact forms of taxation instead. These taxes are designed to require payment in a general way for the presumable damages and the presumable benefits accruing to individual pro ducers.
It appears therefore that however widely this class of cases may differ from those dealt with in the last preceding section, the tax legislator's view of them is undoubtedly the same. The market price of the product is expected to repay the tax, which is accordingly ultimately borne by the consumer.
The question here concerns certain constituent elements in the cost of production, for.which the producer pays the state (the commune, or the like) with the expectation of being repaid by the consumers of his product. In the previous section the question concerned fiscal administrative measures which for the sake of convenience apply to the producer instead of going to the con sumer in person.
§ 248. In the cases already considered, the legislator regu larly regards the tax as simply a matter of outlay. Still it is by no means certain that this shifting will take place as intended by the law, for the reason that the process of price-determination is left to the working of free competition. The legislator, how ever, is justified in his course of action by the fact that there is a very reasonable expectation of such a result. Similarly in the converse case, where the legislator does not intend a shifting of the tax there is room for a thoughtful consideration of the possibility or probability of such a shifting taking place after all.
The case is but the converse of the one last considered, when the question arises of remitting taxes already in force. It is questionable whether, in point of fact, the remission will accrue to the benefit of the persons who have actually borne the tax and whom it is desired to exempt.
The strength and the weakness of the earlier schools of Political Economy and of Financial Science appeared in their dis cussion of the question of shifting. Their strength lay in the fact that ever since the days of the Physiocrats they distin guished clearly between the source and the object of taxation ; that they insisted on the necessary fact that every object of tax ation must ultimately shift its burden to the source of the tax ; that they (supposedly) had to do with definite quantities into which the aggregate income of the community distributed itself ; finally, that they were content, with a felicitous ingenuousness, to soar high above the world of facts and simply draw certain conclusions from certain abstract premises. Their weakness lay
in this, that all the quantities with which they had to do were only symbols and not living facts; neither the "net product" which they considered the source of the tax, nor the " natural wages," nor any of the rest were actualities. A further source of weak ness is the fact that they made no attempt to solve the question as to what force or value was in fact possessed by the tendencies whose presence was asserted or assumed. Ricardo, as well as the Physiocrats, (with the most creditable intention) draws an abstract line of demarkation between the income necessary to subsistence (to efficient labor); and the surplus disposable for purposes of taxation. Opinions differ considerably as to where this surplus is to be found. Ricardo departs so far from the views of his earliest predecessors as to find a net product and therefore a surplus above natural wages in the customary wages paid in actual life.' But here difficulty arises in determining what the abstract quantity of natural wage means in actual life, and so fixing the point beyond which any additional tax will rebound and be shifted to the real source of taxation, wherever that may lie.
The position taken today, which stands much nearer to actual life than these early abstractions (whose services to the science are by no means to be underrated), aims to solve the problem by an appeal to actual phenomena, but is able to offer only very modest results after a great deal of painstaking. For the observa tion of the workings of distribution and price-determination in the phenomena of real life is infinitely more difficult than the drawing of certain conclusions from hypothetical facts and forces of nature. It is not easy even to determine with satisfactory accuracy what the facts are ; but it is much more difficult to dis cover the causal relation of the factors which have produced any given actual results in the matter of price-determination. The results so far attained have been for the most part of a negative character.
It is quite in accordance with this fact if we have little to offer at this point that is acceptable to the science at its present stage of development.
§ 249. While the Physiocrats insisted that all indirect taxes, since they ddl not fall directly on the net product, must unavoid ably be shifted, they by no means regarded this process favor ably. They condemned all indirect taxes because of their being imposed on the shoulders of those who could not bear them. The English school, with its widespread following, was more and more inclined to regard the matter in a favorable light. This was quite in consonance with the general attitude which gradu ally came to prevail in the school, quite in contrast to the popular inclinations of its precursors. The same optimism which led them to regard society from above, with the complacence of the propertied classes, and afforded no room for doubt of the natural harmony of all economic forces, and of their all working together for right and equity in industrial society, and which shut out all disturbing influence of an observation of the facts,—this same optimism it was which enabled them consistently to comfort themselves with the reflection that the burden of taxation, just like all the other elements in the distribution of income, would adjust itself by the " free play of the natural forces of exchange, and that " in the long run" the burden would attain its just level.
