CHAPTER XI. PROTECTION AS INDIRECT AND DELEGATED TAXATION.

Taxation is a price paid to government for common services rendered. In its indirect form, certain goods are charged customs and excise duties, and the extra we pay goes first to the government, and then comes back to us, minus the expenses of collection, in benefit. But, under Protection, the government, wishing to benefit its producing classes, delegates the power of taxation to them; it shuts out foreign competition; and the extra price, made possible by taxing foreign goods, is taken by these producing classes. It is as if a government, recognising the services of distillers as employers of labour, were to impose customs duties on foreign spirits and no excise on home spirits. Protection, then, is paid for by the nation in indirect taxation.

WE know that government does certain things for us. We realise, probably, that these things cannot be done for nothing, and that our taxation is the price of these services. In the annual Finance Accounts is found, on the one hand, the cost of the services which the State renders, and, on the other, the price we pay. Last year the price was £151½ millions.

What, then, is Taxation? It is, as a whole, the annual sum paid to the government—and the government, of course, is just a grand committee of ourselves, put in power by our own votes to carry out our own wishes—in exchange for which the government gives back to us the whole amount, less the expenses of collection and administration, in Common Benefits. If Protection, then, be added to the recognised functions of the State, it is not to be expected that such a function can be performed without heavily adding to the taxation.

But we are so accustomed to hear that Protection “taxes” the people—meaning, by that, “burdens” the people—that we do not so readily realise that, if a tax does burden the people, it is a bad tax. It seems, then, of the last importance that we should understand where Protection stands in the scheme of taxation. For, indeed, the term Taxation is too good for it.

The thesis of the present chapter is that, by Protection, a government delegates and gives away its sacred and sovereign power of taxation, and permits certain of its citizens to impose taxes in their own interest.

In old times, when a sovereign wished to befriend a favourite, he gave him a monopoly of some import. The favourite, having a monopoly of the goods, charged what prices he liked, or could get, and the public bore this burden. They paid the subsidy to the favourite in high prices just as certainly as if they had given a sum out of their pockets. This, in ordinary circumstances, was Burden. It was quartering a worthless character on the homes of England. Only in form was it taxation.

Suppose, however, that Elizabeth gave the Earl of Essex leave to levy sixpence a barrel on every cask of wine that came into the port of London, because Essex manned and maintained a fleet of ships to patrol the entrance to the Thames against pirates and foreign fleets, then the monopoly was only payment for services rendered to the nation. It might be a bad way of paying him—bad taxation; that is all that could be said against it.

This, however, is the kind of taxation that Protection is. The government might go straight to the people; take a sum openly out of their pockets called, perhaps, the Industrial Subsidy; and spend this in giving each deserving manufacturer a sum equivalent to what he would have got in profits under Protection. There is no doubt that this would be direct taxation. As it is, the government gives a monopoly of the home market; not indeed to a favourite, but to a favoured class, the producers—they being considered to render services which deserve recognition—and by this allows them to charge as high a price as they can get under the monopoly. Thus all who buy the goods are forced by the government to pay a subsidy out of their pocket for the maintenance of this favoured class.

