J. S.

Mill on the Income Tax Exemption

and Inheritance Taxes:
The Evidence Reconsidered
Robert B. Ekelund Jr. and Douglas M. Walker

A succession duty is the most unobjectionable mode of [statically and

intertemporally redistributing wealth] . . . because in that way it is
confined to hereditary wealth. I think you must allow people to re-
tain the full advantage for their lives of what they have acquired; but
the State may deal with it on the occasion of succession. I certainly
do think it fair and reasonable that the general policy of the State
should favour the diffusion rather than the concentration of wealth.
-J. S. Mill, Testimony before the Select Committee on Income and
Property Tax

1. Introduction
John Stuart Mill was, arguably, the most complex of all thinkers on
economic and political matters. This man for all intellectual seasons has
insights and wisdom for generations of diverse thinkers. One of the chief
areas of contemporary debate surrounds important questions raised in
Mill’sanalyses of economic policy, particularly tax policy, respecting

Correspondence may be addressed to Robert B. Ekelund Jr., Department of Economics, Auburn

University, Auburn AL 36849 and Douglas M. Walker, Department of Economics, Auburn
University, Auburn AL 36849. We are very grateful to Robert F. HCbert and Mark Thornton
and to two referees for excellent comments on earlier drafts of this article. Naturally we accept
responsibility for the final work.
History of Political Economy 28:4 @ 1996 by Duke University Press.
560 History of Political Economy 28:4 (1996)

income distribution.’ One important and complex issue stands out: To

what extent did Mill develop a coherent tax theory and policy in the area
of income tax exemptions and inheritance taxes which would preserve a
maximum of incentives, a minimum of “drag” on the economic system,
and long-term distributive justice?
This article focuses on two interesting puzzles related to Mill’s well-
known stance on general tax policy. First, why did Mill propose the
income exemption and why did he support changing it between 1852
and 1861, and second, what, exactly, led Mill to recommend progressive
inheritance but (fundamentally) proportional income taxes? Mill’s theo-
retical views on taxation have been ably chronicled elsewhere. However,
the neglect of certain empirical factors relating to the actual British tax
structure and income distribution has, we believe, led to some misinter-
pretations and distortions regarding Mill’s stated views on incentives and
the role of tax institutions in fostering equality both within the existing
system and intertemporally. We maintain that Mill’s concern for ex ante
equality, the diffusion of property, and a workable intertemporal concept
of capitalism-views which interacted with the institutional as well as
the ideational environment within which he wrote-was the hallmark of
his theoretical and practical thought on taxation.

2. Mill and the British Tax Structure

The tax structure of England as Mill viewed it in the first edition of the
Principles (1848) and in testimony before Parliament in 1852 and 1861
was complex and filled with anomalies. Basically it was, as were many
European systems of the day, a product of medieval (feudal) influences
with particular elements from the more recent past. The form and amount
of taxation in the United Kingdom were, of course, much conditioned by
such “exogenous” events as the Napoleonic Wars and (later) the Crimean
War (1852-54). Indirect taxes, including “regalian” taxes in the form of
customs duties and excises on particular commodities, were still a very
large part of the tax structure in 1848. Out of a total tax revenue of &5 1.4
million, fully 25 percent of the total was taken in the form of excises and
38 percent in the form of customs revenues in 1848, the year that Mill’s
Principles first appeared (Shehab 1953,90).

1. Elements of this debate have occupied a number of historians of economic theory and
policy over recent decades (Schwartz 1972; Ekelund and Tollison 1976, 1978; West 1978;
Hollander 1985).
 Ekelund and Walker / Mill on Income Tax 561

Direct taxes were (re)gaining favor in Mill’s day. Wars with France
at the end of the eighteenth century and the beginning of the nineteenth
had created extraordinary demands on the treasury. In 1798 William Pitt
levied the first income tax (in Great Britain only) at a rate of “101. per
cent [that is, 10 percent] on incomes of 2001. and upwards of various
rates [for incomes] between 2001. and 601. a year” (Levi 1860, 147).
That tax expired in 1815 but was reinstituted by Sir Robert Peel in 1842.
After significant revisions of the entire tax structure under William Glad-
stone in 1852-53, income taxes, despite continuous opposition, became
a permanent part of the British tax structure.2
“Death duties” (probate, legacy, and, later, succession duties, levied
initially under the Stamp Act of 1815) were also long part of the tax
structure. In addition, other remnants of the medieval tax structure, espe-
cially the taxes on land and other forms of property, and a preponderance
of indirect taxes, persisted into Mill’s day. While it is not our purpose to
provide details here, we find it significant that a radical restructuring of
the British tax system (actually that of the United Kingdom) was in full
swing during Mill’s heyday as an economist.

Mill as Classical Economist

Mill’s belief in the cornerstones of classical economics, which was ac-
companied by a severe case of “capital phrenia,” is another key to un-
derstanding his proposed restructuring of the tax system. In this classical
version of “trickle down economics,” Mill wished to protect savings
at all costs because savings is the fountain from which investment and
improvement of the laboring classes (through the wages fund) springs.
In testimony before Parliament in May 1852, Mill was adamant in the
classical view, clearly distinguishing between “productive” and “unpro-
ductive” uses of spending money:
If people invest their money in some mode in which it is rendered
productive, it is more useful than if they spent it upon themselves. If
1,0001. a year were expended even in alms, it would be soon spent, and
the benefit of it would remain only so long as it lasted; but if the same
sum were employed productively, by being lent to a manufacturer or
2. The tax imposed in 1842 was levied at 7d. in the pound on incomes of 1501. and above. In
1853 this rate was continued plus a rate of 5d. on incomes from 1001. to 1501., and the tax was
extended to Ireland. Rates rose and fell over the period of the Crimean War in the 1850s and in
response to alterations in the excises and customs duties (see Levi 1860, 147-63, for a useful
summary of the entire British tax structure up to 1860).
562 History of Political Economy 28:4 (1996)

