The Principles of Political Economy
by John Stuart Mill

Book 5

Chapter 4

Of Taxes on Commodities

    1. By taxes on commodities are commonly meant, those which
are levied either on the producers, or on the carriers or dealers
who intervene between them and the final purchasers for
consumption. Taxes imposed directly on the consumers of
particular commodities, such as a house-tax, or the tax in this
country on horses and carriages, might be called taxes on
commodities, but are not; the phrase being, by custom, confined
to indirect taxes those which are advanced by one person, to be,
as is expected and intended, reimbursed by another. Taxes on
commodities are either on production within the country, or on
importation into it, or on conveyance or sale within it; and are
classed respectively as excise, customs, or tolls and transit
duties. To whichever class they belong, and at whatever stage in
the progress of the community they may be imposed, they are
equivalent to an increase of the cost of production; using that
term in its most enlarged sense, which includes the cost of
transport and distribution, or, in common phrase, of bringing the
commodity to market. 
    When the cost of production is increased artificially by a
tax, the effect is the same as when it is increased by natural
causes. If only one or a few commodities are affected, their
value and price rise, so as to compensate the producer or dealer
for the peculiar burthen; but if there were a tax on all
commodities, exactly proportioned to their value, no such
compensation would be obtained: there would neither be a general
rise of values, which is an absurdity, nor of prices, which
depend on causes entirely different. There would, however, as Mr
M'Culloch has pointed out, be a disturbance of values, some
falling, others rising, owing to a circumstance, the effect of
which on values and prices we formerly discussed; the different
durability of the capital employed in different occupations. The
gross produce of industry consists of two parts; one portion
serving to replace the capital consumed, while the other portion
is profit. Now equal capitals in two branches of production must
have equal expectations of profit; but if a greater portion of
the one than of the other is fixed capital, or if that fixed
capital is more durable, there will be a less consumption of
capital in the year, and less will be required to replace it, so
that the profit, if absolutely the same, will form a greater
proportion of the annual returns. To derive from a capital of
1000 l. a profit of 100 l., the one producer may have to sell
produce to the value of 1100 l., the other only to the value of
500 l. If on these two branches of industry a tax be imposed of
five per cent ad valorem, the last will be charged only with 25
l., the first with 55 l.; leaving to the one 75 l. profit, to the
other only 45 l. To equalize, therefore, their expectation of
profit, the one commodity must rise in price, or the other must
fall, or both: commodities made chiefly by immediate labour must
rise in value, as compared with those which are chiefly made by
machinery. It is unnecessary to prosecute this branch of the
inquiry any further. 

    2. A tax on any one commodity, whether laid on its
production, its importation, its carriage from place to place, or
its sale, and whether the tax be a fixed sum of money for a given
quantity of the commodity, or an ad valorem duty, will, as a
general rule, raise the value and price of the commodity by at
least the amount of the tax. There are few cases in which it does
not raise them by more than that amount. In the first place,
there are few taxes on production on account of which it is not
found or deemed necessary to impose restrictive regulations on
the manufacturers or dealers, in order to check evasions of the
tax. These regulations are always sources of trouble and
annoyance, and generally of expense, for all of which, being
peculiar disadvantages, the producers or dealers must have
compensation in the price of their commodity. These restrictions
also frequently interfere with the processes of manufacture,
requiring the producer to carry on his operations in the way most
convenient to the revenue, though not the cheapest, or most
efficient for purposes of production. Any regulations whatever,
enforced by law, make it difficult for the producer to adopt new
and improved processes. Further, the necessity of advancing the
tax obliges producers and dealers to carry on their business with
larger capitals than would otherwise be necessary, on the whole
of which they must receive the ordinary rate of profit, though a
part only is employed in defraying the real expenses of
production or importation. The price of the article must be such
as to afford a profit on more than its natural value, instead of
a profit on only its natural value. A part of the capital of the
country, in short, is not employed in production, but in advances
to the state, repaid in the price of goods; and the consumers
must give an indemnity to the sellers, equal to the profit which
they could have made on the same capital if really employed in
production.(1*) Neither ought it to be forgotten, that whatever
renders a larger capital necessary in any trade or business,
limits the competition in that business; and by giving something
like a monopoly to a few dealers, may enable them either to keep
up the price beyond what would afford the ordinary rate of
profit, or to obtain the ordinary rate of profit with a less
degree of exertion for improving and cheapening their commodity.
In these several modes, taxes on commodities often cost to the
consumer, through the increased price of the article, much more
than they bring into the treasury of the state. There is still
another consideration. The higher price necessitated by the tax,
almost always checks the demand for the commodity; and since
there are many improvements in production which, to make them
practicable, require a certain extent of demand, such
improvements are obstructed, and many of them prevented
altogether. It is a well.known fact that the branches of
production in which fewest improvements are made, are those with
which the revenue officer interferes; and that nothing, in
general, gives a greater impulse to improvements in the
production of a commodity, than taking off a tax which narrowed
the market for it.

