Popular Science Monthly/Volume 51/June 1897/Principles of Taxation: Nomenclature and Forms of Taxation XVII
| PRINCIPLES OF TAXATION. |
By DAVID A. WELLS, LL. D., D. C. L.,
CORRESPONDANT DE L'INSTITUT DE FRANCE, ETC.
VIII.—NOMENCLATURE AND FORMS OF TAXATION.
THE most simple form of taxation is a poll or capitation tax. Both terms may be regarded as identical in use and meaning, but the former is probably more frequently used in tax treatises and discussions.
What is a Poll Tax?—In a strictly economic sense the essential requisite of a "poll" or "head" tax is that it be laid on all polls or heads, and be unvarying in amount. A varying poll tax would be an arbitrary exaction, and would not be sustained for a moment as a proper exercise of the right of taxation, if laid without reference to a man's ownership of property. So soon, however, as the amount of the tax exacted is made dependent upon the amount of the property owned, the tax ceases to be a varying poll tax, and becomes a tax on the property itself. The popular idea of a poll tax in the United States is an annual tax, small in amount, uniform as respects rate, and applicable only to adult male persons. Such conceptions are not, however, in accord with historical experience, which is to the effect that uniformity in assessment has never been an essential or even usual feature of this form of taxation, but as a rule the tax has been intentionally rated to the person assessed according to his rank and station and supposed property. The "poll" or "capitation" tax of history has, therefore, been rather an "income" than a per capita tax; and the poll tax of the United States finds few precedents in history. Under the Byzantine Empire a so-called universal poll tax was substituted in lieu of almost all the tithes, customs, and excises which had before been relied on for revenue; and this substitution and its influence was regarded by Hume as one of the chief causes of the decadence of the Roman state (see page 584, vol. xlviii, March, 1896).
The first so-called poll tax in England was granted in 1377, and from that date down to the time of Queen Anne was an important source of revenue, and, not being uniform, except in its incidence per capita, gave rise to great popular dissatisfaction, both by reason of its amount and inequality, and also by the inquisitorial methods employed for its assessment and collection. At first (1377) the rate was fourpence on every head, male and female, above fourteen years of age. Subsequently, under the reign of Richard II, in order to avoid the unfairness of subjecting all—rich and poor, noble and serf—to such a uniform tax, a more equitable system was introduced, the taxpayers being classified by reference to rank, condition of life, and property, the rate ranging from six pounds thirteen shillings for dukes and archbishops, to two pounds for barons and knights, and three shillings fourpence on those of "least estate." The retention of the former uniform rate of fourpence on all married laborers and upon all single men and women above fourteen years of age, who were presumed to be without estate, was, however, a cause of great dissatisfaction among the masses, and the attempt to collect it undoubtedly constituted the prime cause of the famous "Wat Tyler rebellion" of 1381. In the case of the last poll tax authorized in England under Queen Anne a like attempt at classifying persons was continued; the rate commencing at one shilling per annum on all persons worth more than fifty pounds, and rising to ten pounds for peers of the realm, both spiritual and temporal. One curious provision of this final enactment was, that in all cases Catholics were to pay double the rate imposed on Protestants. Bachelors and widowers without children were also subjected to special rates. Some writer has remarked that such exactions could only have been designed and authorized by a government of misanthropes; for if one with a view of escaping them abandoned single blessedness, he only involved himself in greater difficulties; for there was a tax upon marriages, a tax upon births, and, if the health of the victim broke down under these exactions, a sum varying from three to thirty florins, according to his station, had to be paid before his sorrowing relatives could bury him. These taxes on marriages were enforced in England from 1695 to 1705, and during the first five years of their continuance yielded an average annual revenue of about two hundred and fifty thousand dollars. It was noted that their continuance had the undesirable effect of increasing the number of marriages by irresponsible persons, and in a manner devoid of all solemnity. The rates imposed in England as late as 1706 on bachelors and widowers contracting marriage varied according to the class in life to which they belonged; from thirty pounds to twenty-five pounds on the elder sons of the higher orders of nobility to twelve shillings on persons possessed of an income of fifty pounds per annum.
Within a very recent period a petition, numerously signed, has been presented to the French Chamber of Deputies asking that a special tax on bachelors be established in France, and recalls the fact that the French revolutionary Convention of 1789, and some of the old republics, established such a tax. The petition further stated that the number of bachelors in Paris is nearly half a million, while the number of married men is not more than 379,000; and "that such a tax ought to be doubly welcome in France: first, because it will increase the declining population of the state by inducing bachelors to marry; and, secondly, because it will help to make up a growing deficiency in the national budget." In Switzerland, in the assessment of an income tax and taxes on dwelling houses, certain deductions allowed to married persons with families, are not allowed to bachelors or childless married people.
Legislation looking to the taxation of bachelors has also been seriously proposed of late in several of the States of the Federal Union. In Illinois, for example, a bill has been introduced in its Legislature imposing a uniform tax on all single men, sound in mind and body, above thirty-two years, who are not able to show that they have proposed marriage three times and been rejected. The proceeds of the tax are to go toward establishing a home for worthy and indigent single women above the age of thirty-eight.
A Missouri bill makes the tax progressive, increasing by successive increments as the bachelor persists in his state of single blessedness.
In modern times (1848) an English Governor of Ceylon—Lord Torrington—undertook to repeat the experience of his country-men of near five centuries before, by imposing a poll tax of three shillings per annum, or one week's labor, valued at three shillings, from every man, rich or poor, in the colony. This exaction, in point of inequality, was worse than the poll tax of Wat Tyler's time, inasmuch as it made the average income of the poorest laborer the standard according to which the rate of taxation was to be established for all. There was also another curious feature connected with this experience. The Cingalese priesthood were held liable to pay this tax, either in money or a week's work, when their religion required that they must neither perform work nor possess property. The result was a revolt attended with much bloodshed, an abandonment of the tax, and the recall of the Governor.