an agriculturist, it would become a fund in perpetuity for maintaining

labour. (Mill [ 18521 1968-69,3 19)
While it might be debatable whether Mill ever relinquished adherence to
the wages fund in any meaningful way, his testimony before Parliament
in 1851-52 and again in 1861 leaves no doubt that he was on these
dates classical to the core with regard to the matter of tax r e f ~ r mMill
.~
consistently defended modes of taxation that suppressed consumption
and encouraged savings.
A second well-known aspect of Mill’s thought is important as regards
taxation and income distribution. A functioning and “just” capitalism as
interpreted by Mill demanded ex ante but not ex post equality. The inter-
temporal nature of this view of justice must be held firmly in mind in
interpreting Mill’s policy views. In order to obtain economic growth and
personal (human capital) growth in society, incentive structures that en-
couraged initiative and work had to be put in place in the tax structure and
elsewhere. But, as we will argue, an appropriate incentive structure was
not enough. Progress required “fluidity” and “mobility” within society at
any given time and across time. Mill’s policy stance, moreover, cannot be
understood apart from his advocacy of the microeconomic diffusion of
property rights within British society. Within this context, Mill faced, de-
spite phenomenal economic growth in his lifetime, a highly skewed and
fundamentally feudal system of wealth and income distribution. Mill’s
intertemporal view of justice (ex ante but not ex post equality), we argue,
is the key, along with his adherence to classical economic theory and
incentives, to understanding his stance on economic policy and income
distribution.

Mill’s Proposals for the British Tax System

The excellent rendition of Mill’s tax policy proposals by Hollander (1985,
858-80) makes a recounting of it just that. We think it useful, however,

3. Indeed, we find some of Mill’s clearest statements against hoarding and Say’s Law (and
its necessary accoutrement, the wages fund) in testimony. Mill rejected notions that would
come to be called “Keynesian” in such statements as “if the money is spent on [a] man’s
personal indulgences, the most that it can do, even on the most favourable supposition, is to
support those who derive employment from it, while it lasts; whereas, if it is invested and
employed productively, it reproduces itself, and becomes a means of supporting a number of
persons in perpetual succession” ([1852] 1968-69,319). To this, Mill adds that equally or even
more productive expenditures might be on endowments (for example, for schools “with proper
precautions for its [the expended money’s] being useful” [319]).
 Ekelund and Walker / Mill on Income Tax 563

to review some of Mill’s tax reform pronouncements in the context of

his classical viewpoint and familiarity with the British tax structure.
Mill’s classical perspective on the importance of making “produc-
tive” investments led him to espouse the exemption of savings from all
taxation, no matter a person’s income level, “in order to do complete
j ~ s t i c e . ”Mill
~ argued that if the portion of income laid by is charged
with income tax, the tax is paid twice: first on the capital and then on
the interest earned on the saving^.^ The use of funds is the key to Mill’s
view. Savings, when used in productive ways, either directly or indirectly
(through financial institutions) led to investment, capital formation, and
(ultimately) augmentation of the wages fund.
While all taxes had the effect of suppressing industry, income taxes, in
particular, were direct taxes on personal and entrepreneurial effort and
savings. Hence, Mill regarded them as a necessary evil, that is, neces-
sary to pay for government expenditures. But equity (in a Benthamite
conception) demanded that “equality of taxation . . . as a maxim of
politics, means equality of sacrifice. It means apportioning the contribu-
tion of each person towards the expense of government so that he shall
feel neither more nor less inconvenience from his share of the payment
than every other person experiences from his” (Mill [ 18481 1965, 804).
But within this framework, Mill’s tax policy assessments included the
issue of the importance of favorable treatment of transitory and precar-
ious incomes. Mill, in these regards, clearly wanted the burden of the
total tax take to fall in the laps of hereditary or “permanent” incomes

4. Mill was adamantly against what he identified as the double taxation of savings. For
example, in 1861 testimony, he railed against the state for “taxing people twice on the same
portion of their income” or for “taxing people for the fact of their saving” ([I8611 1968-69,
220). According to Mill: “Taxing people on what they save, and not taxing them on what they
spend, or taxing people on a larger proportion of their income, because they are better off, does
not hold the balance fairly between saving and spending; it is contrary to the canon of equity,
and contrary to it in the worst way, because it makes that mode of employing income which is
public policy to encourage, a subject of discouragement” (220).
5 . Mill explained the double tax with a numerical example: “suppose in one year I save 1001.:
if I did not save that 1001. I should have to pay 31. to the State, which would leave me 971. to
expend on luxuries or indulgences: but if, instead of spending, I save the 1001., I should not
save it to lock it up, but to invest it; and I should immediately begin to pay the income tax on
the income derived from it, which would be equivalent to paying the tax on the 1001. If I spend
the 1001. I pay 31. to the State, and have 971. for my own use; if I save it, I pay 31. to the State,
which reduces my future income from it in the same proportion, and I also pay three per cent.
on this diminished income; so that, in reality, I pay the income tax twice, first on the capital and
then on the interest. This could only be just, on the supposition that I had the use and benefit
both of the capital and of the income; but I have not” ([1852] 1968-69,299).
564 History of Political Economy 28:4 (1996)

and implicitly on those favored in the existing English distribution of

wealth.6
Hollander clearly notes the import of Mill’s differential treatment since
the upper classes were most likely the recipients of hereditary incomes.
And not only were terminable annuities and precarious and temporary
professional incomes to be treated with favor-all incomes “derived from
personal exertion” were to be given differential treatment. This would
include, of course, wages from unskilled workers as implied in Mill’s
testimony before Hubbard’s committee in 1861 (Hollander 1985, 868).
Taxes on exertion and work effort were to be avoided or minimized as
far as possible and savings of all classes were to be encouraged and
~upported.~ An exemption of one-fourth annual income on the part of in-
comes earned “by personal exertion” was advocated by Mill-although
he regarded the one-third annual income exemption proposed by Hub-