    3. Such are the effects of taxes on commodities, considered
generally;. but as there are some commodities (those composing
the necessaries of the labourer) of which the values have an
influence on the distribution of wealth among different classes
of the community, it is requisite to trace the effects of taxes
on those particular articles somewhat farther. If a tax be laid,
say on corn, and the price rises in proportion to the tax, the
rise of price may operate in two ways. First: it may lower the
condition of the labouring classes; temporarily indeed it can
scarcely fail to do so. If it diminishes their consumption of the
produce of the earth, or makes them resort to a food which the
soil produces more abundantly, and therefore more cheaply, it to
that extent contributes to throw back agriculture upon more
fertile lands or less costly processes, and to lower the value
and price of corn; which therefore ultimately settles at a price,
increased not by the whole amount of the tax, but by only a part
of its amount. Secondly, however, it may happen that the dearness
of the taxed food does not lower the habitual standard of the
labourer's requirements, but that wages, on the contrary, through
an action on population, rise, in a shorter or longer period, so
as to compensate the labourers for their portion of the tax; the
compensation being of course at the expense of profits. Taxes on
necessaries must thus have one of two effects. Either they lower
the condition of the labouring classes; or they exact from the
owners of capital, in addition to the amount due to the state on
their own necessaries, the amount due on those consumed by the
labourers. In the last case, the tax on necessaries, like a tax
on wages, is equivalent to a peculiar tax on profits; which is,
like all other partial taxation, unjust, and is specially
prejudicial to the increase of the national wealth. 
    It remains to speak of the effect on rent. Assuming (what is
usually the fact,) that the consumption of food is not
diminished, the same cultivation as before will be necessary to
supply the wants of the community; the margin of cultivation, to
use Dr Chalmers, expression, remains where it was; and the same
land or capital which, as the least productive, already regulated
the value and price of the whole produce, will continue to
regulate them. The effect which a tax on agricultural produce
will have on rent, depends on its affecting or not affecting the
difference between the return to this least productive land or
capital, and the returns to other lands and capitals. Now this
depends on the manner in which the tax is imposed. If it is an ad
valorem tax, or what is the same thing, a fixed proportion of the
produce, such as tithe for example, it evidently lowers
corn-rents. For it takes more corn from the better lands than
from the worse; and exactly in the degree in which they are
better; land of twice the productiveness paying twice as much to
the tithe. Whatever takes more from the greater of two quantities
than from the less, diminishes the difference between them. The
imposition of a tithe on corn would take a tithe also from
corn-rent: for if we reduce a series of numbers by a tenth each,
the differences between them are reduced one-tenth.
    For example, let there be five qualities of land, which
severally yield, on the same extent of ground, and with the same
expenditure, 100, 90, 80, 70, and 60 bushels of wheat; the last
of these being the lowest quality which the demand for food
renders it necessary to cultivate. The rent of these lands will
be as follows: 

The land producing 100 bushels will yield a rent of 100-60 or 40
bushels.
That producing      90 bushels will yield a rent of  90-60 or 30
bushels.
That producing      80 bushels will yield a rent of  80-60 or 20
bushels.
That producing      70 bushels will yield a rent of  70-60 or 10
bushels.
That producing      60 bushels will yield a rent of  no rent.

Now let a tithe be imposed, which takes from these five pieces of
land lO, 9, 8, 7, and 6 bushels respectively, the fifth quality
still being the one which regulates the price, but returning to
the farmer, after payment of tithe, no more than 54 bushels: 

The land producing 100 bushels reduced to 90 will yield a rent of
90-54 or 36 bushels.
That producing      90 bushels reduced to 81 will yield a rent of
81-54 or 27 bushels.
That producing      80 bushels reduced to 72 will yield a rent of
72-54 or 18 bushels.
That producing      70 bushels reduced to 63 will yield a rent of
63-54 or  9 bushels.

and that producing 60 bushels, reduced to 54, will yield, as
before, no rent. So that the rent of the first quality of land
has lost four bushels; of the second, three; of the third, two;
and of the fourth, one: that is, each has lost exactly one-tenth.
A tax, therefore, of a fixed proportion of the produce, lowers,
in the same proportion, corn-rent. 
    But it is only corn-rent that is lowered, and not rent
estimated in money, or in any other commodity. For, in the same
proportion as corn-rent is reduced in quantity, the corn
composing it is raised in value. Under the tithe, 54 bushels will
be worth in the market what 60 were before; and nine-tenths will
in all cases sell for as much as the whole ten-tenths previously
sold for. The landlords will therefore be compensated in value
and price for what they lose in quantity; and will suffer only so
far as they consume their rent in kind, or after receiving it in
money, expend it in agricultural produce: that is, they only
suffer as consumers of agricultural produce, and in common with
all the other consumers. Considered as landlords, they have the
same income as before; the tithe, therefore, falls on the
consumer, and not on the landlord. 
    The same effect would be produced on rent, if the tax,
instead of being a fixed proportion of the produce, were a fixed
sum per quarter or per bushel. A tax which takes a shilling for
every bushel, takes more shillings from one field than from
another, just in proportion as it produces more bushels; and
operates exactly like tithe, expect that tithe is not only the
same proportion on all lands, but is also the same proportion at
all times, while a fixed sum of money per bushel will amount to a
greater or a less proportion, according as corn is cheap or dear.

