The Shifting and Incidence of Taxation
by Edwin R. A. Seligman (1899)

Read the book as pdf:
Part 1, Book 1: The early Theories
Part 1, Book 2: The modern Theories
Part 2; The Doctrine of Incidence

INTRODUCTION

The problem of the incidence of taxation is one of the most neglected, as it is one of the most complicated, subjects in economic science. It has indeed been treated by many writers; but its discussion in scientific literature, as well as in everyday life, has frequently been marked by what Parieu calls the “simplicity of ignorance.” Yet no topic in public finance is more important; for, in every system of taxation, the cardinal point is its influence on the community. Without a correct analysis of the incidence of a tax, no proper opinion can be formed as to its actual effect or its justice. It is, therefore, time for an attempt to be made not only to pass in review the theories hitherto advanced, but to contribute to the solution of some of the theoretic problems while paying special attention to the practical aspects of the discussion.

A word first as to the terminology. In the process of taxing, we must distinguish three conceptions. First, a tax may be imposed on some person; secondly, it may be transferred by him to a second person; thirdly, it may be ultimately borne by this second person or transferred to others by whom it is finally assumed. Thus the person who originally pays the tax may not be the one who bears its burden in last instance. The process of the transfer of a tax is known as the shifting of the tax, while the settlement of the burden on the ultimate taxpayer is called the incidence of the tax. The incidence of the tax is therefore the result of the shifting, and the real economic problem lies in the nature of the shiftings.

The English language is unfortunately deficient in its nomenclature. While incidence conveys to the mind the notion of the ultimate result of the shifting, we have no word to express the immediate result of the original imposition of the tax. “Assessment” of the tax looks upon the process from above downward; but we lack a term to characterize the process as seen from below upward. The French and the Italians have the words percussion, percussione, to express this idea of the primary result of the assessment. They, therefore, logically term the shifting of the tax the repercussion[1] of taxation, the ultimate result of which is the incidence (incidence, incidenza). But, in using English, we must content ourselves with the awkward term “original incidence,” while “incidence,” when used alone, technically means the ultimate incidence, or the result of the intermediate process. But the incidence—the result—must never be confounded, as is often the case, with the shifting—the process.

The shifting of a tax, moreover, must not be confused with what is known as the evasion of a tax or escape from a tax. Shifting is the non-payment of a tax through a transfer of the burden to some one else; evasion is the non-payment of a tax without any transfer. A tax may be thrown off entirely without being shifted to any one. Evasion may be either legitimate or illegitimate, conscious or unconscious. For instance, through smuggling we have an illegitimate evasion, but no shifting of the tax. On the other hand, when a new tax stimulates the improvement of processes of production,—as, for example, the beet-sugar tax in Europe or the whiskey tax in America at one time,—the producer evades the tax to a certain extent, but does not shift it. This is legitimate evasion. Finally, when there is capitalization of incidence,—a process to be fully explained later, whose main feature is the fact that under certain circumstances the purchaser of a taxable object, by cutting down the purchase price, discounts the tax which he will have to pay, —there is practically an evasion of taxation, but no shifting. In this case the evasion is unconscious; in both the preceding cases the evasion was the result of a conscious effort. The distinction between evasion and shifting has puzzled many writers. We shall have occasion to revert to it constantly.

The Germans have devised a very elaborate nomenclature to distinguish the various kinds of shifting; for example, to indicate whether a tax is shifted forward from the producer to the consumer, or back from the consumer to the producer, or farther on from one consumer to another.[2] Such nomenclature is impossible in English. Moreover, not only is it of little importance, but scarcely any two writers use the terms in precisely the same way. Above all, the rather fine distinctions have served merely to bring about a confusion between evasion and shifting.

Another fertile source of error is the distinction between the shifting of a tax and the incidental burden which may rest on the shifter. When we consider, for instance, the shifting of a tax as between buyer and seller, or between producer and consumer, the question that concerns us is: Will the price of the article be raised by the imposition of the tax. If the price is raised, we say that the tax is to that extent shifted. But even a complete shifting of the tax does not necessarily mean an entire absence of loss to the seller. Thus, it usually happens that an increase of the price of a commodity leads to a decrease in sales; and it may happen that these decreased sales, even at higher prices, may yield less total profits than before. In such a case, not only does the buyer pay the tax, but the seller also suffers a loss, even though the tax has been shifted completely. The study of shifting, it is evident, concerns itself primarily with the extent to which a given tax, received by the government, is divided between the parties in question. It does not seek to exhaust the problem of the incidental or additional burdens which may result from the tax.

