Ludwig von Mises Institute

Chapter 32
Tariff and Special Taxation

There is an abnormal effect on price, and, hence, injustice in the distribution of wealth, in the tariff system of taxation, apart from the contested principle of protection, as distinct from revenue, which ought to remove that system from our national policy. It is, in the addition of price to the article taxed, an effect that is inadmissible in any system of taxation. When taxes are levied, ad valorem, on all property alike, they have no effect whatever on price, all prices being precisely the same as if there were no taxes at all. This is the only true principle of taxation, since it leaves undisturbed the just rewards of labor, and both the domestic and foreign trade of the country unimpaired.

Price is not value, and taxes are paid in value. Suppose the annual taxes to be one per cent, ad valorem, on all property; then the farmer, for instance, would appropriate one bushel of every hundred bushels of his corn to the payment of his tax bill and the support of government. Or suppose the taxes are two per cent; then his appropriation must be two bushels instead of one to the same purpose. He gets neither more nor less price for his corn in either case, since the supply of corn is not altered by the taxes; and, obviously, it is the same with every other sort of capital. Value in capital must be contributed by some or all citizens to the support of government; and when a scheme of taxation enables anyone to add the sum of his tax, or any portion of it, to the price of the commodity he produces or sells, it is unjust, inasmuch as it enables him to shirk his tax and shift his burden upon the shoulders of other men.

No increase of expenditure, whether of government or of individuals, can attract money; nothing but capital in circulation can do this. An increase of other capital attracts money by making other capital relatively plenty and cheap, and money relatively scarce and dear; and money, like every other commodity, seeks the dearest market: that is, where it commands the most value in exchange. In all cases general or average prices result from the supply of money or currency, modified by the activity of circulation, in relation to the supply of other capital or objects of exchange, and are in no degree affected by the taxes which provide for the expenditure of government. A thing must be made more desirable by the expenditure upon it, or the expenditure adds nothing to capital or wealth.

John Stuart Mill remarks, in his chapter of "Taxes on Commodities," that the effect of such taxes, "when levied on all commodities in exact proportion to their value, would neither be a general rise of values, which is an absurdity, nor of prices, which depend on causes entirely different." That is to say, values depend on the supply of everything in relation to the supply of every other thing, and, as they necessarily embrace all exchangeable things, money included, leaving nothing for a standard of comparison, a general rise of values is an impossibility. Whereas prices depend simply on the supply of money or currency in relation to the supply of all other things; hence a general rise of prices is easily possible, and takes place whenever the currency is increased in relation to the circulating capital, or the circulating capital is diminished in relation to the currency.

General prices and taxes, however, depend, legitimately, on diametrically opposite causes, viz., the prices on the accumulation of capital which attracts money, and the taxes on the consumption of capital which repels money. But whether the currency be money attracted by other capital, or credit, organized by banks or government, general prices have no dependence on, and are in no manner influenced by, the taxes; for taxes neither alter the relative supply, nor the desirableness, of anything whatever.

It follows that when a price is raised by special taxation it is raised on the principle of plunder, since, as it cannot affect general or average prices, the currency it employs, and the price it absorbs, must be abstracted from other prices. Hence some men escape their just proportion of the taxes, while others, who have not the advantage of special taxation to add to the prices of their products, are compelled to pay not only their own share of the taxes but the share of others besides.

The power of this evil principle is, of course, unequal in proportion as prices are affected by it in the general circulation of things; not that one thing is so much higher, and another precisely as much lower, than the true and natural price; because the commodities included in the tariff, or charged with special taxation, form the smaller portion of the circulating capital.

