Routledge Library Editions

PRINCIPLES OF
PUBLIC FINANCE

ECONOMICS
 Routledge Library Editions — Economics

P U B L IC E C O N O M IC S
In 5 V olu m es

I Principles of Public Finance Dalton

II Problems of Economic Planning Durbin
III The Economic Theory of Fiscal Policy Hansen
IV An Expenditure Tax Kaldor
V The Principles of Economic Planning Lewis
 PRINCIPLES OF
PUBLIC FINANCE

HUGH DALTON
 First published in 1922

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Principles of Public Finance

ISBN 0-415-31397-X
ISBN 0-415-31396-1
ISBN 978-1-136-52065-5 (ebk)
Miniset: Public Economics
Series: Routledge Library Editions —Economics
Principles of Public Finance

BY
HUGH DALTON, M.A., D.Sc. (Econ.), M.P.
Sometime Reader in Economics in the University of London

E L E V E N T H IMPRESSION
 First Edition, December, 1922.
Second Edition, October, 1924..
Third Edition, M a y , 1926.
Fourth Edition, February, 1927.
F ifth Edition (enlarged, revised and reset)f
January, 1929.
Edition, December, 1930.
Seventh Edition, August, 1932.
Eighth Edition, 1934.
N inth Edition (enlarged, revised and reset), 1936.
Edition, January, 1939.
Eleventh Edition, M a y, 194.1.

Publisher’s Note.
T his book has been translated into Arabic,
Czech, Dutch, German, Japanese, Turkish and
Urdu.
 PREFACE TO THE FIRST EDITION
T h is book contains the substance of lectures on the
Theory of Public Finance delivered at the London
School of Economics. It is designed, in Bacon's words,
“ to excite the judgment briefly, rather than to inform
it tediously." I have aimed at setting out, without
undue elaboration, the chief general principles which
are applicable to the public finance of a modern
community. For the study of first principles is a
necessary preliminary to an effective discussion of
practical problems, and should be helpful in providing
a framework of general ideas, into which particular
ideas and particular facts can be fitted, so as to
appear, not as unique and isolated things, but in their
true relation to a larger whole.
Though I may seem occasionally to have yielded a
little to temptation, it is not my object in this book to
advocate any detailed practical policy, but only to
indicate some of the general considerations on which
any sound policy must be based. Facts, in the field of
public finance, are moving so rapidly at the present
time, that realistic studies are soon out of date and the
form, in which practical problems present themselves,
is constantly changing. But there are certain general
principles of which this is not true. Ignorance, or
V
vi PREFACE

neglect, of these has caused, and is still causing, grave

economic damage to the world. In the course of my
argument, therefore, I have occasionally turned aside
to criticise certain current opinions on questions of
taxation, public expenditure and public debts, which
I believe to rest upon errors of judgment and confusions
of mind.
It has been customary with the majority of econ­
omists to adopt a somewhat negative attitude towards
public expenditure. I have attempted to treat this
part of the subject more positively and to exhibit the
parallelism which exists between the theory of public
expenditure and that of taxation.
I have made few references in the text to the writings
of others. But for the benefit of readers, who wish to
pursue the subject further, I have added a short note
on books.
HUGH DALTON.
London School of Economics,
September, 1922.
 EXTRACT FROM
PREFACE TO THE FIFTH EDITION
As compared with the First Edition of this book, the
Second, Third and Fourth only showed a few minor
verbal changes. But in this, the Fifth, Edition I have
made larger alterations in the original text. . . .
I have added two new chapters, X X IV and X X V ;
attached Notes, containing some elaborations which
may bore “ the general reader,'' to certain Chapters;
lengthened and brought up to date the Note on Books ;
and provided an Index. The result is a somewhat
longer book, though its general framework is unchanged.
But I have tried not to sacrifice compactness, nor an
eclectic brevity.

