Popular Science Monthly/Volume 49/September 1896/Principles of Taxation: Definition, Object, and Sphere of Taxation XI
|PRINCIPLES OF TAXATION.|
By DAVID A. WELLS, LL.D., D.C.L.,
CORRESPONDANT DE L'INSTITUT DE FRANCE, ETC.
III.—THE DEFINITION, OBJECT, AND SPHERE OF TAXATION.
IT would seem to be in the nature of an economic or commonsense axiom, that a large and varied experience in respect to the management of any one of the great departments of the world's business, would result in the gradual evolution and final definite establishment of certain rules or principles, which would be almost universally recognized and accepted as a basis for practical application and procedure. But in respect to the matter of taxation—which is a fundamental necessity for the maintenance not only of all government, but of civilization—no such result has been achieved. In no department of economic science is there, moreover, so much obscurity and conflicting opinion. Most economists teach that there is "no science of taxation as there is a science of exchanges"; and "that there are no great natural laws running through and controlling taxation and its effects." And while the student will find examples in the history of states or governments of the practical application of almost every form of appropriation of private property under the name of taxation which human ingenuity, prompted by necessity, selfishness, or greed, could devise, and a sufficient record of effects to warrant the drawing of general and correct inferences, it is nevertheless probably true that there is not, at the present time, a single existing tax, decreed by despotism, or authorized by the representatives of the taxpayers, which has been primarily adopted, or enacted solely with reference to any economic principles, or which has sought to establish the largest practical conformity under concurrent circumstances to what are acknowledged to be the fundamental principles of equity, justice, and rational liberty. But, on the contrary, the influence of temporary circumstances, as viewed, in most instances, from the standpoint of a governmental administration—despotic or republican alike—desirous of retaining power, has ever been the controlling motive in determining the character of taxation; or, as Colbert, the celebrated finance minister of Louis XIV, is reported to have expressed it, in saying that "the art of taxation consists in so plucking the goose [i. e., the people] as to procure the largest quantity of feathers with the least possible amount of squawking." Hence, apart from its methods of distributing power and patronage, the popular idea of evil, as connected with government, may almost always be referred back to unequal or excessive exactions; and to the reality of which, as evils, more than to any other one agency, may be referred most of the world's political revolutions, and the ferocity with which, as was notably the case in France, they have been often conducted. Hence,
also, the preference almost always shown, on the, part alike of those who enact and those who pay taxes, for indirect taxation, which very successfully blinds the taxpayer as to the amount which he pays and as to the time and place of its collection; and hence, finally, the idea, which has come to be all but universally entertained, that taxation per se is in itself an evil—something to be avoided, if possible, and an escape from which is always "good fortune"
A question of prime importance, therefore, which confronts us at the outset in entering upon any discussion of this subject is. Are these assumptions of economists that there is no science of taxation and no general laws regulating its exercise and effects—assumptions generally concurred in by jurists and popular sentiment—correct? If they are, then there are no principles of taxation to discuss, and a consideration of the subject must be limited mainly to a recital of the worlds experiments and experiences and an exposition of legislative enactments and court decisions. To admit their correctness, furthermore, is equivalent to confessing that human knowledge, in at least one department, has reached its extreme limit; and that a class of transactions which, more than almost any other, are determinative of the distribution of wealth, the forms in which industry shall be exerted, and the sphere of personal liberty, are best directed by accident or caprice. To ascertain the true state of the case ought, accordingly, to constitute the main object of inquiry, and, with a view of helping to the formation of an intelligent opinion, attention will be first asked to the meaning or definition of the two fundamental terms, tax and taxation. And in so doing we obtain immediately an illustration of the indefiniteness of idea and lack of exactitude in expression that characterize this whole subject, and also a very definite clew to their origin.
Analysis of the Word Tax.—Thus, the word tax in the English language, and its equivalent in all other languages, is used in a very loose and indefinite sense. Many writers, and the dictionary-makers generally, use the word in an extremely generic sense, to cover and designate all contributions obtained by process of assessment and levy (act of collection) by a state or government from the persons and property of its citizens; or from persons and property within its power and jurisdiction; in whatever form, or however arbitrary the assessments or levies may be, and by whatever name they may be known or designated—whether tribute, toll, talliage, duty, gabel, customs, impost, poll, subsidy, aid, excise, income, or benevolence. Such a definition, however, which, makes no distinction between contributions levied at his unrestrained will or caprice, and for any purpose, by a bandit whom circumstances have raised to the head and government of a petty tribe or community; or by an absolute and ignorant Oriental potentate, like Ismail Pasha, Khedive of Egypt (1863-'79); or by a European monarch, like Louis XIV, who said, "I am the state" and those contributions which represent that part of the wealth of a state which is taken from its citizens with their free consent for exclusive public purposes, in accordance with a well-defined and intelligent public policy; a definition that recognizes no distinction between these two methods and objects of taking, obviously can not be scientifically correct; for there can be no more analogy between the two methods than between a payment for value received and an act of highway robbery. Obviously, also, there can be no science of taxation predicated or formulated on such a definition, for there can be no science of irregularity and arbitrary action.
Again: "So long as people use words which have no precise signification, which may be interpreted in a variety of ways, and which present at once to the mind different ideas more or less obscure, more or less mixed up with one another, there will be uncertainty in the theory, or rather there will be a vague, incomplete, and ill-co-ordinated theory; and then, as all practice is the application of a theory, the practice resulting from it will be faulty"—M. Menier.