Thus, if we assume, without pretending to statistical accuracy, that property amounting to nine thousand millions of dollars changes hands in one year in this country, one-ninth of which is raised in price forty per cent, on the average, by tariff and special taxation, then that one-ninth, the normal price of which would be one thousand millions, sells, under the abnormal operation of the tax, for fourteen hundred millions of dollars, and the four hundred millions of extra price is necessarily abstracted from the remaining eight-ninths of the property, which should bring, under the natural law of distribution, eight thousand millions, but will fetch only seven thousand six hundred millions of dollars. That is to say, the producers of one thousand millions of value are protected forty per cent by plundering the producers of eight thousand millions five per cent.

This is not the question of protection, as distinguished from revenue, in the tariff system, which agitates political parties; it is more than that: it is the question of spoliation by government of one part of the community for the benefit of another involved in every act of special taxation—every tax on the pound or the yard or the bushel or the piece: every per cent on a specific commodity—whether in the tariff or the internal revenue system. And it is the fatal mistake of the free traders and revenue reformers that they do not see this essential point in political economy and shape their politics accordingly. They concede the whole argument, in principle, when they advocate a tariff on imports of any description, and become protectionists unawares.

Senator Sherman is criticised in some of the public prints for saying that he sees no difference in principle between a tariff for revenue and a tariff for protection. Senator Sherman has discovered the truth; he is right; there is no difference except in degree. Of course, a tariff will be more or less protective as it affects more or less any special price; but in its very nature it is protective, inasmuch as it must protect some interests from their due share of taxation, or in the accumulation of profits, by plundering others. And its effect is to disarrange, not only the normal and profitable distribution of property, but of population also. Huge fortunes, and great cities festering with corruption, are built up, by diminishing the wealth and population of the country districts, through this abnormal system; while, in the cities, the effect is to make a few men rich and the vast majority poor.

Notwithstanding the curious error of the French sect of Économistes, founded by Doctor Quesnay, in teaching that merchants, artificers, and manufacturers are maintained altogether at the expense of the proprietors and cultivators of the land, that school was right in its doctrine, on the point under consideration, as set forth by Adam Smith, thus:

When a landed nation oppresses, either by high duties or prohibitions, the trade of foreign nations, it necessarily hurts its own interest in two different ways. First, by raising the price of all foreign goods, and of all sorts of manufactures, it necessarily sinks the real value of the surplus produce of its own land, with which, or, what comes to the same thing, with the price of which, it purchases those foreign goods and manufactures. Secondly, by giving a sort of monopoly of the home market to its own merchants, artificers, and manufacturers, it raises the rate of mercantile and manufacturing profit, in proportion to that of agricultural profit; and, consequently, either draws from agriculture a part of the capital which had before been employed in it, or hinders from going to it a part of what would otherwise have gone to it. This policy, therefore, discourages agriculture in two different ways: first, by sinking the real value of its produce, and thereby lowering the rate of its profits; and, secondly, by raising the rate of profits in all other employments. Agriculture is rendered less advantageous, and trade and manufactures more advantageous, than they otherwise would be; and every man is tempted by his own interest to turn, as much as he can, both his capital and his industry from the former to the latter employments.

The doctrines of the Économistes are treated with perfect fairness in the Wealth of Nations, Book 4, Chapter 9, "On the Agricultural Systems," and everyone who proposes to vote or to legislate with reference to taxation, and especially with reference to a tariff on imports, should study that chapter. Doctor Quesnay's system is therein shown to be a generous one; its "capital error seems to lie in its representing the class of artificers, manufacturers and merchants, as altogether barren and unproductive"; but it admits that this unproductive class is "not only useful, but greatly useful to the other two classes," and hence proposes perfect freedom of trade as the true policy for the nation. It gives merely a theoretical preference to agriculture as the basis of all production and of all wealth; but inculcates noninterference with industry by government as its cardinal principle.

"Every system," says Adam Smith, "which endeavors, either by extraordinary encouragements to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it, or, by extraordinary restraints, to force from a particular species of industry some share of the capital which would otherwise be employed in it, is, in reality, subversive of the great purpose which it means to promote. It retards instead of accelerating the progress of society towards real wealth and greatness; and diminishes instead of increasing the real value of the annual produce of its land and labor": to which may be added the words of Bastiat—"The good of each tends to the good of all, as the good of all tends to the good of each."