November, 1928.

v ii
 PREFACE TO THE NINTH EDITION
I h a v e again given this book a very thorough revision.
In the last few years we have seen strange sights in
public finance and many men have had fresh thoughts.
I have wished not to lengthen this book unduly, but,
subject to this condition, I have taken account both of
the new facts and the new ideas of this period. And I
have been able to cut out much dead wood, both small
twigs and larger branches. Chapter X X V I is new and
many of the earlier chapters are substantially changed
and, I hope, improved.
The boundaries of public finance are not clear cut.
It is, for instance, very much entangled at some points
with the theory of money and of industrial fluctuations,
subjects on which thought is now very active, though
opinion, even among certified economists, is still deeply
divided. And tariffs, which belong to public finance,
are closely related to other forms of trade restriction,
which do not. Sometimes, therefore, I have had to cut
short lines of argument which, if allowed to run on,
would run too far afield.

October, 1935.

v iii
 CONTENTS

.—IN TRODUCTORY.
PAGE
PART I
C h apter I. T h e N a t u r e o f P u blic F in a n c e a n d
the M ain D iv isio n s o f t h e S u b j e c t 3
§1. Public finance deals with the income and expenditure
of public authorities and with their mutual adjustment.
Public authorities are all sorts of territorial governments.
§2. Such income and expenditure chiefly consist of money
receipts and money payments. §3. The main divisions of
public finance are (1) public income, (2) public expenditure,
(3) public debts and assets, (4) financial administration.
The scheme of this book.

C h a p te r II. T h e P r in c ip l e o f M ax im um S o c ia l
A dvantage 7
§1. The effects of raising public revenue should be balanced
against the effects of spending it. The distinction between
false and true economy. §2. Most of the operations of
public finance resolve themselves into transfers of
purchasing power. The best system of public finance is
that which secures the maximum social advantage from
the operations involved. §3. Important criteria of
social advantage are (1) the preservation of the community
against internal disorders and external attacks, (2) im­
provements in production, (3) improvements in distribu­
tion. §4. Some negative conclusions.

C h a p te r III. P u b lic F in a n c e a n d P r iv a t e
Fi n a n c e 17
§1. The adjustment of income and expenditure by a
private individual and by a public authority. §2. A
private individual tends to distribute his expenditure so as
to equalise marginal utilities. A similar principle should
govern the distribution of public expenditure between
different objects. §3. A similar principle should govern
its total amount and also the distribution of public income
between different sources. §4. Public authorities can vary
their income and expenditure more easily than private
individuals. §5. Statesmen should discount the future
less than private individuals do.
ix
X CONTENTS
PAGE
P A R T II.— PU BLIC INCOME.
C h a p te r IV . S o u r ce s o f P u b lic I nco m e • 25
§1. The income of a public authority may be defined
broadly or narrowly. §2. Taxes distinguished from other
sources of public income. A further classification under
twelve heads. §§3-4. The dividing lines between different
kinds of public income cannot, in practice, be sharply
drawn.

C h a p te r V . T a x a t io n a n d S ome D ist in c tio n s

B etw een T axes • • • 32
§1. Taxation might not be necessary, but, in practice,
cannot be avoided. §2. The popular distinction between
direct and indirect taxes. §3. Taxes on income and taxes
on capital or property. §4. Taxes on property and taxes
on commodities. §5. Temporary and permanent taxes.
§6. Taxes on persons and taxes on things. §7. The place
of certain taxes in tax classifications.

C h a pte r VI. S ome C h a r a c te r istic s o f a G ood

T a x System • • • • 41
§1. A tax system should be judged as a whole. §2. Single
tax systems and multiple tax systems. §3. A multiple
tax system is preferable. §4. But too great multiplicity
is undesirable, though particular taxes may need to be
complex. §5. Should taxes be felt as much or as little as
possible ? §6. What taxes are most felt ? §7. An
ingenious, but impracticable, suggestion. Subjective and
objective burden of taxation.