6. Basically, Mill suggested that if incomes are capitalized, tax payments should also be
capitalized. An identical tax paid on a “life” annuity worth 1,5001. as upon an annuity worth
3,0001. in perpetuity would be unjust. If the income worth 3,0001. a year pays an income tax of
10 percent in perpetuity and the one worth 1,5001. pays 10 percent also for a certain number of
years, the former will be equivalent to 3001. and the latter to 1501. This would seem just because
the one (l500l.)would be worth only half the selling value of the other. But “wants,” according
to Mill, must be considered along with “means.” Most particularly, temporary or precarious
incomes should be taxed “at a lower scale than permanent or certain incomes, not because of
their having a lower selling value, but because the possessors of those incomes have one want,
which those who possess permanent incomes have not; they are liable to be called upon in most
cases to save something out of that income to provide for their own future years, or to provide
for others who are dependent upon them; while those who possess permanent incomes can
spend the whole, and still leave the property to their descendants or others” ([ 18523 1968-69,
286).
7. There were limits to Mill’s advocacy of differential treatment. He was opposed on principle
to progressive taxation measures with respect to earned or “life” incomes or “life” savings. His
involvement with the principle of diminishing marginal utility is problematic (discussed below).
However, with respect to the treatment of the savings of the poor, Mill does resort to a kind
of marginal utility argument, but in reverse. In response to a question (from Hubbard) as to
whether the rich are better able to save than the poor and whether, on that account, the poor
should be treated differently, Mill replied: “I should say not, because the relief that you give
in the case of the poor, is the relief of a much greater necessity. Though they save less, still
what they do save costs them a much greater effort, and therefore to have that effort alleviated,
is a greater advantage to them. And in regard to the rich, though it is true that they can save
more without any substantial mischief to themselves, it does not follow that they will. Those
whose income is permanent, seldom do so. And if they do, I am not sure that the fact that by
doing so, they confer a special benejit on the poor by adding to the capital of the country, is
not a sufficient reason in one way to overrule the reason in the other” ([1861] 1968-69, 219;
emphasis added). Thus, the egalitarian (that is, proportional) treatment of the savings of all
classes is defended on the bases of both marginal utility and the operation of the wages fund in
capitalist accumulation.
 Ekelund and Walker / Mill on Income Tax 565

bard’s committee in 1861 a good approximation. The important point

at hand is that such a scheme, given a tax amount to be raised, would
place a heavier burden of total taxation on the wealthy, whose exis-
tence depended on heritable properties and, to a large extent, landed
estates.
Less well known is Mill’s view on feudal land taxes. These were taxes
upon land based on feudal obligations to the Crown. Mill, in his testi-
mony of 1852, justified the then-present land tax and even entertained
an augmentation of it on the ground that feudal taxes were removed
without a quid pro quo on the part of landholders. According to Mill,
“feudal charges had been taken away previously; but they had been taken
away without commutation, which I think was a gross injustice; to abol-
ish charges upon land which had been previously held subject to those
obligations, and to render it free of those obligations” ([ 18521 1968-69,
303). The land tax, imposed to replace these feudal obligations (chiefly
military service) was, according to Mill, far lower than the privileges
these lands enjoyed under the feudal system. Taxes were abolished for a
time (the last of them during the time of Charles 11), but a land tax was
invoked shortly thereafter (and levied systematically under Pitt).
Mill, in testimony, opposed any justification for the reduction or elimi-
nation of land taxes as they then existed. Recognizing that “the possession
of land has always been a source of importance and power,” Mill notes
that the then-present “land tax bears a very small ratio to the value of land;
and as the land was granted for the purpose of feudal service, it cannot
well be supposed that the burthen of that service was only a twentieth or
a thirtieth part of the value of land” ([1852] 1968-69,3065). When the
questioning got around to manorial rights-which were directly linked
to feudal land rights and obligations-Mill argued that land-manor tax-
ation was justified, not only on the basis of feudal obligations but also
because the value (opportunity cost) of the rights were more valuable in
a rich state of society than in a poor state.
Historically, therefore, land taxation and even discriminatory taxes
levied unevenly across England could be justified on the basis of feu-
dal obligations. But Mill judged raises in such taxes “questionable” on
the basis of prior feudal obligations since market adjustments take place
due to taxes when particular pieces of property are subjected to taxes
over long periods. The original taxpayer initially pays the tax but the
tax is capitalized in subsequent sales. As Mill puts it, “if the land is
under any disadvantage it tells on the price for which the land is sold”
566 History of Political Economy 28:4 (1996)

([ 18521 1968-69, 309).8 Mill’s argument could hardly be interpreted as

an attempt to soak heritable property with land taxes, but it did provide a
justification for the maintenance of land and manorial taxes on a wealthy
aristocracy. Changes could be justified on the basis of “policy,” more-
over; and inequities that developed through time (such as intertemporal
improvements in land or property) could be addressed by changing tax
rates ([ 18521 1968-69, 3 11).
These views on taxation and equity were clearly compatible with Mill’s
classical theory and view of equity, but he also understood that indirect
taxation had, of necessity, to be supplemented with direct exactions.
His most famous views on taxes therefore relate to income taxes, direct
“exemptions” from those taxes, and inheritance taxes. Since excise and
other indirect taxes were regressive, direct taxes could not be proportional
if equal sacrifice was to be obtained. As Mill argues, “a just income tax
ought never fall on necessaries” ([ 18611 1968-69,212). In the Principles,
an exemption of $50 was used as an example: “If 501. a year is sufficient
(which may be doubted) for these purposes, an income of 1001. a year
would, as it seems to me, obtain all the relief it is entitled to . . . by
being taxed only on 501. of its amount,” but Mill adds the qualifier that
the amount “should not, I think, be stretched further than to the amount of
income needful for life, health, and immunity from bodily pain” ([ 18481
1965, 807). In his Parliamentary testimony of 1852, Mill suggests an
exemption of $150 ([1852] 1968-69,294), but by 1861 he advocated an
exemption of $100 (with lower rates between $100 and $150). Why did
Mill alter his views? A historical and empirical reconstruction of income
distribution and changes in the tax system over the later years provides
clues to the justification for the exemption and the change between 1852
and 1861, as well as insights into Mill’s famous advocacy of progressive
inheritance taxes.