    There are other modes of taxing agriculture, which would
affect rent differently. A tax proportioned to the rent would
fall wholly on the rent, and would not at all raise the price of
corn, which is regulated by the portion of the produce that pays
no rent. A fixed tax of so much per cultivated acre, without
distinction of value, would have effects directly the reverse.
Taking no more from the best qualities of land than from the
worst, it would leave the differences the same as before, and
consequently the same corn-rents, and the landlords would profit
to the full extent of the rise of price. To put the thing in
another manner; the price must rise sufficiently to enable the
worst land to pay the tax; thus enabling all lands which produce
more than the worst, to pay not only the tax, but also an
increased rent to the landlords. These, however, are not so much
taxes on the produce of land, as taxes on the land itself. Taxes
on the produce, properly so called, whether fixed or ad valorem,
do not affect rent, but fall on the consumer: profits, however,
generally bearing either the whole or the greatest part of the
portion which is levied on the consumption of the labouring
classes. 

    4. The preceding is, I apprehend, a correct statement of the
manner in which taxes on agricultural produce operate when first
laid on. When, however, they are of old standing, their effect
may be different, as was first pointed out, I believe, by Mr
Senior. It is, as we have seen, an almost infallible consequence
of any reduction of profits, to retard the rate of accumulation.
Now the effect of accumulation, when attended by its usual
accompaniment, an increase of population, is to increase the
value and price of food, to raise rent, and to lower profits:
that is, to do precisely what is done by a tax on agricultural
produce, except that this does not raise rent. The tax,
therefore, merely anticipates the rise of price, and fall of
profits, which would have taken place ultimately through the mere
progress of accumulation; while it at the same time prevents, or
at least retards, that progress. If the rate of profit was such,
previous to the imposition of a tithe, that the effect of the
tithe reduces it to the practical minimum, the tithe will put a
stop to all further accumulation, or cause it to take place out
of the country; and the only effect which the tithe will then
have had on the consumer, is to make him pay earlier the price
which he would have had to pay somewhat later - part of which,
indeed, in the gradual progress of wealth and population, he
would have almost immediately begun to pay. After a lapse of time
which would have admitted of a rise of one-tenth through the
natural progress of wealth, the consumer will be paying no more
that he would have paid if the tithe had never existed; he will
have ceased to pay any portion of it, and the person who will
really pay it is the landlord, whom it deprives of the increase
of rent which would by that time have accrued to him. At every
successive point in this interval of time, less of the burthen
will rest on the consumer, and more of it on the landlord: and in
the ultimate result, the minimum of profits will be reached with
a smaller capital and population, and a lower rental, than if the
course of things had not been disturbed by the imposition of the
tax. If, on the other hand, the tithe or other tax on
agricultural produce does not reduce profits to the minimum, but
to something above the minimum, accumulation will not be stopped,
but only slackened: and if population also increases, the
two-fold increase will continue to produce its effects - a rise
of the price of corn, and an increase of rent. These
consequences, however, will not take place with the same rapidity
as if the higher rate of profit had continued. At the end of
twenty years the country will have a smaller population and
capital, than, but for the tax, it would by that time have had;
the landlords will have a smaller rent; and the price of corn,
having increased less rapidly than it would otherwise have done,
will not be so much as a tenth higher than what, if there had
been no tax, it would by that time have become. A part of the
tax, therefore, will already have ceased to fall on the consumer,
and devolved upon the landlord; and the proportion will become
greater and greater by lapse of time. 
    Mr Senior illustrates this view of the subject by likening
the effects of tithes, or other taxes on agricultural produce to
those of natural sterility of soil. If the land of a country
without access to foreign supplies, were suddenly smitten with a
permanent deterioration of quality, to an extent which would make
a tenth more labour necessary to raise the existing produce, the
price of corn would undoubtedly rise one-tenth. But it cannot
hence be inferred that if the soil of the country had from the
beginning been one-tenth worse than it is, corn would at present
have been one-tenth dearer than we find it. It is far more
probable, that the smaller return to labour and capital, ever
since the first settlement of the country, would have caused in
each successive generation a less rapid increase than has taken
place: that the country would now have contained less capital,
and maintained a smaller population, so that notwithstanding the
inferiority of the soil, the price of corn would not have been
higher, nor profits lower, than at present; rent alone would
certainly have been lower. We may suppose two islands, which,
being alike in extent, in natural fertility, and industrial
advancement, have up to a certain time been equal in population
and capital, and have had equal rentals, and the same price of
corn. Let us imagine a tithe imposed in one of these islands, but
not in the other. There will be immediately a difference in the
price of corn, and therefore probably in profits. While profits
are not tending downwards in either country, that is, while
improvements in the production of necessaries fully keep pace
with the increase of population, this difference of prices and
profits between the islands may continue. But if, in the untithed
island, capital increases, and population along with it, more
than enough to counterbalance any improvements which take place,
the price of corn will gradually rise, profits will fall, and
rent will increase; while in the tithed island capital and
population will either not increase (beyond what is balanced by