Fully to understand the difference between the two systems and the difference between their effects, we must go a little deeper into what Taxation always means and always does. Usually the individuals of a nation provide each other with goods and services by each making and selling what he likes. But, as a nation, we have many common interests which can best be provided for in common. National Defence is one of these. In times not very long ago, the noble surrounded himself with a band of retainers, whom he fed, uniformed, and housed. Many of them were domestic servants of various sorts; many of them were merely private policemen. When, again, a rich citizen went to supper at a late hour through one of the parks, he hired an armed escort. When we learn that Sir Robert Peel first established the splendid force we still, in grateful remembrance, call Bobbies or Peelers, the fact suggests—what was true—that, before his day, men took their local defence into their own hands; they carried swords, and their servants were armed. But from very early times it was seen that national, as distinct from local and personal defence, was not a matter for private effort. An army and navy were provided by the central authority, and were paid for by a subsidy levied on the citizens. Justice is another common interest. No man should get more than justice because he is rich and able to hire lawyers or employ strength, and no man should get less than justice because he is poor; it was to secure this even-handed justice that the expenses of courts, judges, and administration generally were got from the citizens by way of a general levy. So even with the more ornamental parts of the constitution. For some time after the Conquest, kings paid to be kings. They had immense expenses for armies, the administration of justice, etc., and they paid for these out of their own estates. When they spent more than they could afford, they generally took simple ways of getting their subjects to assist them. Taxation was called Benevolence, Aids, Gifts, Contributions, and, when appealed for on higher motives, Duty. And one reason given for the fact that there was so little friction between our early kings and their people, was that the Scottish kings lived within their incomes, and did not come on the people for taxes. But, some time ago, it was discovered that it was a bad thing for the sovereign to defray anything of his kingly duties out of his own purse. We do not like unpaid secretaries even now. We were not willing to be under an obligation; we wanted to have some control of what he spent. So we put him on a salary like any other government servant, and the “Civil List” of £470,000 appears in the same category of the Finance Accounts as the £5 paid to the Precentor of the Town Church of Glasgow.

The idea of taxation, then, is that of a sum, contributed by each man out of his income, in payment for the great common services. It is compulsory indeed. It could not be otherwise. However good the things we buy, we all naturally want to escape paying for them if we can: and, as natural men, I have no doubt we should be quite willing that Mr. Carnegie should pay the heavy end of our taxes, as he does our University fees. But this is not consistent with political freedom. We want every man to pay taxes; to know that he is paying taxes; and to have the right to say to the government, “You shall not spend my money except in a way that I approve.” By imposing the duty of paying, we give him the right of dictating the spending. In this, as in many other directions, we compel a man to be free—just as we ourselves are not free till we put ourselves under the compulsion of the Good Will.

Unfortunately, we cannot carry out the idea of taxation as we should like. Although we are the most enlightened of all peoples as regards the bearing of taxation, even we cannot stand a 15d. income tax unless in time of war. It seems too much to give up all at once. Besides, if we raised all our taxation by income tax, we should get no contribution from the poorer incomes—at least more would be spent in collection than was collected. Yet as all men should pay taxes, we get them to pay in another way—both those who object to pay too much income tax and those who would escape because their incomes are too small. We stop tobacco, spirits, tea, etc., at the Custom House. We make the importer pay a certain duty on them, and then he recovers that duty in the price which he charges us for the tobacco, spirits, and tea. Thus every one who purchases these commodities, pays part of his taxes every time he buys. This we call the “indirect taxation” of Customs Duties.

Here, then, is taxation taking the shape of a raised price—an extra above the price at which the goods would otherwise be put in the shops. And this is the form which protective taxation takes. It is an extension of the Customs Duties for revenue. If the United States had no internal taxes, but raised a sufficient revenue from a tariff on goods coming into the country, this might very well be the sole taxation of the United States. It would all be indirect taxation, but there is no doubt whatever that it would be taxation. So when the tariff is not for revenue purposes but for protective purposes, it is not essentially different in form. It taxes the consumers inside the country in high prices.

But there is a difference. We tax tea by Customs Duties, and so tax all tea, for we have no tea but what comes into the country. Hence government gets all the revenue; that is, all the tariff charges. I say the government gets it all, and, when we pay the extra price, we know that the extra is coming back to us in services. The natural man might grumble at having to pay a tax on tea which amounted to 6d. a week, but he could have little reason to do so if he found that the government was paying this 6d. to a policeman to guard his house. This, then, is the idea of taxation: we pay, but it all comes back to us.

In the case of a protective tariff, however, we pay, but it does not all come back to us. The government taxes foreign cotton cloth, and raises, say, £1000 by this tax. The money goes to the Exchequer. When the cloth is sold, the £1000 is added to its price, and the consumers of the cotton cloth pay their taxes to the amount of £1000 in proportion to their purchases. But, unlike the tea, other cotton cloth is made inside the country—say, as much again. If it also passed through the custom house, it also would pay £1000, and here again £1000 would come back to us. But it does not. There is no excise. The home-made cloth pays nothing. But, nevertheless, we are charged the same price for it as we are for the imported cloth. Where does this second £1000 go? To the home makers of cloth. We are being taxed £1000 for their benefit. Notice, then, that, if there were no home trade, a double quantity of cloth would be imported from abroad; £2000 would be raised from it; we should pay higher prices as in the other case: but we should get all the £2000 back. Taxation, indeed, is like evaporation. The moisture is taken out of the ground and rises into the clouds. But the clouds dissolve in rain, and give it back again. And what I am trying to bring out may be suggested by this; the moisture may be taken out of the soil of Great Britain, but the rain may fall in Ireland.

