Essays in Economics   by   Leon Maclaren

III

Taxation

Taxation is levied on many assessments; on assessments of incomes, prices of commodities, horse-power of internal combustion engines, agreements, registrations, licences, postage stamps, telephone calls, occupation of land and buildings, and dead men's estates: but, whatever the assessment, this much is plain, that taxation is drawn from the fruits of industry, from wealth which is the product of labour applied to land. Equally, this much more is plain, that taxation is a secondary claim in the distribution of wealth and may come from rent or wages, from either of the primary avenues of the distribution of wealth: ultimately, it cannot come from anywhere else.

Taxation may not, however, be drawn directly from rent in the hands of the tenant in occupation of the land or from wages in the labourer's possession; its collection may be postponed until after the rent or wages has been distributed amongst the secondary claimants; as, for example, when it is drawn directly from the moneylender's interest or the landlord's claim. The timing of the exaction will modify its results and it is proposed, therefore, to deal separately with taxation drawn immediately from these secondary claims and to discuss first the effect of taxation drawn directly from rent and wages.

It is usual, and for some purposes necessary, to make a distinction between taxes paid according to whether they are paid by the ultimate payer directly to the Government or are paid by him (concealed in price or other charge) to the person who, in fact, paid the Government.

For the purposes of this essay, this distinction will be ignored. Whether the taxation is paid directly to the Government or is paid in some indirect way, it is paid all the same, and it is the effect of this payment which is the present subject of inquiry.

Finally, the effect of taxation will not be the same where the fundamental pattern set by the distribution of wealth in wages and rent is different. It will be necessary, therefore, to treat the effect of taxation where all land is enclosed, and when land is free, separately.

1.  TAXATION DRAWN FROM RENT IN THE HANDS OF THE TENANT WHERE LAND IS ALL ENCLOSED

Needless to say, taxation paid by the tenant of land on which an industrial undertaking is established will generally be paid from the rent yielded by the undertaking. If this is insufficient it may be met out of reserves or by selling up the stock, buildings and equipment of the undertaking, but such resources are plainly of limited capacity. In any event, they are themselves accumulations of wealth or claims on wealth and were originally rent or wages. Again, the tenant may earn wages himself, but where all land is enclosed, the measure of these will be small and the effect of taxation on wages remains to be considered. Apart from these incursions into reserves, capital or his own wages, the tenant's supply with which to meet the taxes drawn from his undertaking must be rent.

Now this elementary fact is the very one to be ignored in the assessment of taxes in modern states. They are levied on every conceivable assessment, no matter how difficult, problematical or expensive the assessment may be, except upon an assessment of the rent. The result is that the resulting levy bears no necessary relation to the rent to be produced on the site. As in the case of employers' contribution to national insurance, superannuation schemes and the like, they are assessed on the number of persons in the tenant's employ, regardless of the fact that rent arises from the very fact that on better land the same labour is more productive than on poorer land. They fall on the transport vehicles and services used by the undertakings regardless of the fact that these very undertakings which by reason of their situation need more transport are those which are away from the centres of communication and of high rents. Taxes are hidden in the price of raw materials and fall on every step in production irrespective of the situation or natural advantages or disadvantage of the land. They are levied on production and on the difficulties of production into the bargain, and are proportionately heavier on less productive land than on better land.

The effect of this system may be broadly illustrated by the extension of the diagram used to represent the secondary claims on rent. For the purpose of this illustration, let the increasing burden of taxation as it falls on poorer land be ignored: let it be supposed that it bears a fixed relation to total production: let it be 10%. Suppose further that each site is worked with equal skill, carries an equal burden of interest for money borrowed to stock and equip the undertaking and assume a profit margin of 10%. The result is as follows (Fig 8):-


Fig.8

This diagram shows how, as production moves on to less productive land, the fixed proportion of production taken by taxation is a growing proportion of rent. Consequently, taxation so levied depresses the proportions going both to the landlords and the local authority. Ultimately, even if the landlord and rating authority took nothing, which they would not agree to do, there is insufficient left both to pay interest and yield a profit at the least the entrepreneur will accept. Though the site, which, if fully equipped, would yield 80, that is 35 more than wages and 15 more than wages and interest, it will not be profitable to develop and use it fully.

The landlord will certainly demand something, and the rating authority will want its contribution based on what the landlord demands. Out of a total product of 80, only 7 is available for the landlord, the rating authority and the tenant's profit. The business promoter will no longer be interested. Beyond this point, businesses will be run by men who depend on their wages for their livelihood. In growing measure as the land is less productive, their businesses will be financed by their own savings.