C h a p te r VII. T h e I n c id e n c e o f T a x a t io n • 51
§1. The problem of incidence is part of the larger problem
of the economic effects of taxation. The incidence is the
direct money burden. Illustrations of the direct and
indirect money burden of a tax and of its direct and
indirect real burden. §2. Some examples of incidence,
including that of an inheritance tax and of an income tax.
§3. The incidence of a tax on a particular commodity is
divided between the buyer and the seller in the ratio of
the elasticities of supply of, and demand for, the com­
modity. §4. This proposition covers the case of taxes
on international trade. §5. The possibility of “ making
the foreigner pay.” §6. Modification of the theory of
incidence in the case of taxes on monopolists.
 CONTENTS xi
C h a p t e r V III. T h e I n c id e n c e of T a x a t io n
(continued) • • • • 62
§1. The argument of the last chapter is incomplete.
§2. The incidence of a tax on land values. §3. On
buildings. §4. On commodities in general. §5. On
monopolists. §6. The incidence of employers’ and
workers’ contributions to social insurance. §§7-8. Some
mistaken ideas concerning incidence.

N o te to C h a p t e r s V II a n d V II I • • 72
A mathematical discussion of the incidence of taxes on
particular commodities, and a non-mathematical discus­
sion of the incidence of income tax.

C h a p te r IX . T h e D ist r ib u t io n o f t h e B u r d en
of T a x a t io n from the P o in t of

V iew of E q u it y • • • . 86
§1. Discussions under this head take account of the
direct, but not of the indirect, burden of taxation. §2.
The principle of minimum sacrifice. §3. Particular taxes
should not be condemned as inequitable, but may some­
times be approved as equitable. §4. Three alternative
principles of equitable distribution : (1) cost of service,
(2) benefit of service, (3) individual ability to pay. The
first two are impracticable as regards taxation in the
proper sense of the term. §5. Ability to pay may be
interpreted to mean (1) equal sacrifice, (2) proportional
sacrifice, (3) minimum sacrifice, or (4) constant inequality
of incomes. Some assumption must be made regarding the
relation of income to economic welfare. On any reasonable
assumption, all four interpretations lead to progressive
taxation. §6. The criterion of equity is inferior to that
of economy, but tends to discredit both equal and
proportional sacrifice.

N o te to C h a p t e r I X • 96
A further discussion of some of the points raised in Ch. IX.,
§5.
xii CONTENTS
PAGE
C h a p te r X . T h e E f f e c t s o f T a x a t io n o n
P r o d u ctio n • 103
§1. Classification of possible effects. §2. Effects on
people’s ability to work and save. §3. Effects on
people’s desire to work and save. §4. Elasticity of
taxpayer’s demand for income. §5. Taxes which do not
influence desire to work and save. §6. Influence of other
taxes on the assumption that demand is elastic. §7. An
inheritance tax is superior to an income tax. §8. The
possibility that demand is inelastic. §9. The presumption
against the diversion of economic resources from their
“ natural channels.” §10. Taxes which cause the
minimum of diversion as between different employments.
§11. The presumption against diversion tested in particular
cases. §12. Diversion as between different localities.
The problem of " distressed areas.” §13. Summary of
main conclusions.

C h a p te r X I. T h e E f f e c t s o f T a x a t io n on
D ist r ib u t io n . . . .
§1. Importance of these effects. §2. Effects of various
types of tax system. §3. Some taxes inevitably regressive.
§4. Possibilities of progression in an income tax. §5. In
an expenditure tax. §6. In an inheritance tax. §7. In
a general property tax. §8. In land taxes and corporation
taxes. §9. A protective tariff in relation to distribution.
§§10-11. Recent development of the British tax system.
Progressive taxes and regressive grants.

N o t e t o C h a p te r XI . . . . 146
Some further statistics. The measurement of " pro­
gressiveness ” in a tax system.

C h a pte r X I I. S ome O th e r E ffects of

T a x a t io n . . . . .
§1. The cost of collection of various taxes to the public
authority. §2. And to those from whom the taxes are
collected. §3. The effects of taxation on employment.
§4. Errors due to the omission to take account of the
effects of public expenditure.

