Popular Science Monthly/Volume 51/September 1897/Principles of Taxation: Nomenclature and Forms of Taxation XIX

PRINCIPLES OF TAXATION.
By DAVID A. WELLS, LL. D., D. C. L.,

CORRESPONDANT DE L'INSTITUT DE FRANCE, ETC.

X.—NOMENCLATURE AND FORMS OF TAXATION.
(Continued from page 480.)

"REAL" AND PERSONAL TAXES.—Direct taxes are also spoken of, and in fact, classified as real and personal taxes. "Real" taxes (Latin res, thing), or taxes on realty, as is the general expression, are taxes on property—generally on things naturally characterized by immobility—without reference to the pecuniary condition of the owner, and hence without taking his debts into account. A tax on land or real estate—houses and land—is a typical tax on realty; and a tax legally assessed upon such property rests, or is a lien upon it, irrespective of its ownership.

Business taxes are regarded as real taxes, as they are taxes on pursuits or occupations rather than on persons. The same is true of taxes on capital and the rental value of land or buildings.[1] The restriction on the levy of direct taxation imposed by the Constitution of the United States on the Federal Government does not apply to the States.

Personal taxes are taxes on persons. A poll or "capitation" or "head" tax, implying a uniform payment from every poll or head of some portion or all the population of the State, would be a typical personal tax. Strictly speaking, therefore, a personal tax can be no other than a poll tax levied under the above conditions. What are usually called personal taxes are taxes assessed or rated to a person, not as in the case of a poll tax because he is a person or citizen, but in virtue of the movable property—furniture, clothing, vessels, carriages, animals, money at interest, stocks in corporations, bonds, or negotiable instruments and the like belonging to him. It is the individual that the law regards as the objective rather than his personal property—which may not be tangible or visible—on enforcing the tax; the property being resorted to for the purpose of ascertaining the amount of tax which its owner should pay. An income tax is regarded as a personal tax because it is assessed on the income that gathers about a person irrespective of its source—rents, interest, profits, salaries, and the like. A tax on land is a tax on realty, while a tax on a mortgage is a personal tax, which is equivalent to affirming that the former is a thing, while the latter is only the representation or shadow of the thing.

In levying taxes on realty the owner, as a rule, is not allowed to offset or reduce its valuation by the amount of his outstanding indebtedness; but in the case of the taxation of personal property such an offset is generally permitted, on the ground that a man should be taxed only upon what he owns and not upon what he owes; and even when not allowed by law, the circumstance of indebtedness is almost always taken advantage of by persons assessed, for reducing valuation in making returns to the tax officials of the value of their property. In assessing an income tax a deduction is allowed for interest paid on mortgages, and such business expenses as lessen income. Personal expenses, as house rent, cost of living, and the like, can not, on the other hand, be properly deducted from income before it is taxed, because income is sought for and exists for the purpose of defraying such expenditures. By the income-tax law of the United States, enacted in 1865, and also in 1894, deductions were allowed from the amount of taxable income, of all taxes paid within the year, of all interest paid on indebtedness, and the rent or rental value of any homestead actually occupied by the taxpayer.

One of the most curious features of recent tax experiences in the United States has been the extent to which this practice, or right of reducing valuations of personal property for taxation by debts, has been made the opportunity for evading taxation. Thus, by the very structure of the Federal Government, its various instrumentalities, as heretofore explained,[2] are necessarily exempted from all taxation by the States of the Federal Union. Recognizing this, it has been the habit of individuals to effect credit purchases to a greater or less amount of United States securities a short time previous to the time fixed for tax returns or valuation, and then offsetting the debts thus incurred against valuation, evade the taxation on their personal property to which they would otherwise be subjected.[3] And for such moral wrong there would appear to be no legal remedy on the part of the State, except by the commission of a greater wrong—namely, the prohibition of the offsetting of all debts in tax valuations; or, what is the same thing, the imposing of a discriminating burden of taxation upon persons who, for any cause, may be in debt—a denial of equity which public sentiment in every free country will not long tolerate. A further proof and illustration of this averment may be found in the fact that years ago the Constitution of Ohio provided that credits, or evidences of indebtedness, should be subject to taxation by a uniform rule; and the Supreme Court of Ohio subsequently decided that this did not allow any offset of debts owed against credits owned. But popular opinion was so adverse that by common consent this clause of the Constitution, as interpreted by the court, was entirely disregarded in making up tax valuations.

In old English history the division of property into real and personal was wholly unknown; and all laws regulating this species of property, with a view to taxation or inheritance, are of comparatively modern origin.[4] It is also interesting to note that probably full one fourth of all the so-called personal property of this country—namely, all railroad, steamship, telegraph, telephone securities—did not have an existence fifty years ago.