8. Mill in fact argued that this principle applied to all sorts of taxation applied to property,
although changes might be made as a matter of policy. With respect to commodity taxation,
for example, the malt tax, Mill argued, “I can never suppose that taking away the malt tax, or
the tax on any other commodity, is required by justice to the particular class that immediately
pay it, though it may be advisable on grounds of policy” ([ 18521 1968-69,309). This was so,
he alleged, even though the initial tax was “unjust,” because remission of the tax to the present
generation would be as much a “windfall” as the imposition of the tax on the initial payers was
“confiscation.” Mill’s illustration: “it was an exceedingly improper act of Hen. 8th to give away
the lands of the monasteries to individuals, whose successors now possess those lands; but I
conceive it would be now unjust to take those lands, or any portion of them, from the present
possessors” ([ 18521 1968-69,308).
 Ekelund and Walker / Mill on Income Tax 567

3. Income Distribution and the Low-Income

Exemption
The quality of statistics on wealth and income distribution in nineteenth-
century England, though relatively good, must necessarily be suspect,
although the data have been carefully adjusted by a number of researchers
(Soltow 1968; Williamson 1980; Rubinstein 1986; and, most particularly,
Lindert and Williamson 1983).9Without question, however, the decades
preceding Mill’s evaluation of the British tax system were periods of
massive growth in wealth and income. The flowering of the Industrial
Revolution made the nineteenth century “England’s century.”
Allowing even for the poor quality of these early data, the massive
growth of wealth wrought by the Industrial Revolution must have been
the source of incredible percentage increases in per capita well-being in
the United Kingdom. These progressive increases were translated into
equally dramatic increases in per capita national income, according to
most accounts. According to estimates reported in Baxter 1868 (66),
national income (from all sources) expanded threefold between 1801
and 1858. Per capita income increased from E14.7 to E20.15 between
1800 and 1858, according to Levi’s estimate (1860,7).” However, data
on income distribution tell a far different story-one that most clearly
explains Mill’s directions in public finance vis-8-vis his classical the-
ory and his philosophical conception of justice in long-term distribu-
tion.

Income Inequality
While all data sources for the period must contain important qualifi-
cations, official accounts of the distribution of income in Great Britain
(England and Scotland) in 1801 and again in 1848 tell an important story.
We have constructed Lorenz curves (figure 1) from data collected by
William Farr (1852) for the distribution of income in the years 1801 and
9. The critically important issue of income distribution in nineteenth- and early-twentieth-
century England and its relation to British capitalism has been addressed by Jeffrey Williamson
in a number of contributions (for example, see Williamson 1985). Although the Lindert-
Williamson adjustments to the Levi-Baxter data we report below (for 1867) would strengthen
our argument concerning the extent of income inequality, we utilize the more “conservative”
Baxter data estimates in our discussion. For other purposes, of course, the adjustments are
extremely useful.
10. Levi, using statistics collected in France, contrasted Britain’s progress (f20.15 per capita
in 1858) with that of France (f15 per capita) and of Russia ( f 5 per head).
568 History of Political Economy 28:4 (1996)

100

90

80

70

50
Eo
0
C
W
40
1801
30
1848
20

10

0’
0 10 20 30 40 50 60 70 80 90 100
Population (YO)

Figure 1 Great Britain: Lorenz Curves (1801 and 1848). Source: Farr
1852, 11462-63.

1848. Clearly income data are self-reported and huge discrepancies exist
between estimates of the income-earning population in various classes
and the number of returns reported. This was a persistent complaint
among observers and compilers of tax statistics well into the nineteenth
century. The dramatic inequality in income distribution is obvious from
the Lorenz curves, even allowing for the fact that only 1,020 persons re-
ported income above $3,000in 1801 and reportage was not much better
in 1848. By 1848, a year with better estimates, about 60 percent of the
population earned just over 10 percent of the income in Great Britain.

1 2 . Mill argued that income taxes led to fraud and moral degeneration ([1861] 1968-69,
229). Many others complained of cheating. For example, the Draft Report to the Income Tax
Committee of 1861 described the income from the trades and professions (Schedule D in the
code) as depending “on the conscience of the tax-payer, who often, it is feared, returns hundreds
instead of thousands, and who is certain to decide any question that he can persuade himself
to think doubtful, in his own favour” (quoted in Baxter 1868, 32; see also Sir S. Morton Peto’s
[ 1863,491 elaboration and documentation of enforcement problems).
 Ekelund and Walker / Mill on Income Tax 569

Table 1 Population Estimates by Class: United Kingdom (1867)

Upper and Middle Classes
With Independent Incomes 2,759,000
Dependent 3,859,000
6,6 I 8,000
Manual Labor Class
Earning Wages 10,961,000
Dependent 12,130,000
23,091,000
Total Estimated Population 29,709,000

Source: Baxter 1868, 16.