Similarly, in growing measure, what is saved in interest by supplying the funds instead of borrowing them, will go to taxes, to the landlord and the rating authority. Where the funds available to the tenant are inadequate, as will not infrequently have been the case, equipment will be relatively poor, and the tenant will have to make good the deficiency by the added zest, drive and imagination of the man working for himself over and above that exerted by the ordinary employee. It will be work, work, work. Thus, the small independent craftsman, the small trader, the tenant farmer will cling on the edge of the profitable land, not far removed from the unemployed man, working to produce with inferior equipment that extra rent needed to pay the secondary charges on his undertaking. Every penny will count: his wife and family will be brought in to help, and his whole outlook on life is likely to be coloured to a greater or less degree by the driving necessity to produce this extra rent. Here again, is the cottager and peasant, but with this difference: he must hold his own against the gathering power of the machine.

Extend production only a little further and the position is hopeless. The site will not yield the rent needed to pay the secondary claims and it will be kept out of production. That it will produce some rent, something more than the labourer would gladly accept in wages, is of no avail if it will not yield sufficient to pay the secondary claims. Thus, taxation, assessed upon production and the processes of production, forces land and men out of production, and, where it is is honestly administered, does so with a cold and impartial efficiency. It operates, as does land speculation, to hold land out of use; it intensifies the struggle for existence, and, by this indirect means, depresses wages and inflates rent.

When times are difficult and production is depressed, it is here, at the fringe, that men first fail. Seasons of relative prosperity and rising rents are always accompanied by a rapid increase in the number of small independent businesses, which at such times can yield sufficient rent to meet secondary claims. Periods of relatively bad trade, however, eliminate them as fast. Their little savings are lost and their independence is gone.

Though taxation is a secondary claim on wealth, and therefore cannot exceed the primary claim from which it is drawn, it can and does react on the primary division of wealth and can and does affect the share taken by rent and wages.

2.  TAXATION DRAWN FROM RENT IN THE HANDS OF THE TENANT WHERE LAND IS FREE

It has just been noticed how taxation assessed upon production and the processes of production, may, by eliminating land and labour from production, intensify the struggle for existence, for access to land, and by that means may depress wages and inflate rent. The reaction of taxation on the primary avenues of distribution becomes clearer when its effect is considered where land is free.

Let the production where land is free be represented as follows (Fig 9):-


Fig.9

In these conditions wages would be 70. Now let it be supposed that taxation assessed on production and the processes of production is imposed and that it works out at 10% of production. The result would be (Fig. 10):-


Fig.10

Taxation would, in this supposed case, reduce what could be earned on the best site open to use, from 70 to 63: wages would therefore fall to 63 and rent rise by 7 on every site. Men would be willing to work anywhere for 63 and landlords and other secondary claimants would be able to demand on the better sites the amount by which the inflated rent exceeded taxation. Every increase in taxation would therefore reduce wages and increase rent.

In short, taxation imposed on production must come out of rent: it is inevitable. Increases in such taxation must inflate rent until that point is reached where the labourers will not except less. At this point, production stops or taxation gives way. Thus, suppose the least for which men are willing to work is 45 and suppose taxation rises to 50% of production, then the result would be as in Fig. 11.


Fig.11

In this illustration, taxation of itself, without any assistance from other secondary claimants or from any fall in productivity following upon the impoverishment of the workers would eliminate land from production and create unemployment. On these sites producing 80 or less, the amount left for wages after taxation is extracted is less than 45 - less than the least the labourer is willing to accept. At every step in the advance of taxation, wages would be reduced, and rent increased, until that point was reached where wages would not yield further and production is stopped.

As, therefore, taxation upon production must come out of rent, it would seem only to be a recognition of the facts to assess it upon the rent. Ignoring for the present the existence of other secondary claims upon rent, so that the operation of taxation may be observed in isolation from interacting or disturbing factors, let it be supposed that taxation rises to 100% of the rent (Fig. 12).


Fig.12

In these circumstances, taxation harmonises with the natural division of wealth into rent and wages. Though it takes the whole of rent, it does not operate to inflate the rent or reduce wages. A man can, in these circumstances, claim as much as he could earn for himself on the best land open to use. Indeed, instead of taxation levelling men down, depressing the reward for endeavour, creating or intensifying a struggle for existence, it would equate the reward of tenants for their industry to what they earned by their work, and, as has been observed elsewhere, would be recovering for public use that share of wealth which came to men because of the benefit they enjoyed from the co-operative endeavour of the community over and above what would be enjoyed by them on the best land open to use.