In one of the states of Central America a poll tax was recently required to be paid monthly; all adult male inhabitants of the several towns and cities being obliged to present themselves at the municipal treasuries and pay their dues in person.
In the colonial period of our history the poll tax was enacted by nearly all the North American colonies at one time or another. In Virginia and Maryland it was for a long time the only direct tax; and in the latter State it was imposed upon all free men and free women, and upon all free children over twelve years of age; and was rendered particularly odious and burdensome from the circumstance that its payment was required in tobacco, a given number of pounds to the head, the value of which commodity was not constant, but varied with supply, which at times was intentionally restricted, with the intent of augmenting its market price. There was, however, another side to this experience. The poll tax in the two States named was almost a measure of necessity. Land was of small value, for there was in the new colonies little distinction between improved and unimproved lands. Slaves were not taxable as personal estate, but belonged to the land and figured as real property; and the personal estates of the planters were comparatively small. Polls were therefore the most available measure of taxation, and tobacco was the currency of the day. All bills and charges were made out in so many pounds of tobacco; all lawyers' and court fees were so determined; the parish and county levies were fixed in weights of tobacco; and the minister drew as his salary so many pounds of tobacco from each parishioner, without respect to the market value of the crop. It accordingly happened that a poll levy might be excessive one year and nominal the next; with lawyers, ministers, and clerks rejoicing in abundant means one season and reduced to starvation point the next. Unequal, in proportion to wealth of the payer, as such a poll tax was, its inequality was furthermore greatly aggravated by fluctuations in the exchangeable value of the medium in which it was payable.
During the colonial period also, in North America, men's persons were included in the schedules of property made in reference to taxation; and instead of having a fixed sum, as was subsequently the rule in assessing a poll tax, the value of the poll was rated according to the earning capacity of the individual; and if he was old and infirm, or in any way disabled, the value of the poll was placed at a small amount.
Possibly by reason of English and American colonial experiences, and perhaps from an infiltration as it were, down through the ages, of the fact that in Greece and Rome the poll tax was exacted only of the people of subjugated provinces, and was therefore regarded as a mark of inferiority or slavery, this tax in modern times has not been in accord with public sentiment, and in most countries has now been abandoned. The last poll tax in England was enacted in 1689. Like all its predecessors, it was always unpopular and was regarded as unsuited to the people of England. It was repealed in 1698, and "henceforth this form of tax passed into the list of taxes tried and never again to be imposed in England. What minister," said Henry Fox in 1748, "would presume again to suggest the hated hearth money of the Stuarts, or the poll taxes of the reign of William III?" (Dowell, Taxation in England, vol. ii, p. 49.)
In the United States the poll tax formed, in 1895, a part of the tax system of twenty-six of the States and Territories, and was not recognized in twenty others, and in some of the latter its levy is prohibited by constitutional provisions. In New York a general law for the incorporation of villages confers upon its trustees the power to raise money by levying a poll tax.
From a theoretical or purely economic point of view the present popular opposition and adverse sentiment to the poll tax in the United States do not seem to be warranted by any very good reasons. The arguments made use of by those opposed to its continuance are not derived from old-time precedents, or warranted by the experience of foreign countries, inasmuch as its assessment in the States of the Federal Union has always been inconsiderable in amount, and has rarely involved in its collection any inquisitorial or arbitrary measures. The one most deserving of attention has been, that it practically imposed a property qualification upon the right of suffrage by making its payment a prerequisite to the act of voting, a money payment of even so small a sum as two dollars per annum in Massachusetts and one dollar in Connecticut being regarded in that light. But in answer to this it may be said that paupers are disfranchised not because they are vicious or illiterate, but, because of their inability to support themselves or aid in supporting the State, it is held that they ought not to be allowed a voice in the government of the State. To be consistent, therefore, the advocates of the abolition of the poll tax as administered in New England ought also to connect with it—i. e., its abolition—an extension of suffrage to the inmates of poorhouses who, otherwise qualified for its exercise, are now debarred from it exclusively by a lack of property qualification. On the other hand, a leading argument in favor of its continuance is that the majority of citizens who pay no direct State taxes upon property of any kind, but who are self-supporting and not paupers, ought not to be exempt from directly contributing to the support of the government, and this argument may be amplified and illustrated as follows: Thus, there is no citizen, be he ever so humble, who is not vitally interested in the preservation and welfare of the civil society of which he is a member; and it is of the first importance, more especially as the tendency of the age seems to be antagonistic, that each member of society should be encouraged to realize at all times his personal interest in the well-being of the State. To the rich man society comes and exacts a contribution in some proportion to his means, and as a consequence he has inducements to directly interest himself in the fiscal management of the government. To the poor man, who is otherwise rarely directly confronted with the tax gatherer, society comes also, and, in common with all citizens of a certain age, asks a very small annual contribution for the support of the State, because each citizen is interested in its existence and welfare, has a measure of responsibility resting upon him, and should be made to realize that responsibility. In the fact, therefore, that the poll tax touches directly every citizen and is an effective agency for awakening him to a sense of his political duties and responsibilities, and so better qualifies him for the exercise of the right of suffrage, is to be found the true reason for the incorporation of a small annual poll tax into every correct system of State taxation.
As has already been pointed out, a poll tax, having regard solely to the person and not to his property, is the only tax to which the term personal can be rightfully applied. It is the essence also of every free and just government that every person—the most humble as well as the most exalted—is equal before the law, and has a right to invoke the sovereignty of the State in all its fullness for the protection of his person. Keeping these two points in view, it would further appear that a poll tax assessed equally upon all citizens, and free from all discrimination, represents the most perfect equality of service, and is the only tax which a citizen can pay which can be regarded in the light of a reciprocal for the service which the State renders to him in protecting his person, all other taxes being in respect to property or business.
