place through the exchange of hills on a system well known to all who are familiar with the workings of the foreign exchanges.

It is noteworthy that this triangular trade is found chiefly in connection with the Crown Colonies, while, on the other hand, all the self-governing Colonies except New South Wales, Victoria, and Newfoundland, import more from foreign countries than they export to them. Indeed, judged by protectionist principles, India is more valuable than all the white Colonies put together. The following table shows the value of the goods that India and the self-governing Colonies import from and export to the United Kingdom and the five foreign countries mentioned.

Now, in view of this state of affairs, it is necessary to consider closely what is the most likely effect of a tax on imports from foreign countries into the United Kingdom. If this achieves the end aimed at by Protectionists, and causes us to diminish our purchases of foreign goods, our manufacturers may benefit, in the first instance, by the monopoly thus secured to them in the home market, but there are several secondary results which seem bound to follow. The foreigner, having sent us less goods, will have at his disposal fewer bills drawn on England. He can no longer, to the same extent, pay for the goods purchased from our Colonies in British bills. Accordingly, he must either curtail his imports from the former, or pay directly in goods of his own. In the latter case, he displaces any equivalent amount of British exports, and what wə gain in the home market we lose in the colonial.

It will, no doubt, be objected that a substantial preference granted by the Colonies to the Mother Country would suffice to secure the colonial market also for us. Under these circumstances the only result of such a system which combined a tariff on home imports with a preference in the Colonies, would be to destroy the commerce between foreign countries and the Empire. Instead of our taking payment for the exports to our Colonies indirectly through foreign

countries, we should compel the Colonies to dispose of a greater part of their produce here in order to pay us directly; and it is unlikely that this new arrangement would bring them the same profit as before, otherwise there is no reason why they should not at present send their produce here instead of to the Continent.

No doubt the actual result would combine both these disadvantages. Foreign countries would take less from our Colonies, and for what they did take they would pay to a greater extent in their own manufactures. Thus, while the Colonies lost at one end, we should lose at the other.

There is still another point which illustrates the close interdependence of our foreign and our colonial trades, and that warns us of the difficulty in tampering with the intricate machinery by which these are carried on. Our exports to foreign countries include nearly sixty millions of foreign and colonial produce, Germany alone taking over ten millions, the United States nearly twenty millions.

A large part of this consists of tropical and colonial products purchased with our own manufactures and resold to foreign countries at a profit. Should our trade with the latter suffer as a consequence of Mr. Chamberlain's scheme, we could hardly hope to sell to them the same quantity of such products, and thus the manufactures with which we purchased them would find their market contracted, and our exports to the Colonies would reflect the decrease in our imports from foreign countries.

Here we have one more illustration of the truth that our aggregate exports pay for our aggregate imports, and there is no more reason why our sales to Germany should balance our purchases from her than that a baker should sell bread to the particular bootmaker from whom he buys his boots. Any attempt to set a particular part of our exports against a particular part of our imports can only be due to a lack of acquaintance with the broad facts of international trade.

When this close connection is borne in mind it is easy to see the worthlessness of those arguments which are based on the mere fact that our exports to the Colonies are more elastic than those to foreign protected markets. All it proves is that the latter force us to pay for our purchases indirectly. Unfortunately the study of the foreign exchanges is so difficult that only experts are able to see the machinery at work, and to note for themselves the manner in which countries settle their trade debts by an exchange of bills. A clear knowledge of these facts would go far to dispel those wild illusions that Protectionists cherish on the score of colonia! trade.

W. M. LIGHTBODY.

ON DIRECT TAXATION AND A

MODERN MAXIM.

IT has lately been enunciated as a maxim of finance that direct and indirect taxation should be co-related. The maxim may for the present pass, but the application of it, on the present basis of taxation, cannot be allowed to pass. The terms of this maxim require enlarging in order to premise that, so far as possible, direct taxation as well as indirect should fall upon the whole community. At present, while indirect taxation does fall upon the whole, that which is direct falls but upon a very small class, and our national finance is thus so ordered as to engender a conflict of class interests. This not politic, nor in the interest of the State. There should be no room for the small class of direct taxpayers to feel that they are being unduly burdened for the benefit of the overwhelming numbers of those who are indirectly taxed, and whose sense of responsibility as citizens is therefore not so lively. On the other hand, there is probably no selfish desire on the part of direct taxpayers that they should escape from bearing a just burden at the expense of the more numerous, but less able, class who pay indirect taxes only, though it is to be remembered that the former class falls wholly within the category comprising the latter. Property is under great obligations to the State, and the charges which its preservation entails would appear to bear a larger proportion in the costs of administration than the mere maintenance of civil government, if it be possible to draw this distinction. It is right, therefore, that property should make a proportionate contribution for State purposes. But it is not right that in a democratic government the many should, to any extent, be permitted to shift their just burdens on to the shoulders of the few. Power is now vested in the many, and it is the duty of a government to see that responsibility shall be linked with power.