So far, for the purpose of observing the operation of taxation which is assessed upon production and the processes of production and payable by the tenant in occupation of the land it has been assumed that taxation was levied on the total production of each site and that it bore a constant relationship to production on each site. In practice, this impartial relationship does not exist. As was noticed at the beginning of this essay, taxation is levied on many assessments and, as between similar processes using similar materials and involving similar labour, would tend to bear more heavily on less productive than more productive land. This increasing burden means, of course, that as between such similar processes, the poor land will have to yield more in proportion to production for taxation than land yielding a higher rent, and the difficulty of producing sufficient rent on the poorer land to pay taxation and keep the land in production will be more intense than has been already observed.

Not merely, however, does taxation tend to fall most heavily on different sites which are being worked in the same way, but it varies between different ways of using the same sites.

Some materials will be loaded with more taxes than others, some equipment more than others, some processes more than others. Between two ways of working which are equally productive a tenant will be influenced to use one which carries less taxation. Moreover, between two methods of working, one of which is better than the other, but is also so much more heavily taxed as to deprive a tenant of any advantage from using it other than the satisfaction of doing a better job, he will be influenced to use the inferior method. Indeed, if the added taxation attached to the superior method not merely eliminates the tenant's advantage from using it, but turns its use into a positive disadvantage, he may be obliged to abandon it; for if the improved rent to be obtained from the better working of the site is not sufficient after paying taxation to meet the other charges on the rent, he will change his methods or fail.

Again, taxation, which differentiates by the method of its assessment between one commodity and another, one process and another, may affect the nature of the business carried on on the land. Some industries inevitably carry much more taxation than others: in England the beer, whisky and tobacco industries are outstanding examples. Between two undertakings of equal productivity on any one site, and which produce therefore the same rent, a tenant engaged in the heavily taxed industry may find that the rent is insufficient to carry the taxation levied upon it and as a result his industry will be supplanted by the other. Similarly, a more heavily taxed but more productive industry may well be ousted by a less productive industry which produces less in rent, because even the greater rent will not produce enough to meet the heavier taxation.

This result of discriminatory taxation will inevitably be reinforced by the landlord's claim. As between two tenants, the one who pays the landlord more is more likely to obtain the land. The amount of rent taken in taxation will reduce the amount left for the landlord. To gain access to a site, therefore, a tenant whose undertaking is subject to heavier taxes than others will need to produce more rent than the others on the same site if he is firstly to pay taxation, secondly to pay as much to the landlord as the others could pay, and thirdly, be left with a profit for himself. The pressure of the landlord's claim tending as it constantly does to press towards the most a tenant is able to pay, accentuates the effect of taxation which falls more heavily on one undertaking than another. Equally, it aggravates the effect of taxation in diverting the way of working an undertaking from one which is more heavily taxed to one which is less heavily taxed.

To sum this up: to make it practical business to use a site in the most productive way for the most productive undertaking, the rent produced by the undertaking must be sufficient at least to pay taxation on production, and to pay the landlord's claim (which normally will not be less than that which a less productive undertaking or a less productive method of working would pay). If the undertaking is to be organised by an entrepreneur it must also yield the least in profit for the tenant which he is willing to accept.

3.  TAXATION ON PRODUCTION

Fully to appreciate the effect of taxation levied on production it is necessary to carry the observations made so far one step further and consider how taxation comes to be levied at all. A good illustration of this is supplied by the system of local rates in England. As has been noticed earlier in these essays, the local rates are levied upon an assessment of what the landlord obtains, or could obtain if there were one, from the site. This would certainly appear to be a tax deliberately levied upon part of the rent of the land, and this doubtless was the intention of those who originally imposed it. On a closer observation of its operation, however, the assessment for rates operates to inflate rent in much the same way as taxation levied on production and the processes of production.

For the purposes of the assessment for rating, the valuation of the landlord's claim is based on an assumption; it is assumed that the landlord's claim is limited to what he could obtain from the land, as it is in fact being used at the time of the assessment.