As the Constitution of the United States also excludes from representation "Indians not taxed," it would seem to imply that its authors regarded the exercise of suffrage by a citizen that was not a pauper and paid no direct tax, as an anomaly not likely to occur under a government founded upon equal public rights and responsibilities, and also that a citizen who did not pay any direct tax to the State was not likely to have any more correct idea or measure of his true relation to the State than a wild Indian.
If, however, public sentiment in any community is so adverse to the levy of moderate poll taxes that their collection is not and can not be enforced with any degree of uniformity and equality, as is reported to be the case in many States, then the advisability of their abandonment can not well be questioned, for the want of respect for all law, which always results from the maintenance upon the statute book of any law which a community will not regard or permit to be enforced, is an evil that far outweighs any possible good that can come from its continuance. Furthermore, the statement is probably warranted that in no instance in history has it been possible to enforce a permanent tax against which by common consent the public has revolted.
In considering the feasibility of its continuance it should not be overlooked that the tax upon property can be collected because the State holds a confiscatory power over the property to the extent of the tax. But the tax upon the non-property-holding polls can not be collected except through the consent of the assessed person, unless resort is had to the old law of imprisonment until payment is made—a remedy not likely to find favor.
The recent experiences of Massachusetts and Pennsylvania are especially worthy of note in this connection. The Constitution of Massachusetts, adopted during the Revolution, limited the suffrage to "every male inhabitant of twenty-one years of age and upward, having a freehold estate within the Commonwealth of the annual income of three pounds, or any estate of the value of sixty pounds." This restriction was abolished in 1821, but payment of a poll tax was still required before a man could vote. In recent years, however, this form of taxation has become so unpopular in this State, mainly by reason of a general belief that politicians, without distinction of party, were in the habit of collecting and disbursing large sums for the purpose of influencing or bribing voters by payment of their poll taxes, that in 1891 an amendment to the Constitution of the State was adopted which, while retaining the previous obligation of the payment of an annual poll tax, abolished such payment as a prerequisite for voting. The result was that before the adoption of this amendment from fifty-two to fifty-nine per cent of the poll tax due in the city of Boston was collected year by year; but since then the percentage of collection has fallen below forty-four per cent. Many of the city's own employees figure among the delinquents, and it has been found necessary to place hundreds of poll bills in the hands of the city treasurer for the deduction of the amount due from their wages. Leaving out the persons who can not pay without great sacrifice, it is stated that Boston is still losing above one hundred thousand dollars yearly in revenue from failure to collect the taxes upon polls that can and should pay. And this, in a modified form, is probably the situation throughout the State of Massachusetts.
In Pennsylvania the State Constitution makes the payment of a State or county tax, at least one month before election, a prerequisite to the exercise of suffrage; and as the poll tax involves the smallest amount of tax that a citizen could pay, it was expected that almost every man would pay it. But, in point of fact, it was found that thousands of citizens neglected to do so, and the political campaign committees, irrespective of party, recognizing this fact, have adopted the policy of furnishing voters whom they desired to influence with receipts for the payment of their poll taxes; and this practice has attained to such magnitude in recent years, that the two leading party organizations in the city of Philadelphia alone purchased in the year 1894 over ninety-five thousand such receipts. Obviously this is a form of bribery which is forbidden by the spirit if not by the letter of the law; and to meet such a situation of affairs the Legislature of Pennsylvania has recently (1897) enacted a law forbidding the payment of a poll tax by any other person than the elector against whom such tax is assessed.[1]
Neither of the judicial authorities above referred to seem to have grasped the great principle essential to the continuance of every truly free state—that the power of taxation should not he invoked for police purposes, but be strictly limited to the raising of revenue to meet legitimate state expenditures. "The man who will not buy a tax receipt, but expects his party to purchase it for him, is a bad citizen. He is, in effect, a person who is bribed, and who holds the value of his vote at a very small sum."—Philadelphia Times.
Of other terms employed to indicate different forms or methods of taxation, and a clear understanding of the meaning of which is essential to any correct discussion of the subject, the following are the most important"
Direct and Indirect Taxes.—Taxes are generally characterized or classified as being either direct or indirect; but these terms, although in common use, are somewhat indefinite, owing to the inability of economists to agree as to their exact meaning; while in the United States this indefiniteness has been increased by the circumstance that its Supreme Federal Court has felt compelled by the language of the Federal Constitution to assign to the term "direct," as applicable to taxation, a "legal" rather than an economic definition.
In a general sense the term direct is applied to those taxes which are demanded from the particular persons whom it is intended or desired shall pay them; and indirect to those which are demanded from a person with the expectation and intention that he shall indemnify himself for payment of the same at the expense of some other person.[2] There is, furthermore, a marked distinction, founded on sound philosophy, between a direct and indirect tax, which, if concisely expressed, will constitute two unimpeachable definitions. Thus an indirect tax, whoever may first advance it, is paid voluntarily and primarily (in the sense of ultimately) by the consumer of the taxed article. On the other hand, a direct tax has always in it an element of compulsion; not necessarily on the person who advances the tax in block, but on the person who is compelled to use or consume the taxed property or its product. For example, there is nothing compulsory or unequal in an ordinary license tax. If the license is high, no one is compelled to engage in a business covered by its legal requirement; and few persons will until the average profits of the taxed business by the regular laws of competition finally reach the average profits of other like employments or investments. A tax on commodities like whisky, tobacco, fermented liquors, oleomargarine, playing cards, dice, and the like, can always be avoided as a primary tax, or can be paid at discretion. But there is nothing voluntary in the payment of a tax upon all real or personal property, or on the income of such property. Human beings can not subsist without some forms of personal property, and therefore a tax upon all personal property or its income is of necessity compulsory and not voluntary. Any general assessments of personal property on or by reason of its income, as well as assessments on real estate, are unavoidable in their nature, and therefore, from a philosophic or economic point of view, are typically direct taxes. (See Alexander Hamilton's brief in the Carriage case, Hamilton's Works, vol. vii, p. 848.)