Agriculture is the great unprotected industry of the United States; and the effect of our tariff policy is to condemn the farmer to relatively poor pay for hard work. He is compelled to pay the tariff advance on the foreign goods, and on the domestic goods raised in price thereby, which he consumes in his family, while his own produce is at the same time depressed below its natural price by reason of the tariff advance on other merchandise. He is thus taxed both positively and negatively, and bears, as it were, a double burden. It follows that men turn to farming with reluctance, and young men escape from it on every imaginable opportunity, crowding our cities and manufacturing towns, prematurely and unnaturally, with a population that would be more profitably and healthfully distributed over the country; while the temptations and immoralities of cities multiply idlers, paupers, and vagabonds, that are altogether foreign to our normal growth in civilization.

Agriculture is also the great natural industry of this country. We are emphatically what Adam Smith calls a landed nation. Nature works gratuitously, and agriculture is the employment here in which nature co-operates the most efficiently with the labor of man in the production of value. Vast unoccupied tracts of fertile land; an invigorating and varied climate; an almost endless extent of free navigation of rivers and lakes; numerous and safe harbors on two oceans; timber, and coal, and iron, in abundance, for the construction of roads and of vessels to transport our bulky products to all markets: these are among the advantages which Nature offers to human industry here, as nowhere else, for the pursuit of agriculture in cheap production; and the nation, as a whole, thrives by reason of these advantages, in spite of a very preposterous political economy, and of much needless individual bankruptcy, perplexity, and suffering.

Where food and the other necessaries of life are procured with the least labor they are the cheapest, and the people have the advantage of every other people—the facilities for procuring raw material being the same—for manufacturing and producing everything, whether of necessity, convenience, or luxury, and this advantage can only be impaired or sacrificed by the interference of government. The people of the United States have precisely this advantage; it crops out in a ceaseless and increasing flood of immigration from the old countries and in the most wonderful national prosperity known to history. Yet it is interfered with by government in creating a false currency, by which money is made unnaturally cheap, and goods unnaturally dear, as well as in the tariff system and other artifices to reward one class of men at the cost of another.

By making money artificially cheap, government compels us to part with money—the sinews of trade—when we should naturally ship merchandise, and receive money. Our exchanges are thus thrown into the wild vortex of credit, the centre of which is called "money," but is nothing of the sort, because it is not capital: it is a promise, and makes no payment; it is, indeed, more entirely credit than any other part of the system, since it is formed, not like an ordinary promissory note, by the passing of capital, but by granting one credit against another—a mere bubble that collapses by an offset, and reduces the currency and general prices without the payment or passing of any capital whatever. Nearly the whole circulating capital of the country is thus set afloat on "the Daedalian wings of paper money," carrying prices up and down with all the uncertainty of a game of hazard; so that, notwithstanding the great wealth and general prosperity of the nation, there is not, probably, on the face of the earth, a people so much and so often cheated of their dues, or generally more uncomfortable in their business relations, and more unhappy, individually, than we are.

Take the hands of government off of money and commerce, and leave money, without the interference of a false banking system, to the natural law of circulation, as a commodity, and business would be more secure and active here than anywhere else, while, in spite of England, we should take the lead in the navigation and in the commerce of the world. Everywhere the thing which is produced the cheapest constitutes the means of buying cheapest whatever may be wanted at home or abroad. But this simple and undeniable truth is wholly ignored in our political economy. Obviously, the cost of a commodity imported can never by any possibility exceed the cost of the commodity exported which pays for it; and this is equally true in the transactions of merchants and of nations, let the price be as it may. What if a yard of broadcloth is imported at the price of eight dollars, and paid for in four bushels of wheat exported at two dollars the bushel; the question is, what is the cost of the wheat to us? If only one dollar the bushel, then the cost to us of the yard of broadcloth is but four dollars, and the profit of four dollars to the merchant or the nation, one or both, is invested in the cloth.