The difference emerges in the absence of an excise. We tax spirits coming into the country, and the government gets the whole of the customs duty. We tax spirits made in the country—isolating the distillery as if it were an island on a lake—and, again, the whole of the excise goes to the government. The price of all spirits, whether imported or made at home, is raised by the same amount in either case, and the whole of the tax comes back to us in services. But if there were no excise, the home distiller would be in the position of the home producer of cotton cloth under Protection. He would charge the same—or nearly the same—price as the importer,¹ but the whole of the sum, which otherwise would have gone in duty, goes to him as private gain.

The question is:—Is this as good a bargain for the nation? Is it as good that £1000 should go to the few makers of cloth as if it came to all who wear cotton?

The answer may be this, “No; it is not so good; but it is advisable as a temporary measure—on the Infant Industry argument. It only needs time till the home maker can set up on a large scale, and then the cost of making at home will come down. In time, the home-made cloth will be able to undersell the duty-paid cloth. Given more time still, and the duty can be removed altogether. Then we shall have no £1000 of revenue, but we shall have cheap cloth. We lose in one way to gain in another.”

All this may be admitted. But, if the desired does not happen: if the manufacture of cotton remains an Infant Industry all its days, and the cost of making does not come down: what does it mean but that the nation continues to be taxed and burdened as Consumers, to give a profit to the Producers?

The momentous point of difference is, perhaps, better illustrated from Local Taxation, where the government services rendered are largely industrial.

The Municipality of Glasgow has raised large sums by borrowing, and sunk them, as capital, in providing the machinery for the great common services of water, gas, and tramways. For these sums, it has to pay interest; and, to cover the interest and the running expenses, to provide for depreciation, and to lay aside a sinking fund to wipe out the capital borrowed, it charges a price in the shape of water rates, gas rates, and tramway fares. Here, then, are three great industries carried on by the local government. Who pay for them? Those who burn gas; those who use water; and those who ride in tramway cars;—in other words, the Consumers.

Perhaps it has never occurred to many people that, when they pay id. for a Municipal car fare, they are paying taxes.¹ It would be quite clear, were it not for the obstinate idea that a tax is a “burden”—something one does not get full value for. Suppose that, each morning, the Municipal scavengers cleared our ash bins, and charged us each morning a halfpenny for the service. Would this be different from charging 3d. a week? Would it be different from charging 1s. a month or 13s. a year? Suppose, then, that the Municipality, instead of charging by an ordinary bill, sends in a blue tax paper saying that, under the Statute Labour provisions, the tax—or rate as it is called—for cleansing amounts to 13s.: what is the difference? In this case, we should see clearly enough that a tax or a rate is a payment made to the Municipality as doing certain things for the great body of the citizens, which otherwise the citizens would have to do for themselves, or get others to do for them.

If this is clear as to the carrying away of ashes, is there any difference between this and the carrying of persons in a tramway car? The difference, of course, is merely in the mode of payment and the basis of assessment. We pay the car every journey; we pay the rate once a year. If there were “free ferries” across the Clyde, does anyone think that we should not pay for them? We should, of course, have to pay for them by an annual rate.

But, in the case of Tramways, it is only a few years since the Municipality followed another method. It gave a private company the monopoly of the car lines, and charged them a rent of several thousands a year for it, allowing them within limits to charge what fares they liked. This rent was paid by the private company out of the car fares, and a dividend was earned besides.