Finally, we must not confound the incidence with the effect of taxation. A tax may have a great many effects. It may diminish industry and impoverish individuals; it may stimulate production and enrich individuals; it may be an unmitigated curse to society; it may be a necessary evil; it may be an unqualified boon to the community regarded as a whole. With none of these problems does the student of incidence busy himself. All that he has to investigate is the question: On whom does the tax ultimately fall? When we once know this, we can then proceed to the further discussion of the effects produced by the pressure of taxation on the various classes or individuals. The shifting is the process; the incidence is the result; the changes in the distribution of wealth are the effect.

The discussion of incidence thus depends entirely on the investigation of the shifting of taxation. The real problem before us is to ascertain the conditions according to which a tax is shifted onward, backward, or not at all. Only when we understand whither, why, and how a tax is shifted, can we discover its actual incidence. In the following pages an attempt will be made to attack the problem by first giving a detailed critical history of the doctrine, and then taking up the positive theory itself. In the second part it will be convenient to begin with a statement of some general principles, to follow this with a consideration of the chief separate taxes, one by one, and to close by drawing the general conclusions applicable to the science of public finance.

PART I
THE HISTORY OF THE DOCTRINE
OF INCIDENCE

GENERAL SURVEY

The writers on the shifting and incidence of taxation, like those on almost all other economic topics, may be broadly divided into two classes, marked off from each other by the period in which the theory of distribution was formulated by the Physiocrats and Adam Smith. The doctrine enunciated by the first class of writers—almost exclusively English—may be summed up under the head of “The Early Theories.”

The English literature on taxation, prior to Adam Smith, begins at about the middle of the seventeenth century. For somewhat more than a hundred years, the theories on the incidence of taxation are found, with a few important exceptions, in occasional pamphlets written to advocate or to oppose practical measures of reform. It was not until a few decades before Adam Smith that a consideration of the general theory of incidence assumed a more prominent place in the treatises on economic topics. The propositions of the statesmen as well as of the pamphleteers of the earlier period rest, however, on more or less definite theories of incidence.

1 The only works which contain a history of the theory of incidence are the German works of J. Kaizl, Die Lehre von der Ueberwälzung der Steuertt, 1882, and G. v. Falck, Kritische Ruckblicke auf die Entwickelung der Lehre von der Steuerüberwalzung seit Adam Smithy 1882. Both these works deal only with the modern theories, and even for this period they are inadequate. Whole classes of authors are omitted, among them some important ones. Each work is chronological, and makes little attempt to analyze the theories according to schools. Falck is richer in the account of the early German writers. Kaizl is better acquainted with several of the French authors, although he omits some of the most noteworthy. Both neglect the English authors, with the exception of Smith, Ricardo and Mill, and ignore the Continental and American writers. Falck is almost without any positive ideas at all, while Kaizl adheres so closely to one or two German predecessors that his own constructive work is slight. Both books are, however, to be recommended as the only ones that we possess on the subject. The abler work, originally written as a doctor’s dissertation, is that of Dr. Kaizl, who has since then attained a prominent position as professor in the University of Prague, and as author of numerous economic treatises in Bohemian, and who now (1898) occupies the post of Minister of Finance in the Austro-Hungarian monarchy.

It may conduce to clearness to classify these pioneers according to their practical inferences from the doctrine of incidence. From this point of view, the writers before Adam Smith may be divided into six categories, as follows:—

1. Those who discuss the general excise.
2. Those who favor a single tax on luxuries.
3. Those who favor a single tax on houses.
4. Those who favor a general property tax.
5. Those who favor a single tax on land.
6. Those who favor a more eclectic system.

This whole field of economic inquiry has thus far been so little cultivated, and many of the works referred to are now so rare that it may be wise to treat this section of the history more fully than would otherwise be permissible in a work which pretends to give only a general sketch of the historical development of the doctrine of incidence.

