The Simplified Wealth of Nations of Adam Smith, Book 5, Chapter 2, Article 4: General Taxes -- Customs Duties
Chapter 2m, Article 4: General Taxes -- Customs Duties
History of Customs Duties
165 Customs duties are much more ancient than excise duties.
They were called 'customs' to denote customary payments which used from time immemorial.
They were originally taxes on merchants' profits.
During the times of feudal anarchy, merchants were:
a little better than emancipated bondmen
despised like all other burgh inhabitants.
Merchants' gains were envied.
The nobility consented that the king should tallage the profits of:
their own tenants, and
the merchants who they were not interested in protecting.
The nobility did not understand that:
merchants' profits cannot be subject to a direct tax, and
the final payment of all such taxes must fall on the consumers with a big overcharge.
166 The gains of foreign merchants were looked on more unfavourably than those of English merchants.
Thus, foreign merchants were naturally taxed more heavily.
This distinction between the duties on foreign and English merchants began from ignorance.
It has been continued by the spirit of monopoly.
It aims to give our own merchants an advantage in the home and foreign markets.
167With this distinction, the ancient customs duties were imposed equally on all goods, necessities and luxuries, exports and imports.
Why should the dealers of one sort of goods be more favoured than those in another?
Why should the merchant exporter be more favoured than the merchant importer?
168 The ancient customs were divided into three branches.
The duty on wool and leather
This was the most ancient of all.
It was chiefly an export duty.
When the woollen manufacture was established in England, an export duty was imposed on them to prevent the export of woollen cloth.
Such exportation would cause the king to lose his customs on wool.
A duty on wine imposed per ton and was called a tonnage
A duty on all other goods imposed per pound of their supposed value and was called a poundage.
In 1373, a duty of 6-pence in the pound was imposed on all exports and imports.
Excepted were wools, wool-fells, leather, and wines.
These were subject to particular duties.
In 1390, this duty was raised to 12 pence in the pound.
In 1393, it was reduced to 6 pence.
In 1400, it was raised to 8 pence.
From 1402 to 1697, it was raised to 12 pence.
The Subsidy of Tonnage and Poundage was created by an Act of Parliament.
It continued for so long at 12 pence in the pound, or at 5%. [12 / 240]
A subsidy came to denote a general duty of 5%.
This subsidy is now called the (1) Old Subsidy
It is still levied according to the book of rates established in 1660.
This method of ascertaining the value of goods by a book of rates is older than James I's time.
The (2) New Subsidy was imposed by 1697 and 1698.
It was an additional 5% tax on most goods.
The (3) 1/3 and 2/3 Subsidy came between the Old and New Subsidies.
It made up another 5% of which they were of proportional parts.
The (4) Subsidy of 1747 made a 4th 5% on most goods.
The (5) Subsidy of 1759 made a 5th 5% on some particular goods.
Besides those five subsidies, many other duties were imposed on particular goods to:
relieve state exigencies, and
regulate the country's trade according to mercantile principles.
169 That system gradually came more into fashion.
The 5% Old Subsidy was imposed indifferently on exports and imports.
The four subsequent subsidies and other duties were all laid on importation, with a few exceptions.
Most of the ancient duties imposed on the export of home produce and manufactures were lightened or removed.
Export bounties were even given to some of them.
Drawbacks too were granted on their exportation.
Only half the duties imposed by the Old Subsidy on importation are drawn back on exportation.
Those duties imposed by the latter subsidies and other imposts on most goods are drawn back in the same way.
This growing favour of exportation and discouragement of importation, had only a few exceptions .
These exceptions chiefly concern some raw materials.
Our merchants and manufacturers are willing that raw materials should come:
as cheap as possible to themselves, and
as dear as possible to their rivals in other countries
Foreign materials such as Spanish wool, flax, and raw linen yarn are sometimes allowed to be imported duty free.
The exportation of the raw materials of Great Britain and our colonies was sometimes banned or subjected to higher duties.
English wool exports were banned.
The exportation of beaver skins, beaver wool, and gum Senega was subjected to higher duties.
Great Britain got almost the monopoly of those commodities by the conquest of Canada and Senegal.
170 I showed in Book 4 that the mercantile system was not very favourable to the people's revenue or the national annual produce.
It is not more favourable to the sovereign's revenue, at least as that revenue depends on duties.
171 Because of the mercantile system, the importation of several goods was banned.
It reduced the importers to smuggling.
It entirely prevented the importation of foreign woollens.
It very much reduced the importation of foreign silks and velvets.
In both cases, it entirely annihilated the revenue of customs which might have been levied on such importation.
172 The high duties imposed on foreign imports encouraged smuggling in many cases.
In all cases, high duties reduced customs revenue below what moderate duties would have afforded.
Dr. Swift says that in the arithmetic of the customs is 2 + 2 = 1.
This is perfectly true regarding such heavy duties.
Such duties could never have been imposed had not the mercantile system taught us to use taxation as an instrument of monopoly, not revenue.