The lowest 22.5 percent earned only 1.3 percent of income, while the
upper 3 percent earned 46 percent of reported income.12
Two facets of these data should be noted at the outset. Wages-those
earned by manual labor-were exempt from taxation, and thus a vast
segment of the population was eliminated from the 1801 and 1848 data
(and from tax liability). But a second point is that the inequality in income
distribution most likely grossly underestimates the skewness in wealth
distribution in England at the time. Underreporting and fraud by income
earners and the exclusion (until later in the century) of income from
landed estates are only two good reasons. There is also evidence of
massive undervaluations of property over the period (Peto 1863,4546).
Robert Dudley Baxter, in a paper read before the Statistical Society
of London in 1868, shed new light on the form of income distribution
in the United Kingdom. Baxter estimated the population and income for
each class (including “dependent” classes). l 3 His population estimates
are shown in table 1. Upper and middle classes comprise only 23 percent,

12. These data and those in other sources were used to test the existence of a so-called Kuznets
curve-inequality rising until about the mid-nineteenth century and moderating slightly af-
terward (Williamson 1985, 3)-in Soltow 1968. Lee Soltow argues, contrary to Lindert and
Williamson (1983), that income inequality was not lessened until World War I in the early
twentieth century. All of these writers use reported data and adjustments to reported data to
construct Lorenz Curves, Gini coefficients, and Pareto curves to support their arguments, which,
of course, do not directly concern us here.
13. The “dependent classes” included nonworking wives, children, and relatives at home;
scholars; paupers; prisoners; vagrants; and manual laborers above sixty-five years of age (Baxter
1868, 81).
570 History of Political Economy 28:4 (1996)

1OOOOO

lo000

lo00

100

10

1
I(1) 1(2) I1 III(1) III(2) IV v M

Income Class

Figure 2 United Kingdom (1867): Estimate of Income Distribution.

Source: Baxter 1868,64.

while the manual labor class is composed of 77 percent of the popula-

tion. Drawing upon the data on wages and earnings of the working classes
collected in the previous year by Levi (1867), Baxter presented an es-
timate of income distribution for the year 1867. We present a graphic
reproduction of those data in figure 2 for the United Kingdom (including
Ireland). l4
The primary advantage of the Levi-Baxter calculations is that they
include the wage income of the working classes as well as salaried in-
comes of those in middle and upper income groups. By modern standards
income distribution in England in 1867 was comparable to that of an un-

14. Lindert and Williamson (1983) build upon Soltow’s calculations and use data from
Baxter’s appendix 4 (for England and Wales only). Our calculations are for the United Kingdom.
Further, as noted above, Lindert and Williamson have made important adjustments to Baxter’s
data. Specifically, they deleted Baxter’s inclusion of 350 companies from the household data
and adjusted upper incomes accordingly, made adjustments for the number of persons in the
income tax liability class (reducing it by 40%) and included paupers in the distribution (1983,
95). Since all of these would tend to make the income distribution for 1867 even more skewed
than that in figure 2, we simply report Baxter’s original data for the United Kingdom (that is,
including Ireland).
 Ekelund and Walker / Mill on Income Tax 571

derdeveloped country, and this result appears to be the case in spite of

the fact that Baxter may have overestimated the number of taxpayers
by 40 percent (Lindert and Williamson 1983, 95). In figure 2, average
income in each category (our calculations) is reported in log scale (but
with actual numbers) on the left vertical axis and number of persons
(in millions) is depicted on the vertical at right. The income classes are
divided into six major groups with two subgroup^.'^
By our calculations, taxes on large incomes of E5,OOO or more (Class I
[ 11) were assessed on 8,500 individuals who received an average income
of E14,842. Those below the level of the income tax (El00 in 1867) were
12,458,000 individuals with an average income of less than &33!Given
recent and well-executed adjustments to this data, our calculations are
an upper bound on income equality.

Mill’s Income Exemption Reconsidered

Mill’s proposed exemptions for the income tax take on new meaning
in light of these statistics and the modifications made to the system at
the time of his testimony before Hubbard’s committee in 1861. Mill
was clearly addressing a tax system in flux. In order to understand his
change from advocating a El50 exemption (in 1852) to a El00 exemption
(with lower rates between El00 and 5150) in 1861 testimony, we must
understand how the tax system put in place by Peel and Gladstone in
1852-53 changed in intervening years (up to 1861). Customs duties were
reduced dramatically-from covering over 1,000 items to only 44. The
burden of excise taxes on the poor was likewise in flux and was falling
(but still relatively high) after the Peel-Gladstone reforms. l6
Levi (1860,30-3 1) estimated the tax burden on the poor for 1858 after
reforms had begun to reduce the principal indirect taxes-customs and
excises. Levi used estimates of the population of 1 million in the upper
15. Baxter’s income divisions, corresponding to figure 2 above, were Upper and Middle
Classes: Class I (1) f5,000and upward; Class I (2), f 1,000 to €5,000; Class II,f300 to €1,000;
Class III (l), f 100 to €300; Class III (2), under f 100; Manual Labour Class: Class IV (higher
skilled labor and manufactures), €50 to f73; Class V (lower skilled labour and manufactures),
f35 to 252; Class VI (agriculture and unskilled labor) El0 10s. to €36 (1868,64).
16. Duties on glass were repealed in 1845, on bricks in 1850, and on paper, soap, and
auctions in 1853 by Peel’s reforms (see Pet0 1863, 83, for statistics on excise duties and
receipts in 1862). In addition to reform of excise taxes, new policies simplified assessed taxes
on sumptuary goods such as servants, horses, and dogs. A house tax based on rental payments
was, moreover, substituted for the window tax in 1857 (Peto 1863, 113-14).
572 History of Political Economy 28:4 (1996)

classes, 9 million in the middle class and 18 million in the working-class

(along with 1million poor, old, infirm, and otherwise unable to pay taxes).
On the basis of total taxes, Levi showed that the poor bore the largest
percentage burden of total tax payments: 14 percent versus 11.5 percent
of income for the middle class and 12 percent of income for the upper
classes. The burden was due almost exclusively to particular customs and
excise duties, especially on commodities that analysts thought not good
for the lower classes (malt, spirits, and tobacco), but also (in 1858) on
tea and sugar.17In addition, there is evidence of a rise in the total “take”
of the income tax by one-third between 1855 and 1865, from an increase
in the value of real property (land, houses, railways, mines, and so on)
and from other sources.
In the face of such developments, Mill continued to advocate a total
exemption of El00 (with lower rates between El00 and E150) for all,
an exemption of one-third on earned incomes, special provisions for
transitory and precarious incomes, and property taxed at the full rate in
his 1861 testimony.’’ This advocacy was in sharp contrast to observers
of the day who thought that “wages” and the working classes generally
should also become the object of income taxation, not on the basis of the
protection of property but as compensation for the protection of personal
rights and privileges accorded British citizens.” But Mill, even in the
face of a declining burden of indirect taxes on the poor and working