The celebrated French economist above quoted also makes the following well-warranted criticism on the current definitions of taxation: "They have" he says, "one general fault: they try to point out the employment of taxes, but they do not show the origin of taxes"
What, then, will be a correct definition of a tax?
It is not easy to frame such an one, in clear and succinct language, covering all the essential conditions. It probably never has been done, and therefore the best thing to do is not to spend time and effort in attempting it, but rather to endeavor to illustrate and point out its meaning indirectly. And, with this purpose in view, it is important to recognize at the outset an exact and homely truth, and one which heretofore has been generally overlooked by writers on taxation and political economy, namely:
That a government never has any money—by which alone the expenses of the state can be defrayed—except what the people-citizens or subjects—give, or concede to it by voluntary or involuntary action; and that the people, as a whole and in turn, never have any to give except what comes to them as the result of their work, or from an exchange of the products of their work. And such being the case, it follows, as has been happily pointed out by Mr. Atkinson, that what the Government really wants of its people, when it calls upon them for taxes, is work, and that the methods of taxation are only methods for collecting and using the products of work. Hence the following definition of a tax, deduced from the above statement of fact by Mr. Atkinson—that "it is that certain portion of the product of a country which must be devoted to the support of the Government"—embodies a meaning and a truth not incorporated and set forth in the ordinary or popular definitions. At the same time it is deficient in not recognizing any distinction between a just and uniform taking and an exaction or confiscation.
Taxation in the United States, its Aggregate and Distribution.—During the year 1890 the aggregate revenue receipts of the several governments of the United States, derived mainly from taxation, as reported by the census of that year, were $1,039,482,013, apportioned as follows: Federal taxation, $461,184,080; State taxation, $578,328,333. The last aggregate was again subdivided into $116,157,040 for State purposes, including the Territories and District of Columbia, $133,525,493 for county purposes, and $329,635,200 for municipalities and schools. If a temporary and extraordinary charge for pensions—$140,959,361 in 1895—which now rests upon the Federal Government, were eliminated, and Federal expenditures were reduced correspondingly, the taxation and expenditures of the national or Federal Government would be small in comparison with the total cost of all government. Federal and State; a result that constitutes a complete refutation of the common assumption that the national Government is rapidly absorbing the functions of the State and local governments and reducing them substantially to police precincts. Of the Federal revenues, nearly one half under the existing fiscal system are derived from taxes on distilled spirits, fermented liquors, and tobacco, all of which may be fairly regarded as self-imposed. If we assume, as we are probably warranted in doing, the average value of the product of each person in the country who is occupied for gain, at six hundred dollars per year, or two dollars per day for three hundred working days, then that part of the annual product of the country which went to the support of its Government or the State in 1890 was the equivalent of the work of 1,734,121 such persons for one year, or 520,236,300 days' work; or, in other words, for every dollar that the Government expends, somebody must work for at least half a day, or furnish a value equivalent for such an amount of work. Again, for the year 1890, the aggregate of taxation in the United States—national, State, and local—required or represented about seven per cent of the value of the entire annual product of the country, which probably approximated $1,200,000,000. In former days it was often customary to allow persons to pay their taxes by actual days' work, and this is still the practice in some parts of the United States and in Canada and some countries of Europe. Before the French Revolution, the tax imposed on the French peasantry, and known under the name of corvée, as has been already shown, was an obligation to render a specified number of days' work to the state, or to some seignior or noble. During the early colonial days of Massachusetts, the people of the settlements far removed from Massachusetts Bay paid their proportion of the expense of maintaining a colonial government at Boston in wheat, which was shipped down the Connecticut River in canoes, and then transferred to sailing craft and transported by sea to Boston. One could hardly imagine the disturbance and excitement that would be occasioned if all the taxes of the country were to be collected in this way, and if the head of every family was compelled to perform annually some twenty days' labor to discharge the obligation incumbent on himself and family to pay taxes, which would be about the amount which the head of every family in the United States would have to perform to meet its present annual expenditures. Everybody would then be talking economy; and the politician who wanted votes, instead of promising public buildings, or more salaried offices to his constituents, would say, "Gentlemen, give me your votes and elect me, and I will have your compulsory labor cut down next year from twenty-five days to twenty, or even fifteen" And yet the difference between that state of things and the present is merely a difference of appearance.
What is Taxation?—The popular or dictionary definition of taxation—namely, "the act of levying a tax or imposing taxes"—is as indefinite and imperfect as the ordinary definition of a "tax" has been shown to be. Scientifically considered, taxation is the taking or appropriating such portion of the product or property of a country or community as is necessary for the support of its government, by methods that are not in the nature of extortions, punishments, or confiscations; and a systematic and orderly arrangement and presentation of the knowledge gained by experience and discussion, with a view to effect such a result with certainty, uniformity, and the minimum of cost and trouble to society and its individual taxpayers or contributors, constitutes the Science of Taxation.
In what will be hereafter said, the word taxation will be used as far as possible in the sense in which it has been defined; but at the same time the employment of the unscientific term has become so general that its use in default of any satisfactory synonym is almost unavoidable, especially in the historical treatment of the subject.