the improvements), or if they do, will increase in a less degree;
so that rent and the price of corn will either not rise at all,
or rise more slowly. Rent, therefore, will soon be higher in the
untithed than in the tithed island, and profits not so much
higher, nor corn so much cheaper, as they were on the first
imposition of the tithe. These effects will be progressive. At
the end of every ten years there will be a greater difference
between the rentals and between the aggregate wealth and
population of the two islands, and a less difference in profits
and in the price of corn. 
    At what point will these last differences entirely cease, and
the temporary effect of taxes on agricultural produce, in raising
the price, have entirely given place to the ultimate effect, that
of limiting the total produce of the country? Though the untithed
island is always verging towards the point at which the price of
food would overtake that in the tithed island, its progress
towards that point naturally slackens as it draws nearer to
attaining it; since - the difference between the two islands in
the rapidity of accumulation depending upon the difference in the
rates of profit - in proportion as these approximate, the
movement which draws them closer together, abates of its force.
The one may not actually overtake the other, until both islands
reach the minimum of profits: up to that point, the tithed island
may continue more or less ahead of the untithed island in the
price of corn: considerably ahead if it is far from the minimum,
and is therefore accumulating rapidly. very little ahead if it is
near the minimum, and accumulating slowly. 
    But whatever is true of the tithed and untithed islands in
our hypothetical case, is true of any country having a tithe,
compared with the same country if it had never had a tithe.
    In England the great emigration of capital, and the almost
periodical occurrence of commercial crises through the
speculations occasioned by the habitually low rate of profit, are
indications that profit has attained the practical, though not
the ultimate minimum, and that all the savings which take place
(beyond what improvements, tending to the cheapening of
necessaries, make room for) are either sent abroad for
investment, or periodically swept away. There can therefore, I
think, be little doubt that if England had never had a tithe, or
any tax on agricultural produce, the price of corn would have
been by this time as high, and the rate of profits as low, as at
present. Independently of the more rapid accumulation which would
have taken place if profits had not been prematurely lowered by
these imposts; the mere saving of a part of the capital which has
been wasted in unsuccessful speculations, and the keeping at home
a part of that which has been sent abroad, would have been quite
sufficient to produce the effect. I think, therefore, with Mr
Senior, that the tithe, even before its commutation, had ceased
to be a cause of high prices or low profits, and had become a
mere deduction from rent; its other effects being, that it caused
the country to have no greater capital, no larger production, and
no more numerous population than if it had been one-tenth less
fertile than it is; or let us rather say one.twentieth
(considering how great a portion of the land of Great Britain was
tithe-free). 
    But though tithes and other taxes on agricultural produce,
when of long standing, either do not raise the price of food and
lower profits at all, or if at all, not in proportion to the tax;
yet the abrogation of such taxes, when they exist, does not the
less diminish price, and, in general, raise the rate of profit.
The abolition of a tithe takes one-tenth from the cost of
production, and consequently from the price, of all agricultural
produce; and unless it permanently raises the labourer's
requirements, it lowers the cost of labour, and raises profits.
Rent, estimated in money or in commodities, generally remains as
before; estimated in agricultural produce, it is raised. The
country adds as much by the repeal of a tithe, to the margin
which intervenes between it and the stationary state, as is cut
off from that margin by a tithe when first imposed. Accumulation
is greatly accelerated; and if population also increases, the
price of corn immediately begins to recover itself, and rent to
rise; thus gradually transferring the benefit of the remission,
from the consumer to the landlord. 
    The effects which thus result from abolishing tithe, result
equally from what has been done by the arrangements under the
Commutation Act for converting it into a rent.charge. When the
tax, instead of being levied on the whole produce of the soil, is
levied only from the portions which pay rent, and does not touch
any fresh extension of cultivation, the tax no longer forms any
part of the cost of production of the portion of the produce
which regulates the price of all the rest. The land or capital
which pays no rent, can now send its produce to market one-tenth
cheaper. The commutation of tithe ought therefore to have
produced a considerable fall in the average price of corn. If it
had not come so gradually into operation, and if the price of
corn had not during the same period been under the influence of
several other causes of change, the effect would probably have
been markedly conspicuous. As it is, there can be no doubt that
this circumstance has had its share in the fall which has taken
place in the cost of production and in the price of home-grown
produce; though the effects of the great agricultural
improvements which have been simultaneously advancing, and of the
free admission of agricultural produce from foreign countries,
have masked those of the other cause. This fall of price would
not in itself have any tendency injurious to the landlord, since
corn-rents are increased in the same ratio in which the price of
corn is diminished. But neither does it in any way tend to
increase his income. The rent-charge, therefore, which is
substituted for tithe, is a dead loss to him at the expiration of
existing leases: and the commutation of tithe was not a mere
alteration in the mode in which the landlord bore an existing
burthen, but the imposition of a new one; relief being afforded
to the consumer at the expense of the landlord, who, however,
begins immediately to receive progressive indemnification at the
consumer's expense, by the impulse given to accumulation and
population. 

