Popular Science Monthly/Volume 51/October 1897/Principles of Taxation: The Existing Methods of Taxation XX
| PRINCIPLES OF TAXATION. |
By DAVID A. WELLS, LL. D., D. C. L.,
CORRESPONDANT DE L'INSTITUT DE FRANCE, ETC.
XI.—THE EXISTING METHODS OF TAXATION.
SUBJECTS OF TAXATION.—The subjects of taxation, to use a happy generalization of Justice Field of the United States Supreme Court (Foreign-held Bond Case, 15 Wallace), "are persons, property, and business. Whatever form taxation may assume, whether as duties, imposts, excises, licenses, or direct, it must relate to one of these subjects. It is not possible to conceive of any other, though as applied to them taxation may be exercised in a great variety of ways."
With this postulate we are legitimately led up to the consideration of the ways or methods by which the State or Government, in virtue of its sovereignty, and on the ground of necessity, and solely for its support, taxes or compels contributions from the three above-enumerated subjects, for the purpose of defraying its expenditures.
Apportionment of Taxation.—This department of the subject of taxation, while the most practical and therefore the most interesting, is at the same time the one most obscure, and the one about which there is the most striking difference of opinion among writers on economic and fiscal subjects. The four maxims or canons laid down by Adam Smith in his Wealth of Nations, by
reason, as he claims, of their eminent justice and equality, have obtained such world-wide celebrity that they are almost always referred to as of unquestionable authority in all discussions of this subject, and have been thus characterized by an eminent French student and writer (M. Menier) on taxation: "When a legislator," he says, "brings forward a new scheme for taxation, he is always careful to say that it is not in contradiction with even one of these rules; and at the same time he never fails to invoke them as authority during a debate, even when he is actually scheming to transgress them."
These rules are four in number, and are as follows: 1. "The subjects of every state ought to contribute to the support of the Government, as nearly as possible, in proportion to their respective abilities—that is, in proportion to the revenue which they respectively enjoy under the protection of the state." In the observation or neglect of this maxim consists what is called the "equality or inequality of taxation." 2. "The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor and to every other person. The certainty of what each individual ought to pay is, in taxation, of so great importance that a very considerable degree of inequality (I believe, from the experience of all nations), is not near so great an evil as a very small degree of uncertainty." 3. "Every tax ought to be levied at the time and in the manner in which it is most likely to be convenient for the contributor to pay it." 4. "Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state."
But although almost universally accepted as the embodiment of the highest wisdom, the above four maxims or canons of Adam Smith have been and are, nevertheless, open to some criticism. In the first place, they are so general in their nature and so lacking in any precise rule or test for application, that they stand in the light of aphorisms; somewhat as the maxims "Honesty is the best policy," "Never put off till to-morrow what can be done today," etc., to which all respect is always given, except the desirable one of practical use in actual cases. In fact, the originators of the very worst forms of taxation now existing might and probably would plead that their methods or practices were based on the ideas of Adam Smith, or were as near in conformity to them as was possible under the existing circumstances. Again, the first maxim or canon embodies two propositions antagonistic to each other, and one of which can hardly be considered correct; namely, that every citizen should pay taxes for the support of the Government in proportion to his ability. For if, as almost all authorities are now agreed, taxes are the compensation which persons or property pay to the state for protection, then it of necessity follows that where there is no protection, ability is no just guide for assessment. "Where there is no protection," said Judge Story (in the case of United States vs. Rice, 4 Wheaton, 276), "there can be no claim to allegiance or obedience." And that Adam Smith did not intend to have his first proposition fully accepted would seem evident from the circumstance that he added to it, and qualified it with these other words, "that is, in proportion to the revenue which they [the citizens] respectively enjoy under the protection of the state." Montesquieu, who wrote at an earlier date, also enunciated even more clearly this commonsense and equitable principle, when he said (see Spirit of the Laws), that "the public revenues ought not to be measured by the people's abilities to give, but by what they ought to give." "And what they ought to give," as has been remarked by another writer, "can, of course, be only measured by the benefit they are to derive."