In this latter case, the tramway fares represent the kind of taxation the protected consumer pays. The protective government—with one significant exception, that it charges nothing for the grant of monopoly—deals with the industries of the country as the Glasgow Municipality formerly did with the tramways. It gives its producers a partial or total monopoly of the national market. It charges importers a heavy sum on foreign goods, which they pay on entry of the goods, and this is the indirect taxation called Customs Duties. The people who bear this taxation are not the importers, but the consumers, who thereafter buy the goods and pay the heightened price. This is very simple and quite unexceptionable. It is, so far, merely taxation for revenue—the same kind of taxation as is levied in colonies where the tariff is not primarily protective.

But something else ensues. Within the country, there are a number of manufacturers making the same kind of goods as those imported. Probably they cannot make the goods at the same cost. But, whether they can or cannot, one thing is certain: that they will not sell their goods under the price of the imported articles—except in so far as they have over-production, and cannot dispose of all the goods at the high price. Thus it comes that all these goods, imported and homemade alike, carry a tax contained in the price.

The government has practically said to its home producers: “We know that you cannot produce so cheaply as an old country, and that your prices must, accordingly, be higher if you are to exist at all. But we want you to exist; and, instead of giving you a direct subsidy or bounty, we shall shut out, wholly or partially, the goods of other countries. This will cut off a good deal of the competition”—it would probably be called the “unfair competition”—“at least, it will prevent your being undersold; and you will be permitted in peace to charge a price that will cover your necessarily higher costs.”

The result is, that all who buy goods in a protected country—that is, the Consumers—are taxed, although they do not know it, for the benefit of their own Producers. Only now and then does it seem to occur to the citizen of a protected country that he does not gain much if he gets twice the wage and profits that we get, on condition of paying twice as much as we do for everything he buys.

What this indirect subsidy costs in figures, it is impossible to say. It was an American who said: “The tribute which a few rich men are enabled by this system to levy upon the rest of the community—at the most moderate estimate—is three times the amount of duties actually collected by the government upon such products”¹—which means, one may suppose, that, for every £1 which the government gets in customs duties, private individuals get £3 in excise. What should we say if our breweries and distilleries were managed on such a system?

This, then, is the answer to the question, Who pays for Protection? The Nation pays for it in Indirect Taxation.

And what it pays in this way is quite additional to, and independent of, the costly—indeed extravagant—machinery of collection of import duties. This is always an expense. When I said that the community gets its taxation back—that it is not a burden but a price—I should have added “minus the expenses of collection.” These expenses are always and necessarily Burden.

Happily, with us, the expense of collection is reduced to a minimum. One of the things we aim at is a system of taxation which shall take out, and keep out, of the pockets of the people as little as possible. But in Protection, where everything entering is watched, and generally taxed, the machinery of collection is enormously costly, and all this must be paid for, as pure burden, by the nation through its ordinary taxation. So that, apart from this heavy indirect taxation just spoken of, there is a second taxation—both of them for the benefit of the protected industries.

¹This, of course, would not be true in all circumstances. There would remain competition among the home producers, and, if foreign goods were shut out by the duty, the high profits would induce a rush of capital which probably would for a time make the competition very severe and reduce prices. This, indeed, is a common phenomenon of Protection, and has already been emphasised in the quotation from the Tariff Commission of 1882, on page 73. But such competition, under Protection, usually ends in a Trust or price agreement, whereby prices are put up again to a monopoly level just sufficient to prevent the competing foreign goods coming in—in which case, the country loses the revenue it would otherwise have had, and the consumers do not get either relief or compensation.

¹It should be said that, in the literature of economic science, there is considerable difference of opinion as to what payments to government, are properly called Taxes and what called “fees “or “prices.” Many restrict the word to cases where the attempt to measure and assess benefit, if present at all, is a minor matter, thus making the method of assessment the criterion of whether the payment is a tax or not. This would exclude such charges as postage stamps, gas rates, tramway fares. Others, again, while including such services as those of the Post Office in the purview of taxation, would restrict the tax proper to the net revenue or “profits.” There are great difficulties in any classification. But, for the present purpose, the academic distinctions may be left out of account, and the word may be used to include all payments for government services to large bodies of general consumers, however rendered, and however assessed and measured.

¹T. G. Shearman, Natural Taxation, Putnams, p. 24.