    5. We have hitherto inquired into the effects of taxes on
commodities, on the assumption that they are levied impartially
on every mode in which the commodity can be produced or brought
to market. Another class of considerations is opened, if we
suppose that this impartiality is not maintained, and that the
tax is imposed, not on the commodity, but on some particular mode
of obtaining it. 
    Suppose that a commodity is capable of being made by two
different processes; as a manufactured commodity may be produced
either by hand or by steam-power; sugar may be made either from
the sugar-cane or from beet-root, cattle fattened either on hay
and green crops, or on oil-cake and the refuse of breweries. It
is the interest of the community, that of the two methods,
producers should adopt that which produces the best article at
the lowest price. This being also the interest of the producers,
unless protected against competition, and shielded from the
penalties of indolence; the process most advantageous to the
community is that which, if not interfered with by government,
they ultimately find it to their advantage to adopt. Suppose
however that a tax is laid on one of the processes, and no tax at
all, or one of smaller amount, on the other. If the taxed process
is the one which the producers would not have adopted, the
measure is simply nugatory. But if the tax falls, as it is of
course intended to do, upon the one which they would have
adopted, it creates an artificial motive for preferring the
untaxed process, though the inferior of the two. If, therefore,
it has any effect at all, it causes the commodity to be produced
of worse quality, or at a greater expense of labour'. it causes
so much of the labour of the community to be wasted, and the
capital employed in supporting and remunerating the labour to be
expended as uselessly, as if it were spent in hiring men to dig
holes and fill them up again. This waste of labour and capital
constitutes an addition to the cost of production of the
commodity, which raises its value and price in a corresponding
ratio, and thus the owners of the capital are indemnified. The
loss falls on the consumers; though the capital of the country is
also eventually diminished, by the diminution of their means of
saving, and in some degree, of their inducements to save. 
    The kind of tax, therefore, which comes under the general
denomination of a discriminating duty, transgresses the rule that
taxes should take as little as possible from the tax-payer beyond
what they bring into the treasury of the state. A discriminating
duty makes the consumer pay two distinct taxes, only one of which
is paid to the government, and that frequently the less onerous
of the two. If a tax were laid on sugar produced from the cane,
leaving the sugar from beet-root untaxed, then in so far as cane
sugar continued to be used, the tax on it would be paid to the
treasury, and might be as objectionable as most other taxes; but
if cane sugar, having previously been cheaper than beet-root
sugar, was now dearer, and beet-root sugar was to any
considerable amount substituted for it, and fields laid out and
manufactories established in consequence, the government would
gain no revenue from the beet-root sugar, while the consumers of
it would pay a real tax. They would pay for beet-root sugar more
than they had previously paid for cane sugar, and the difference
would go to indemnify producers for a portion of the labour of
the country actually thrown away, in producing by the labour of
(say) three hundred men, what could be obtained by the other
process with the labour of two hundred. 
    One of the commonest cases of discriminating duties, is that
of a tax on the importation of a commodity capable of being
produced at home, unaccompanied by an equivalent tax on the home
production. A commodity is never permanently imported, unless it
can be obtained from abroad at a smaller cost of labour and
capital on the whole, than is necessary for producing it. If,
therefore, by a duty on the importation, it is rendered cheaper
to produce the article than to import it, an extra quantity of
labour and capital is expended, without any extra result. The
labour is useless, and the capital is spent in paying people for
laboriously doing nothing. All custom duties which operate as an
encouragement to the home production of the taxed article, are
thus an eminently wasteful mode of raising a revenue. 
    This character belongs in a peculiar degree to custom duties
on the produce of land, unless countervailed by excise duties on
the home production. Such taxes bring less into the public
treasury, compared with what they take from the consumers, than
any other imposts to which civilized nations are usually subject.
If the wheat produced in a country is twenty millions of
quarters, and the consumption twenty-one millions, a million
being annually imported, and if on this million a duty is laid
which raises the price ten shillings per quarter, the price which
is raised is not that of the million only, but of the whole
twenty-one millions. Taking the most favourable, but extremely
improbable supposition, that the importation is not at all
checked, nor the home production enlarged, the state gains a
revenue of only half a million, while the consumers are taxed ten
millions and a half; the ten millions being a contribution to the
home growers, who are forced by competition to resign it all to
the landlords. The consumer thus pays to the owners of land an
additional tax, equal to twenty times that which he pays to the
state. Let us now suppose that the tax really checks importation.
Suppose importation stopped altogether in ordinary years; it
being found that the million of quarters can be obtained, by a
more elaborate cultivation, or by breaking up inferior land, at a
less advance than ten shillings upon the previous price -- say,
for instance, five shillings a quarter. The revenue now obtains
nothing, except from the extraordinary imports which may happen
to take place in a season of scarcity. But the consumers pay
every year a tax of five shillings on the whole twenty-one
millions of quarters, amounting to 5 1/4 millions sterling. Of
this the odd 250,000 l. goes to compensate the growers of the
last million of quarters for the labour and capital wasted under
the compulsion of the law. The remaining five millions go to
enrich the landlords as before. 
    Such is the operation of what are technically termed Corn
Laws, when first laid on; and such continues to be their
operation, so long as they have any effect at all in raising the
price of corn. But I am by no means of opinion that in the long
run they keep up either prices or rents in the degree which these
considerations might lead us to suppose. What we have said
respecting the effect of tithes and other taxes on agricultural
produce, applies in a great degree to corn laws: they anticipate
artificially a rise of price and of rent, which would at all
events have taken place through the increase of population and of
production. The difference between a country without corn laws,
and a country which has long had corn laws, is not so much that
the last has a higher price or a larger rental, but that it has
the same price and the same rental with a smaller aggregate
capital and a smaller population. The imposition of corn laws
raises rents, but retards that progress of accumulation which
would in no long period have raised them fully as much. The
repeal of corn laws tends to lower rents, but it unchains a force
which, in a progressive state of capital and population, restores
and even increases the former amount. There is every reason to
expect that under the virtually free importation of agricultural
produce, at last extorted from the ruling powers of this country,
the price of food, if population goes on increasing, will
gradually but steadily rise; though this effect may for a time be
postponed by the strong current which in this country has set in
(and the impulse is extending itself to other countries) towards
the improvement of agricultural science, and its increased
application to practice. 
    What we have said of duties on importation generally, is
equally applicable to discriminating duties which favour
importation from one place or in one particular manner, in
contradistinction to others: such as the preference given to the
produce of a colony, or of a country with which there is a
commercial treaty: or the higher duties formerly imposed by our
navigation laws on goods imported in other than British shipping.
Whatever else may be alleged in favour of such distinctions,
whenever they are not nugatory, they are economically wasteful.
They induce a resort to a more costly mode of obtaining a
commodity, in lieu of one less costly, and thus cause a portion
of the labour which the country employs in providing itself with
foreign commodities, to be sacrificed without return.