The presence or absence of the principle of compulsion as constituting the essential difference between a direct and an indirect tax has not, it is believed, been before recognized by economists. And yet it is clearly involved or comprised in the definitions given by acknowledged authorities on the subject. Thus M. Leroy Beaulieu, in his Traité de la Science des Finances, characterizes those taxes "as direct which the legislator intends should be paid at once and immediately by him who bears their burden. They strike at once his fortune or his revenue, and every intermediary between him and the treasury is suppressed." McCulloch (Principles of Taxation) describes a tax "to be direct when it is immediately taken from property," and indirect "when it is taken from its owners by making them pay for liberty to use certain articles or exercise certain privileges." M. Say defines a direct tax to be the "absolute demand of a specific portion of an individual's real or supposed revenue." (Political Economy, p. 461.)
In the assessment of direct taxes a proportionality is generally sought between the person who pays and the value of his property, or ability to pay. Thus, in the taxation of watches, which are popular subjects for direct taxation, the proportionality between the owner who pays and the amount of property rated is recognized and maintained, by imposing, as in the city of Philadelphia, a tax of one dollar on watches of gold and one of seventy-five cents on watches of silver. In the assessment of indirect taxes the maintenance of any proportionality between the taxpayer and his fortune is not regarded. The idea of a personal assessment, which is characteristic of direct taxes, furthermore does not apply to indirect taxes, and the person upon whom the incidence of such taxation primarily falls may be regarded as advancing rather than paying the tax, which is ultimately paid by a consumer, not as a tax, but as a part of the market price of a commodity.
In other words, the general effect if not the avowed object of an indirect tax is to place its burden in a roundabout way on the person who ultimately bears it. Taxes on imports, or customs dues; most internal revenue taxes; "octroi" taxes, or taxes levied by municipalities on commodities—mainly articles of food—brought within their limits from without stamps and fees for registering or verifying documents, are typical examples of indirect taxation.
The objections to this form of taxation are so great as to warrant their characterization as evils. In the first place, they prevent the taxpayer from knowing what he pays, by mixing up the price of an article with the tax, as has been already noticed. Secondly, they enhance the cost of a commodity to the consumer to a degree (often largely) in excess of the original burden of the tax. Thus, if an importer of sugar, salt, wool, coal, or metals pays taxes on these commodities when they enter the territory of another country (as, for example, that of the United States), he adds them to the first or invoice cost of the importation. On this aggregate he calculates and adds interest and profits when he sells to a wholesale dealer; and this process is repeated by every smaller dealer or retailer through whose hands the commodities pass on their way to final consumption; and as the number of such intermediaries is greatest in the case of articles sold by small retailers, the final burden of the tax is greatest on the very poor, whose necessities compel them to buy in very small quantities.[3] There is thus a very real and close connection between indirect taxation and pauperism.
In dealing with the relative influence of direct and indirect taxation, Mr. Gladstone, when Chancellor of the Exchequer, took the position in a parliamentary discussion in 1859 that "the distinction between them involves the question between rich and poor. All classes pay indirect taxation: the middle and wealthy pay direct; but indirect taxes press much more seriously on the laboring population."
An instructive comparison of the method and influence of direct and indirect taxation may be instituted by supposing the two systems to be put into practical operation under similar circumstances, for effecting a purpose which all are willing to admit is most desirable or necessary. For example, a town meeting is held to provide means for building a bridge. The direct and honest way would be to assess and levy an equitable tax, adequate to provide for the proposed expenditure, on the property of the citizens of the town. An indirect way, as exemplified by the tariff (omitting the complicated machinery for appraising merchandise), would be to provide that the storekeepers of the town should charge, on account of the proposed expenditure, an excess over general prices to the extent of two cents a pound on sugar, twenty-five cents more per yard on woolen cloth, five cents more for each tin pail or cup, and, keeping an account, return the results of the extra prices paid on the above-mentioned and other like commodities by their consumers, to the town treasury. Would it not be evident that under such a method of procedure the wealth of the town would in a great degree escape taxation for the construction of the bridge, and that its expense and burden would fall mainly upon the poor; inasmuch as the average amount of consumption of sugar, cloth, and tin by the citizens of the town, and the average per capita taxation contingent on the same, would have no just or uniform relation to their ability to pay for the same? A man with ten thousand a year income will not probably consume ten times as much sugar as one with one thousand a year.
In the case of imported commodities charged with import duties, not only is the price of the imported commodity enhanced directly by the duty, but the price of a much larger quantity of competing product of domestic origin is increased to approximately the same extent. Thus, in the case of iron and steel, the average difference in the prices of these commodities in England and the United States during the ten years from 1878 to 1887 inclusive, occasioned by the imposition of indirect customs taxes by the latter country on such a comparatively small proportion of its domestic consumption as was imported, increased the cost of the total consumption of these products in the United States during the period mentioned, to the extent of at least $550,000,000. Such an increase represented an average of $55,000,000 per annum in excess of the cost of a like quantity to consumers in Great Britain during the same period; an aggregate, according to the census data of 1880, in excess of the entire capital invested in the iron and steel industries of the country, including all its mines of both coal and iron.