Such a limitation of the meaning and nature of the word tax as has thus been given is clearly of the first importance, and a lack of its recognition is undoubtedly responsible in a high degree for the present unsatisfactory position of the subject of taxation as a department of economic knowledge; and also for a very general belief that in determining the forms of taxes the only rule to be followed is that of expediency. It may be too much to claim that a general recognition and practical acceptance of the proposed definitions and limitations are absolute essentials for the conception and construction of any just and intelligent system of taxation, and also for any such collocation of general truths relative to taxation as will raise the subject to the dignity of a science. But, be this as it may, it seems certain that such recognition and acceptance would at once sweep away many obstacles that would otherwise stand in the way of such a consummation, and bring a high degree of order into what is now a comparative chaos.
And, as one illustration of this, consider how entirely, and yet how naturally, the proposed definitions and limitations change the generally accepted idea of the relation of a tax to the individual taxpayer.
As has been already pointed out, the popular idea of a tax is that it is always an evil. Most writers also on political economy, in discussing the subject, start with the idea that the act or exercise of taxation necessarily implies perpetual antagonism between the state, the sovereign, or the executive, and the private citizen. The parties concerned are the citizen on the one side and the state on the other, and the former being comparatively weak and the latter exceedingly strong, the state is always assumed to get the upper hand. M. Proudhon, in his work Théorie de l'Impôt maintains that "all taxes are iniquitous," and that "if a sole tax was established it would be the sum of fiscal iniquities," "There are no taxes," says Ricardo, "which have not a tendency to lessen the power to accumulate," J. B. Say, the eminent French economist, declared that, by whatever name known, taxes are always a burden upon the private citizen. M. Garnier, another French economist, defines taxes "as the reduction made on the private fortunes of the citizens by the Government to meet public expenditures." According to John Stuart Mill, "it is impossible in a poor country to impose any tax which will not impede the increase in the national wealth."
"None of us feel, when the tax-gatherer comes, that to be taxed is a favor; or that, as to the money exacted, we as individuals are the better off for its having been taken from us. We know the tax is a burden; as such it is recognized by every person upon whom it is imposed,"—Hon. Thomas M. Cooley.
All such conceptions of the position of the state in respect to the taxpayer are, however, monarchical, implying the relation of master and subject, lord and serf; and from such a point of view this general idea of antagonism between the taxpayer and the government is correct and has been in accord with the great mass of the world's experiences. In fact, these conceptions undoubtedly originated with the first or old economists, who, living under arbitrary, despotic governments, and unable to comprehend the modern ideas respecting personal liberty and a free government, came to the only conclusion respecting the nature of taxation that their limited sphere of observation and experience would permit, And so to-day, under an absolute government, the interests of the sovereign—czar, sultan, emperor, king, whatever name he bears—are always in a greater or less degree in antagonism to those of the nation, and these same conceptions have also to a large extent been generally accepted in states whose form of government is not monarchical, but free or popular, as in the United States, where, through lack of intelligence or interest on the part of the general public and of the law-makers, systems for raising revenues have been built up and tolerated which almost without exception are unjust in their administration and incidence. When an eminent lawyer and member of the Constitutional Convention of the State of New York in 1867-'68 stood up before that assemblage when the subject of taxation was under consideration and said, "I insist that a people can not prosper whose officers either work or tell lies—there is not an assessment roll now made out in this State that does not both tell and work lies, no man gainsaid him, for no man who had ever given any attention to the subject could.
But such conceptions are not true of taxes levied under a popular form of government, and in accordance with conditions essential to justify their right to be called taxes; for there is no one act which can be performed by a community which brings in so large return to the credit of civilization and general happiness as the judicious expenditure, for public purposes, of a fair percentage of the-general wealth raised by an equitable system
of taxation. The fruits of such expenditure are general education and general health; improved roads, diminished expenses of transportation, and security for life and property. And it will be found to be a general rule that no high degree of civilization can be maintained in a community, and indeed that no highly civilized community can exist, without comparatively large taxation; the converse of this proposition, however, at the same time not being admitted, that the existence of high taxes is necessarily a sign of high civilization.
It is interesting to note, however, that as civilization increases, and taxation becomes absolutely greater, it also becomes relatively less. Thus, in most of our great cities the cost of the water supply to its inhabitants constitutes at present one of the largest items of municipal expenditure—an item that forty or fifty years ago hardly found a place in municipal accounts. And yet the cost of a supply of even the minimum quantity of water now regarded as essential to meet the ordinary requirements for personal cleanliness and health would be very much greater to every citizen, were he to undertake to supply himself, even if it were possible, by the old methods; to say nothing of the comfort and luxury, as well as protection against loss by fire, which an increased supply, made possible only through a greatly increased aggregate of taxation, has afforded.
In short, taxation assessed and levied under conditions clearly conformable to reason and justice, is no more of an evil than any other necessary and desirable form of expenditure. Its proper exercise does not diminish, but protects and augments, national wealth, and is no more a burden upon the people of a state than the payments made for the care and profitable management of private or corporate investments of capital are a burden upon the owners of such capital. Indeed, M. Menier, whose study of taxation entitles him to be regarded as an authority, contends that the analogy between the expenditures of a state which have to be remunerated by taxes and the expenditures of a manufacturer is most complete. The state, he says, possesses a certain extent of territory. That territory has such and such natural utilities. These natural utilities have been developed by labor or appropriated by man, and the capital of the nation is the ensemble (the whole) of the utilities it possesses. In the case of a private person the conditions are the same. His capital is the ensemble of the utilities he possesses. The result which he, equally with the state, seeks to attain, is the same—namely, to make the capital which they control fructify to the greatest possible extent for the benefit of the citizens of the state on the one hand and the individual on the other; and between the expenditures which it is necessary to incur for the attainment of these ends on the part of the state and the individual there is no essential difference. And from this analogy, thus urged to identity, M. Menier deduces the following definition of taxes:
They represent, he says, he investment of the capital of the nation, or state, and the general expenses of its care and development
It is obvious, however, that M, Menier's analogy would not hold good under a system which failed to recognize any difference between a tax and an arbitrary exaction.
