Indirect taxation costs the real tax-payers much more than the government
receives, partly because the middlemen through whose hands taxed commodities
pass are able to exact compound profits upon the tax,8 and partly on account
of extraordinary expenses of original collection;9 it favors corruption in
government by concealing from the people the fact that they contribute to
the support of government; and it tends, by obstructing production, to crush
legitimate industry and establish monopolies.10 The questions it raises are
of vastly more
concern than is indicated by the sum total of public expenditures.
8. A tax upon shoes, paid in the first instance by shoe
manufacturers, enters into manufacturers' prices, and, together with
the usual rate of profit upon that amount of investment, is recovered
from wholesalers. The tax and the manufacturers' profit upon it then
constitute part of the wholesale price and are collected from retailers.
The retailers in turn collect the tax with all intermediate profits upon
it, together with their usual rate of profit upon the whole, from final
purchasers — the consumers of shoes. Thus what appears on the surface
to be a tax upon shoe manufacturers proves upon examination to be an
indirect tax upon shoe consumers, who pay in an accumulation of profits
upon the tax considerably more than the government receives.
The effect would be the same if a tax upon their leather
output were imposed upon tanners. Tanners would add to the price of leather
the amount of the tax, plus their usual rate of profit upon a like investment,
and collect the whole, together with the cost of hides, of transportation,
of tanning and of selling, from shoe manufacturers, who would collect
with their profit from retailers, who would collect with their profit
from shoe consumers. The principle applies also when taxes are levied
upon the stock or the sales of merchants, or the money or credits of
bankers; merchants add the tax with the usual profit to the prices of
their goods, and bankers add it to their interest and discounts.
For example; a tax of $100,000 upon the output of manufacturers
or importers would, at 10 per cent as the manufacturing profit, cost
wholesalers $110,000; at a profit of 10 per cent to wholesalers it would
cost retailers $121,000, and at 20 percent profit to retailers it would
finally impose a tax burden of $145,200 — being 45 per cent more
than the government would get. Upon most commodities the number of profits
exceeds three, so that indirect taxes may frequently cost as much as
100 per cent, even when imposed only upon what are commercially known
as finished goods; when imposed upon materials also, the cost of collection
might well run far above 200 percent in addition to the first cost of
maintaining the machinery of taxation.
It must not be supposed, however, that the recovery of
indirect taxes from the ultimate consumers of taxed goods is arbitrary.
When shoe manufacturers, or tanners, or merchants add taxes to prices,
or bankers add them to interest, it is not because they might do otherwise
but choose to do this; it is because the exigencies of trade compel them.
Manufacturers, merchants, and other tradesmen who carry on competitive
businesses must on the average sell their goods at cost plus the ordinary
rate of profit, or go out of business. It follows that any increase in
cost of production tends to increase the price of products. Now, a tax
upon the output of business men, which they must pay as a condition of
doing their business, is as truly part of the cost of their output as
is the price of the materials they buy or the wages of the men they hire.
Therefore, such a tax upon business men tends to increase the price of
their products. And this tendency is more or less marked as the tax is
more or less great and competition more or less keen.
It is true that a moderate tax upon monopolized products,
such as trade-mark goods, proprietary medicines, patented articles and
copyright publications is not necessarily shifted to consumers. The monopoly
manufacturer whose prices are not checked by cost of production, and
are therefore as a rule higher than competitive prices would be, may
find it more profitable to bear the burden of a tax that leaves him some
profit, by preserving his entire custom, than to drive off part of his
custom by adding the tax to his usual prices. This
is true also of a moderate
import tax to the extent it
falls upon goods that are more
cheaply
transported from the place
of production to a foreign
market where the import tax
is imposed than to a home market
where the goods would be
free of such a tax — products, for instance, of a farm in Canada
near to a New York town, but far away from any Canadian town. If the
tax be less than the difference in the cost of transportation the producer
will bear the burden of it; otherwise he will not. The ultimate effect
would be a reduction in the value of the Canadian land. Examples which
may be cited in opposition to the principle that import taxes are indirect,
will upon examination prove to be of the character here described. Business
cannot be carried on at a loss — not for long.
9. "To collect taxes, to prevent and punish evasions,
to check and countercheck revenue drawn from so many distinct sources,
now make up probably three-fourths, perhaps seven-eighths, of the business
of government outside of the preservation of order, the maintenance of
the military arm, and the administration of justice." — Progress
and Poverty, book iv, ch: v
10. For a brief and thorough exposition of indirect taxation
read George's "Protection or Free Trade," ch. viii, on " Tariffs
for Revenue."
Whoever calmly reflects and candidly decides upon the merits of indirect
taxation must reject it in all its forms. But to do that is to make a great
stride toward accepting the single tax. For the single tax is a form of direct
taxation; it cannot be shifted.11