    6. There is one more point relating to the operation of taxes
on commodities conveyed from one country to another, which
requires notice: the influence which they exert on international
exchanges. Every tax on a commodity tends to raise its price, and
consequently to lessen the demand for it in the market in which
it is sold. All taxes on international trade tend, therefore, to
produce a disturbance and a readjustment of what we have termed
the Equation of International Demand. This consideration leads to
some rather curious consequences, which have been pointed out in
the separate essay on international Commerce, already several
times referred to in this treatise.
    Taxes on foreign trade are of two kinds - taxes on imports,
and on exports. On the first aspect of the matter it would seem
that both these taxes are paid by the consumers of the commodity;
that taxes on exports consequently fall entirely on foreigners,
taxes on imports wholly on the home consumer. The true state of
the case, however, is much more complicated. 
    'By taxing exports, we may, in certain circumstances, produce
a division of the advantage of the trade more favourable to
ourselves. In some cases we may draw into our coffers, at the
expense of foreigners, not only the whole tax, but more than the
tax: in other cases, we should gain exactly the tax; in others,
less than the tax. In this last case, a part of the tax is borne
by ourselves: possibly the whole, possibly even, as we shall
show, more than the whole.' Reverting to the supposititious case
employed in the Essay, of a trade between Germany and England in
broadcloth and linen, 'suppose that England taxes her export of
cloth, the tax not being supposed high enough to induce Germany
to produce cloth for herself. The price at which cloth can be
sold in Germany is augmented by the tax. This will probably
diminish the quantity consumed. It may diminish it so much that,
even at the increased price, there will not be required so great
a money value as before. Or it may not diminish it at all, or so
little, that in consequence of the higher price, a greater money
value will be purchased than before. In this last case, England
will gain, at the expense of Germany, not only the whole amount
of the duty, but more; for, the money value of her exports to
Germany being increased, while her imports remain the same, money
will flow into England from Germany. The price of cloth will rise
in England, and consequently in Germany; but the price of linen
will fall in Germany, and consequently in England. We shall
export less cloth, and import more linen, till the equilibrium is
restored. It thus appears (what is at first sight somewhat
remarkable) that by taxing her exports, England would, in some
conceivable circumstances, not only gain from her foreign
customers the whole amount of the tax, but would also get her
imports cheaper. She would get them cheaper in two ways; for she
would obtain them for less money, and would have more money to
purchase them with. Germany, on the other hand, would suffer
doubly: she would have to pay for her cloth a price increased not
only by the duty, but by the influx of money into England, while
the same change in the distribution of the circulating medium
would leave her less money to purchase it with. 
    'This, however, is only one of three possible cases. If,
after the imposition of the duty, Germany requires so diminished
a quantity of cloth, that its total value is exactly the same as
before, the balance of trade would be undisturbed; England will
gain the duty, Germany will lose it, and nothing more. If, again,
the imposition of the duty occasions such a falling off in the
demand that Germany requires a less pecuniary value than before,
our exports will no longer pay for our imports; money must pass
from England into Germany; and Germany's share of the advantage
of the trade will be increased. By the change in the distribution
of money, cloth will fall in England; and therefore it will, of
course, fall in Germany - Thus Germany will not pay the whole of
the tax. From the same cause, linen will rise in Germany, and
consequently in England. When this alteration of prices has so
adjusted the demand, that the cloth and the linen again pay for
one another, the result is that Germany has paid only a part of
the tax, and the remainder of what has been received into our
treasury has come indirectly out of the pockets of our own
consumers of linen, who pay a higher price for that imported
commodity in consequence of the tax on our exports, while at the
same time they, in consequence of the efflux of money and the
fall of prices, have smaller money incomes wherewith to pay for
the linen at that advanced price.
    'It is not an impossible supposition that by taxing our
exports we might not only gain nothing from the foreigner, the
tax being paid out of our own pockets, but might even compel our
own people to pay a second tax to the foreigner. Suppose, as
before, that the demand of Germany for cloth falls off so much on
the imposition of the duty, that she requires a smaller money
value than before, but that the case is so different with linen
in England, that when the price rises the demand either does not
fall off at all, or so little that the money value required is
greater than before. The first effect of laying on the duty is,
as before, that the cloth exported will no longer pay for the
linen imported. Money will therefore flow out of England into
Germany. One effect is to raise the price of linen in Germany,
and consequently in England. But this, by the supposition,
instead of stopping the efflux of money, only makes it greater,
because the higher the price, the greater the money value of the
linen consumed. The balance, therefore, can only be restored by
the other effect, which is going on at the same time, namely, the
fall of cloth in the English and consequently in the German
market. Even when cloth has fallen so low that its price with the
duty is only equal to what its price without the duty was at
first, it is not a necessary consequence that the fall will stop;
for the same amount of exportation as before will not now suffice
to pay the increased money value of the imports; and although the
German consumers have now not only cloth at the old price, but
likewise increased money incomes, it is not certain that they
will be inclined to employ the increase of their incomes in
increasing their purchases of cloth. The price of cloth,
therefore, must perhaps fall, to restore the equilibrium, more
than the whole amount of the duty; Germany may be enabled to
import cloth at a lower price when it is taxed, than when it was
untaxed: and this gain she will acquire at the expense of the
English consumers of linen, who, in addition, will be the real
payers of the whole of what is received at their own custom-house
under the name of duties on the export of cloth.'
    It is almost unnecessary to remark that cloth and linen are
here merely representatives of exports and imports in general;
and that the effect which a tax on exports might have in
increasing the costs of imports, would affect the imports from
all countries, and not peculiarly the articles which might be
imported from the particular country to which the taxed exports
were sent. 
    'Such are the extremely various effects which may result to
ourselves and to our customers from the imposition of taxes on