An incident also illustrative of the character of an indirect tax was afforded some years ago when it was proposed in Washington to ex-Governor Warmoth, of Louisiana, as representative of the sugar-producing interest of that State, to substitute a bounty on domestic sugars in place of the protection afforded by the then tariff (taxation) on the importation of foreign sugars. The suggestion was repelled with no little warmth, on the ground that such a substitution would be most prejudicial to the domestic sugar industry. "The people," he said, "know that a bounty is a tax, and as soon as they found out its amount would insist upon its repeal, and thus the sugar interest would lose both the protection of the tax on foreign competitive imports as well as the bounty." How far subsequent events harmonized with this forecast by Mr. Warmoth is worthy of brief notice in this connection. Congress in 1891 entirely repealed all the tariff (tax) on the importation of raw sugars, and to compensate the domestic producers of sugar for the abrogation of the protection which had been previously given them, authorized the payment by the Federal Government of a bounty of from one and three fourths to two cents per pound on their product. In a little more than four years subsequently, when the effect of the bounty—aggregating over $30,000,000 and representing nearly the whole cost of producing the sugar entitled to bounty—had been fully recognized by the public. Congress repealed the act authorizing its payment without restoring the former protective duties; and with such a pronounced approval of its action on the part of the people of the United States as to render it almost certain that no Congress will hereafter authorize the direct payment of bounties by the Federal Government for any purpose.[4]
The Relative Burden on Taxpayers of Direct and Indirect Taxation.—Any discussion of this subject would be incomplete that failed to notice the estimates of the relative burden on taxpayers of direct and indirect taxation by persons well qualified by study, and administrative tax experience, to express an opinion.
It is not a matter of dispute that the cost of collecting direct taxes is, as a rule, much less than is the case with indirect taxes, and that of the receipt contingent on the former the largest proportion accrues to the Government. Thus in Prussia, where the administration of taxation may be characterized generally as despotic, the cost of raising revenue from direct taxes has been reported at four per cent and of indirect at twelve per cent. Under a direct tax system everybody knows how much he really pays, and if he votes for war or any other expensive national luxury, he does it with his eyes open to what it costs him. If all taxes were direct, taxation would be much more apparent than at present, and there would be a continuous popular demand, which at present there is not, for economy in public expenditures.
In England it has been estimated that for every fifty millions of indirect taxes paid into the exchequer, seventy millions are finally taken from consumers; and M. Guyot, late French Minister of Public Works, has recently shown by a series of statistical diagrams, that the octroi system of indirect taxation in France adds on an average twenty per cent to the cost of goods to consumers over and above the tax.[5] In New Zealand, where a comparatively small population and limited and definite sources of revenue have afforded extraordinary facilities for making an analysis, an expert has recently calculated that for every million and a half collected through the customs the people of that colony have paid not less than a million and two thirds.
In 1851 a committee of the Liverpool (England) Financial Reform Association published a statement, that a careful investigation instituted by it showed, that the difference between the net amount paid into the exchequer from indirect taxes and the gross amount taken through or in consequence of this system from the taxpayers, was not less than an average of thirty-seven per cent; and added that the evidence that had led to this conclusion "can neither be controverted as matter of fact, nor strengthened as a matter of argument."
In 1846 Hon. Robert J. Walker, then Secretary of the Treasury, in accordance with instructions from the United States Senate to report the extent to which the price of domestic products was enhanced by the then existing duties imposed on the import of competing commodities, submitted the following statement: "The revenue from imports last year exceeded twenty-seven millions of dollars, of which, twenty-seven millions are paid to the Government upon imports, and forty-four millions in enhanced prices of similar domestic articles. This estimate is based upon the position that the duty is added to the price of the import and also of its domestic rival. If the import is enhanced in price by the duty, so must be its domestic rival, for, being like articles, their price must be the same in the same market." (Senate Document, First Session, Twenty-ninth Congress, 1845–’46.)[6]
In a debate in the Constitutional Convention of the State of New York in 1867–’68, the late Hon. George Opdyke, a member, and one of the best economic and fiscal authorities of his time, stated that his investigations had led him to the conclusion that consumers of imported articles in the United States are "charged with at least fifty per cent in addition to the duties actually received by the Government."
As the result of a careful study of the subject, based on the rates of duty imposed by the tariff law of March, 1883, Hon. William H. Springer (for a long time a prominent member of Congress) was led to the conclusion that the average increase in the prices of domestic commodities due to the duties imposed on the import of competitive products had not been less than $556,000,000 for every year of the twenty years next precedent to 1883, "making an aggregate of over eleven billions of dollars, not one dollar of which went into the national Treasury." (See North American Review, vol. cxxxvi, No. 319.)
The experience of the indirect taxation of commodities also shows that they favor the concentration of business in a few hands, or the creation of monopolies. Of this the experience of the internal revenue system of the United States has furnished some curious examples. Thus a tax was imposed in 1864 on matches at the rate of one cent per package of one hundred or less; and, although comparatively insignificant, it yielded at one time, by reason of the immense number of matches consumed, an annual revenue of over $3,500,000, which sum the manufacturer was obliged to advance by purchasing and affixing stamps to each package as a prerequisite to selling. To manufacturers furnishing their own design for the stamp, the Government allowed a discount of ten per cent on stamps of an aggregate value in excess of five hundred dollars purchased at any one time, and sixty days' credit to such manufacturers as could offer satisfactory security (i. e., in the form of United States bonds) for their payments. Under such circumstances small manufacturers with a limited capital were crushed, and the business of manufacturing concentrated in a very few firms, which raised the retail price of matches to an extent considerably in excess of the amount of the tax. In later years (1883), when it was proposed to repeal this tax, the singular spectacle was afforded of the larger manufacturers strenuously exerting themselves to influence Congress to prevent the repeal, and asking that they might continue to be taxed. Their efforts were, however, unavailing. The tax was abolished, and the retail price of matches immediately declined more than fifty per centum—i. e., from fifteen cents to six cents for six boxes.