This view no longer prevails in the science. Examination of the philosophical foundation of the earlier schools and obser vation of the phenomena of real life have led to this result. The older theory occupied itself with forces which were not present in the form and manner assumed, and with assumed effects which were simply a broadly exaggerated generalization of certain possible results. As to whether and when these results actually occur, these are questions to be decided by observa tion of the facts. The reason for its being a priori quite uncertain whether the facts in question occur, when they occur, what effect they have, lies in the heterogeneous character of the forces con cerned. It is psychic forces, moral factors, that are here concerned. It is not a question of a natural equilibrium which natural forces left to themselves will seek and establish, but of an equilibrium of equity which is to be sought after, which is not established by a " free play of forces," rather by a progressive development of convictions, which, on the basis of exact observation, bring the facts into conformity with the idea.
To cite a conspicuous example, it is quite possible that a tax laid on the laboring majority will be shifted from them to shoulders better able to bear it, for the reason that it falls on the necessary means of subsistence. Whether this possibility is real ized depends in the first place on the view taken of the equity of the tax, and in the second place on the spirit, the actions, organization, the pecuniary means of all the various parties who are expected to bear a part or the whole of the burden. Energy in pushing their own interests, the sense of fairness in con sidering the interests of others, the means disposable for competition in 'market, the nature of the ideals aimed at by the parties to the struggle—these are the real forces which, under furthering or hindering conditions of the market, decide what. is to be the actual course of events.
§ 25o. Accordingly we find that on no point touching the question of shifting and incidence, is the modern science so thoroughly agreed as on the disillusion with respect to the tra clitional a priori assumption which originated in the doctrine of prices held by the old school. It is no longer confidence in the effectiveness of the assumed tendency, but rather the apprecia tion of the actually operative causes that is decisive.
The tax legislator, therefore, in every case where he adopts, increases, lowers or abolishes a tax, will accordingly have to make himself familiar with the forces at work, in order to pre vent the intent of the law and therefore the equitable provision which the state has in view, from being thwarted. In a question of the taxation of the necessary means of subsistence he will beware of assuming, with the old school of thinkers, that the equity of the case will take care of itself in that the new burden will presently be shifted to the employers or the consumers of the products of labor, etc. ; he will rather try to find out what are the chances of the laborers being able to shift the burden from their own shoulders by effecting a rise in wages. Even this new attitude of doubt is a step in advance as compared with the old error. When the question concerns the abolition of an existing tax on consumption, we shall have, in place of the assumption that the abolition of the tax will be sure to accomplish its purpose (that is, to take the burden from the consumers) an investigation as to what are the intermediate personal factors whose co-operation is necessary in order to accomplish the object of the legislator.
The great variety of the facts of life and the peculiarities of each individual piece of legislation are of course to receive due consideration ; but there are, after all, certain general observa tions whose application is not bounded by the peculiarities of any individual case.
Shifting of taxation will take place regularly in proportion as the following causes are present : (I) the consciousness of une qual distribution of the burden of taxation, (2) the wish to rid oneself of the unequal burden, (3) the pecuniary ability to accom plish this purpose.
From these considerations it follows that a shifting of taxes can more readily be accomplished by capitalists than by laborers,, by well paid and organized laborers better than by other classes of laborer's, by organizations of employers better than by individual employers, by owners of movable capital better than by owners of immovable capital, by professional business people better than by amateur business men, by merchants better than by the consumers who are their customers,— or what amounts to the same thing, they are in a better condition to withhold the benefit of a reduction from the classes of the population which it was intended to benefit.