Taxes Under Mercantilism

Taxes under Mercantilism, Theory of Taxation

Generally speaking, the mercantilists believed that taxes should be paid according to the benefits received from the state. Sir Wil­liam Petty (1623-1687) wrote the first systematic treatise on this subject. He believed in the sovereignty of the government and he realized that to carry on the necessary functions included not only the traditional patterns such as defense, maintenance of rulers, administration of justice, and the care of men's souls. Three additional functions were added: support of schools and colleges, so that the ablest students might attend rather than those who had money enough but little ability; support of orphanages and care for the dependents; and finally the maintenance of highways, navigable streams, bridges and harbors.

As the basic formula for taxation, Petty stated that men should contribute to the state according to the share and interest they have in the "public peace," that is, "according to their Estates or Riches." In spite of the justice of the formula, Petty found that people were reluctant to pay their taxes. The cause of this might be ascribed to the inconvenience of the time of payment, the scarcity of money, the fact that people thought- the sovereign was asking for more than he needed, more of it than necessary was going for unnecessary splendor, and taxes were not levied equitably on all. He attempted to give an economic justification of taxation by saying that taxes did not change the economic po­sition of the nation in the slightest. Money taken in taxation is returned directly to the people. However, taxes ought not to be levied in such a way as to reduce the funds necessary to support the trade of the nation. Therefore, taxes are not harmful as long as they are spent for domestic products. One of the major diffi­culties, he believed, in making taxes equitable and proportional, however, was the lack of knowledge concerning the number of people and their wealth.
Upon two methods of taxation current in his day, Petty had decided views. These were debasement of currency and excise taxes. He claimed that debasement was really a very inequitable system of taxation, falling most heavily upon the creditors of the state and the holders of fixed incomes. The normal uses of debasement, such as the attraction of foreign money and lower­ing of wages, Petty found to be unsuccessful. Consequently he warned that debasement was as "a sign that the state sinketh." He was more charitable to taxes upon domestic consumption, or excises. That each person should be taxed in proportion to his enjoyment or expenditure seemed to him essentially just. More­over, by encouraging thrift the wealth of the nation would be in­creased. Duties upon imports and exports were approved if they were levied within reason and somewhat selectively. An import duty should be levied on goods manufactured in England. It should be just high enough to keep the foreign product from do­mestic consumption. For raw materials necessary for England's industry, no duty at all or only a very light one should be levied. With luxury goods from abroad the interests of the nation would be well served if the duty were excessive. The nation would- by such measures be made frugal. Export duties should never exceed a point where they would raise the cost of the product beyond the price asked by competitors in other nations.

To other minor types of taxation Petty stood in opposition. Poll taxes, if levied on all alike, were unfair. He condemned taxes on lotteries because a lottery operated by private interests profited by the gullibility of men. This attribute, if exploited at all, should be done by the state, not private interests. Taxes on monopolies were sound originally because a monopoly right was the reward of an. able public benefactor. That was no longer true, and monopolies were rapidly increasing in number. He felt, therefore, that the presence of a monopoly tax encouraged the creation of monopolies, an unwise practice as judged by the pres­ent holders of monopolies.

Petty's work stands alone as the first systematic treatment of the problem of taxation. Each tax, however, is an invitation to a discourse upon related economic factors. Thus the statement of critics that Petty's work is not a systematic treatment of eco­nomics is completely justified. However, his scattered observa­tions on general economic subjects were vital and enduring. Much of what he said has a distincdy modern flavor.

David Hume (1711—1776) was the next of the English economists to deal at length with the problem of taxation. He contended that both a monetary economy and a relative equality in the distribution of wealth contributed to a strong state, since the sources of revenue were more numerous and the ease with which revenue could be secured from the people was greater. Hume like Petty stood in opposition to all arbitrary taxes because they were unequal and they were costly to collect. On the other hand, he held that the laying of a tax might have good results, especially among laborers who because of the tax might be en­couraged to work more efficiently. However, if industry was too heavily taxed, the result would be the death of industry rather than its growth in earning power. Hume believed levies upon luxury to be wise taxation. It taxed those who were wealthy enough to pay for luxuries; the tax was paid in small amounts entering into final price almost as a cost of production; and a person had an element of choice—he could either pay the tax or do without the unnecessary luxury.

In regard to the other relationships of the state to economics, Hume represented a compromise. He believed that commerce thrived in a state where freedom was allowed, and perished where restrictions were too numerous. It was the state's function to insure liberty and at the same time to protect business interests. Yet Hume never indicated that he considered individual welfare superior to that of the state. For the greatness of the nation it was necessary for the state to foster those conditions which cause foreign trade to prosper; at the same time, he denied the basic mercantilist thesis that a nation prospered only through a favorable balance of foreign trade.

Hume, like Mill nearly a century later, lived in a period when economic ideas were in a state of flux. New ideas were developing but they had not crystallized; old ideas hung on as a matter of tradition. Hume brought together the old and the new, but he could never quite eliminate the contradiction which an associa­tion of the old and the new made inevitable.