173 The bounties sometimes given on the exportation of home produce and manufactures, and the drawbacks paid on the re-exportation of most foreign goods, have created:
many frauds, and
This destroys public revenue more than any other.
To obtain the bounty or drawback, the goods are sometimes sent to sea then clandestinely re-landed in another part of the country.
The revenue of customs has been reduced very greatly by fraudulent bounties and drawbacks.
The gross produce of customs for the year ending January 5, 1755 was £5,068,000.
The bounties paid out of this revenue were £167,800.
The drawbacks paid on debentures and certificates were £2,156,800.
Bounties and drawbacks together was £2,324,600.
Because of these deductions, the revenue of the customs was only £2,743,400.
£287,900 was the cost of management in salaries
The net revenue of the customs for that year was £2,455,500.
The management expence was between 5% to 6% on the gross revenue of the customs. [5.068m / 287.9k = 5.68%]
It was something more than 10% of the remainder of that revenue after deducting the bounties and drawbacks.
174 Because of heavy import duties, our merchant importers smuggle as much and record as little imports as they can.
Our merchant exporters record more than they export:
out of vanity,
to pass for great dealers in goods which pay no duty, and
to gain a bounty or a drawback.
Because of those frauds, our exports appear to overbalance our imports in the customhouse books.
This gives comfort of those politicians who measure national prosperity by the balance of trade.
175 All imported goods are liable to some duties of customs unless exempted.
Such exemptions are not numerous.
If any imported goods are not mentioned in the book of rates, they are taxed at 57.45 pence for every 240 pence value, according to the importer's oath.
This is nearly at 25% or five subsidies [5% x 5] or five poundage duties. [57.45 / 240 = 23.94]
The book of rates is extremely comprehensive.
It enumerates many articles, many of which are little used and therefore not well known.
Frequently, it is not certain:
what article some goods should be classed under, and
what duty they should pay.
Mistakes from this sometimes ruin the custom-house officer.
They frequently create much trouble, expence, and vexation to the importer.
The customs duties are much more inferior to excise duties regarding perspicuity, precision, and distinctness.
176 It is unnecessary that every article of that expence should be taxed just so that everyone can contribute to the public revenue proportional to their expence.
The revenue levied by excise duties is supposed to fall as equally on the contributors as that which is levied by customs duties.
Excise duties are imposed only on a few articles of the most general use and consumption.
Many people thought that customs duties might be confined to only a few articles through proper management.
177 The foreign articles of the most general use and consumption in Great Britain presently consist chiefly in:
foreign wines and brandies
some of the productions of America and the West Indies—sugar, rum, tobacco, coconuts, etc.
some of the productions of the East Indies—tea, coffee, china-ware, spiceries, piece-goods, etc.
These articles presently afford most of the revenue drawn from customs duties.
The taxes which are presently imposed on most foreign manufactures were imposed for home monopoly, not for revenue.
Our own workers might have a bigger advantage in the home market and many articles which bring no tax revenue might afford a very great one:
by removing all prohibitions, and
by subjecting all foreign manufactures to moderate taxes as those which from experience on each article afforded the greatest public revenue.
178High taxes frequently afford a smaller revenue to government than moderate taxes:
by reducing the consumption of taxed commodities, and
by encouraging smuggling.
179 When the reduction of revenue is caused by the reduction of consumption, the only remedy is to lower the tax. 180When the reduction of the revenue is caused by smuggling, it may be remedied:
by reducing the temptation to smuggle, and
This temptation can only be reduced by lowering the tax.
by increasing the difficulty of smuggling.
The difficulty of smuggling can be increased only by establishing a better system of administration to prevent it.
181 The excise laws obstruct and embarrass the smuggler more effectively than the customs laws.
By introducing into the customs a system of administration similar to that of the excise, the difficulty of smuggling might be very much increased.
This change can be very easily done.
182 The importer of commodities liable to any customs duties could be allowed to carry them to his own private warehouse or to lodge them in a warehouse at
his own expence or
public expence, but:
under the key of the custom-house officer, and
never to be opened but in his presence
If the merchant carried them to his own warehouse:
the duties would be immediately paid and never drawn back, and
that warehouse would be always subject to the custom-house officer's visit and examination.
He will ascertain if the amount in it matched the duty paid.
If he carried them to the public warehouse, no duty would be paid until they were taken out for home consumption.
If taken out for exportation to be duty free, proper security would always given that they will be really exported.
The dealers in those commodities are always:
subject to the custom-house officer's visit and examination, and
obliged to justify by proper certificates the payment of the duty on the goods in their shops or warehouses.
The excise-duties on imported rum are presently levied this way.
The system could extended to all duties on imported goods, provided that those duties were like the excise duties.
Those duties should be confined to a few sorts of goods of the most general use and consumption.
If they were extended to all goods, as at present, there would be not enough public warehouses.
The merchant would be forced to trust very delicate and perishable goods only into his own warehouse.