Discriminating Taxation.—The proposition that "the subjects of every state ought to contribute to the support of the Government in proportion to their respective abilities" embodies also, and inferentially favors the policy of discriminating taxation, and finds popular expression and justification in the assertion that the rich man needs more protection from the state than the poor man, has more interests to be guarded, and it is therefore right that he should pay more in proportion to his fortune. "It is just," says Sismondi, the Italian economist, "that all should support the Government in return for the protection it gives to their persons and properties, in proportion to the advantages society guarantees to them, and the expenses which it incurs on their account." But the question is pertinent, to whom or to what class of its members does society afford the most protection or render the most service? Is there any standard by which such proportionality can be even approximately determined? To these questions Mr. John Stuart Mill has made the following answer:
"It can not be admitted," he says, "that to be protected in the ownership of ten times as much property is to be ten times as much protected. Whether the labor and expense of the protection, or the feelings of the protected person, or any other definite thing be made the standard, there is no such proportion as the one supposed, nor any other definable proportion. If we wanted to estimate the degrees of benefit which different persons derive from the protection of Government, we should have to consider who would suffer most if that protection were withdrawn; to which question, if any answer could be made, it must be that those would suffer most who were weakest in mind or body, either by nature or by position. Indeed, such persons would almost infallibly be slaves. If there were any justice, therefore, in the theory of justice under consideration, those who are the least capable of helping or defending themselves, being those to whom the protection of Government is the most indispensable, ought to pay the greatest share of its price; the reverse of the true idea of distributive justice, which consists not in imitating but in redressing the inequalities and wrongs of Nature. Government must be regarded as so pre-eminently a concern of all that to determine who are most interested in it is of no real importance. If a person or class of persons receive so small a share of its benefit as make it necessary to raise the question, there is something else than taxation which is amiss, and the thing to be done is to remedy the defect instead of recognizing it and making it a ground for demanding less taxes."
M. Menier, of France, widely known as a manufacturer of chocolate, but who has shown himself to be an economist of repute and a most valuable member of the French Chamber of Deputies, in a comprehensive treatise on taxation (L’ Impost sur le Capital, Paris, 1874; English translation, London, 1880) re-enforces the conclusions of Mr. Mill respecting the popular theory of discriminating taxation by different though not less forcible arguments and illustrations, taking as a text the following remark of M. Léon Faucher, another distinguished French writer on economic subjects: "It seems just that he who, thanks to his talents, to his property, or his capital, procures for himself and his family the enjoyments of luxury should pay to the state a tribute proportionately more considerable than he who has only the produce of his daily labor to nourish and bring up his family." "To those," says M. Menier, "who do not reflect, nothing seems more simple than this proposition. A minimum of wants is spared taxation. In proportion as income increases the tax increases. Let us see the consequences.
"A principle is or is not. A principle recognized as true ought never to be given up, whatever may be its apparent dangers. Once admitted, it must be submitted to, followed out to the end, and its consequences accepted. If by following out its consequences we perceive that we are getting at the absurd, we must return to the principle, and subject it again to the touch of observation. There are many who content themselves with stopping halfway, not daring to advance, and afraid to turn back to discuss the principle on which they have long relied. They are the inventors of compromises, who adjourn questions instead of solving them.
