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 Of Capital. 39

when it is necessary to resort to so high an income-tax that it must in great part be paid out of the capital of the country, or when taxes on commodities have been raised to the point at which further increase is attended with a diminution of revenue. In both these cases the production of wealth is at once impeded. If we had to decide between a loan and taxation as a mere abstract question concerning the production of wealth, there would be little hesitation in deciding against the loan, because a loan would generally be paid more entirely out of capital. It is, however, impossible to frame a general maxim which will apply to every case. Before a decision can be arrived at as to the extent to which additional expenditure should be met by a loan or by increased taxation, the economic circumstances of the country ought to be most carefully considered. Thus it may very possibly happen that additional taxation may be imposed without causing any serious inconvenience to the mass of the people or without to any appreciable extent interfering with industrial progress. The circumstances, however, of another country may be such as to cause the gravest evils to be associated with an increase of taxation. For example, the financial condition of India is such as to render it impossible to raise any considerable increase of revenue from taxation without producing very serious consequences. Past experience has shown that it is extremely difficult to raise revenue in India by any form of direct taxation, such as the income-tax; and any indirect tax is comparatively speaking unproductive unless it can be imposed on some article of general consumption. The mass of the Indian people are so poor, often earning wages of only 3d. or 4d. a day, that the only article they consume which admits of taxation is salt. The salt duty in India is one of the heaviest imposts that is levied in any country on a first necessary of life, and additional revenue could not be obtained from it without inflicting severe suffering upon the Indian people.

These discussions upon the relative advantages and disadvantages of loans and taxation will show the importance of arranging a tax so that it should cause the least possible diminution of capital. It is, therefore,

BOOK I. CH. IV.

A general principle of taxation.