17. Levi comments, with obvious Victorian elitism, on the poor’s total tax burden of
f20,300,000 in 1858:“Do such taxes press on their first necessaries of life? Far from it. The 21s.
per head, which are estimated to be paid in taxes by the working classes are derived as follows:
tea, 2s. 8d.; sugar, 2s. 8d.; malt and spirits, 8s. 6d.; tobacco, 2s. 10d.; other taxes, 4s. 4d. Of
the total 21s. per head, 1Is. 4d. are thus derived from their drinking habits and their tobacco,
articles from which they can well abstain, and which are of little or no use, either bodily or
intellectually, and 9s. 8d. from provisions and other necessaries. This is really the amount of
taxes paid at present by the temperate and frugal portion of the working classes of the United
Kingdom, and we doubt if they are as lightly taxed in any other country” (1860,34-35). Levi
was also the author of the chief study of working-class wages and earnings in the 1860s (1867).
18.Hollander (1985,86143) notes the uncertainty and vagueness with which Mill addressed
the exact value of the proposed exemptions. By 1868, for example, Mill still believed the poor
to be the victims of indirect taxation relative to the rich and advocated that incomes between
f50 and “f150 or f200” should be exempt from income taxation.
19. Levi, for example, thought that the upper and middle classes were in a sense “overtaxed”
and that the poor and working classes should be taxed more: “The working classes are exempt
from a great part of the public burdens, and they have certainly no reason to complain of the
amount of taxes now imposed on them. On the contrary, whilst they share to the full in the
protection afforded by the State, and in the privileges of British nationality, they contribute
considerably less to the Exchequer than what political justice would dictate” (1 860, 163).
 Ekelund and Walker / Mill on Income Tax 573

classes, defended the El00 income deduction which exempted 95 or

greater percent of the British population from income taxes. From a
holistic viewpoint (the manner in which Mill himself viewed the tax
system; [ 18521 1968-69, 3 1 9 , the exemption shifted the burden to the
wealthy, and increasingly to people with massive hereditary (landed)
fortunes.2o

4. Inheritance Taxes, Bentham, and

Intertemporal Ex Ante Equality
The suggestion that Mill’s progressive inheritance tax proposal was de-
signed as a focal point of an income redistribution program has been met
by a number of criticisms. The most frequent criticism is that the actual
revenues from such taxes were “insignificant” at the time. While literally
correct, we believe that the observation, with regard to Mill’s insistence
on intertemporal ex ante equality, misses the point. Mill’s underlying
reasoning and the subsequent course of “death duties” are interesting in
this regard.

Mill’s Benthamite Roots on the Inheritance Tax

Mill’s views on the progressive inheritance tax and, in large measure,
taxation in general are clear extensions of those propounded by Jeremy
Bentham in Escheat vice Taxation (1795).21Bentham completely dis-
missed arguments defending absolute rights to property based on “nat-
ural law” and other arguments.22Rather, he based his argument on the

20. Less has been made of Mill’s defense of income exemptions as based on Benthamite
principles. Bentham had argued that all should have minimum exemption of income from tax
for “necessaries” (see Levi 1860, 152).
21. The essay (1795; written several years prior to 1795) was titled Supply without Burden;
Escheat vice Taxation: being a Proposal for Saving in Taxes by an Extension of the Law of
Escheat: including Strictures on the Tares on Collateral Succession comprized in the Budget
of 7th Dee. 1795.
22. Bentham reveals his utter contempt for those who rely on an invoked “natural law” to
support one or another view of inheritance. He says, “Quere, who is this same Queen, ‘Nature,’
who makes such stuff under the name of laws? Quere, in what year of her own, or any body
else’s reign, did she make it, and in what shop is a copy of it to be bought, that it may be burnt
by the hands of the common hangman. . . . It being supposed, in point of fact, that the children
have or have not a right, of the sort in question, given them by the law, the only rational question
remaining is, whether, in point of utility, such a right ought to be given them or not? To talk of
a Law of Nature, giving them, or not giving them a natural right, is so much sheer nonsense,
answering neither the one question nor the other” (1795,93-94).
574 History of Political Economy 28:4 (1996)

“utility” of the individuals receiving inheritance and on the incentives or

disincentives involved. Bentham’s fundamental argument was that
Whatever power an individual is, according to the received notions
of propriety, understood to possess in this behalf, with respect to the
disposal of his fortune in the way of bequest-in other words, whatever
degree of power he may exercise, without being thought to have dealt
hardly by those on whom what he disposes of would otherwise have
devolved-that same degree of power the law may, for the benefit of
the public, exercise once for all, without being conceived to have dealt
hardly by any body, without being conceived to have hurt any body,
and, consequently, without scruple: and even though the money so
raised would not otherwise have been to be raised in the way of taxes.
(1795, 12-13)
Bentham wanted to strengthen the law of escheat-the law dealing with
the disposition of intestate property to the state-and to limit the power
of bequest. The law of intestate succession was to be eliminated except
between close relatives with only half of the (then) current amount going
to uncles and aunts, grandparents and nephews and nieces. For those who
died intestate, the state imposed a 100 percent tax on all inheritance. Ben-
tham, unlike Mill, did not want to limit inheritance in direct lines, noting
the possible disincentives of such limits on legators concerning “the in-
ducements to accumulate, and lay up property, instead of spending it”
(1795, 17). Death, in other words, meant that property rights are subject
to limitation^.^^ Bentham defended the (virtually) painless inheritance
tax on collaterals (who had no cause to expect inheritance and whose
utility was not appreciably diminished by not receiving one) as lighten-
ing the burden of taxes on the poor and working classes of society (1795,
14). In other words, Bentham’s arguments hinged on the utilitarian and
incentive effects of various possible tax structures.
Mill adopted Bentham’s sequence of inheritance-cum-utility-maximi-
zation theory as his own. His reasoning, as he acknowledges ([1848]

