assented that, in the absence of knowledge, it seems best to assume that there is no great variation: then to all intents and purposes it is possible to say, so far as this argument is concerned, that the tax raises the price by the amount of the tax (Q. 600-610).

584. Again, it was stated by the Association of British Chambers of Commerce and by the Co-operative Congress that prices are often increased by more than the indirect tax in order that the trader may cover interest on the further capital expended. This is no doubt so, although the interest is likely to be relatively a very small factor.

585. It may further be contended that an actual profit is made on the tax, and the support of Adam Smith can be quoted: "A tax upon these articles (necessaries of life) necessarily raises the price somewhat higher than the amount of the tax, because the dealer who advances the tax must generally get it back with a profit." But Professor Seligman, referring to this view and dealing with a commodity which passes through several hands, points out that "under competitive conditions, there is always a producer or middleman on the margin of production-that is, one who produces or handles the product without profits, simply getting back his expenses-and the price of the whole supply, at any given moment, is equal to his cost of doing the business. The mere fact that the product passes through a number of hands cannot in itself raise the price by more than the exact cost of such transference. The tax is simply

an addition to the cost of production; and there can be no geometrical increase in the tax."* This argument is, we, think, valid, assuming free competition over the whole field of supply. In actual fact, where competition is not in free play, it may well be that some profit is made on the tax. This, we think, will be particularly so at the retail stage, owing to the personal and local advantage often enjoyed by the retailer.

586. On the whole it is likely that in most cases the amount directly passed on to the consumer on account of Customs and Excise duties corresponds fairly closely with the amount of those duties, but with a natural tendency to be rather greater.

587. In the general note on "incidence "incidence" (paras. 288-92) it has been observed that a trader who succeeds in shifting a tax may nevertheless suffer from reduced sales, and again, that an employee who bears a tax may be able on that account to obtain an increase of wages.

588. The above paragraphs relate only to the existing duties. We are not called upon to discuss the incidence of commodity taxes in general. However, in order to avoid any misunderstanding it may be well to note that we are not attempting to lay down a hard and fast rule that all such taxes in their

* Incidence of Taxation-Columbia University Press-4th Edition, 1921p. 353.

entirety are necessarily borne by the consumer. Economists are generally agreed that there are conditions in which an import duty may be partly borne by the foreigner, e.g., if there is only a limited market for his particular commodity outside the country where the duty is in force in such a case, rather than lose an important part of his market, he may choose to bear some of the duty.

GENERAL EFFECTS OF THE CUSTOMS AND EXCISE DUTIES.

Introductory.

589. The Customs and Excise duties may be contrasted with the Income Tax, as indirect taxes, which are intended to be, and in fact are, passed on to the consumer. Again, they may be contrasted as taxes which apply to a limited field,-viz., to certain selected commodities-while the Income Tax is a general tax applying to income as such.

590. A common objection to the taxation of commodities is that it interferes in an artificial way with the natural course of expenditure, and so of production. People may buy less of the taxed goods, and the trade which supplies them may be expected to suffer. The strength of this particular criticism depends very much on the goods chosen for taxation. The existing Customs and Excise duties are mostly levied on articles of very general consumption, the demand for which is relatively inelastic. On the whole, to judge by the effects of changes in their rates, the duties do not appear to have altered the character of consumption very greatly, except in the case of alcoholic drinks. The heavy taxes on beer and spirits have undoubtedly had an important restrictive effect*; here, however, it does not follow that the result has been harmful either to the consumer or to national production as a whole, while the brewers and distillers-apart from inefficient concerns do not appear to have been in a worse position than before.

591. We do not think that the existing duties have had any very disturbing effect on the trade of the country. At the same time we are of opinion that the tendency of indirect taxation is, in general, to cause not only dislocation when first imposed or varied, but a continuing diversion of trade from the course it would otherwise pursue the present system is comparatively harmless in this respect only on account of the particular subjects on which the bulk of the duty is levied.

592. Practically, the chief questions to be considered arise from the weight of the burden which the duties lay upon the poorest members of the community: we propose then to examine the effect of the duties on the standard of living and physical efficiency of the wage-earning classes.

The change in consumption, however, must not be entirely attributed to this cause. It is partly due, no doubt, to enforced war-time restrictions which were in operation long enough to affect habits; it is also partly due to the trade depression and other general causes.

The order of our discussion will be as follows:

I. The weight of the duties and the
standard of living-

:

Paragraphs.