"But taxation, it is claimed, may be ‘wisely progressive.’ I know no more concerning a ‘wise progression’ than I do about a ‘wise addition’ or a ‘wise multiplication.’ A progression is or it is not. If it is insignificant, then it is a delusion. The inequality it aims at destroying subsists intact. If a true progression in taxation is established, here are the results we obtain: We will suppose, for example, that the tax ought to be trebled when the income is doubled; then a tax of 10 francs on 100 francs of income would rise to 200 francs on 2,000 francs, to 600 francs on 4,000 francs, to 1,800 francs on 8,000 francs, to 5,400 francs on 16,000 francs, to 16,200 francs on 32,000 francs, to 48,600 francs on 64,000 francs, and to 145,000 francs on 128,000 francs. I conclude that the principle that ends in such a consequence can only be false. What! the tax would one day exceed my fortune! I should be the debtor of the fiscal system that had absorbed more than my revenue. Then it would be for my interest not to augment it! I shall have accumulated only for the treasury, and the more I acquire the more rapidly I shall be despoiled. . . .That system may suit Utopians and retrograde people who completely absorb the individual in the state, but it will not suit those who, relying on facts, think the greatness and wealth of the state ought to proceed from the development of individuals. It may suit those who seek equality at the basis, but not those who seek equality at the summit. The theory of progressive taxation is a vestige of the old prejudice that regarded wealth as an evil, as a sort of theft from the rest of the country, and that it would be equitable to make the rich man atone or make reparation for the possession of his fortune and his pleasures. In warlike civilizations, where wealth was based on violence, it is not difficult to understand the legitimacy of this prejudice; but it finds no warrant in our industrial civilization, where all wealth, to be legitimate, must be based on the appropriation of natural agents to our wants. But the partisans of a wise progression in taxation have found means of escaping from the absurdity of the above consequence—namely, confiscation. They propose that above a certain figure the progression shall stop. Under such a system they would favor him who has but little money; but they would favor still more him whose wealth exceeds a certain limit. If you have £4,000 a year, you pay the maximum of the progression; if you have more than £4,000, the progression vanishes. A principle which ends in such consequences does not exist."
M. Menier's Rules.—To establish a system of taxation which will be equitable and effective without involving the principle of progressive or discriminating taxes, M. Menier regards the following constructive rules as fundamental:
1.Taxation should never be laid on circulating capital, "since every tax that obstructs circulation impedes production in a geometrical ratio." 2. Taxation should be levied on the commodity; never on persons. 3. Taxes should never impede the liberty of labor. 4. Every tax ought to be levied as cheaply as possible. 5. There should be but one sole and single tax—namely, on fixed capital.[1]
The True Measure of the Burden of Taxation on Production.—In addition to the maxims, or canons, proposed by Adam Smith, another one, first pointed out by Mr. Edward Atkinson, of Massachusetts, is worthy of being added, and may even be regarded in the light of a fundamental principle; and that is, that the burden or injurious effect of a tax on production or exchange is not to be measured by the ratio which the tax may bear to the gross value of the subject of taxation, but rather by the proportion which the tax bears to the profit which might normally or naturally result from undertaking a certain line of industry or product. To practically illustrate this, let us take an example. Let us suppose two men, A and B, to start shops for the manufacture of machinery, each with a capital of $20,000, and that each in his operations expends $20,000 for coal and iron, $40,000 in wages, and $4,000 for transportation of the raw materials to the shops for manufacture. The total cost of the annual product of each shop will then be $64,000, or a little more than three times the capital; and a sale of their respective products, at the net price of $66,000, would yield the owners $2,000, or ten per cent profit. Now, suppose further that under such conditions A has a tax imposed on him of three and an eighth per cent upon the value of his product; it may be a customs or excise tax, or an increased rate of railroad freight. This amounts to $2,000 on the $64,000 of product—no excessive burden, it may be said, and only requiring A to sell his $66,000 for $2,000 additional. But suppose A can not get this $2,000 additional; and he certainly can not if the other man, B, is exempt from this three-and-an-eighth-per-cent tax, or contrives to evade it, and competes with A in the open market. Then, in such a case, this three-and-an-eighth-per-cent tax upon product manifests itself as ten per cent upon the entire investment and absorbs the entire profits which otherwise might have been realized; so that the business of A first drags, then stagnates, and is finally abandoned; while his workmen are discharged, the village where the shop is located runs down, the artisans, shopkeepers, and professional men connected with it complain of hard times and emigrate from the locality or the country, while the railroad fails to confer all the benefit to the community or profit to its stockholders that might be possible. B, on the other hand, exempt from the tax, keeps on working, and when hard times come continues his sales and the occupations of his workmen by taking five per cent profits instead of ten, and selling his goods, as he can afford to, at reduced prices to meet temporary conditions. Actual practical illustrations of the injustice and disaster consequent on such discrimination in respect to tax burdens and exemptions are afforded on a small scale in the history of much railroad management, and to a larger extent where two nations with different systems of taxation undertake to compete with each other in the sale of the products of their labor in the common markets of the world. We find here an explanation also of the immediate beneficial effects which attended the first tentative measures of reform in the British tariff instituted by Sir Robert Peel in 1842 and 1845, which, although consisting mainly in the removal of numerous small but obstructive duties, nevertheless started British industry forward by leaps and bounds, even before the larger burdens of tariff restrictions were removed in later years.