our exports; and the determining circumstances are of a nature so
imperfectly ascertainable, that it must be almost impossible to
decide with any certainty, even after the tax has been imposed,
whether we have been gainers by it or losers.' In general however
there could be little doubt that a country which imposed such
taxes would succeed in making foreign countries contribute
something to its revenue; but unless the taxed article be one for
which their demand is extremely urgent, they will seldom pay the
whole of the amount which the tax brings in.(2*) 'In any case,
whatever we gain is lost by somebody else, and there is the
expense of the collection besides: if international morality,
therefore, were rightly understood and acted upon, such taxes, as
being contrary to the universal weal, would not exist.'
    Thus far of duties on exports. We now proceed to the more
ordinary case of duties on imports. 'We have had an example of a
tax on exports, that is, on foreigners, falling in part on
ourselves. We shall therefore not be surprised if we find a tax
on imports, that is, on ourselves, partly falling upon
foreigners. 
    'Instead of taxing the cloth which we export, suppose that we
tax the linen which we import. The duty which we are now
supposing must not be what is termed a protecting duty, that is,
a duty sufficiently high to induce us to produce the article at
home. If it had this effect, it would destroy entirely the trade
both in cloth and in linen, and both countries would lose the
whole of the advantage which they previously gained by exchanging
those commodities with one another. We suppose a duty which might
diminish the consumption of the article, but which would not
prevent us from continuing to import, as before, whatever linen
we did consume.
    'The equilibrium of trade would be disturbed if the
imposition of the tax diminished, in the slightest degree, the
quantity of linen consumed. For, as the tax is levied at our own
custom-house, the German exporter only receives the same price as
formerly, though the English consumer pays a higher one. If,
therefore, there be any diminution of the quantity bought,
although a larger sum of money may be actually laid out in the
article, a smaller one will be due from England to Germany: this
sum will no longer be an equivalent for the sum due from Germany
to England for cloth, the balance therefore must be paid in
money. Prices will fall in Germany and rise in England; linen
will fall in the German market; cloth will rise in the English.
The Germans will pay a higher price for cloth, and will have
smaller money incomes to buy it with; while the English will
obtain linen cheaper, that is, its price will exceed what it
previously was by less than the amount of the duty, while their
means of purchasing it will be increased by the increase of their
money incomes. 
    'If the imposition of the tax does not diminish the demand,
it will leave the trade exactly as it was before. We shall import
as much, and export as much; the whole of the tax will be paid
out of our own pockets. 
    'But the imposition of a tax on a commodity almost always
diminishes the demand more or less; and it can never, or scarcely
ever, increase the demand. It may, therefore, be laid down as a
principle, that a tax on imported commodities, when it really
operates as a tax, and not as a prohibition either total or
partial, almost always falls in part upon the foreigners who
consume our goods; and that this is a mode in which a nation may
appropriate to itself, at the expense of foreigners, a larger
share than would otherwise belong to it of the increase in the
general productiveness of the labour and capital of the world,
which results from the interchange of commodities among nations.'
    Those are, therefore, in the right who maintain that taxes on
imports are partly paid by foreigners; but they are mistaken when
they say, that is is by the foreign producer. It is not on the
person from whom we buy, but on all those who buy from us, that a
portion of our custom-duties spontaneously falls. It is the
foreign consumer of our exported commodities, who is obliged to
pay a higher price for them because we maintain revenue duties on
foreign goods. 
    There are but two cases in which duties on commodities can in
any degree, or in any manner, fall on the producer. One is, when
the article is a strict monopoly, and at a scarcity price. The
price in this case being only limited by the desires of the
buyer; the sum obtained from the restricted supply being the
utmost which the buyers would consent to give rather than go
without it; if the treasury intercepts a part of this, the price
cannot be further raised to compensate for the tax, and it must
be paid from the monopoly profits. A tax on rare and high-priced
wines will fall wholly on the growers, or rather, on the owners
of the vineyards. The second case in which the producer sometimes
bears a portion of the tax, is more important: the case of duties
on the produce of land or of mines. These might be so high as to
diminish materially the demand for the produce, and compel the
abandonment of some of the inferior qualities of land or mines.
Supposing this to be the effect, the consumers, both in the
country itself and in those which dealt with it, would obtain the
produce at smaller cost; and a part only, instead of the whole,
of the duty would fall on the purchaser, who would be indemnified
chiefly at the expense of the landowners or mine-owners in the
producing country. 
    Duties on importation may, then, be divided 'into two
classes: those which have the effect of encouraging some
particular branch of domestic industry, and those which have not.
The former are purely mischievous, both to the country imposing
them, and to those with whom it trades. They prevent a saving of
labour and capital, which, if permitted to be made, would be
divided in some proportion or other between the importing country
and the countries which buy what that country does or might
export. 
    'The other class of duties are those which do not encourage
one mode of procuring an article at the expense of another, but
allow interchange to take place just as if the duty did not
exist, and to produce the saving of labour which constitutes the
motive to international, as to all other commerce. Of this kind
are duties on the importation of any commodity which could not by
any possibility be produced at home; and duties not sufficiently
high to counterbalance the difference of expense between the
production of the article at home and its importation. Of the
money which is brought into the treasury of any country by taxes
of this last description, a part only is paid by the people of
that country; the remainder by the foreign consumers of their
goods. 
    'Nevertheless, this latter kind of taxes are in principle as
ineligible as the former, though not precisely on the same
ground. A protecting duty can never be a cause of gain, but
always and necessarily of loss, to the country imposing it, just
so far as it is efficacious to its end. A non-protecting duty, on
the contrary, would in most cases be a source of gain to the
country imposing it, in so far as throwing part of the weight of
its taxes upon other people is a gain; but it would be a means
which it could seldom be advisable to adopt, being so easily
counteracted by a precisely similar proceeding on the other side.