593-4

595-7 598-614

615

616-24

625-31

...

632-7

638-42

I. THE WEIGHT OF THE DUTIES AND THE STANDARD OF LIVING.

593. General.-From the table in paragraph 218 it will be seen that the great bulk of the yield is from the food, alcohol, tobacco and entertainments duties. The following table will illustrate the weight of these duties in 1913-14 and in the last three years:

:

594. An attempt has been made in the tables in paragraph 255 to illustrate the burden of the duties at certain points on the income scale. The figures present a very different appearance from those of the progressive direct taxes. Instead of increasing from a very low charge on the small income to a very high charge at the top of the income scale, they advance very little and soon reach a maximum. In other words, the indirect taxes

are regressive; the smaller the income, the larger is the rate upon it which the taxes represent.

595. Regression in the indirect taxes.-When we speak of a tax as regressive we have in mind simply the ratio of the tax to incomes of different sizes. If everybody's expenditure on a given taxed article were the same, whatever their income, the rate of tax borne by the individual would vary inversely to the size of his income, e.g., if the tax were d. in the pound for an income of £1,000, it would be d. in the pound for an income of £500, 1d. in the pound for an income of £250, and 21d. in the pound for an income of £100. Where a light tax is laid upon a cheap article of general consumption, the regression approximates to this type all through the income scale. But the heavier the tax the more it will tend to restrict consumption in the smaller incomes as compared with the larger; as a result, the tax will be less regressive at the lower end of the income scale.

596. For the sake of example, we may take an imaginary case the increase of a duty from 0-2d. per unit to 5'2d. per unit might have an effect of the following kind :

In this example the raising of the duty has led to a severe curtailment of consumption, especially for the £100 income. The higher tax is less regressive, but it may be very damaging if the subject of the tax is a valuable article of diet.

597. It is therefore necessary to judge an indirect tax not only according to the degree of its regression, but also according to its actual weight, and the extent to which it affects consumption.

But, before we proceed to consider the principal existing duties on this plan, we must examine the important and rather difficult question of the relation between those duties and wages. It is sometimes urged that the working classes have been largely compensated for the increased duties by extra wages granted on their account. This goes to the root of the question how the duties are really affecting the standard of living.

598. Indirect taxes and wages. (i) General.-In the section of our Report dealing with the standard of living (paras. 9 to 44) we have seen that, compared with 1914, weekly rates of money wages have, on the average, advanced to about the same extent as the cost of living. But this average correspondence conceals the greatest diversity in different industries. In some of the sheltered trades wage-rates have moved right ahead of the cost of living, while in some of the depressed export trades they have fallen far behind. Generally, we noted that the unskilled have gained to some extent as compared with the skilled.

For

599. Whether an individual wage-earner has the same purchasing power as before the war depends on the extent to which the wage-rates, etc., affecting him have advanced, and the way in which he is in the habit of laying out his money. instance, the teetotaler, other things being equal, has more easily retained his power to purchase the same quantity of the same commodities than the beer-drinker, beer having gone up in price more than the general cost of living.

600. In some cases it may happen, without the application of any index figure, that wages in a given post have advanced sufficiently over the pre-war amount to cover the increase in the individual's cost of living, including all the dutiable articles on which he has been in the habit of spending.

601. The question with which we are concerned in such a case is the reason for the increase in wage-rates. Is it on account of the increased duties that the individual has succeeded in obtaining an increase of wage sufficient to cover them? If so, he has escaped the whole effect of the increased taxation; otherwise he has not. Clearly the reason cannot be assumed. The fact that his wages have advanced sufficiently to cover the increased duties may be a mere coincidence.

602. Let it be supposed that the extra duty he bears on tea, sugar, tobacco, &c., amounts in all to £10, and that his increase of wage amounts in the year to £80. The increase in the wagerate will have been regulated by a variety of factors in addition to the increase in the cost of living; primary factors will have been the amount which the industry could afford, and the relative bargaining strength of employers and men. We have to ask what part of the £80 can really be attributed to a particular element-indirect taxation-in a particular factor—the increased cost of living. It is impossible to say.

Suppose, for the sake of illustration, it is £3. Then the increase of Customs and Excise duties has imposed on the individual a burden of £10, and it has enabled him to obtain, as against this burden, £3 more in wages. It happens by mere chance that the increase in wages (£77) due to other causes has enabled him to meet the balance of £7 duty, without reducing his consumption or his saving in any direction.