The views developed in the period subsequent to the Physiocrats and Adam Smith, which will be discussed in Book II. under the title of “The Modern Doctrines,” are somewhat more difficult to subdivide with accuracy; for it is not always easy to draw the line sharply between writers many of whom have much in common. Nevertheless, their theories of the incidence of taxation may be conveniently classified as follows:—

1. The Physiocratic theory.
2. The Absolute theory.
3. The Diffusion theory.
   • The Optimistic theory.
   • The Pessimistic theory.
4. The Capitalization theory.
5. The Eclectic theory.
6. The Agnostic theory.
7. The Socialistic theory.
8. The Quantitative or Mathematical theory.

The word “single” is not here used in opposition to “double.” The phrase denotes a general tax on luxuries as the exclusive tax.

BOOK I: The early Theories

Chapter I:  Those who discuss the General Excise

By the term “excise” is meant a tax on commodities, levied on the producer or the domestic dealer. It is distinct from customs duties which are levied on the importer; although, after commodities have once been imported, an internal duty or excise may also be levied on them. These internal taxes or excises are popularly supposed to be shifted to the consumer and, accordingly, while they are imposed in first instance on the producer or dealer they are commonly classed as indirect taxes on consumption. The English publicists, however, were by no means unanimous in accepting this popular view. We may, in fact, distinguish no less than four different theories as to the incidence of the excise. These theories are:—

1. That, while the excise is at first shifted from the dealers to the consumers, it will not finally rest on the poor consumers.
2. That the excise will rest on consumers in general.
3. That the excise will be shifted to the landowners.
4. That the excise will finally rest on the dealers or traders.

The earliest writers to propose a system of excises did not look much farther than the surface fact that the excise was a tax on a consumable commodity, and therefore presumably a tax on consumption. Their ideal was a tax on expenditure, and this ideal, in their opinion, could be most easily attained by a general excise. Although this project was a favorite one with many of the early authors, it gradually met with opponents as well as with adherents until, under Walpole, it became, in the second quarter of the eighteenth century, the subject of a fierce controversy.[3]

The first English writer to posit expenditure as the basis of taxation was Hobbes, in a work written shortly after the imposition of the first excise in 1643. Hobbes, like many of the later continental tax reformers, held a tax on expense to be a logical corollary of the doctrines of equality and universality of taxation. To tax property, he thought, would be to discourage thrift and to put a premium on extravagance; while, since everybody consumes something, a tax on expense cannot possibly be evaded like so many of the other taxes.[4] The scheme of the excise itself was soon adopted by several writers. Thus Cradock states that “the General Excise (so much decryed and Petitioned against) in its proper Constitution, is the most equitable of Impossitions: no man being charged with it, but he that sels it for profit, to the consumption of the Commodity, who in truth pays it insensibly without Complaint.”[5] Another writer in speaking of the Dutch excise regards it as “certainly the most equal and indifferent tax in the world, and least prejudicial to any people.”[6] So familiar indeed did the system become that Culpeper was able to state: “It hath alwayes been a received Maxim, That our meer Consumption can scarce be too heavily excised.”[7] And in another passage he remarks that: “Domestick Excise in a thriving State hath no fellow, it carries no Compost from the Soyl, and even the Labourer pays it cheerfully when work is quick.”[8]

The excise, however, did not exist long before the pamphleteers began to have more decided views as to its incidence. Thus began the differences of opinion, which we shall now proceed to explain.

1. The Excise does not rest on the Poor Consumers

The first economist to express any decided opinion on the incidence of the excise was the famous advocate of the Mercantilist theories, Thomas Mun. He discusses the tax systems of Italy and Holland, and finds their essence to consist in “a custom on all new wares transported, customs upon every alienation or sale of live Cattel, Lands, Houses, and the portions or marriage mony of women, license mony upon all Victualling houses and Innkeepers, head money, Custom upon all the Corn, Wine, Oyl, Salt and the like, which grow and are consumed in their own dominions.” Now all these seem to be “a rabble of oppression to make the people poor and miserable.”[9] But Mun declares this to be a mistake. For in proportion as the necessaries of life increase in price, the rate of wages must rise also. In the long run, therefore, the taxes on the poor will be shifted to the employers, and through them to the rich consumers of manufactured articles.[10] This is a good thing, because the rich will thus be “forced to abate their sinful excess and idle retainers.”[11] Mun’s idea, it is plain, is that taxes on consumption are to be commended because they will be shifted to the employing producer; or, at all events, that they must not be regarded as falling on the consumption of the mass of the community.