But the better way to state this problem is in labor, since labor is the basis of value. If the yard of broadcloth cost, say in England, eight days' labor, and our four bushels of wheat cost but four days' labor, it is clear that on the cloth, being more wanted than the wheat, we make one hundred per cent profit by the exchange. And, assuming that more than eight days' labor must be expended to manufacture the cloth here, we are gainers still further by producing the wheat instead. Now, whether the gain be one hundred per cent or any per cent, the principle involved is the same, and it is manifestly absurd for the government to force the manufacture of broadcloth which we can procure cheaper by leaving our industry to its natural liberty in the production and export of wheat.

It is not, however, the purpose of this paper to elaborate the arguments of well-known authors in economical science—Harris, Smith, Say, Ricardo, McCulloch, Mill, Bastiat, Chevalier, Cobden, and others—all of whom have exposed the folly of the so-called protective principle in a tariff, but to exhibit the wrong of every description of tariff and special taxation, since it is impossible to advance the price of anything by a tax unless upon the principle of plunder, by taking unequally and unjustly the property of some men for the benefit of others, or robbing the many for the benefit of the few. This is a point of great importance, with respect to legislation, which no one of these authors seems to have brought into view. True, it is to be inferred from Adam Smith's statement, following Quesnay, that "when a landed nation, by means of duties, raises the price of foreign goods and of manufactures, it necessarily sinks the value of the produce of its own land," because the value of that produce cannot sink without a proportional fall of price to the injury of its producers; but he does not say this; and, by fixing his attention too exclusively on the tariff, and its effect upon the general welfare of the nation, he seems to have overlooked, in a great measure, its effect on different classes of citizens, and entirely to have overlooked the fact that every tax which raises a special price rewards some men by plundering others.

Now, it is for statesmen to discover and apply some perfect ad valorem system of taxation, which shall be free from the iniquity of raising the price of anything. No one expects perfect equity in the operation of any law, however perfect the system on which it may be based, until all men become honest, which is not likely to happen immediately; but the several States and territories of this Union require a valuation of property for their own purposes of local taxation, and it would seem to be practicable and easy for the general government to co-operate with the State and territorial governments in obtaining a uniform and correct valuation, through commissioners appointed by Congress and the Executive, to act with the local assessors, and the per cent applicable to the general government could then be collected with the local taxes at no more cost, necessarily, than would attend the collection of the local taxes alone.

What honest objection can there be to this? Certainly it would abolish customhouses, with their needless cost—their spies and informers and lying oaths and abominable corruptions; while it would relieve merchants from a senseless routine of labor, complication, and delay, in the transaction of business, and tend greatly to expedite and augment the commerce and wealth of the nation.

As to the method of valuation, very likely, because of possible concealments, and the weak integrity in public matters too generally prevailing, perfect directness may not be the best, with respect to personal property, and it may be well to adopt some such plan as that proposed by Mr. David A. Wells, and the New York Commission, of calculating upon the rental of real estate, multiplying the sum of the rental, with the greatest fairness and approximate accuracy, to estimate the value of the personal property.

Just here it may be proper to say that, whatever may have been intended by the 4th clause of Section 9, Article 1, of the U. S. Constitution—"No capitation or other direct tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken"—it is, and has been from the first, a dead letter, except as to the capitation tax, because it would be so palpably unjust to apportion the tax by the head on the aggregate property of the nation, the same in the poorer as in the richer sections of the country, that it is plainly impracticable, and no such apportionment seems ever to have been attempted. Clearly, no law to that effect could be executed. We may, therefore, dismiss that as a possible objection to a uniform system of ad valorem taxation.

But whatever plan may be considered or adopted, every good citizen and every statesman should set his face like flint against the present system, and every other which can have the same effect of raising prices by taxation.