The result of this assumption is that if land is not being used at all, even though it is highly valuable and could easily fetch a very high sum for the landlord on the market, it is assessed at nothing at all and pays no rates. Thus, a site or a block of buildings in the centre of a great city, which is unused, pays no rates. At the other extreme, land which is fully developed and used to the limit of its capacity is assessed for the rates on what the landlord could obtain from its full development and use. At every stage, from complete idleness to full development and use (and the stages are legion) the assessment increases. Thus, adding another storey to a building, or installing running water, or central heating, adds to the assessent.

It is plain therefore that every improvement made in or upon land so that it may be used more fully and more productively, carries an additional burden of rates. The result is as though, with every improvement of the use of his site, the tenant had to pay more to the landlord. Before embarking on any improvement a tenant has to take into account not merely the taxation on the improvements he introduces, but the increased burden of rates which the improvement will have to carry. He will have to calculate whether or not the increase in the rent which his site will produce as a result of the improvements in its use will be sufficient to meet the claims of taxation and rates which will fall upon him. Needless to say, the burden thus imposed will discourage development and in some cases may well prohibit it.

That is one side of the picture. The other side, however, is significant. The man who withholds land from use, whether from mere neglect, for sport, for speculative purposes, or to sustain a monopoly, may rest assured that the site will escape rates and taxation. His action may condemn men to unemployment, may reduce the share of wealth taken in wages, may assist the onset of industrial depression, but he will be free of any obligation to the community in the matter. Similarly, this land may be poorly or inadequately developed, may even be a slum, or a sweat shop, but he may be assured that the rates and taxes levvied on the use to which the site is put will be correspondingly low, and will leave him with the best income the site will produce for him in its then condition. Thus assured, he may wait until such time as some enterprising tenant or some public authority sweeps away the clutter on his land and develops it for him. He will then, of course, reap the benefit of his abstinence in price or compensation.

4.  TAXATION DRAWN FROM WAGES

Taxation drawn from wages will obviously reduce the benefit which the labourer receives from his work. To illustrate the effect of this, however, it will be simplest to use the diagram which has been used before, to assume that land is free and any man who so wishes may easily acquire a piece for himself and that wages are determined by what the labourer could earn as his own master on the best land open to use. Let it be supposed that wages are determined by a productivity of 80, and that the least for which the labourers are willing to work is 45. In these circumstances let it further be assumed that the Government imposes a 50% tax on wages. If the matter rested there, the result would be as follows (Fig. 13):


Fig.13

With wages at 80 and taxation taking 40, the labourer would be left with 40, which would be less than he would be willing to accept for his work. Plainly in these circumstances, in order to have 45 for himself, he would demand 90, 10 more than the best site open to use would produce. This would mean, of course, that the sites producing 80 or less could not be worked at all. The result would be exactly the same as if all land had been enclosed and the sites producing 80 or less were not available.

The result of this may be regarded either as a rise in wages to 90 and a corresponding fall in rent to 60, 50, 40 and so on. Or it may be regarded as an increase in rent to 105, 95, 85 and so on, and a corresponding fall in wages to 45. Whichever way it is regarded, the result is precisely the same as it would have been had the demands of rent been forced up to all that was left after the labourer had received the least for which he was willing to work. In short, taxation drawn from wages operates in the same way as increases in rent and may be regarded as such. The result may be represented as in Fig. 14.


Fig.14

To sum all this up, taxation must come out of rent. If the rent is insufficient to pay taxes, either rent must increase or the undertaking fail. Rents can only advance beyond their natural level at the expense of wages. Therefore, taxation, which cannot be paid out of rent at its natural level, inflates rent and reduces wages.

This relationship, however, is hidden and not immediately to be seen. Taxation cannot force rent above that point where it will leave less for the labourer than the labourer is willing to accept. At that point further incursions by taxation must either be borne by the other claimants on the rent, or the industry must fail. This hard fact divides people into two parties about taxation: those who regard industry from the point of view of the rent receivers, the landowners, moneylenders, entrepreneurs and the like, who see taxation clearly as a force which reduces their income and shuts down industry and who therefore oppose it on principle, and those who regard taxation from the point of view of wages. To them, however high taxation rises, it does not make much difference in its immediate impact, for they still work for the least they are willing to accept. The other man pays the taxes, and, on the whole, they approve.

Unhappily they do not see the indirect results of taxation which by inflating rent and driving land out of production intensifies the struggle for work and effectively reduces wages. What they do see is that when taxation is handed back to them in health services, family allowances and the like they are recovering part of the rent, part of what the other man obtains and that if taxation is eased, the immediate result is that the claimants on rent get more than they did before. This deep division of interest explains much in modern politics.

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