Other writers furthered the doctrine that the excise did not rest on the mass of consumers by advocating the wider theory that taxes in general are really no burden. Thus, Waterhouse maintained that “money raised upon the poorer sort, returns to them again” in the shape of increased employment or higher wages, and that a tax must be looked upon as a loan, the proceeds of which soon come back to the taxpayers.[12] Another writer laid down the proposition that “Impositions upon a People make them thrive,”[13] and that “Taxes are no Charge either to the Kingdom in general, or to particular Persons; but on the contrary a Gain to all.”[14] His chief arguments to prove this assertion are, first, that since taxes are employed on court or for war they make money circulate, and, secondly, that “the poor are employed by Taxes, and are by that means taken off from being a Charge to the Kingdom.”[15] The author goes even farther than Waterhouse; for while the latter contented himself with calling taxes a species of loan, the former maintains that they ought properly to be regarded as the poor man’s bank, which supports him in distress.[16] Of all taxes, none appears to him so good as the excise, “which indeed seems of all Taxes the most equal: for that no man by it can be said to be oppressed, he being his own Assessor, and pays but what he pleases, according to his Expence.”[17]

Another anonymous pamphleteer of the same period agrees that “Excises are the most equal and less grievous Tax of all others,” and believes that a moderate tax will not be felt to such an extent as to hinder consumption at all.”[18] Who would ever use the less Sugar, if one peny Excise were paid out of twelve peniworth? Who would use the fewer Ribbons, for 2d. Excise upon every 12d.? Who would play the less at Cards or Dice, if 3d. were paid out of 12d.? What Lady would ever forbear to wear Pearls or Diamonds, or to buy Fans and Looking-Glasses, if 4d. were laid upon every 12d.” Our author’s confidence in the harmlessness of a tax amounting to one-third of the value of a commodity would, perhaps, not be shared by many of the present day.

These views of Mun and his successors as to the virtual immunity of the mass of consumers from the weight of taxation did not, however, make much headway. During the following decades the opinion, to be discussed in the next section, that the excise was a real burden on the poorer consumers, gradually gained ground. But toward the middle of the eighteenth century, isolated writers reverted to the theory of Mun. Of these, none is more remarkable than Fauquier. He gives a most lucid and vigorous argument, designed to show that a tax on the workingman, whether a direct tax on wages or an excise on the necessaries of life, will inevitably be shifted from his shoulders. Fauquier puts his general principle as follows: “The Poor do not, never have, nor ever possibly can, pay any Tax whatever. A man that has nothing can pay nothing.”[19] He proceeds on the assumption that wages are always at the bare minimum of subsistence. If the laborer, therefore, can no longer live on his usual income, whether this condition be due to an increase in the price of necessaries or to a forcible diminution of his wages through a tax, his nominal wages must rise in proportion.[20] In fact, Fauquier believes that in many cases his wages will rise more than in proportion to the tax. But this he does not attempt to prove. He does, indeed, try to show that when a tax is imposed on the producer or the seller of commodities, a sum over and above the tax will be shifted to the purchaser.[21] But even if this conclusion were valid as to profits, the reasoning would not be applicable to wages. However this may be, Fauquier is quite positive that taxes rest only on the rich consumer, “that is, the Man of Fortune who lives on his Income.” And this is true, “even in those Taxes which are said mostly to affect the Poor, and which they seem, at first Sight, to pay out of their own Pockets.”[22]

Fauquier, indeed, differed from Mun in his practical conclusions. For while Mun advocated the general excise, Fauquier opposed it on the ground that the same result—that of taxing expense—might be more conveniently attained in another way.[23] The point of interest to us here, however, is that both writers agreed in the belief that an excise would not rest on the poor consumer, but would be shifted to the employer, and that if we can speak of an excise resting at all on the consumer, it is the rich consumer that is meant. This doctrine was later accepted by Sir James Steuart[24] and became a part of the classical doctrine, as elaborated by Adam Smith and Ricardo.

