7. Taxation

For classical nineteenth-century Liberalism, which assigns to the State the sole task of safeguarding the citizen’s property and person, the problem of raising the means needed for public services is a matter of small importance. The expenditure caused by the apparatus of a liberal community is so small, compared with the total national income, that there is little appreciable difference between meeting it one way or another. If the liberal writers of that period have been concerned to find the best form of taxation, they have done so because they wish to arrange every detail of the social system in the most effective way, not because they think that public finance is one of the main problems of society. They have of course to take into account the fact that nowhere in the world have their ideas been realized, and that the hope of seeing them completely realized in the near future is slender. They see clear evidence of liberal development everywhere, they believe that the distant future belongs to Liberalism; but the forces of the past still seem sufficiently strong to inhibit its progress, though no longer strong enough to stop it completely, let alone suppress it. There still exist schemes for violence and conquest, there are standing armies, secret diplomatic treaties, wars, tariffs, State interference in trade and industry — in short, interventionism of every kind in home and foreign policy. So, for a considerable time to come, the nations must be prepared to allow considerable sums for governmental expenditure. Though questions of taxation would be of minor importance in the purely liberal state, they call for increased attention in the authoritarian state in which liberal politicians of their time have to work. In the first place, therefore, they recommend that State expenditure shall be restricted. But if they do not completely succeed in this they must decide how the necessary funds are to be raised without more harm than is absolutely necessary.

Liberal taxation proposals must necessarily be misunderstood unless it is realized that liberal politicians look on every tax as an evil — though up to a point an unavoidable one — and that they proceed from the supposition that one must try to keep State expenditure down to a minimum. When they recommend a certain tax, or, to speak more correctly, call it less harmful than other taxes, they always have in mind the raising of only a relatively small sum. A low rate of taxation is an integral part of all liberal 1 programmes of taxation. This alone explains their attitude towards the income tax, which they were the first to introduce into serious discussions on public finance, and their willingness to agree that a modest minimum of subsistence shall be free from taxation and the rate of taxation on small incomes lowered.

The socialist financial policy also is only a temporary one, its validity being limited to the period of transition. For the Socialist State, where all means of production belong to society and all income finds its way in the first place to the State coffers, questions of finance and taxation do not exist at all in the sense in which the social order based on private property has to deal with them. Those forms of the socialist community which, like State Socialism, intend to allow private property to continue in name and in outward form, would not really need to levy taxes either, although they might retain the name and legal form of taxation. They would simply decree how much of the social income obtained in the individual enterprises should remain with the nominal owner and how much should be handed over to the State. There would not be any question here of a taxation which imposes certain obstacles in individual businesses, but leaves the market to deal with its effect upon the prices of commodities and wages, on profits, interest, and rents. Questions of public finance and the policy of taxation exist only where there is private ownership in the means of production.

But for socialists, too, the public finance problems of capitalist society increase in importance as the period of transition becomes more and more prolonged. This is inevitable, seeing that they are continually trying to expand the area of the State’s tasks and that there is consequently an increase in expenditure. They thus take over the responsibility of increasing the income of the State. The socialist policy has become the decisive factor in the development of government expenditure, socialist demands regulate the policy of taxation and in the socialist programme itself public finance comes more and more into the foreground. Whilst in the liberal programme the basic principle is a low rate of taxation, the socialists think a tax is better the heavier it is.