As is the case with direct and indirect taxes, the line of demarcation between real and personal property, and consequently between real and personal taxes, is very indefinite, and some very nice and curious points in connection therewith have been established by usages, or court decisions. Thus an apple on the tree is real estate, but when fallen upon the ground it becomes personal property. Running water accumulated in a pond is real estate, though the owner is not permitted to invest it with the peculiar attribute of real estate—namely, stability—by permanently arresting its flow. In some States the engines, water wheels, shafting, and even belts of factories are real estate, while looms and lathes are personal property. Stone in the quarry is real estate, but when thrown out by a blast and made ready for market it becomes personal property. Hop-poles, not standing, have been decided to be real estate, but wood cut and corded for sale is personal property. A statue exhibited for sale in a workshop is personal property, but when placed upon a permanent foundation (although not fastened to it), as an ornament in front of a house, has been held to be a part of the realty. Chairs in a theater and screwed to the floor, as they can not stand alone, are considered a part of the realty; but gas fixtures and mirrors, made to order for the house, and attached to the freehold, but removable without injury thereto, are not deemed a part of the realty. Before emancipation in the United States, slaves, which by the Federal Constitution were recognized as persons, were in several of the States declared by law to be real estate;[5] and in one State of the Union, Wisconsin, the one species of property which is especially typical of mobility, and is of no value apart from its capability of motion, namely, the rolling stock of railroads, has been by law made real estate. Shares in the national debt of France, as well as stock on the bank of France—instrumentalities which in the United States would be regarded as personal property in its most typical form—may by French law be made real estate, and as such be administered on.

Some years ago the following curious experience occurred in one of the New England States: A person rented a farm, and on the expiration of his lease attempted to remove from the estate the manure which had accumulated during his holding, assuming that he had the right to it as personal property. The owner of the farm, on the other hand, forbade the removal of the manure, on the ground that it was real estate, and so a part of the farm. The case found its way into the courts, and on its trial the lessee and defendant who appeared for himself, attempted to substantiate the legality of his proceedings in the following manner: Addressing the judge after the facts in the case had been established, he asked, "Was the hay in the barn personal property?" Judge "Certainly." Lessee: "Were the horses and cattle personal property?" Judge: "Without dispute." Lessee: "Then will your Honor please to tell me how personal property can eat personal property and produce (dung) real estate?" The decision was nevertheless in favor of the owner of the farm, or the plaintiff. Subsequently the courts of New York decided that manure accumulated in connection with a livery stable, not being an agricultural product pertaining to a farm, was not real estate but personal property.

In a case in the State of Tennessee, where a person who had entered a neighbor's field and removed corn on the stalk was prosecuted for larceny, the court held that the offense was not larceny, which is the unlawful taking and carrying away of personal property, but trespass, inasmuch as the corn not severed from the ground was real estate, but would have been larceny if the corn had been gathered or disconnected from the ground previous to its taking. Thereupon a bill was introduced into the Legislature of Tennessee to make it a felony to steal corn from a field under any circumstances.

From these illustrations it seems obvious that the distinction between real and personal property and real and personal taxes is, to a very great extent, an artificial and not a natural distinction.

The following are some of the other terms used to designate particular forms of taxation, the meaning and technical application of which may not be readily apparent:

A franchise tax is a tax on a franchise, or on a right granted by a State to a corporation or association to exercise certain privileges. In fact, a franchise is a privilege, and in most cases it is an exclusive privilege, and has an actual value largely disproportionate to the amount of capital invested by the company or corporation upon which it has been conferred.[6] It has been held by the courts that a franchise tax is not a tax on capital or on real estate, but on privilege, and does not exclude additional taxation on any property covered by the franchise.

The terms imposts and "customs" (Latin ""consuitudines") are generally understood to mean indirect taxes on the importation of commodities, while the term duty is more properly applied to a tax upon exports.