2. The Excise rests on Consumers in General

Here comes
– Chapter V: Those in favor of Single Tax on Land

Read Part I, Book 1 as pdf here.

Footnotes:

[1] They also use the words translation, traslazione, which are the same as our “transference” or shifting. The French also speak of taxes being “rejetes,” our “thrown off” or “shifted.”

[2] The German terms are Abwälzung, Fortwälzung, Ruckwälzung, Weiterwälzung, and the general term Ueberwälzung. Their Abwälzung is nothing but our “evasion,” and is not a form of shifting at all. Some writers, however, —Roscher, for example, —use “Abwälzung” to denote shifting in general. There is no uniformity in the usage.

[3] “Those who care to go into the literary history of the controversy over the famous ” excise-scheme,” which was in reality no scheme for a general excise at all, are referred to the monographs of Leser, Ein Accisestreit in Englandy Heidelberg, 1875, ^^’^ ¬∞f Ricca-Salerno, Le dottrine finanziarie in Inghilterra tra la fine del secolo XVII e la prima nieta del XVIII, Bologna, i888. A list of additional contemporary pamphlets may be found in the bibliography printed by Sinclair, History of the Public Revenue of the British Empire, 3d ed., 1804, vol. iii, appendix, pp. 94-136. Many of the monographs discussed by Leser and Ricca-Salerno do not dwell on the question of incidence. So far as they do discuss the subject, they, as well as other works of the same period not mentioned by the German and Italian writers, will be considered in the following pages.

[4] “The Equality of Imposition consisteth rather in the Equality of that which is consumed, than of the riches of the persons that consume the same. For what reason is there, that he which laboureth much, and sparing the fruits of his labour, consumeth little, should be more charged, then he that living idlely, getteth little, and spendeth all he gets; seeing the one hath no more protection from the Common-wealth then the other ? But when the Impositions are layd upon those things which men consume, every man payeth Equally for what he useth: Nor is the Common-wealth defrauded, by the luxurious waste of private men.”—Leviathan, or the Mattir, Forme, and Pozver of a Common-wealth Ecclesiasticall and Civill. By Thomas Hobbes of Malmesbury, London, 1651, chap. 30, part 2, p. 181 (reprint of iSSi, p. 270). For a fuller statement of the benefit theory of taxation on which this passage is based, see Seligman, Progressive Taxation in Theory and Practice, 1894, pp. 87, 88.

[5] An Expedient for Regulating the Customes and Excise. Approved by divers well affected Alarchants, and others of the Citty of London. By Francis Cradock. Marchant. London, 1659, p. 1.

[6] England’s Interest Asserted in the Improvement of its Native Commodities; and more especially the Manufacture of Wool. By a true Lover of his Majesty and Native Country. London, 1669, p. 33.

[7] A Discourse shewing the many Advantages which will accrue to this Kingdom by the abatement of US UR Y, together with the Absolute necessity of Reducing Interest of MONE Y to the lowest rate it bears in other Countreys, That, at least, we may Trade with our Neighbours upon Equal Termes. Humbly presented to the High Court of Parliament now Sitting. By Sir Tho. Culpeper, jun. Kt. London, 1668, p. 3. The title of the work explains why Culpeper follows up the passage in the text by the admonition: “Then tax Usury, there is no Consumption like it; Excise the Excise-man, for Usury is the grand Excise upon our Land and Trade.”

[8] Ibid., p. 2. Culpeper is opposed to any further taxation of land, and expresses himself vigorously as follows:—

“Can the Land bear it? Surely No, if it be not limited to the present distress, and sweetened with some Recompense: Alas! Land is at its last Gasp, and ready to give up the Ghost, without a powerful Cordial: Most Parishes can already present some Farms wholly deserted, Neither Tenant being willing to hire, nor Owner able to stock them; Many stocked but two halfs, most to loss: Besides, Land is like the heart, from which all the other Members must receive their Life and Vigour; Great reason therefore have we to cherish our Land, unless we will reduce our selves to the state of a meer Colony; which would manifestly end in our Desolation and Conquest.”