N o t e t o Ch apter X I I • • . . 163
The conception of “ taxable capacity,” and certain
writings on this subject, are examined.
 CONTENTS xiii
PAGE
Ch apter X III. T he Tax System from th e
P o in t o f V ie w of E co no m y • • 172
§1. The last three chapters in relation to first principles.
§2. Taxation according to ability to pay, interpreted
broadly, is equivalent to minimum sacrifice, or maximum
social advantage, in the long run.

C h a pter X IV . I ncom e from P u b lic P r o p e r t y

and P u b lic E n t e r p r is e s • • 175
§1. The receipt of such income justifies a decrease of
taxation and an increase of public expenditure. §2.
Political considerations sometimes relevant. §3. Effects
of public ownership and enterprise upon production.
§4. And upon distribution. §5. Three alternative
principles of payment for public service. §6. Three
further alternatives, when the voluntary price principle
is adopted. §7. Cases in which the compulsory cost of
service principle should be adopted. §8. Missed oppor­
tunities of securing a large revenue from public property
and enterprises.

C h a p te r X V . I ncom e from t h e P u b l ic P r in t ­
in g P ress • • • 184
§1. The printing press may be used, either directly or
indirectly, to raise revenue. §2. The effect of inflation
is to reduce the value of the currency both internally and
externally. §3. It operates as a regressive tax and causes
a redistribution of income. §4. Its effect on production.
§5. Public acquiescence in inflation due to economic
ignorance. After a certain point the revenue yield of
inflation rapidly dries up. §6. Effects of deflation. §7.
Moderate and gradual changes in the value of money
sometimes advantageous. §8. Fallacy that an un­
balanced budget necessarily leads to inflation. Normal
revenue from profits of currency note issue. Occasional
profit from reducing value of currency in terms of gold.
xiv CONTENTS
PAGE
P A R T III.— PU BLIC E X P E N D IT U R E .
C h a p t e r X V I. O b j e c t s a n d C l a s s i f i c a t i o n o f
P u b l ic E x p e n d it u r e • • • 195,
§1. Results of neglect by economists of the theory of
public expenditure. §2. Reasons for the growth of public
expenditure. §3. Distinction between expenditure to
preserve social life against attack and to improve its
quality. §4. Chief forms of actual expenditure. §5.
Classifications of expenditure and some further distinc­
tions.

C h a p te r X V II. G r a n ts a n d P u r ch a se P r ic es 205
§1. The distinction between grants and purchase prices is
parallel to that between taxes and selling prices. §§2-3.
Development of this parallel. §4. Its possible application
to the distribution of grants. §5. Incidence of grants
part of the larger question of their economic effects.

C h a p te r X V III. T h e E f f e c t s o f P u b lic
E x p e n d it u r e on P r o d u ctio n • • 211
§1. Other things equal, public expenditure should increase
production as much as possible. §2. An example of con­
fused thought. §3. A digression on armed forces. §4.
Effects of public expenditure on ability to work and save.
§5. And on desire to work and save. §6. Diversion of
economic resources through public expenditure. §7.
Diversion to secure better provision for the future. §8.
Limits to the practicability of free supply. §9. Diversion
from spending to private and public saving. §10. Diver­
sion as between different localities. §11. Public finance
and economic institutions. §12. Summary of main
conclusions.

C h a pte r X IX . T he E ffects of P u b lic

E x p e n d it u r e on D is t r ib u t io n • 229
§1. Public expenditure should reduce the inequality of
incomes. §2. Regressive, proportional and progressive
grants. §3. Indirect effect of grants on distribution.
§4. Effect of grants in adjusting incomes more closely to
needs. §5. Grants conferring common benefit. §6.
Finance of public works by taxation or by loan.
 CONTENTS xv

C h a p te r X X . S om e o t h e r E f f e c t s o f P u b lic
E x p e n d it u r e . . . . 234
§1. Cost of administration. §2. The possibility of
diminishing unemployment through steadying the demand
for labour. §3. Public works and the trade cycle. §4.
The central problem of public finance restated.