As the characterizations of "poll," "head," or "capitation" taxes, the only possible form of direct taxation on a person, and of the advantages and disadvantages of indirect taxes, through the agency of which the Federal Government collects the largest proportion of its revenues, have been already pointed out, the field of discussion under this head is practically limited to the existing methods of State or local taxation on property and business, in contradistinction to national or Federal taxation, or to the system under which nearly six tenths of all the contributions which the people of the United States make for the support of their governments are assessed and collected.
In Great Britain about two thirds of the revenue of the kingdom is from "local" in contradistinction to "national" taxation—£53,000,000 in 1890. Of this amount some £32,000,000, or about three fifths, is raised by rates on the annual value of land and house property in various localities. The next largest source of local revenue is from tolls, dues, etc., from docks, piers, harbors, ferries, and markets, and yields over £7,000,000, or thirteen per cent of the total. The total expenditures for local purposes in 1890 were returned at £67,000,000; the difference between local expenditures and receipts being made up by contributions or grants from the inland revenue department of the kingdom and by municipal loans. The aggregate local debt of the kingdom is about one third of the national debt, and has been mainly incurred for municipal and urban improvements, such as water and gas supply, markets, tramways, parks, libraries, public baths, wash houses, drainage, and other improvements. The purposes for which the proceeds of local taxes are expended in the United Kingdom are mainly for poor relief, gas and water supply, schools, police, asylums, etc. In a report made to the British Association for the Advancement of Science in 1870 by Mr. Stanley Jevons, it was stated that the methods by which the local taxes of the kingdom were then levied were substantially according to an act passed in the reign of Elizabeth.
Popular Theory of Taxation in the United States stated and examined.—The general idea which constitutes the basis of the system of State or local taxation mainly recognized in the United States (though not in other countries), and genererally known and designated as "the general property tax" is founded on the assumption that, in order to tax equitably, it is necessary to tax everything; the term everything being at the same time used in a sense so indefinite as to embrace not merely things in the nature of physical actualities other than persons, but also persons, incomes, rights, representatives of property, titles, trusts, conclusions of law, debts, and in short any act of assessing capable of resulting in the obtaining of revenue. As a logical consequence of this idea, the exemption of anything from taxation is furthermore held to be not only impolitic, but unjust, and if made necessary by circumstances, as something to be regretted.
The general property tax for general State purposes exists in all but four of the States of the Federal Union—Delaware, New Jersey, Pennsylvania, and Wisconsin. In Delaware there has been no property tax since 1877, as its expenses are defrayed mainly by licenses and taxes on railroads. In New Jersey there is only a school tax on property, but no property tax for general State purposes. In Pennsylvania the State tax is levied only on personal property. In Wisconsin the so-called State tax is levied only to defray the interest on the debt, and for the purpose of contributing to the university (one eighth mill tax), schools (one mill tax), and expenditures on account of the insane. But there is no property tax for general purposes. In addition to these four cases a property tax is levied in Vermont only in case the corporation taxes do not suffice to pay the entire expenses of the State (Seligman, Financial Statistics of the American Commonwealths, 1889).[2] Equally popular and plausible is the argument by which this assumption, and the administrative system based upon it, is upheld and defended. "Is not all property," it is asked, "either directly or through its owner, protected by the state or sovereignty?" "Do not all persons owe allegiance to the state?" And if so, "why should not all persons and property contribute to the requirements of the state for revenue in proportion to their ability?"
