When the compulsory payment of funds to the state became a fixed and important part of fiscal systems, students became concerned about the economic effects of such procedure. An idea commonly held among early writers was that a tax, to some degree at least, created a new ability on the part of the person who paid it. It was contended that the fear of being compelled to change one's manner of living because of the burden of the tax, would cause exertion to provide for the tax and still leave the individual as well situated as before. Examples of the increased exertions during several wars were cited to prove this effect of taxes. Some pointed out, however, that such a result could be expected only if the burden was not so great as to seem insurmountable. Others took the view that there was no power in a tax to create ability to meet it - that people did not get ability to spend from spending, but spent because they had the ability. Energies might be intensified either to pay the tax or to devise some scheme for evading it, but any other reason than a tax might have caused a similar intensification. Energy itself, moreover, had little power of production, but was really effective only when applied to capital. A tax which curtailed the amount of capital, therefore, lessened the effectiveness of energy and curtailed the ability to meet the burden.
It is very possible that a tax may stimulate production, but its burden is felt, none the less, in this increased use of energy which is designed to provide the tax. If taxes encroach upon capital, it means a lessening of productive power, and with this a lessening of ability to meet burdens. The real economic consequences, however, cannot be determined without knowing what would have been done with the fund had the state not taken it, and then what use the state makes of it. If the source of the tax is one which otherwise would have been squandered, perhaps, in a way to lessen the efficiency of production, then it is more economical for the state to take it and use it. State expenditure, moreover, may often increase productive efficiency, and hence increase the ability of bearing tax burdens. Expenditures for maintaining a sound system of banking and currency, standardizing weights and measures, and providing experiment stations, are no doubt expenditures of this nature.
Many early writers opposed taxes which would affect capital. Ricardo favored an income tax; though Mill pointed out that a tax on incomes might affect capital by impairing savings. All were agreed that capital should not be impaired by taxation. Whether any tax will impair capital will depend, after all, on the habits and inclination of the individual. Two men may each have an income of $2,000, out of which each has been saving $500. A tax of $100 is placed upon the income of each. One now spends only $1,400, and still adds the $500 to his capital account, in which case the tax has had no effect on the accumulation of his savings. The other still spends $1,500, and adds only $400 to his savings account, in which case the tax has curtailed savings. It can be readily seen, therefore, that no categorical statement can be made as to the economic effects of a tax.