P A R T IV .— PU BLIC DEBTS.
C h a p te r X X I. T h e G e n e r a l C h a r a c te r istic s
o f P u b lic D e b ts . . . . 243
§1. Public debts and public assets. §2. Classification of
public debts. §3. Long and short term debts and
terminable annuities. §4. Special inducements to
lenders. §5. Fixed and variable rates of interest. §6.
The historical persistence of war debts.

C h a p te r X X II. T h e B u r d e n o f P u b lic D e b ts 251

§1. Direct and indirect burden of an external debt.
§2. Direct burden of an internal debt. §3. Indirect
burden of internal and external debt. §4. Probable
increase during peace of burden of war debts. §5. Limits
within which public borrowing is legitimate. §§6-7.
Some misconceptions examined. “ Making posterity
pay.” §8. The burden of a debt exhibited by assuming
its disappearance.

C h a p te r X X III. T h e R ep a y m e n t o f P u b lic
D e b t s ..................................................265
§1. Repayment or repudiation. §2. Varieties of the
latter. §3. The rate of repayment. §4. Conflicting
views regarding a special debt-redemption levy. §5.
The argument from equity. §6. The cost of delay.
§7. Sinking funds.

C h a p te r X X IV . T h e C o n v er sio n o f P u b lic
D e b t s .................................................. 282
§1. The meaning of conversion. §2. Its limitations in
practice. §3. New issues at a heavy discount are undesir­
able. §4. The relation of sinking fund policy to oppor­
tunities for conversion. §5. The case of the floating debt.
xvi CONTENTS

C h a p te r X X V . I n te r- G o v e rn m e n ta l D e b ts • 289
§1. These debts are generally the result of war, but their
origin is here irrelevant. §2. Two aspects of such debt
payments, that of public finance and that of private trade.
The first is simple. §3. The second relates to trade
balances. §4. And to possible effects on the foreign
exchanges. §5. The paradox that it is better to give than
to receive is, in general, fallacious, but may contain an
element of truth in special circumstances. §6. It is also
a fallacy to suppose that tariffs imposed by creditors on
debtors prevent debt payments. On the contrary, they
may make those payments greater. §7. Some general
reflections. The end of the post-war system.

C h a p te r X X V I . B a l a n c in g t h e B u d g e t • 300
§1. A balanced budget and moral sentiments. §2. The
meaning of a “ balanced budget ” and of “ expenditure "
and “ revenue ” in this connection. The length of the
accounting period. §3. The cause of unbalanced budgets
in the Great Depression is the fall of prices. §§4-5.
Either deflationary or inflationary remedies may be
attempted.

N o t e on B o o k s ........................................ ......... 3 11
 PART I

INTRODUCTORY
 Ch a p t e r I
TH E N ATU R E OF PU BLIC FINANCE AND THE
MAIN DIVISIONS OF THE SUBJECT

§ 1 . Public finance is one of those subjects which

lie on the border line between economics and politics.
It is concerned with the income and expenditure of
public authorities, and with the adjustment of the one
to the other. The “ Principles of Public Finance ”
are the general principles which may be laid down with
regard to these matters.
“ Public authorities ” include all sorts of territorial
governments, from parish councils up to national,
imperial and even international governments. They
differ widely among themselves, of course, as regards
the magnitude of the areas and populations which they
govern, the range of functions which they exercise,
their methods of obtaining income, the objects of their
expenditure, and their financial relations with other
public authorities, superior or subordinate to them­
selves. But in a broad survey of the subject these
differences are only of secondary importance. In
particular, there is no fundamental distinction between
the public finance of " central ” and of “ local ”
authorities in such a country as Great Britain, or of the
various grades of government in the hierarchy of a
Federal Constitution.
§ 2. In modern civilised communities the income
and expenditure of public authorities consist, almost
exclusively, of money receipts and money payments.
The word “ finance ” signifies “ money matters ” and
3
4 INTRODUCTORY