[9] England’s Treasure by Forraign Trade, or, the Ballance of our Forraign Trade is the Rule of our Treasure. By Thomas Mun. 1664, chap. xvi.: “How the revenues and incomes of princes may justly be raised,” pp. 151, 152.

[10] “Neither are these heavy Contributions so hurtfull to the happiness of the people, as they are commonly esteemed: for as the food and rayment of the poor is made dear by Excise, so doth the price of their labour rise in proportion; whereby the burden (if any be) is still upon the rich, who are either idle, or at least work not in this kind, yet have they the use and are the great consumers of the poors labour.”—Ibid., p. 154 (p. 89 of the reprint of 1895 in Ashley’s Series of Economic Classics’).

[11] Ibid., p. 155.

[12] “What money the people bestow upon his Majesty in Leavies and assessments, his Majesty returns to his people in wages, pay, exchange and Merchandize, what he receives for his care, he payeth them for their Labour; what is paid to his Exchequer is returned to their Markets: there is a circle in the veine of Gold and Silver as in that of blood. … This money is not lost, but lent. … What the Gentry take from you with one hand, they give you with another; what their power ruling over you calls for in contribution, their goodness in employing you bestows upon you in wages.”—One Tale is good, until another is told, or, Some sober Reflections upon the Act for Chimney-Money. Drawn up for the Use of some Neighbors, and thought usefull to be communicated to the good people of this NATION. By William Waterhouse, Esq., London, 1662, pp. 29, 30.

[13] Taxes no Charge: in a Letter from a Gentleman, to a Person of Qualitye Shewing the Nature, Use, and Benefit of Taxes in this Kingdom; and compared with the Impositions of Foreign States, London, 1690, p. 5.

[14] Ibid., p. 9.

[15] Ibid., p. 13. Additional reasons are that “the worst members in the Commonwealth (viz.) the Extravagant and Debauch’d” really pay the taxes, and that so far as taxes consist of customs duties, they “Keep out a Destructive Trade.”

[16] ” ‘Tis a vulgar error to believe that Taxes, even to the meanest Man is a Charge, for that his Mite is with increase return’d by the expence of that which would never have seen day, but by the force of a Law; so that publick Taxes, expended in our own Country, may be accounted the poor and the Mechanick’s bank, by which they are employed, and maintained.”—Ibid., pp. 17, 18.

[17] Taxes no Charge, p. 25. Although the author opposes the benevolences, monopolies, alterations of money and taxes on polls, offices and travellers, he suggests a supplement to the general excise through taxes on Jews, playhouses and “the Vermin of the Nation, lewd Persons of both Sexes.” It is no wonder that he confesses in another place: “thus I have huddl’d together a mixt Discourse.”—Ibid., p. 19.

[18] A familiar Discourse between George, a true-hearted English Gentleman, and Hans, a Dutch Merchant: Concerning the present Affairs of England. London, 1672, pp. 37, 38.

[19] An Essay on Ways and Means for raising Money for the Support of the Present War, without increasing the Public Debts. By F. F. (Fauquier), London, 1756, p. 17. “This is universally true in all Countries,” he adds, “at all Times, and equally so, whether Provisions are dear or cheap. I have heard, that in India a man can live for one Penny a Day; this then will be nearly the Price of Labour in that Country.”

[20] “If by Taxes, or Dearth, or any other Cause, the common Necessaries of Life become so dear, that a Labourer cannot live at the usual Wages; the Price of Labour must, and in Fact actually does, rise in Proportion thereto at least, generally much more.”—Ibid., p. i8. “If Taxes are laid on Labour meerly, or on such Articles as the meanest Labourer must want and use, he will still live, and his Wages must be raised.”—Ibid., p. 20.

[21] “If [taxes are laid] on the Manufacturers, or Venders of Goods, they will raise the Prices of the Commodities they respectively deal in, sufficient not only to pay the Tax, but to make them full amends for the Money they disburse for the Payment of it, and then always make a third Addition to bring the Price to a round or even Sum. So that the whole Tax, and much more, is ultimately paid by the Consumer.”—Ibid., pp. 19, 20.

[22] bid., p. 20. c

[23] See below, p. 62.

[24] See below, p. 88.

[25] A Treatise of Taxes and Contributions. [By William Petty.] London, 1667.

[26] Ibid., p. 20.