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