    'If England, in the case already supposed, sought to obtain
for herself more than her natural share of the advantage of the
trade with Germany, by imposing a duty upon linen, Germany would
only have to impose a duty upon cloth, sufficient to diminish the
demand for that article about as much as the demand for linen had
been diminished in England by the tax. Things would then be as
before, and each country would pay its own tax. Unless, indeed,
the sum of the two duties exceeded the entire advantage of the
trade; for in that case the trade, and its advantage, would cease
entirely.     'There would be no advantage, therefore, in
imposing duties of this kind, with a view to gain by them in the
manner which has been pointed out. But when any part of the
revenue is derived from taxes on commodities, these may often be
as little objectionable as the rest. It is evident, too, that
considerations of reciprocity, which are quite unessential when
the matter in debate is a protecting duty, are of material
importance when the repeal of duties of this other description is
discussed. A country cannot be expected to renounce the power of
taxing foreigners, unless foreigners will in return practise
towards itself the same forbearance. The only mode in which a
country can save itself from being a loser by the revenue duties
imposed by other countries on its commodities, is to impose
corresponding revenue duties on theirs. Only it must take care
that those duties be not so high as to exceed all that remains of
the advantage of the trade, and put an end to importation
altogether, causing the article to be either produced at home, or
imported from another and a dearer market.' 

NOTES:

1. It is true, this does not constitute, as at first sight it
appears to do, a case of taking more out of the pockets of the
people than the state receives; since if the state needs the
advance, and gets it in this manner, it can dispense with an
equivalent amount of borrowing in stock or exchequer bills. But
it is more economical that the necessities of the state should be
supplied from the disposable capital in the hands of the lending
class, than by an artificial addition to the expenses of one or
several classes of producers or dealers.

2. Probably the strongest known instance of a large revenue
raised from foreigners by a tax on exports, is the opium trade
with China. The high price of the article under the Government
monopoly (which is equivalent to a high export duty) has so
little effect in discouraging its consumption, that it is said to
have been occasionally sold in China for as much as its weight in
silver.