DISCOVERY 



145 



Taxation and 

 Unemployment 



By Douglas Knoop, M.A. 



Pro/cssor of Economics in the Uniuersily of Slic/field 



The purpose of this article is to examine the con- 

 nection between taxation and unemployment. Though 

 students of the problem of unemployment have paid 

 little or no attention until recently to the possible 

 influences of taxation, students of public finance have 

 always contemplated the possible discouragement to 

 industry and trade which might be brought about by 

 unwise or excessive taxation. This point was emphasised 

 by Adam Smith as early as 1776.' In stating his fourth 

 maxim of taxation, he noted that a tax " may obstruct 

 the industry of the people, and discourage them from 

 applying to certain branches of business which might 

 give maintenance and employment to great multi- 

 tudes." Subsequent writers on public finance have 

 all laid stress on this so-called canon of economy, with 

 a distinct tendency to emphasise its importance even 

 more than was done by Adam Smith. 



That it is theoretically possible to crush an industry 

 almost, or entirely, out of existence by means of high 

 taxation must be admitted ; an actual case is noted 

 in the Poor Law Report of 1834, viz. farming in the 

 parish of Cholesbury in Bucks. Whilst the population 

 was almost stationary from 1801 to 1831, the rates 

 had increased from £10 14s. at the end of the eighteenth 

 century to £99 4s. in 1816, and to £150 5s. in 1831. In 

 1832 the attempt was made to collect rates amounting 

 to £367, but it proved an impossibility as the landlords 

 gave up their rents, the farmers their tenancies, and 

 the clergyman his glebe and his tithes. Thus the whole 

 parish was abandoned owing to excessive rates and 

 the labourers were thrown out of employment. 



The connection between taxation and unemploy- 

 ment in this country at the present time does not 

 appear to be exactly of this character. Roughly, it 

 seems possible to distinguish two types of cases : m 

 the first, the prevailing depression in trade is having 

 an unfavourable influence on taxation ; in the second, 

 taxation is having an unfavourable influence on the 

 depression in trade, but probably rather by checking 

 a recovery than by actually causing imemployment. 

 I propose to examine these two types of cases in turn. 



I 



I. A tax is not always paid finally by the person 

 or firm from whom it is collected ; the payer in 

 the first instance may succeed in shifting it on to 

 someone with whom he has economic relations, e.g. 

 a tobacco manufacturer probably shifts the tobacco 



' Wealth of Nations, Book V, chap, ii, part 2. 



duty on to the tobacconist, who in liis turn passes it 

 on to the smokers in the form of an enhanced price. 

 The problem as to who finally pays a particular tax 

 is often very complex, and I must content myself here 

 with drawing attention to one consideration. When 

 the demand for the products of industry is slack, it is 

 always much more difficult to shift the final payment 

 of taxes on to buyers than when the demand is keen. 

 Consequently, at the present time, owing to the great 

 falling off in the demand for many products, it is 

 probable that business firms have to pay finally a 

 bigger share of rates and taxes than was the case a 

 year or two ago. 



2. Both individuals and business firms, in so far as 

 they finally pay taxes, regard taxation as involving a 

 sacrifice or burden, because it compulsorily deprives 

 them of part of their resources in return for somewhat 

 remote and indefinite services, the value of which 

 does not appear to them to be worth the sum paid in 

 taxation. The extent of the burden or sacrifice would 

 appear to depend largely upon the use which the tax- 

 payers could have made of the sums paid in taxation, 

 had these remained in their possession. At this point 

 it is necessary to distinguish between the cases of 

 private individuals and of business undertakings. The 

 larger the income of an individual, the less urgent do 

 the wants tend to become which he is prevented from 

 satisfying because of taxation. Consequently £3,000 

 taken in taxation from a person with £10,000 a year 

 probably causes less sacrifice than £300 taken in 

 taxation from a person with £1,000 a year. In so far 

 as taxes do finally rest upon business firms, e.g. 

 income tax on sums placed to reserve, the mere size 

 of the resources affected by the taxation appears to 

 be no indication of the urgency of the wants which 

 could have been satisfied, had the sums taken in 

 taxation been available for use at the discretion of the 

 firms concerned. One firm paying £30,000 income 

 tax in respect of £70,000 placed to reserve may be in a 

 far better position to use the money, and in far more 

 urgent need of it, than another firm paying £3,000 

 income tax in respect of £7,000 placed to reserve. 



At the present time practically all firms are in need 

 of liquid resources for business purposes, and the 

 drain of ready money involved by taxation payments 

 is particularly burdensome. At times when resources 

 are more liquid, or when credit is more easily obtained, 

 the burden of taxation is not so severely felt. 



3. Owing to the fall in the general level of prices 

 associated with the depression in trade, and the 

 consequent increase in the purchasing power of money, 

 rates of taxation have automatically become heavier 

 in certain cases. Thus specific customs or excise 

 duties, like those on spirits, beer, tobacco, tea, and 

 sugar, represent more to would-be buyers to-day than 