183 Taxation would always be an instrument of revenue and never of monopoly if:
such a system could prevent smuggling, and
every duty was occasionally altered to afford the greatest revenue to the state.
A revenue equal to the present net customs revenue might be drawn from the import duties of a few sorts of goods of the most general use and consumption.
Customs duties might become of the same simplicity, certainty, and precision as excise duties.
Under this system, the revenue lost by the re-entry of goods which have been drawn back, would be all saved.
This savings would alone be very big.
If it were added the abolition of all export bounties on home produce, where those bounties were not in drawbacks of excise duties, the net customs revenue might be equal to what it was before.
184 If by such a change of system, the public revenue suffered no loss, the country's trade and manufactures would certainly gain a very big advantage.
This would render most commodities, including necessities and raw materials, perfectly free.
It might be transported to and from all parts of the world with every advantage.
So far as the free importation of necessities reduced their average money price in the home market, it would reduce the money price of labour, without reducing its real recompense.
The value of money is in proportion to the quantity of necessities it will purchase.
The value of necessities is independent of the quantity of money which can be had for them.
The reduction in labour's money price would be attended with a proportional reduction in the money price of all home manufactures.
It would gain some advantage in all foreign markets.
The price of some manufactures would be reduced in a still greater proportion by the free importation of raw materials.
If raw silk could be imported from China and India duty free, the silk manufacturers in England could greatly undersell those of France and Italy.
There would be no occasion to prohibit the importation of foreign silks and velvets.
The cheapness of their goods would secure to our own workers:
the possession of the home market, and
a very great command of the foreign market.
Even the trade in the taxed commodities would be carried on with much more advantage than at present.
If those commodities were delivered out of the public warehouse for foreign exportation, being in this case exempted from all taxes, their trade would be perfectly free.
Under this system, the carrying trade would enjoy every possible advantage.
If those commodities were delivered out for home consumption, the importer not being obliged to advance the tax till he had an opportunity of selling his goods, to some dealer or consumer, he could always sell them cheaper than if he had been obliged to advance it at the moment of importation.
Under the same taxes, the foreign trade of consumption might be done with much more advantage.
185 Sir Robert Walpole tried to establish an excise scheme on wine and tobacco similar to my proposal.
Sir Robert Walpole
The bill with those two commodities was then brought into Parliament.
It was supposed to be an introduction of a more extensive scheme of the same kind.
Faction and smuggling merchants raised a violent and unjust clamour against that bill.
The minister dropped it.
None of his successors dared to resume the project from fear of exciting another clamour.
186 The duties on imported foreign luxuries for home consumption sometimes fall on the poor.
They fall principally on the middle or upper-middle class.
Examples of such duties are those on foreign wines, coffee, chocolate, tea, sugar, etc.
187 The duties on the cheaper luxuries for home consumption fall equally on all classes in proportion to their respective expence.
The poor pay the duties on malt, hops, beer, and ale, according to their own consumption.
The rich pay those duties according to their own consumption and that of their servants.
188 The whole consumption of people in the lower and lower-middle classes are much greater in quantity and value than the consumption of those of the middle and upper-middle classes.
The whole expence of the lower class is much greater than that of the upper classes.
Almost all the capital of every country is distributed among the lower class as wages of productive labour
A big part of the revenue from rent and profits is distributed among the lower class as wages and maintenance of menial servants and unproductive labourers
Some profits belong to the same rank as a revenue from the employment of their small capitals.
The combined profits made by all the small shopkeepers and retailers is very big.
It makes a very big part of the annual produce.
Some rent belongs to the same rank.
A big part belongs to the lower-middle class.
A small part belongs even to the lower class.
Common labourers sometimes possess an acre or two of land.
Though the expence of those lower classes are very small individually, collectively they make the largest portion of their society's total expence.
What remains of the national annual produce for the consumption of the upper class are always much less in quantity and value.
The taxes on expence which fall on the upper class are on the smaller portion of the annual produce.
Such taxes are likely to be much less productive than:
those which fall indifferently on the expence of all classes
even those which fall chiefly on the expence of the lower clases or the larger portion of society's annual produce
The excise on the materials and manufacture of home-made fermented liquors is the most productive of all the taxes on expence.
This excise falls on the expence of the common people.
In the year ending July 5, 1775, the gross produce of this excise was 3,341,837 pounds.
189 It must always be remembered, that it is the luxurious and not the necessary expence of the lower class that should be taxed.
The final payment of any tax on their necessary expence would all fall on the upper class.
It would fall on the smaller portion of the annual produce, not on the greater portion.
Such a tax must either raise wages or lessen the demand for labour.
It could not raise wages without throwing the final payment of the tax on the upper class.
It could not lessen the demand for labour without lessening the national annual produce.
The national annual produce is the fund from which all taxes must be finally paid.
However, as this tax reduced the demand for labour, it must always raise wages higher than they otherwise would be.
The final payment of this enhancement of wages must always fall on the upper class.