Principles of Political Economy · John Stuart Mill
Chapter III. Of Taxes On Commodities, Or Indirect Taxes.
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 England for corn 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 iron in the United States 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 corn exported will no longer pay for the iron imported.
Money will therefore flow out of the United States into England. One effect is to raise the price of iron in England, and consequently in the United States. 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 iron consumed. The balance, therefore, can only be restored by the other effect, which is going on at the same time, namely, the fall of corn in the American and consequently in the English market. Even when corn 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 English consumers have now not only corn 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 corn. The price of corn, therefore, must perhaps fall, to restore the equilibrium, more than the whole amount of the duty; England may be enabled to import corn at a lower price when it is taxed than when it was untaxed; and this gain she will acquire at the expense of the American consumers of iron, 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 corn.
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.(345) The result of this investigation may, then, be generally formulated as follows: That country which has the strongest demand for the commodities of other countries as compared with the demand of other countries for its own commodities will pay the burden of the export duty. 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 corn which we export, suppose that we tax the iron 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 corn and in iron, 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 iron we did consume.
“The equilibrium of trade would be disturbed if the imposition of the tax diminished, in the slightest degree, the quantity of iron consumed. For, as the tax is levied at our own custom-house, the English exporter only receives the same price as formerly, though the American 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 the United States to England: this sum will no longer be an equivalent for the sum due from England to the United States for corn, the balance therefore must be paid in money. Prices will fall in England and rise in the United States; iron will fall in the English market; corn will rise in the American. The English will pay a higher price for corn, and will have smaller money incomes to buy it with; while the Americans will obtain iron 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 labor 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 it 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 for 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 can not 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 land-owners or mine-owners in the producing country.
Duties on importation may, then, be divided “into two classes: (1) those which have the effect of encouraging some particular branch of domestic industry [protective duties], (2) and those which have not [revenue duties]. The former are purely mischievous, both to the country imposing them and to those with whom it trades. They prevent a saving of labor 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 labor 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 the United States, in the case already supposed, sought to obtain for herself more than her natural share of the advantage of the trade with England, by imposing a duty upon iron, England would only have to impose a duty upon corn sufficient to diminish the demand for that article about as much as the demand for iron had been diminished in the United States 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 can not be expected to renounce the power of taxing foreigners unless foreigners will in return practice toward 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.” By “reciprocity” is meant that, when one country admits goods free of duty from a second country, this latter country will also admit the commodities of the former free of duty; or, as is often the case, if not free of duty, at a less than the usual rate. Until the last few years we have had a reciprocity treaty with Canada, but it is not now in force; and an arrangement for closer commercial relations with Mexico is now under consideration.
Ideas discussed in this chapter
Text from Project Gutenberg, public domain in the United States.