Many years ago the late Henry C. Carey characterized indirect taxation in the following forcible and figurative language: "The whole system of indirect taxation," he said, "is mere petty larceny. It is an attempt to filch that which can not be openly demanded. It is one of those 'inventions' of man by which the few are enabled to grow rich at the expense of the many, and is therefore greatly favored by that class of men who prefer living by the labor of others to living by their own. The man who plunders a city is of the same species with the highway robber. The one who imposes indirect taxes is of the same species with the chevalier d'industrie. All belong to the genus of great men. All are equally destitute of manly or generous feeling. The plunderer of cities selects those which are weak and defenseless, and the collector of indirect taxes selects the commodities used by poor men who can not defend themselves; and where the system most prevails, men are most weak and cheap and food most dear."[7] (H. C. Carey, Past, Present, and Future, pp. 464, 465, Philadelphia, 1848.)
And yet Mr. Carey's name, more than that of any other citizen of the United States, is identified with a system of raising revenue which is based exclusively on indirect taxation.
Mr. Henry George, in one of his essays, also thus forcibly makes clear a leading characteristic of the indirect taxes levied by the Federal Government: "Propose," he says, "to abolish, or even reduce, one of these taxes, and Washington will be filled with lobbyists begging and working for its extension. What does this mean? It means that these taxes yield revenue to private parties as well as to the Government."
Carlyle was not far out of the way in characterizing legislators who advocate indirect taxation as having a purpose, "that those who are not hungry should suppress those who are. The pigs are to die—i. e., be subject to taxation—no conceivable help for that; but we, by God's blessing, will at least keep down their squealing!"
The question of the relative merits of the two systems of taxation under consideration, has long been since the days of Jeremy Bentham a subject of discussion, with a trend of popular sentiment unmistakably in favor of indirect, or it should rather be said in opposition to direct taxation.[8]
What satisfactory explanation can be given for a conclusion so clearly adverse to public interest? John Stuart Mill has attempted it as follows: "The feeling is not grounded on the merits of the case, and is of a puerile kind. An Englishman dislikes not so much the payment as the act of payment. He dislikes seeing the face of the tax collector and being subjected to his peremptory demand. Perhaps, too, the money which he is required to pay directly out of his pocket is the only taxation which he is quite sure that he pays at all. That a tax of two shillings per pound on tea, or of three shillings per bottle on wine, raises the price of each pound of tea and bottle of wine which he consumes by that and more than that amount can not indeed be denied. It is the fact, and is intended to be so, and he himself is perfectly aware of it; but it makes hardly any impression on his practical feelings and associations, serving to illustrate the distinction between what is merely known to be true and what is felt to be so."
Mr. Mill also expressed the opinion that men's minds are so little guided by reason on this subject that if it was attempted to raise all the imperial revenue of Great Britain by direct taxation, the dissatisfaction on the part of the people at having to pay so much would be extreme.
Speaking on this subject in the House of Lords in 1860, the Earl of Derby said that "by making the whole revenue of the United Kingdom depend upon direct taxation the pressure would be so odious that wars would be avoided, because no party would incur the odium of carrying them on."
There can be no doubt that high direct taxes, making evident to the most unobservant citizen the excess of burden imposed upon him, have been the prime cause of the repudiation of public debts in the United States, and the arrest or ruination of internal improvements of great importance.
Mr. George Opdyke, in his Treatise of Political Economy, advanced the idea that the phenomenon of preference for indirect taxation in the United States might be accounted for in part by the fact, that the unjust manner in which taxes were levied by Great Britain on her American colonies engendered in the public mind of their people "a deep-seated hatred of every form of taxation; and the direct being its most visible or sensible form, it has been mistaken for the worst—an impression that was strengthened when the most unpopular of our Presidents (the elder Adams) recommended this policy, and when the opposing political party, seizing the occasion to profit by public prejudice, represented it as the worst form of tyranny."[9]
An economic phenomenon in connection with this subject goes far to support the idea that political economy can not be an exact science, inasmuch as it is largely or wholly based on human action, concerning which nothing certain and invariable can be predicated. Thus the argument and evidence are complete that it is not a wise, humane, or perhaps a moral policy for a state created or maintained for the purpose of promoting the interests of its people to adopt a system of indirect taxation for the raising of revenue; and, furthermore, that it is contrary to human nature for a people to desire or be willing to pay more for any service or commodity than it is intrinsically worth; or, what is the same thing, perform more work in return for the same than is a fair equivalent. And yet both governments and the people in all countries and at all times (including the present) have shown a preference for this system of taxation over any other.
One explanation of this curious inconsistency is as follows: It is and ever has been the aim of all governments to avoid responsibility and occasion for popular criticism in respect to their financial policy; and a direct tax is an annual reminder to their citizens or subjects of the burden of government, and prompts them to hold the government to a strict accountability. Under a free or popular form of government a general system of direct taxation would practically call for an annual judgment of the voters on the fiscal policy of an administration in power, and such a tightening of the purse-strings as would reverse such policy in case of its popular disapproval. But with a system of indirect taxation, as a tariff on imports, a government can undertake the most unnecessary and extravagant measures and obtain revenue sufficient to defray its contingent expenditures without general popular disapproval.