"So far as it is necessary for the security of person and property, money spent for the support of government is as usefully expended as is the purchase of clothing or provisions; but when the sum taken exceeds what is required for that purpose, it is only a question of amount between the sovereign of India, who exacts one half of the produce, and the legislator of Great Britain or the United States, who exacts a million of pounds or of dollars for which an equivalent is not given."—H. C. Carey, On Wealth, p. 343; Philadelphia, 1888.
An almost self-evident corollary from these sound deductions would be, that any tax or system of taxation that did not protect but diminished private property would tend to imperil or dry up the sources of public revenue.
A recognition of the true relation which a just and equitable system of taxation sustains to the state and to the capital or property of its citizens, and also of the fact that under such a system a tax works to a diminution of the income of the property taxed, and not to a diminution of the value of the property itself, ought to effectually expose the fallacy of the somewhat popular idea, that taxation is really a gradual (and in the course of time a complete) confiscation by the public of all private or individual property; and that in a certain sense no man by reason of taxation can be regarded as having a perpetual ownership of any property; an annual tax on the value of any property of one and a half per cent, with five per cent interest, exhausting such value in about thirty years. If taxation brought no returns, either direct or indirect, to the persons or property assessed, there would be some warrant for regarding it as an act of confiscation; but if it provides, as every correct system of taxation does, for a certain class of expenditures, in default of which in the present state of society there would be no adequate protection to property and no encouragement for its accumulation and development, then there is no more reason for regarding taxation as confiscation than for attributing the same effect to payments for wages, rents, repairs, interest, insurance, etc.
A practical illustration of the truth of this conclusion is to be found in the circumstance, that as a rule the class of property paying the highest proportional taxes in any community is the most profitable or desirable to its owners. It is also a pertinent question, why property which has paid taxes for a given period—say thirty years—and has so been absorbed by the public, should continue to be assessed; or why, if the person popularly regarded as the owner of such property should refuse to pay taxes, the property should be sold for taxes when it has already been taken to itself by the public.
Another point of interest in connection with this subject which has been little noticed by economists is, that if a high degree of civilization can not exist without a high degree of taxation, the methods of economizing labor, or, what is the same thing, of producing a greater amount of product with a given amount of labor—conditions which make high civilization possible—enable a government progressive in this respect continually to take a larger share of the results of the work of its citizens, expressed in terms of money, without really increasing their burdens of taxation. "Every invention and discovery by which the production of commodities is facilitated and their value reduced, enables individuals to spare a larger quantity for the use of the state. The sacrifice made in. paying taxes, consists in the labor, or in the cost of the money or produce required to pay them and not in the amount of such money or produce." A given, amount of food and clothing, iron, steel, copper, leather goods, paper, and transportation can now, for example, be furnished to the Government of the United States for at least one third, and probably not more than one fifth, of the labor required to produce like quantities of these same commodities or services in 1840; while the wages paid for the work which such quantities represent or necessitate have been increased from fifty to seventy-five per cent and upward. In 1840 an operative in the cotton mills of Rhode Island, working thirteen to fourteen hours a day, turned off 9,600 yards of standard sheeting in a year; in 1886 the operative in the same mill made about 30,000 yards, working ten hours a day. In 1840 the wages were $176 a year; in 1886 the wages were $285 a year.
During the ten years from 1870 to 1880 the increase in the number of hands employed in anthracite coal mining was 32·2 per cent, as compared with an increase of product of 82·8 per cent; while in the case of copper during the same period the ratios were 15·8 and 70·8 per cent respectively. The whole tendency, therefore, of the modern conditions of production is not to entail any greater sacrifice on the part of the taxpayers for the support of the Government, but rather to diminish it. "Governments have precisely the same interest as their subjects in facilitating production, inasmuch as its increased facility affords the means of adding to the quantity of produce at their disposal without really adding to the weight of taxation; whereas, on the contrary, a diminished facility of production must either diminish in an equal degree the produce appropriated by government or compel it to lay heavier burdens on its subjects. Public wealth, in short, is merely a portion of private wealth transferred to government, and the greater the amount of the latter the greater, of course, will be the magnitude of the portion that may be conveniently spared for public purposes."—J. R. McCulloch.
When Taxation becomes an Evil.—It is not pretended that taxation, even under a correct system of assessment and collection, may not under some circumstances be an evil. It is an evil when through extraordinary or injudicious expenditures of the state it is excessive and demands too large a proportion of the annual or concurrent income of the people (in the form of rents, interest, profits, salaries, and wages), out of which, or out of the annually augmented wealth of a country, and not out of accumulated capital, all taxes ought to be paid, and as a rule are paid. The economic rule governing taxation of first importance laid down by Prof. Cossa (Scienza delle Finanze) is "that it should, when possible, tax income only, whether national or individual, but spare the estate itself."