Now let us consider direct taxation, not in theory, but in the light of facts as they appear in the financial year 1902-3, and we venture to think that examination will entitle us to call the new direct taxation theory "new fangled," and to describe it as the merest claptrap, but little above the rank of a catchword in a music-hall ditty, adopted by fainéant Chancellors of th Exchequer in difficulties.

The present Chancellor of the Exchequer recently stated in the House of Commons that as nearly as possible 50 per cent. was the

proportion of direct taxation to indirect, though he frankly admitted that this was a mere accidental circumstance, and for the purpose of comparison he showed that during the last few years direct taxation had increased by about 5 per cent. But that by the way. In 1902-3 so-called direct taxation amounted roundly to 64 millions, and indirect to 66. The revenue was increased by some 20 millions not classed under either heading, and therefore unnecessary to consider for this purpose. It was mostly derived from Posts and Telegraphs, and was made up of miscellaneous items. Indirect taxes were represented entirely by the headings Customs and Excise, levied respectively on external and internal commodities, such as spirits and beer, tobacco, tea, sugar and wine.

Now for the 64 millions of "direct" taxes, which expression has been, and is, in Parliament and the Press, so grossly abused to excuse an exorbitant income tax. Of the 64 millions of this 50 per cent. proportion only 38,800,000 is represented by property and income tax, which direct tax has, since the commencement of the war, and taking its present level of one shilling, been increased by 33 per cent.

All the increased direct taxation has thus been put upon this oneitem, with the trifling exception under the heading of Stamps, comprising contract "no es" and company registration fees which were lately increased. The other direct taxes have not been touched, and probably could not have been, for, excepting one, they comprise estate duty which is sufficiently high; stamps on deeds, transfers, &c., though in the past these stamps have been largely varied for revenue purposes; house duty and fee and patent stamps. The one exception is the old Land Tax, which produces the insignificant sun of £725,000. It seems altogether inadequate. This is the onedirect tax which is now never touched, though one does not understand why it should not be made a source of great revenue, as it is in other countries.

Thus it would apparently have been more proper, more just and equitable, less misleading to have shown, in preparing the statistics of the proportionate increase of direct and indirect taxation, that practic 'ly the whole of the increase of direct taxation has fallen upon the small c'ass of income tax payers, upon whom, therefore, the burden has fallen in a far larger proportion than is made to appear. In the popular estimation the information afforded showsthat direct and indirect taxes have advanced pari passu, but this examination of the details exposes the fact that about 24 millions of direct taxes have not been touched, nor any new sources of direct taxation tapped. This is not just, especially when it is remembered that the Property and Income Tax is by no means entirely a property tax, but to a very large extent represents annual earnings only.

It would be well here, perhaps, to glance briefly at the history of this tax. Sir Robert Giffen, in his article "Taxation," in the Encyclopædia Britannica, states that, as originally instituted in April 1798, during the great war with France, under the name of a triplicate assessment, it was rather a consolidation of various assessed taxes levied upon the luxuries of the rich and upon property, than a wholly new tax. In December of the same year this impost was repealed, and a true income tax of 10 per cent. established on all incomes over £60, with abatements between £60 and £200. It was intended as a temporary tax for war purposes only, and was repealed in 1802, but was reimposed when the war 1ecommenced in 1803, with the limit of abatement reduced to £150. So odious was it that Parliament in 1815, when the war came to an end, ordered the destruction of the documents relating to it. Its efficiency as an instrument of finance was, however, so great as to lead to its revival in 1843, when Sir Robert Peel inaugurated his great free trade reform, and swept away duties on exports, duties on imported raw material, and other imposts hampering the trade of the country. The intention again was that the tax should be temporary, but although the free trade work was practically completed in the early 'sixties, and Mr. Gladstone went so far as to dissolve Parliament with a promise that he would abolish the tax if his party were returned to power, it has become a permanent impost. The reason for this is that, with the tax at a low rate, its pressure was found much less intolerable than during the great war, and it has been felt by public men, and business men generally, that the tax, with all its drawbacks, if usually kept at a low rate, fulfils a useful function as a revenue reserve for emergencies, cn account of the ease with which it can be put up and down without disturbing trade.

So much for its history, adding that from 1842-52 incomes up to £150 were exempt, and the rate was 7d. In 1853 the rate was lowered to 5d., and the exemption fixed at £100, at which it remained till 1875, the rate having been temporarily largely increased, during the Crimean War, immediately after which it was reduced from 16d to 7d. Then ensued a period of fluctuations, mostly at low levels, until in 1875 it was only 2d. The next year

it was increased to 3d., and the exemption was again raised to £150, at which it remained till 1894, the rate meantime fluctuating upwards. In that year the exemption was raised to £160, and the rate to 8d., below which it has not since been.

Hitherto, therefore, this tax has been regarded as essentially a war tax, and immediately on the cessation of war it has been greatly reduced. The principle which has governed exemption appears to be somewhat obscure, but the deduction is, no doubt, that under the pressure of war the smaller incomes have been subjected to the tax, though the £100 limit was long maintained, perhaps because, with