Indeed, the best defense that can be offered for the continued resort to indirect taxation is, that with the present large demands on the part of all civilized states for revenue to meet increasing fiscal obligations, mainly incurred for war expenditures, past and present, and the unwillingness of the people to pay direct taxes, it would be practically impossible to maintain the modern government without large contributions from people of limited resources; and that this purpose can only be accomplished by taxing them indirectly. On the other hand, it may be replied that if direct taxation was alone made the agency for obtaining revenue, unnecessarily large expenditures through the resistance of the masses would not be possible. In like manner, if the present indirect taxes levied on imports by the United States were to be replaced by direct taxes, collected in money or in kind from purchasers for final consumption, on whom the burden in both cases finally rests—if every person buying silk or sugar were stopped by a government tax gatherer at the door of the place of purchase and thirty per cent of his purchases taken in kind in one case and fifty per cent in the other in payment for taxes, it is safe to say that such a system would not continue operative any longer than would suffice for the people, through legal methods, to compel its modification. One explanation—i. e., of inconsistency—on the part of the people who pay taxes is, that although the benefits derived from the institution of government (which practically can not exist without taxation) are of the first importance, they are not so very obvious, nor so striking, as to be readily recognized and appreciated by the masses, who are accordingly apt to look with complacence upon a direct (personal) demand for a tax in the light of a compulsory payment, for which no equivalent is returned. Indeed, this feeling is so strong that it has become an almost popular maxim in all countries that "there is nothing which a person so hates to do as to pay taxes," in case they are direct. But by the ingenious plan of taxing articles on which incomes are expended, rather than openly demanding a portion of the income itself, the amount of taxation is concealed from the mass of taxpayers, and its payment is made to appear in some measure voluntary. The indirect tax being generally advanced rather than paid, as has been already shown, in the first instance by the importers, the ultimate purchasers for consumption confound the tax with the natural price of the commodity. No separate demand being made upon them for the tax, it escapes their consideration, and the article which they receive seems the fair equivalent of the sacrifice made in acquiring it. Indirect taxes have also the advantage of being paid by degrees, in small portions, and at a time when the commodities are wanted for consumption, or when it is most convenient for the consumer to pay them."[10]
In the attempt, furthermore, of civilized rulers to maintain a civilized government over an uncivilized people, there seems to be no practical method of compelling such a people to help maintain a proper and desirable government except through a resort to indirect taxation. Thus, in British India, a country of low civilization, small accumulation of wealth, and under such climatic conditions as necessitate the minimum of clothing, shelter, and food, the only way by which the mass of the native population can be compelled to contribute anything whatever, apart from a tax on land in the form of rent, toward the support of a government whose beneficent and civilizing influence has become a matter of history, is by the taxation of salt, the consumption of which is a necessity to all, and the production and distribution of which can in a great measure be controlled.
In the British island and colony of Jamaica, populated mainly by emancipated blacks and their descendants (557,132 out of a total of 580,804 in 1881), who own little or no land, and consume little of food other than what is produced almost spontaneously, the problem of how to raise revenue by any form of taxation for defraying the necessary expenditures of the Government has been one of great embarrassment. For the year 1884 these expenditures averaged three dollars and forty cents per head of the entire population, and of this amount an average of about fifty cents per head could only be obtained from any internal taxation, and this mainly through the indirect agency of licenses and stamps, and not by any direct assessment. The balance of required revenue was obtained from a special tax on some set manufacture, and from export and import duties. A similar state of affairs in Mexico, heretofore noticed somewhat in detail (see vol. xlix, No. 1, pages 45, 46), would also seem to necessitate a resort to a system of indirect taxation.
It is interesting to note, in connection with this subject, that while the States and municipal governments of the Federal Union derive their revenues almost entirely from direct taxation, the national revenues flow almost wholly from indirect taxes on commodities or personal property.
Attention is here also particularly directed to a fact that has almost entirely escaped the notice of economic and fiscal authorities and writers, and that is the remarkable change that has taken place within the last fifty years in the British tax system, whereby, through an extensive substitution of direct for indirect taxation, the burden of tax incidence has been shifted to a great extent from the community at large to the propertied classes. Thus, in 1841–’42, indirect taxes yielded seventy-three per cent and direct taxes twenty-seven per cent of the total imperial revenue, but in 1895–’96 indirect taxes yielded fifty-two per cent and direct taxes forty-eight per cent. Is not the inference warranted, that in the change in the incidence of British taxation above noted is to be found at least a partial explanation of the remarkable and progressive increase, in comparatively recent years, in the consumption of the various commodities that enter into the living of the laboring classes of Great Britain, and is it not also singular that the above facts and their possible inference do not as yet seem to have attracted the attention of those most interested in social economics?
- ↑ During the American colonial period some attempts were made to compel the exercise of suffrage by imposing a fine on citizens neglecting to vote at regular elections; the fine imposed in Maryland on citizens in default of such action having been one hundred pounds of tobacco. But since the adoption of the Federal Constitution no legislation of like character is believed to have taken place in any of the States until 1889, when Kansas City adopted a charter provision imposing a tax of two dollars and a half on each citizen who should fail to vote at a general election. This provision coming up for review before the State courts of Missouri, was affirmed in the first instance by a Superior Court judge, who took the ground that "in the enlightenment of the present age it is in the power of the State to compel its voters to exercise the election franchise, and if the State can do so the city is invested with the same power." After enumerating many things of an arbitrary nature that are done to maintain good municipal government, the judge said that he could see no legal objection to the use of the taxing power for the purpose of securing a full and perfect expression of public sentiment and the election of competent and worthy men to public offices. The position was an advanced one, he admitted, but not an unreasonable one, in view of the fact that "the highest type of government is attained when every voter casts his vote, and that vote is counted just as it is cast." On an appeal to the Supreme Court of the State, the provision was, however, declared unconstitutional, the language of the decision being as follow: "Taxes may be levied," it said, "in money or in services having a money value to the public, and he who pays in money does not necessarily have to pay more or less than he who pays in services, and vice versa, and it is upon this principle that these taxes are upheld; but who can estimate the money value to the public of a vote? It is degrading to the franchise to associate it with such an idea. The ballot of the humblest in the land may mold the destiny of the nation for ages."