If the burden of taxation, or the amount taken, is not fully compensated by increased production or increased saving, it becomes one of the greatest evils to which a people can be subjected; for under such circumstances the means of future production will be impaired, encroached upon, and the country will necessarily begin to retrograde.
When the share of the annual product falling to the workmen of any country is barely sufficient to support life free of taxation, then the burden of taxes begins to promote pauperism. It takes that which is necessary to existence and the maintenance of energy. This is now occurring in Italy. The taxation of Italy probably absorbs more than one third part of the product of the country. The army is served first, the workmen second, while the women become diseased and the children die by lack of adequate nourishment.
Taxation is also an evil, though in a lesser degree, when the rate assessed is not the same upon all persons, property, and business within the same sphere of (business) competition; when it is made an instrumentality for effecting some other purpose than that of raising revenue, no matter how desirable that purpose may be; and when, as in the United States, it is largely indirect, and its incidence and amount are thereby concealed from the ultimate taxpayers.
The general result of experience is also to the effect that when excessive and exceptional taxation has been resorted to by a state for the purpose of regulating or destroying industries or traffic, it has rarely been successful. The economic and moral lesson deducible from such experience may be briefly summarized as follows:
Whenever a government imposes a tax on any product of industry so high as to sufficiently indemnify and reward an illicit or illegal production of the same, then such product will be illicitly or illegally manufactured; and when that point is reached, the losses and penalties consequent upon detection and conviction—no matter how great may be the one or how severe the other—will be counted in by the offenders as a part of the necessary expenses of their business; and the business, if forcibly suppressed in one locality, will inevitably be renewed and continued in some other. It is therefore a matter of the first importance for every government, in framing laws for the assessment and collection of taxes, to endeavor to determine, not only for fiscal but also for moral purposes, when the maximum revenue point in the case of each tax is reached, and to recognize that in going beyond that point the government "overreaches" or cheats itself.
Increase the duties (taxes) on imports beyond a certain point, and smuggling springs up as by magic, and the most cruel and unusual punishments utterly fail to prevent it. American ingenuity was never more fertile or manifested in a more remarkable manner than in the evasion during the years 1864-'68 of a tax, approximating fifteen hundred per centum, imposed by the Federal Government on the manufacture and sale of distilled spirits, resulting in a complete failure on the part of the Government, with almost unlimited military resources at command, to enforce the law, and a final abandonment and repeal of the tax. The comparatively recent tax imposed by the United States on oleomargarine, with a view of destroying its manufacture and preventing its use as an article of food, has been so far ineffectual that its production and consumption have been greater than they were before the law authorizing the tax was enacted.
More than a century ago Adam Smith pointed out that such taxes "tempt persons to violate the laws of their country, who are frequently incapable of violating those of natural justice, and who would have been in every respect excellent citizens had not those laws made that a crime which Nature never meant to be so."
Some other fallacies concerning the sphere and influence of taxation which have obtained popular credence may be here appropriately noticed.
Thus, it is not infrequently assumed that any injurious influences of excessive or unnecessary taxation are largely or wholly imaginary, inasmuch as they are really returned to the contributors (taxpayers) through the expenditures of Government; which, by increasing demand for commodities and services, create or extend markets, maintain prices, and enlarge the sphere or opportunity for industrial employment, and favor an increase in the supply and circulation of money. This assumption is obviously but a reproduction in another form of the fallacy (before noticed) that industry can be stimulated by taxation; and which in turn finds its antetype in a favorite idea of the middle ages that the destruction or waste of commodities "made good for trade"; and which maxim, it is said, a guild of glaziers in Paris practically carried out by encouraging their apprentices to break windows, who may have attempted to justify their conduct by asking themselves the question, "What would become of the glazing business if nobody ever broke windows?"
A general answer to this fallacy is, that to break, spoil, or waste by fire, pestilence, war, famine, shipwreck, or injudicious and unnecessary taxation and public expenditure, always entails a loss to society; and if these results give to certain class interests an opportunity to perform unnecessary work, or sell products at an advance over their current prices in the world's market, and thereby inflict unnecessary and additional taxes on other individuals, it can not be regarded as other than an evil, and prejudicial to public interests.
To those who live on the produce of unnecessary taxation and correlative governmental expenditure, any consequent encouragement of industry by increasing demand and extension of markets, will very naturally seem to be in the highest degree beneficial. But, in order that industry may be truly benefited, the market must be real and not artificial, or one created by unnecessary taxation and expenditure. "It is absurd to suppose that either individuals or states should receive the smallest benefit from the demand of those whom they have been previously and unnecessarily obliged to furnish with the means of buying. To keep up useless regiments and overgrown establishments on the pretense of encouraging industry is quite as irrational as if a shopkeeper were to attempt to increase his business and get rich by furnishing his customers with money to buy his goods."—McCulloch.
Hamilton (a Scotch economist) puts the case even more forcibly. "To argue," he says, "that the money raised in taxes, being spent among those who pay it, is therefore no loss to them, is no less absurd than the defense of a housebreaker, who, being convicted of carrying off a merchant's money, should plead that he did him no injury, for the money would be returned to him in the purchase of the commodities in which he dealt."