23. A similar argument was advanced in another connection-the rights to one’s burial plot-
in an essay by Bentham’s last secretary, Edwin Chadwick (1843). Chadwick, the utilitarian
practitioner, appended a brief exposition of the English law with respect to perpetuities in
public burial grounds (1843,269-71). Rights, in a ruling judicial interpretation, consisted in a
balancing between those of the dead and those of the living, and there were clear intertemporal
aspects to the problem as in the case of intertemporal limits on property rights.
 Ekelund and Walker / Mill on Income Tax 575

1965, 223-24), exactly parallels Bentham’s. In utility terms, collaterals

do not suffer and nonrelatives suffer little, if any at all, from severe limits
or prohibitions on inheritance (compare Bentham 1795, 14-16, 24-25,
with Mill.[ 18481 1965, 223-26).
But Mill went even further than Bentham in wanting to abolish col-
lateral inheritance altogether with strict and progressive limits on direct
heirs. His exact statements on these issues, admirably summarized by
Hollander (1985,876-79), include a defense of limitations on bequests,
that is, limitations on private property. While suppressions of an unlimited
right to bequest may have a marginal negative impact on accumulation
during an individual’s lifetime, such limits were more than acceptable
in order to prevent the squandering of great fortunes by heirs who put
no personal exertion into earning or developing them.24The same went
for intertemporal bequests with long chains of provisions far into the
future. As Mill puts it, “property is only a means to an end, not itself
the end. Like all other proprietary rights, and even in a greater degree
than most, the power of bequest may be so exercised as to conflict with
the permanent interests of the human race” ([1848] 1965, 226). Those
in direct line such as children and parents were to be well protected in
Mill’s scheme so that they would not become a burden on society. But
strict limits to inheritance for direct descendants were to be observed, not
on grounds of diminishing marginal utility but on Benthamite grounds
of “utility” maximization and on negative incentive effects to legatees
([ 18521 1968-69, 309).25
Strict rules regarding inheritance limitations (along with population
control) were the essential cornerstone in Mill’s plan to redistribute and
diffuse wealth and to provide for ex ante equality in British society. It
is correct that the rates of legacy and succession duties remained low

24. Intervivos gifts were, of course, encouraged and permitted as was the setting up of
endowments, but even with the latter, Mill wanted limits that would not create land concentration
or “illegal” activities ([ 18691 1967,616).
25. Some of Mill’s statements give the impression that he was (at least partially) using a
Mengerian marginal utility argument regarding the expenditures of those possessed of great
fortune. Ostensibly, he argued for progressive excise taxes on goods of “higher qualities”
and (possibly) for progressive inheritance taxes on the same grounds-that is, on grounds of
diminishing marginal utility. However, we share the same reluctance as Hollander (1985,880-
8 1) to ascribe such an argument to Mill. A Benthamite conception applying the utility concept to
society, limitations on property rights after death, and incentive effects on individuals are at least
sufficient bases for Mill’s advocacy of direct taxation on inheritance. Mill’s “moral perspective,”
as Hollander notes (1985,880), is sufficient to explain his view on indirect (excise) taxes. Mill
was not, in other words, a neoclassical in this respect.
576 History of Political Economy 28:4 (1996)

throughout the nineteenth century, with the Stamp Act of 1815 supply-
ing the basic rates until the Finance Act amendments of 1910.26These
“stamp duties,” which included a (regressive) probate tax on all inher-
itances and a legacy (and succession) duty depending on relationship
to the legator, failed to get at real estate. Gladstone tried to levy new
death duties on freehold and hereditary landed properties in 1853, but
statistically the results were minimal (Peto 1863, 118-20). Assessment
problems and evasion were unquestionably the reasons for the failure of
reforms.
Large increases and massive levies of death duties as a percentage
of property passed on to heirs did not occur until the twentieth century.
However, the “take” of the death duties did rise during Mill’s lifetime and
afterward, to an extent as the population rose, but also due to increased
coverage, more accurate reporting, and a continued emphasis on direct
versus indirect taxation. Death duty receipts (probate and legacy) grew
from about E2 million in 1851 to E3.4 million in 1859 (Peto 1863, 135-
36). Dramatic increases in the gross capital value of properties subject
to estate duties took their amount to more than S31.7 million in 1918
(Soward and Willan 1919, 338-39, 343, tables 10, 14). Death duties as
a percentage of total government revenue also rose over the last half
of the nineteenth century, indicating that the kind of redistribution Mill
envisioned was actually under way, at least until the massive growth of
the state in England at the turn of the century.

5. Conclusion: Equity and Capitalism in Mill’s

Economic and Social Thought
Incentives, utilitarian principles, and the diffusion of property rights are
the keys to understanding Mill on the statics and dynamics of “equity
and justice” and on specific economic policies to achieve these goals.
Statically, he wanted to preserve incentives for investment and economic
progress in British society. Dynamically, he wanted a diffusion of prop-
erty rights and opportunities for income mobility. Mill’s focus in tax
policy was on reducing and ultimately eliminating the institutions of