The origin of all these terms is obscure and involves some interesting features in English history. It appears certain that they were in the first instance applied to exactions on trade generally, and not, as was finally the case, on imports and exports exclusively, and were in use before indirect taxes on personal property were recognized in England. At the outset and for a long period they were also not regarded in the light of taxes, but rather as dues personal to the sovereign, which he had the right to regulate and collect independent of any statute, and which carried with it the further right to restrain at pleasure the import or export of any commodity.[7] Thus, until the reign of Edward II (1272-1307) the right to tax the export of wool was exclusively a royal privilege; and the enactment of a statute by Parliament in 1275, limiting the amount that the king could take in respect to the export of wool, skins, and leather—but not denying the privilege—is regarded as the first legal foundation in England of the customs revenue. The controversy between the king and Parliament over customs duties went on, however, with varying phases until finally settled in 1682; and from these circumstances, and also from the fact that customs and duties are unseen by those who finally bear their burden because they are embodied in the prices of commodities, has possibly come about the curious idea that tariffs, or taxes on imports, are not taxes on any one or are any burden on property, but rather some sort of a business contrivance for the raising of revenue, and, if they are taxes at all, then that the foreigner pays them.

The term impost is a general expression for any tax, duty, or tribute, but is seldom now applied to any but indirect taxes on imports.

The term excise, though used in the Constitution of the United States, is now almost entirely restricted in use to the tax system of Great Britain; and even there has acquired a far different meaning and application from what it possessed originally. Thus the term was first applied in England to taxes on manufactured commodities produced and consumed in the kingdom, as beer, cider, soap, glass, paper, and the like, and in contradistinction to duties or customs on commodities of foreign manufacture and importation; and this distinction is still officially recognized in the fact that special care has always been taken in all British legislation on this subject to make the excise tax as nearly equal as possible to the customs imposed on the same kind of imported commodities. The term is supposed to find its origin also in the circumstance that it was originally the practice to cut off, or "excise," portions of the goods assessed, and take them away in payment of the tax in kind. The first attempt to impose an excise tax in England was in 1525, and failed, as both Houses of Parliament concurred in opinion that it was unconstitutional. After the Restoration, or under Charles II, the attempt was successfully renewed, and the taxes under it were very curiously divided into two classes, and the receipts from the same made personal to the crown—namely, the hereditary excise, so called because granted to the crown forever in consideration or recompense for the abandonment by the crown of certain perquisites and privileges; and the temporary excise, the receipts of which were only granted to the sovereign for life. The tax was, however, always unpopular in England, being regarded as contrary to the spirit and principles of a just government, and on the accession of William and Mary it was greatly modified and reduced; and it is somewhat curious that a term having such an origin and history should have found a place in the Federal Constitution and be thus recognized as a legitimate form of taxation under a free government. In Great Britain at the present time the only commodities on which taxes designated as excise are assessed are spirits, malt, fermented liquors, and chicory, or other substitutes for coffee. But in addition the British system classifies under the head of excise its taxes on railways and a few other minor subjects.

The late United States Justice Miller defined an excise tax as "one which is assessed upon some article of property or money or something which is exhausted in the use. It is one which from its essence and nature must be paid in fact by the buyer, or the last man who buys or uses the property, because, whoever has it at the time when the tax is levied upon it adds that amount to the selling price when he comes to dispose of it until the property is consumed. It is a tax upon consumption." (Lectures on the Constitution of the United States, p. 238.)[8]

In the United States all Federal taxes that are not levied under the tariff and navigation laws are classified under the general designation of "internal revenue taxes."

The term toll, formerly in extensive use, and signifying duties on imports and exports, is now nearly obsolete, and restricted almost exclusively in meaning to the charges for permission to pass over bridges, ferries, and roads (turnpikes) owned by the parties imposing them. The courts have held that railroad fares can not be regarded as tolls.

A word in very common use in English history, especially when reference is made to fiscal topics, is that of subsidy; but its former and present signification are very different. Under the earlier English kings, when the inadequacy of the hereditary or peculiar revenues of the crown to defray its expenditures compelled the monarch to ask pecuniary aid of his subjects, the grants that were made were known as "tenths," "fifteenths," or the like, according as the exaction of such percentages of certain properties were authorized, and also as "subsidies" and "benevolences." The peculiarity of all such grants was that they were always special and extraordinary, and had no place in any regular system of taxation. Thus, of the reign of Henry VIII it is recorded that Parliament granted subsidies occasionally, but the king, having found a readier way of obtaining money, did not need them the readier way having been the confiscation of all the property of the religious houses, which included more than half of all the land of the kingdom; and of Elizabeth, that during the forty-five years of her reign Parliament granted twenty subsidies and thirty-nine fifteenths, the balance of needed supplies being obtained from crown lands—as the duchy of Lancaster—and other hereditary revenues. Under the Commonwealth regular taxes on lands and other forms of property were for the first time instituted in England, and these proved so productive that the old methods of percentages, subsidies, and benevolences were discontinued, and with their nomenclature disappeared from English fiscal history.