"It is obvious that the services rendered by the various public functionaries who receive the proceeds of taxation form the only return made to the taxpayers. And it is undoubtedly true that these services are of the highest value, and that, when neither the number nor the salaries of those by whom they are rendered are unnecessarily large, they constitute a full and ample equivalent for the sums expended upon them. But all beyond this—all that is drawn from the people by means of taxes, to be expended in maintaining unnecessary functionaries, or in overpaying them—is wholly lost to the taxpayers, or is not in any way compensated to them."—McCulloch.
"We might as well say that it would be a good thing to put snags in the rivers, to fell trees across the roads, to dull all our tools, as to say that unnecessary taxation could work a blessing."—Prof. W. G. Sumner.
Some writers of repute have advocated the special imposition of taxes on the ground that they act as stimulants to industry. M. Gamier entertained this opinion. The late J. R. McCulloch, who wrote learnedly on the Principles of Taxation, favored such practice on the part of government, provided the taxation was "moderate." But of taxation employed for such object which was not moderate he wrote as follows:
"The effect of exorbitant taxes is not to stimulate industry, but to destroy it. The stimulus given by excessive taxation to industry has been not inaptly compared to the stimulus given by the lash to the slave—a stimulus which the experience of all ages and nations has proved to be as ineffectual as it is inhuman, when compared to that which the expectation of improving his condition gives to the productive energies of the citizen of the free state."
The direct beneficial agency, not merely of moderate but of most excessive taxation, as a stimulant to industry, is also obviously a fundamental principle in every so-called "protective tariff system."
Very curiously, the best refutation of these ideas was made by the late H. C. Carey, in a Treatise on Wealth, published in 1838. After indorsing the statement of Mr. McCulloch as to the influence of exorbitant taxation on industry, and the correctness of his analogy between the stimulus afforded thereby and that imparted by the lash, he antagonizes the proposition that the effect of even moderate taxation imposed as a stimulus to industry can be in any degree beneficial, by asserting that what is true of the influence of exorbitant taxation in this respect "is equally true of all unnecessary burdens (of taxation), whether great or small."
"If taxation be a stimulus," he says, "the advantage must increase with its extent, and taking 2s. per week must do more good than taking 1s. Moderation depends upon habit. We think Mr. McCulloch has fallen into the same error with the man who attributes increased vigor to two glasses of brandy, while he deprecates the drinking of a quart as likely to produce intoxication. The man in sound health who drinks two glasses will not work as well as he who drinks none, but he will do so much better than his neighbors who drink by the quart that it may be supposed that his superiority results from the glasses taken, when it really arises out of the six that he has forborne to take. If taxation be good, so is the lash: both will make people work, but neither will make them work well. The moment we admit that taxation in any case tends to promote industry, it is impossible to say where we shall stop."
Another fallacy which has obtained credence, especially in recent years in the United States and even among its legislators, is that the burden of taxation is increased by a fall in the prices of commodities which represent the work that furnishes the money with which taxes are paid. It owes its existence and tolerance to the non-recognition of a principle of taxation which has also been thus set forth by Mr. J. R. McCulloch:
"The amount of a tax is not to be estimated by the bulk or species of the produce which it transfers from individuals to government or to creditors in general, but exclusively by its value. A heavy tax consists in the abstraction of a large value, and a light taxation in the abstraction of a small value. When a fall takes place in the cost of producing any article, its price necessarily declines in an equal degree, and its producers are obliged to dispose of a proportionally larger quantity to obtain the means of obtaining the same amount of taxes. But it is an obvious error to suppose, as is very commonly done, that the burden of taxation is consequently increased. The value paid by contributors remains the same, and it is by values and not by quantities that the weight of taxation is to be measured. If through improvements in agriculture, machinery, or any other cause, two quarters of wheat or two yards of cloth were produced with the same expenditure of capital and labor that is now required to produce one quarter or one yard, it would be no hardship to give double the quantity of wheat or cloth in payment of taxes."
A failure to recognize and understand this principle has led to much erroneous reasoning on the subject of taxation, and finds a curious practical illustration in the following record of recent experience. Thus in the so-called bimetallic discussion in the United States it has been unqualifiedly asserted that, owing to the remarkable decline in the average prices of general commodities (estimated at about eighteen per cent from 1867 to 1877, and thirty-one per cent from 1867-'77 to 1886-'88), and which in turn has been assumed to have been occasioned by the demonetization of silver and consequent appreciation in the value or purchasing power of gold, the burden of the national debt of the United States and also all private debts, especially such as are in the nature of mortgages on land or on other productive fixed capital, has been greatly increased, inasmuch as a greater effort of labor or an increased amount of the products of labor—typically cotton and iron—had become necessary to liquidate such debts and the interest thereon. The error in such reasoning or assumption is found in the circumstance that no consideration is given or allowance made for the different results of labor at the periods of price comparisons, and that the real cost of producing the staple commodities of the United States, or the effort needed to produce a given amount of general merchandise, or the number of days' work put into each piece of such merchandise, has on an average decreased during these periods more than their market prices have decreased, so that instead of the decline in the prices of commodities under consideration having increased the burden upon labor of national and other debts created before such decline, the burden has been lessened to just the extent that the average cost of producing commodities has declined to a greater degree than their average market prices. Thus all authorities are substantially agreed that there are few departments of industrial effort in which the saving of time and work in the twenty to thirty years next anterior to 1890 was at least forty per cent, and in not a few instances has been much greater (in the manufacture of boots and shoes, for example, eighty per cent). In North Carolina the relative increase in cotton product and population from 1870 to 1880 was as 4·5 to 1. With slight changes in the relation of labor to product, the cotton crop of the United States increased seventy-six per cent between the years 1866 and 1872, and forty-nine per cent between 1872 and 1886. Recent investigations have shown, in the case of certain leading articles in hardware, that a given quantity which represented a labor cost in 1870 of a million dollars could be afforded in 1894 for a like cost of $444,444. Another striking illustration of the present cheapness of manufactured articles per unit and as measured in terms of labor payments per hour or day, compared with former recent periods, and as the result of present industrial conditions, is found in the statement that wire nails are now so cheap that, if a carpenter drops a nail, it is cheaper to let it lie than take time to pick it up; and the correctness of which has been demonstrated as follows: "Assuming that it takes a carpenter ten seconds to pick up a nail which he has dropped, and that his time is worth thirty cents per hour, the recovery of the dropped nail would cost 0·083 cent. There are two hundred sixpenny nails in a pound, and they are worth on an average 1·55 cent per pound, making the value of one nail 0·0077 cent. In other words, it would not pay to pick up ten nails at the assumed loss of time and rate of pay of the carpenter."