- ↑ "In the assessment of indirect taxation, and such as is intended to bear upon specific classes of consumption, the object itself is alone attended to without regard to the party who may incur the charge. Sometimes a portion of the value of the specific product is demanded at the time of production—as in France, in respect to the article of salt. Sometimes the demand is made on entry, either into the State, as in the duties of import; or into the towns only, as in the duties of entry. Sometimes the tax is demanded of the consumer at the moment of transfer to him from the last producer—as in the case of the stamp duty, and the duty on theatrical tickets in France. Sometimes the Government requires a commodity to bear a particular mark, for which it makes a charge—as in the case of the assay mark on silver and a stamp on newspapers. Sometimes it monopolizes the manufacture of a particular article or the performance of a particular kind of business—as in the monopoly of tobacco and the postage of letters. Sometimes, instead of charging the commodity itself, it charges the payment of its price—as in the case of stamps on receipts and mercantile paper. All these are different ways of raising a revenue by indirect taxation; for the demand is not made on any person in particular, but attaches upon the product or article taxed."—M. Jean Say, Treatise on Political Economy, 1821.
- ↑ Some years since, at the instance of the writer, the late Charles L. Brace instituted an examination to determine the difference in price to individual consumers of coal bought in comparatively large and small quantities. He reported that as a rule, when coal could be delivered at private residences in the city of New York (at the time when the investigation was made) for four dollars and a half per ton, its cost to the people whose poverty compelled its purchase by the "bucketful" was at least twelve dollars per ton. And yet when subsequently a philanthropic capitalist proposed to remedy this grievance of the poor by selling coal bought in small quantities at greatly reduced rates, his attempt did not meet with the full approval of the people whom he desired to serve, by reason of an inference by them that the project must in some way be a scheme for the promotion of private gain rather than public good.
- ↑ The fundamental question involved in this sugar-bounty matter has never been passed upon directly by the Supreme Court of the United States; but the disbursement of the money voted by Congress for the payment of the sugar bounties having been withheld by the Comptroller of the United States Treasury on the ground that the appropriation was unconstitutional, the case came up before the United States Court of Appeals of the District of Columbia, which sustained the opinion of the Treasury official, and was adverse to the claim that "the general welfare" clause of the Constitution might be stretched to encourage the production of a commodity by a bounty. "If to Congress be conceded," it said, "the power to grant subsidies from the public revenues to all objects it may deem to be for the general welfare, then it follows that this discretion renders superfluous all the special delegations of power contained in the Constitution, and opens a way for a flood of socialistic legislation, the specious plea for all of which has ever been 'the general welfare.'" For further notice of this celebrated case see Chapter VII, Popular Science Monthly, p. 518.
- ↑ It seems incredible, he is reported as graphically saying, "that Frenchmen, usually so sensitive to ridicule, can quietly submit to be 'sweated' and 'plucked' like fowls, without crying out against this antiquated method of indirect taxation only so long as they are kept blind to the tax."
- ↑ This estimates was founded on an apparently careful investigation of the prices "of sixteen leading domestic articles and the manufactures thereof, similar to those on which the present duties (1845) are imposed."
- ↑ "So long as it (indirect taxation) shall be permitted to exist, depopulation, and the system of large revenues, raised by means of indirect taxation, to be squandered by those who live by managing the affairs of others, must continue. So long as it exists, the planter and farmer must continue to give a large portion of their small product in exchange for a small quantity of clothing. So long as it exists, every attempt at the establishment of freedom of trade must be a failure. With its correction, every obstacle to the establishment of perfect freedom will disappear, and the tariff will pass out of existence. The interest of every farmer and planter, and of every laborer and mechanic, is directly concerned in the adoption of a measure that shall be calculated to promptly produce the effect desired—i. e., repeal of indirect taxation—but it is not more his interest than his duty. So long as the present system shall continue, trade of every kind must be subject to violent fluctuations which enable the few to enrich themselves at the expense of the many, and enable gambling speculators to live in palaces and ride in coaches by aid of indirect taxation levied upon the hard-working mechanic and honest trader, ruined by changes in the value of their property. It is, therefore, the bounden duty of every man desirous to promote the great cause of morality, justice, and of truth, to unite his efforts with those of his neighbor for the early accomplishment of this great object."—H. C. Carey, Past, Present, and Future, pp. 471, 472, Philadelphia, 1848.
- ↑ "We find, as the result of our examination and contrast, that direct taxation is, in every essential feature, vastly superior to our present method; that the former accords with justice, economy, and all the other requirements of a sound policy; while indirect taxation violates every principle on which legislation should be based. It must be owned, however, that notwithstanding the weighty objections to the one and the economy and perfect fairness of the other, there are few of our citizens who are desirous of making the proposed change. Direct taxation is a phrase that grates on the nerves of all. Men start at its sound as though it was a portent of evil; something which had impressed them with deadly fear. They seem to regard it as deeply imbued with the spirit of tyranny, to say the least, if not as the most forbidding impersonation of that monster. So unpopular is this method of taxation, that an aspirant for public station or honors would as soon think of committing high treason as propose or advocate it; and if his ambition were bounded by the present, he would be right, for he could not more effectually destroy his popularity."—Treatise on Political Economy, by George Opdyke.
- ↑ An acute economic student and observer writes as follows on this subject: "I have been very much struck by the apathy of taxpayers to the increase of taxes in their most direct form. Take Philadelphia, for example. Nearly every man owns a house there, and yet there seems to have been no objection to the grossest municipal extravagance, entailing heavier and heavier burdens every year. The city to-day levies about ten times as much per head as it did thirty or forty years ago. The exact figures would be easy to get, and would certainly point a moral adverse to your view that direct taxation is twin brother to public economy. I am inclined to look for an explanation to the fact that real estate values have steadily risen, so that after all the increase of taxation has been easily met."
- ↑ J.R. McCulloch. Taxation and the Funding System.