26. Rates (until the 1910 amendments) were with some variations the following: husband or
wife (0%); lineal ancestors or issue (1%); brothers or sisters or their descendants (3%); brothers
or sisters of the father or mother or their descendants (5%); brothers or sisters of a grandfather
or grandmother or their descendants (6%); other collaterals or strangers (10%). In 1910 rates
rose, with a charge (1%) added to husband and wife (Soward and Willan 1919,323-24).
 Ekelund and Walker / Mill on Income Tax 577

hereditary-aristocratic bases of wealth and the replacement of these with

mobile and fluid capitalism. He was attacking a system in which wealth
was not the primary result of individual initiative, talent, or prudence. All
this fits with what Hollander calls “the reform programme,” including
views on education, the possibilities of individual initiative, and welfare
policies.
None of these ideas is particularly new or startling. We do not believe,
however, that previous observers have emphasized the nature of Mill’s
thought in the context of the received economy and institutions of Mill’s
time. Mill advocated classical reforms (including population control)
but within an evolutionary restructuring of property rights and wealth
distribution that would destroy feudal privileges.
Juxtaposition of income distributions between 1801 and 1867 in En-
gland, the tax structure, and the concentration of land ownership in En-
gland with Mill’s views leaves small doubt as to the source of his con-
cerns. In static terms, the income tax exemption (whether 2100 or 2150)
showed a clear concern for the working classes. The highly regressive
indirect taxes (for both necessities and “luxuries”) on the poor justified
the exemption even after the customs and excise tax reforms of the 1850s.
But a point that has been overlooked is that the exemption meant that
more than 95 to 97 percent of the population (depending on the estimates
used) of the United Kingdom was exempt from direct taxes! In spite of
positions to the contrary held by tax experts of the day (Leone Levi, for
example), Mill pursued and advocated the exemption.
Of equal interest is Mill’s desire to remedy a feudal income and wealth
distribution in England through intertemporal policies-particularly those
dealing with land and nonearned income-to be addressed with high and
progressive inheritance taxes. The concentration of landed property and,
especially, the partibility of property made necessary by taxes on inher-
ited property, was attacked (however stealthily) in Mill’s proposals.27
Mill recognized that a radical change in income distribution and sub-

27. Consider Mill’s opinion on Disraeli’s attack on succession taxes because they led to
diffusion of ownership (partibility). In a letter to Sir William Molesworth, a philosophical
radical, on 15 May 1853, Mill argued that the real question was “whether to save the owner of a
landed estate from the necessity of selling part of it . . . he ought to be exempted from paying
his fair share of the taxes. This is so impudent a pretension that it hardly admits of any more
complete exposure than is made by the simplest statement. The reason would seem just as well
for dispensing them from paying any taxes whatever, or from paying their debts, for they may
be unable to do either of these without selling their land. If the inheritors of land wish to keep
it entire let them save the tax out of their income” (Mill [1849-731 1972, 14:105).
578 History of Political Economy 28:4 (1996)

sequent social and economic mobility would take time. He believed in-
heritance taxes to be the essential mechanism of an evolutionary change
toward an efficiently functioning capitalism. Consider Mill’s comments
on this critical matter only two years before his death:
I have very radical notions as to what is the fair mode of sharing
any burthen among the whole community. I would throw a very large
proportion of it upon property-not all property, not property which
has been earned by the industry of its present possessors, but property
which has been inherited, & forms the patrimony of an idle class. But I
see no justice in making those who happen to have inherited land bear
more of the burthen than those who happen to have inherited money.
I would lay a heavy graduated succession duty on all inheritances
exceeding that moderate amount, which is sufficient to aid but not to
supersede personal exertion. (Mill to John Stapleton, 25 October 187 1,
[1849-731 1972, 14:1847)
To argue, as some have (Kurer 1991), that inheritance taxes were “in-
significant” at the time is to misunderstand totally Mill’s redistributive
theory and his “reform program.” The same criticism may be applied
to the charge that he wanted to keep tax rates low enough to prevent
avoidance.28Mill defended low but progressive rates until the end of his
life, as in his essay on “Property and Taxation” ([18731 1967,702). But at
low and constant levels of government an even mildly progressive inher-
itance tax could, after a number of generations, overtake all other taxes
in quantitative importance. While non-progressive “death duties” com-
posed only about 5 percent of the total budget of the United Kingdom up
to the year of Mill’s death (1 873), they grew to about 8.5 percent in 1882,
increasing throughout the rest of the century (Soward and Willan 1919,
339).29Mill was interested in intertemporal redistributions of wealth and
income that would be supportive of a diffusion of property rights and en-
hanced ex ante equality and opportunity on the part of poor and working
class (indeed, all) members of society. These redistributions would flow
from hereditary fortunes in concentrated ownership to ever-changing
lower classes in society.

28. Mill, of course, could not have envisioned the growth of the role of the state in England
at the turn of the century, and later, in the post-1930s United States.
29. According to Soward and Willan, total death duty receipts grew by 1918 to an order of
ten times their amount in 1859 (from about f 3 million to E3 1.5 million) in the United Kingdom
(1919,338-39, table lo), a far greater growth rate than England’s total budget experienced.
 Ekelund and Walker / Mill on Income Tax 579

The broad question that Mill addressed is of course an empirical one:

Did capitalism create greater or lesser inequality in nineteenth- and early-
twentieth-century England? The results are not yet conclusive, but well-
executed recent research suggests that the beginning of a trend toward
lesser inequality began about fifty years prior to World War I (Lindert and
Williamson 1983; Williamson 1985). This would date the beginning of
the process at about the time that some of the Peel-Gladstone reforms-
many of them urged by Mill-were taking hold in England.30Mill, while
certainly no empiricist, was acutely aware of what could be accomplished
by alterations of the tax structure: diffusion of property and mobility
based on skill and inventiveness in the individual. The tax system was to
be used to support the decentralization and security of property rights in
British society as a conduit for growth. Classical principles (utilitarian
rather than marginal utility based) were more than mantras to Mill.31
In order to promote actual reform in society, they had to be adjusted to
existing economic and social institutions. At this critical task, Mill had
no peer.

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30.Mill’s perspicacity extended to a very complete understanding of “crowding out” of private

saving and investment by government borrowing to finance wars, as noted by Williamson. In
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offer evidence” (Williamson 1985, 168-69). We would of course agree that he did not offer
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3 1. The results of the redistribution in the twentieth century are, of course, problematic. In
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minimal government as a precept of laissez-faire. His views on taxation should be logically
adjusted to this “idealized” situation.
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