On the other hand, wages have increased in the United States since 1870 in an approximative ratio with the increase in the effectiveness of labor in producing commodities, and touched the highest point ever known about the year 1890. During the same period debtors have gained greatly by the decrease in the cost of living, and a consequently increased opportunity for laying up a surplus for meeting tax demands and other purposes. The assumption that the comparatively recent fall in the price of commodities in the United States has increased the burden of taxation upon its people, therefore merits the characterization of being one of the most irrational and fictitious of popular economic fallacies.
- "In Austria everything, it is said, is taxed except the air, and even that has to be paid for in places famous for their salubrity. Dogs, cycles, newspapers, advertisements, and innumerable other articles—pleasures and necessaries—are included in the money-producing list; nothing, indeed, seemed excluded until a very short time ago, when a provincial financier forwarded an exhaustive report to the finance ministry on a neglected source of revenue—cats. The horse, the ass, the goat, the hog, the chicken, the dog, the goose—all contribute their mites to the support of the state, said this financial reformer. The cat alone is a parasite, paying nothing to any one and preying upon every one. But is the project really practicable? Certainly it is, replies its author, and he forthwith sets himself to prove it. Every cat for which the tax—a rather heavy sum—is paid, would receive an official colored ribbon for its neck, with a number and a government stamp. Every feline defaulter found without this ribbon would be seized and temporarily confined in the Cats' Home. If not redeemed before the lapse of a fixed terra—say eight days—it would be sold or poisoned by the state." "A tax on beards was in operation for a long time and under various forms in Russia. Peter the Great, knowing the attachment that his subjects had for the hirsute adornment of the face, introduced a tax upon the beard in his empire. The beard is a superfluous and useless ornament, said he, and, starting from this principle, he imposed a tax upon it as an article of luxury. This tax was proportional and progressive, not in proportion to the length of the beard, but to the social position of those who wore it. Each person upon paying his tax received a token, which he had to carry upon his person, for the guards were inexorable, and, always provided with scissors, ruthlessly cut off the beard of those who could not show their badge." "Catharine I confirmed this tax. In 1728 Peter II allowed the peasants to wear a beard, but kept up the tax for the other classes under the penalty of work on the galleys in the case of non-payment. Czarina Anne rendered life still harder to bearded men, for not only were they obliged to pay the special contribution imposed upon them, but also had to pay a double tax upon everything else for which they were assessed. This tax was not abolished until the reign of Catharine II (1702-1798)."
- "A tax is a rate or sum of money assessed on the person or property of a citizen by Government for the use of the nation or State"—Webster's Dictionary.
"The definition of both Webster (Daniel) and Story (Justice) is, that a tax is a contribution imposed by Government on individuals for the service of the State."—Miller, on the Constitution of the United States, p. 285.
"Taxes are defined as the enforced proportional contribution of persons and property levied by the authority of the State for the support of the Government and for all public needs."—Cooley on Taxation, p. 1.
"A tax is a portion, or the value of a portion, of the property or labor of individuals taken from them by Government and placed at its disposal."—J. R. McCulloch.
- The revenue annually exacted, under the name of taxation, by Ismail Pasha, especially during the latter years of his reign, from an exceedingly poor population a little in excess of five million in number, was reported to have been about $75,000,000.
- Despotic rulers in all ages of the type of Louis XIV, the Khedives of Egypt, the Sultans of Turkey, and the Czars of Russia have undoubtedly regarded their expenditures of money exacted under the name of taxation from their subjects for the maintenance of great armies, harems, mistresses, pensions to favorites, and the like, as for legitimate public purposes.
- "Taxation means work, of the head, of the hand, or of the machine, or all combined. And the method of taxation is only a method of distributing the products of work. It is measured, when in the process of distribution, in terms of money, but the money itself stands for work, or is derived from work. And the work of the Government is as much a part of the work of the community as any other. All who work, from the head of the nation down to the lowest municipal official, must be supplied with shelter, food, and clothing; and those who pay the taxes do the work that is necessary to furnish this supply"—The Industrial Progress of the Nation, Edward Atkinson; Putnam, New York, 1890. Taxation and Work, same author.
- The census of 1890 presented for the first time even an approximation of the annual incomes of the several governments of the United States, and the amount and objects for which they were expended.