But, popular and plausible as are the arguments and assumptions for such a system of taxation, which, in the case of the United States, has been made operative under State, municipal, and local governments over the persons, property, and business of over seventy millions of people, and fortified by a vast amount of adjudication, it will require but little investigation and
analysis to satisfy any one who can divest himself from the influence of old prejudices of the truth of the following propositions: First, that the assumption that it is necessary to assess everything in order to tax equitably involves an impossibility, and therefore unavoidable inefficiency, injustice, and inequality in administration; second, that, as popularly used in respect to matters pertaining to taxation, the term property is made to apply equally to entities and to symbols or non-entities, which is in itself an absurdity; and, finally, that the outcome of all this is a system which powerfully contributes to arrest and hinder natural development, to corrupt society, and is without a parallel in any country claiming to be civilized. And, in illustration of this latter point, it may be added that, notwithstanding recent discussions and publications, this whole subject is yet so unfamiliar to the people of the United States that probably nine out of ten of its best-informed and collegiate educated citizens, and even members of the bar, take it for granted that the method of assessing and collecting taxes for local and municipal purposes is substantially the same all the world over; and would be greatly surprised to find on investigation that the American system is one of the things that is exclusively American and so little esteemed by the people of other countries as to be for such reasons strictly "non-exportable."
Taxation of Real Estate.—Attention is first asked to the defects of this system in respect to the taxation of real property. Here everything, as the term implies, is real, tangible, visible; something which can not be concealed; something which can not, under any circumstances, be removed beyond the jurisdiction of the State, except by transfer to the Federal Government; something concerning which the laws and decisions of the courts harmonize rather than conflict. In the valuation of real property, furthermore, it is possible to apply such tests and verifications as will restrict the errors of estimate within comparatively narrow limits. It would also seem as if the law as it exists upon the statute books of most of the States was sufficiently clear and explicit in its declaration and mandate. Thus the language of the statute of the State of New York is as follows:
"All lands within this State, whether owned by individuals or corporations, shall be liable to taxation. The term ‘land’ shall be construed to include the land itself, all buildings, structures, substructures erected upon, under, or above, or affixed to the same; all wharfs and piers; all bridges; all telegraph lines; all surface, underground, or elevated railroads and the iron thereon; all mains, pipes, and tanks laid or placed in, upon, above, or under any public or private street or place; all trees and under-wood growing upon land; and all mines, minerals, quarries, and fossils in and under the same."
In most of the States of the Federal Union the tax laws require that the assessment of all property shall be at its full and fair cash value; and the judicial authorities of the United States have furthermore held that the requirement of approximative equality inheres in the very nature of the power to tax, irrespective of any constitutional or statute provisions.
In the State of New York each assessor on the completion of his official labors subscribes an oath of which the following is the material portion:
"We do severally depose and swear that we have set down in the foregoing assessment roll all the real estate in, according to our best information, . . . and that we have estimated the value of said real estate at the sums which a majority of the assessors have decided to be the full value thereof."And the law further provides that "every assessor who shall willfully swear false in taking and subscribing said oath, shall be guilty of and liable to the penalties of willful and corrupt perjury."
It is difficult to see how language, other than this, could be made more clear and explicit; and it is accordingly evident that if the law fails in its execution, as it certainly does, the fault is not in the statute but in its administration.
Let us now see what are the acknowledged facts in respect to the valuation of real property in New York and other States where the observance of substantially like conditions are imperative.
In some instances in New York the valuation of real estate for taxation is reported as low as twenty per cent of its real value. In a majority of cases in the country the rate varies from twenty-five to thirty-five per cent, and rises in the cities to fifty and possibly sixty per cent of the maximum. In one case, mentioned in the report of the State assessors in 1879, two adjoining counties of the State made a difference of twenty thousand dollars per mile in assessing the same railroad. In short, there can not probably be found a single instance in the whole State, unless possibly in the case of certain unoccupied lands, the property of non-residents, where the law as respects the valuation of real property is fully complied with, and where the oaths of the assessors are not wholly inconsistent with the exact truth. The official reports of other States abound with like reports of flagrant inequalities in the assessment of real property. As a rule, where assessors are dependent for their tenure of office on political favoritism, there is no pretense, notwithstanding their oath, of complying with the law.[3] When, as is often the case, a State tax is apportioned to the several counties of the State, and by the counties to their respective towns, there arises a double competition between assessors of counties in the aggregate and of the towns for making the lowest possible valuation of property, especially real estate.