Classical economics achieved much in the theory of the incidence of taxes. This must be admitted in spite of all the faults of its basic theory of value. When liberal politicians criticized existing conditions and proposed reforms they started from the masterly propositions of Riccardo’s admirable investigations on this subject. Socialist politicians have taken things much more easily. They had no new opinions of their own, and from the classical writers they took merely what they needed for the politics of the moment — isolated remarks, torn from their context and dealing mainly with the incidence of taxes on consumption. They improvized a rough system which nowhere penetrated to the main problem, but had the virtue of being so simple that the masses could understand it. Taxes were to be paid by the rich, the entrepreneurs, the capitalists, in short, by ‘the others’; the workers, that is the electors whose votes were what mattered at the moment, should remain tax free. All taxes on mass consumption, even on alcoholic drinks, were to be rejected, because they burdened the people. Direct taxes could be as high as the government wished to make them, as long as the incomes and possessions of the workers were left alone. Not for one moment does it occur to the advocates of this popular taxation policy that direct taxes and taxes on trade may start a chain of events that will force down the standard of living of the very classes whose alleged special interests they claim to represent. Seldom does anyone ask whether the restriction of capital formation which results from the taxation of property may not harm the non-propertied members of society as well. More and more the policy of taxation evolves into a policy of confiscation. The aim on which it concentrates is to tax out of existence every kind of fortune and income from property, in which process property invested in trade and industry, in shares and bonds, is generally treated more ruthlessly than property in land. Taxation becomes the favourite weapon of interventionism. Taxation laws no longer aim exclusively or predominantly at increasing State revenues; they are intended to serve other purposes besides fiscal requirements. Sometimes their relation to public finance vanishes completely and they fulfil an entirely different function. Some taxes seem to be inflicted as punishment for behaviour that is considered injurious; the tax on big stores is intended to make it more difficult for big stores to compete with small shops; the taxes on stock exchange transactions are designed to restrict speculation. The dues become so numerous and varied that in making business transactions a man must first of all consider what the effect on his taxation will be. Innumerable economic projects lie fallow because the load of taxation would make them unprofitable. Thus in many states the high duties on founding, maintaining, amalgamating, and liquidating joint stock companies seriously restrict the development of the system.

Nothing is more calculated to make a demagogue popular than a constantly reiterated demand for heavy taxes on the rich. Capital levies and high income taxes on the larger incomes are extraordinarily popular with the masses, who do not have to pay them. The assessors and collectors go about their business with positive enthusiasm; they are intent upon increasing the taxpayer’s liability by the subtleties of legal interpretation.

The destructionist policy of taxation culminates in capital levies. Property is expropriated and then consumed. Capital is transformed into goods for use and for consumption. The effect of all this should be plain to see. Yet the whole popular theory of taxation to-day leads to the same result.

Confiscations of capital through the legal form of taxation are neither socialistic nor a means to Socialism. They lead, not to socialization of the means of production, but to consumption of capital. Only when they are set within a socialist system, which retains the name and form of private property, are they a part of Socialism. In ‘War Socialism’ they supplemented the compulsory economic system and were instrumental in determining the evolution of the whole system towards Socialism.2  In a socialist system where the means of production are totally and formally socialized, there could in principle be no more taxes on property or income from property. When the socialist community levies dues from its members this in no way alters the disposal of the means of production.

Marx has spoken unfavourably of efforts to alter the social order by measures of taxation. He emphatically insisted that taxation reform alone could not replace Socialism.3  His views on the effect of taxes within the capitalist order were also different from those of the ordinary run of socialists. He said on one occasion, that to assert that ‘the income tax does not affect the workers’ was ‘truly absurd’. ‘In our present social order, where entrepreneurs and workers stand opposed, the bourgeoisie generally compensates itself for higher taxation by reducing wages or raising prices’.4  But the communist manifesto had already demanded ‘a heavy progressive tax’ and the social democratic party’s demands in taxation have always been the most radical. In that field also, therefore, it is moving towards destructionism.

• 1On the negative attitude of the liberals to the idea of progressive taxes see Thiers, De la propriété, Paris 1848, p. 352 et seq.
• 2See my Nation, Staat und Wirtschaft, p. 134 et seq.
• 3Mengelberg, Die Finanzpolitik der sozialdemokratischen Partei in ihren Zusammenhängen mit dent sozialistischen Staatsgedanken, Mannheim 1919, p. 30 et seq.
• 4Marx-Engels, Collected Writings, 1852-62, edited by Rjasanoff, Stuttgart 1917, Vol. I, p. 127.