- The most recent investigations of Mr. Atkinson, the best authority on this subject, have led him to the conclusion that the average value of the product of each person in the United States, working for gain three hundred days in the year, was in 1890 nearer $700 than $600 per annum.
- Essentially the same definition of taxation has been given by Mr. J. R. McCulloch. "It is," he says, "the name given to the branch of the science of political economy which explains the mode in which different taxes affect the public interest, and in which the revenue required for the public service may be most advantageously raised."—Treatise on the Principles of Taxation, J. R. McCulloch, 1875.
- When the Jewish people, weary of the tax despotism of a sacerdotal class—i. e., the tribe of Levi, to whom the land was held to have been given by Jehovah—manifested an intention of setting up a king, the prophet Samuel foretold that under royalty taxation would be still more oppressive, and "this," he said, "will be the manner of the king that shall reign over you. He will take your sons and appoint them for himself, and set them to ear his ground and reap his harvest; and he will take your daughters to be cooks," etc.; "and your fields, and your vineyards, and your olive-yards, even the best of them; and the tenth of your seed, of your sheep, and your goodliest young men and put them to his work," etc. And the prediction then made was verified, as under like circumstances it has always since been.
- With the old economists the state always preponderates. It is the master of the citizen instead of being merely the steward of the nation. "It addresses the citizens imperiously. They are its contributables, and must pay. According to such doctrine, life is a tollgate. They must give so much a head for the right of living in the country. Man is the debtor of the state. Man pays, not the commodity, and the citizen remains the serf of the state."
"Under monarchical right, taxation is speculation by the king upon the people. In a word, there is an antagonism between those who pay and those who levy taxes. Taxation is the expression of that antagonism."—M Menier.
- Speech of Hon. M. I. Townsend, Delegate at Large, Constitutional Convention of New York, 1867-'68. Proceedings and Debates, vol. iii, p. 1945.
- "I have not seen an instance of rent being very low, and husbandry at the same time being good."—Lowe, quoted by McCulloch.
"It is universally found that the low rents absorb the largest proportion of the product."—H. C. Carey, On Wealth, p. 341.
"An ingenious philosopher has calculated the universal measure of the public impositions by the degrees of freedom or servitude that accompany them, and ventures to assert that, according to an invariable law of Nature, it must always increase with the former and diminish in a just proportion to the latter."—Statement by Gibbon, on the authority of Montesquieu.
- M. Menier, in proposing the above definition, himself recognized the necessity of accompanying it with the following explanation: "When I say that taxes 'represent the investment of national capital,' it is of course understood that I speak only of that of the investment assigned to the state, and that I am very far from the communistic theory, according to which the state, being the owner of the national capital, should turn it to account for its own profit. In the useful employment of the capitals of the nation there are an individual part and a collective part. In my definition of taxes only that collective part, the syndicate contribution, is taken into account."—A Treatise on the Taxation of Fixed Capital, by M. Menier, of the French Chamber of Deputies. English translation, by I. O. Gallegan, Fellow of the University of France; London, 1880.
- This same fallacy was indeed applied to interest in the United States, when an eminent official maintained that in paying; interest for many years on the public debt the people of the country had more than paid oil the principal, and were therefore morally justified in repudiating the debt.
- Year by year the public demands more efficient schools, better postal facilities, better harbors, improved paving, drainage, and lighting of streets, a stricter abatement of nuisances and supervision of infectious disease. All this means a higher standard of public well-being, entailing, however, constantly increased public outlay.
- A most interesting and instructive example of the decay in modern times of a considerable state due to radically vicious methods of collecting revenue is afforded by the present condition of the Asiatic kingdom of Persia. Its typical despotic government, represented by the Shah, annually demands and exacts a large amount of money from its subjects to defray the expenses of the state, but not more, perhaps, than the resources of the country and its people would fairly warrant and sustain, if it was collected by intelligent methods. In default, however, of any knowledge of how to get revenue without destroying the springs of wealth, the method of taxing is so irregular both as to time and rate, and so thoroughly unjust and unequal, as to impair the value and security of property, prevent accumulation and free use of capital, and discourage commerce. A British expert has recently reported to his home government that if a qualified European or American could be placed at the head of the exchequer at Teheran, who was allowed such control that no penny exacted from the people of the state should be absorbed on its way to the treasury, or be taken save in due course of law, he might yet save Persia and drain into it a new and vigorous Asiatic population, who would fill its now deserted hut fertile plains, and organize a commerce in which all the world stood ready to participate and furnish the instrumentalities necessary for its development.
- Out of a consumption of at least fifty million proof gallons of distilled spirits of domestic production in the United States during the fiscal year 1867-'68, the Federal Government collected a tax upon less than seven million gallons, the sale of the difference at the current market rates of the year, less the average cost of production, returning to the credit of corruption a sum approximating sixty million dollars.
- In 1885 a memorial signed by ninety-five members of the United States House of Representatives of the Forty-eighth Congress and presented to the President of the United States contained the following statement: "Eighteen million bales of cotton were the equivalent in value of the entire interest-bearing national debt in 1865 ($2,221,000,000); but it will take thirty-five million bales at the price of cotton now (1885) to pay the remainder of such debt ($1,196,000,000). Twenty-five million tons of bar iron would have paid the whole debt ($2,674,000,000) in 1865; it will now take thirty-five million tons to pay what remains ($1,375,000,000) after all that has been paid."