In a large number of States (twenty-one in 1890) an attempt has been made to correct the undervaluation of property rightfully subject to taxation by creating boards of equalization, with power to raise or lower the valuations of county officials, with a hope of securing substantial uniformity; but this measure has not been successful, and the most intelligent members of such boards have recorded their opinions that it is impossible under the present system to effect any just distribution of the incidence of taxation.
- ↑ M. Menier defines fixed capital as every utility of which the product does not change the identity, as useful machines, instruments of trade, profitable buildings, improvements of land, and the like. Circulating capital, on the other hand, produces utility only by being transformed. It is represented by three elements—materials, goods, money. "Facts prove that the suppression of circulation is a cause of ruin for the land as for every other source of production. Look at Spain since the expulsion of the Moors, who had carried to so great a height the theory and. practice of agriculture. The land, having become the property of a few great families or the clergy, was consolidated. Its circulation ceased completely, and production ceased with it."
- ↑ The statutes of Massachusetts enacted for making this system of taxation effective, and which have been substantially adopted by most of the States of the Federal Union, thus specify the objects, persons, and property that shall be subject to taxation:
Section 1. A poll tax shall be assessed on every male inhabitant of the Commonwealth above the age of twenty years, whether a citizen of the United States or an alien.
Sec. 2. All property, real and personal, of the inhabitants of this State, not expressly exempted by law, shall be subject to taxation.
Sec. 3. Real estate, for the purpose of taxation, shall include all lands within this State and all buildings and other things erected on or affixed to the same.
Sec. 4. Personal estate shall, for the purposes of taxation, include goods, chattels, money, and effects, wherever they are, ships and vessels at home or abroad, money at interest, and other debts due the persons to be taxed more than they are indebted or pay interest for, but not including in such debts due any loan on mortgage of real estate, taxable as real estate, except the excess of such loan above the assessed value of the mortgaged real estate, public stocks and securities, bonds of all railways, including street railways, stocks in turnpikes, bridges, and moneyed corporations, within or without the State, the income from an annuity, from ships and vessels engaged in foreign carrying trade, and so much of the income from a profession, trade, or employment as exceeds the sum of two thousand dollars a year; but no income shall be taxed which is derived from property subject to taxation.
The statute exempts from taxation the property of the United States and of the State; of the literary, benevolent, charitable, and agricultural institutions or societies incorporated within the State; all property of the common school districts; the household furniture of every person not exceeding one thousand dollars in value, and wearing apparel; farmers' utensils, not exceeding three hundred dollars in value; houses of religious worship; mules, horses, and neat cattle less than a year old; swine and sheep less than six mouths old; and "the polls and estates of persons who by reason of age, infirmity, and poverty are unable to contribute fully to the public charges."
"No ship or vessel, unless actually engaged in foreign trade, or in part undergoing repairs, shall be deemed to be engaged in such trade."
The statutes of the State of New York to the same effect are more concise, but equally comprehensive. They provide:
1. "All lands and all personal estate within this State, whether owned by individuals or by corporations, shall be liable to taxation, subject to the exemption hereafter specified.
2. "The term ‘personal estate’ and ‘personal property’ shall be construed to include all household furniture, moneys, goods, chattels, debts due from solvent debtors, whether on account, contract, note, bond, or mortgage, public stocks and stocks in moneyed corporations; they shall also be construed to include such portion of the capital of incorporated companies, liable to taxation on their capital, as shall not be invested in real estate." - ↑ "The strife between counties to reduce assessments has not ceased, and in all probability will not as long as assessors are elected, or selfishness be a passion in the human breast."—Report of the California State Board for the Equalization of Taxes, 1885–‘86.
right eye, which was chiefly used, that when looking at a pinhole ten inches off he saw two, about one tenth of an inch apart, and between these several more, yet the accuracy obtained was the highest ever recorded—98·34 per cent.