At the present time the term subsidy, in place of designating as formerly a grant obtained by the Government from private interests, has come to mean a grant obtained from the Government, in aid of private enterprises which it is claimed should be encouraged by the state in the interest of the general public, as, for example, the fostering of shipbuilding and ship-using, and the cultivation and manufacture of certain commodities. But this modern use of the word "subsidy" can not, it is said, be referred back to any earlier period than the year 1840.

Of the many other terms and words used in connection with the subject of taxation, there are very few that seem to require special explanation, and the majority of these, although formerly in extensive use, have now become obsolete and passed into history—as, for example, gabelle, the term given in France to the tax on salt; corvée, a compulsory contribution of labor; and taille, or taillage, a tax on the supposed profits of agriculturists, and the like. The characteristic of almost all modern tax words or terms is indefiniteness; and probably in no other department of knowledge is there such a lack of exactness in respect to definitions. This to a student may seem at first to be a factor of no little embarrassment, and as assimilating him to the condition of the man who couldn't see the forest because of the multitude of trees; but with the exception of the definitions of tax and taxation, this condition of affairs really constitutes no obstacle in the way of clearly reasoning and determining as to what should be the fundamental principles of taxation.

 

  1. "Real estate for the purpose of taxation shall include all lands within this State, and all buildings or other things erected on or affixed to the same."—Statutes of Massachusetts.
  2. See Popular Science Monthly, vol. 1, No. 3, p. 289; vol. 1, No. 4, p. 468.
  3. When the Federal Government effected in November, 1894, a loan for $50,000,000, a premium was paid on no inconsiderable amount for the privilege of purchase, or investment, so large as to net to the purchaser an abnormally low rate of interest—2·5 per centum. The explanation of this action was that, apart from the recognized value of an unquestionable security, the investment carried with it an exemption from a national income tax of two per cent, as well as from State and municipal taxation—so that the rate of interest accruing to the purchaser was not as low as it might have seemed to be, and by the holders and managers of trust properties was generally regarded as satisfactory.
  4. The first authorization of local taxation in England was for the maintenance of the poor, and occurred in the reign of Elizabeth. At that time it seems to have been assumed that there was no personal property in the kingdom capable of being assessed, and that real property was alone valuable property. Hence it was enacted (43 Elizabeth, cap. 2) that overseers should be appointed who were to raise, by taxation of every inhabitant, parson, "and of every occupier of lands, houses, tithes impropriate, propriations of tithes, coal mines, or salable underwoods in the said parish," moneys for the relief of the poor. No mention was made of personal property, and it is probable that every kind of property then known was mentioned in the act. When fresh burdens were necessary the principle adopted by the act of Elizabeth was continued, without much inquiry or opposition, and owners of personalty have remained exempt from taxation, although personal property has gone on increasing until its value has become much greater than all the real property of the kingdom.
  5. In American colonial day slaves were regarded as belonging to the land, and figured in tax valuations as real property.
  6. The following is a case in point, derived from actual experience: A street railway company in a city of the United States reported the gross earnings of the corporation for 1891 at $1,188,000. Its net earnings were $400,000, or nearly six per cent on a capitalization of $7,000,000. Its city property tax was only $11,000, or $2.10 on $500,000. It is evident, therefore, that the value of the capital of this corporation was due largely to the value of its franchise.

    The value of a franchise is an eminently proper subject for taxation, though it is not commonly so regarded. The Supreme Court of Pennsylvania, in a recent case (1894), has held that under the laws of that State it was proper and lawful in ascertaining the actual value of the capital stock of a corporation (Susquehanna and Schuylkill Railroad Company) to take into consideration, as affecting that value, the franchises of the company. Franchises conferred by Congress upon a corporation created by it, to be exercised within a State, can not be subject to taxation by the State without the consent of Congress—California vs. Central Pacific Railroad Company.

  7. It is a curious fact that the old idea that imposts and customs, or the right to impose exactions on trade, were, when first imposed, not regarded in the light of taxes but as dues personal to the sovereign, which he had the right to regulate and collect independent of any statute, has recently found reassertion and indorsement in the United States Senate by a leading member of that body from New England, that he did not regard the levying of imposts or customs dues on imported commodities as in the nature of taxes; for, if such levies on trade are not taxes, they are simply exactions of a despotic form of government, represented immaterially either by one man or a collection of men, and for whom or for which no rightful claim of representing or being a government by the people or for the people can be preferred.
  8. "What is the natural and common or technical or appropriate meaning of the words duty and excise it is not easy to ascertain. They present no clear and precise ideas to the mind. Different persons will annex different significations to the terms."—Paterson, J., Hylton vs. U. S., 3 Dallas, 171, 176.