their management, and public finance in its modern

sense presupposes the existence of a money economy.
The expenditure of public authorities, indeed,
consists practically without exception of money pay­
ments. But we may notice two sorts of public receipts
which are not money receipts, namely (1) certain unpaid
personal services, and (2) the payment of certain taxes
otherwise than in money. Some unpaid services are
rendered voluntarily to public authorities, others
under legal compulsion. Examples of the former sort
in this country are the services of Justices of the Peace
and of elected members of local authorities. Examples
of the latter sort, which have been called “ labour
taxes,” are the services of jurors, the obligation resting
upon all citizens under the English common law to
assist in sweeping snow from the streets, in extinguish­
ing fires and in helping the police to catch murderers
and thieves. Likewise the “ corvee ” or forced labour,
which is still imposed on coloured populations in certain
colonies, chiefly for road-making and other public
works. Another and more important form of com­
pulsory service, which is still found, even in peace time,
in most modern communities, is compulsory military
service. But this differs from the corvee in that it is
paid for, though at a very much lower rate than it
would be necessary to offer, in order to secure an equal
amount of voluntary paid service.
The payment of taxes in money has gradually super­
seded their payment in kind, for the same reason that a
money economy has gradually superseded a barter
economy, that is to say, on grounds of general con­
venience. But in this country there are a few excep­
tions of comparatively recent origin. Thus since 1909
 THE NATURE OF PUBLIC FINANCE 5

the Death Duties of landowners may, with the consent

of the Inland Revenue authorities, be "paid in land,1
though, when this proposal was first made in the House
of Commons in 1906, it was ridiculed on the ground
that, if it was accepted, distillers would next be asking
to pay their Death Duties in whisky. Again, certain
taxes may be paid by handing over certain public
securities. Since 1919, for example, Death Duties may
be paid in Victory Bonds, a convenient means of debt
redemption, though somewhat expensive to the
Treasury, since a £100 Bond, which was issued at 85
and until 1932 always stood below par in the market,
is accepted as the equivalent of £100 of tax.
Since 1920, also, in the United States royalties,
payable under leases of publicly owned oil-bearing
lands, may be paid to the Federal Government in oil.2
§ 3. The main division in public finance is between
public income and public expenditure, which form two
symmetrical branches of the subject. Some writers
have excluded public expenditure from the scope of
public finance, but this is clearly illogical. Public debts
are often treated as a separate branch of the subject
and this is convenient, since they give rise to a number
of special problems. On the other hand, receipts from
public borrowings form part of public income, while
payments of interest on, and repayments of the principal
of, public debts form part of public expenditure.
Similarly receipts from public assets, whether in the
shape of annual income or of the proceeds of sales, form
part of public income, while payments in respect of
1 This provision, which might have been, and may still be, an
important instrument for transferring land from private to public
ownership, has hitherto been practically inoperative.
2 Lutz, Public Finance, p. 132.
6 INTRODUCTORY

public assets, whether in the shape of expenses of

management, or initial expenses of acquisition, form
part of public expenditure. And these questions are
related to the problem of balancing the budget.
Financial administration, again, raises a series of
special problems and is often treated as a separate
branch of the subject. It is not dealt with in this book,
since the general principles which can be laid down with
regard to it are comparatively few, and since their
effective discussion presupposes in the reader a detailed
acquaintance with existing financial systems. Finan­
cial administration, therefore, belongs to the stage of
realistic study in public finance rather than to that of
general principles.
Part II of this book is devoted to public income,
Part III to public expenditure and Part IV to public
debts and the balancing of the budget. Public assets
are referred to at those points in the discussion, when
they become relevant, but they are unfortunately much
rarer and of much less practical importance than
public debts. The two remaining chapters of Part I
are concerned respectively with the fundamental
principle which should govern all problems of public
finance, and with the relation of public to private
finance, and both these chapters have a bearing on the
mutual adjustment of public income and public
expenditure.