Popular Science Monthly/Volume 52/February 1898/Principles of Taxation: What Is Property? XXIV

Popular Science Monthly Volume 52 February 1898 (1898)
Principles of Taxation: What Is Property? XXIV by David Ames Wells
1391659Popular Science Monthly Volume 52 February 1898 — Principles of Taxation: What Is Property? XXIV1898David Ames Wells


By DAVID A. WELLS, LL. D., D. C. L.,



ONE of the greatest obstacles in the way of framing a correct system of general taxation, is the different and wholly antagonistic opinions that popularly prevail, as to the real nature of what constitutes its chief objective in respect to administrative action, namely, "property." This point finds full confirmation and illustration by reference to the several definitions that have been given to this term by various recognized authorities, and have been accepted to a greater or less extent as authoritative by a general and even educated public. Thus, as before noted, a widely accepted definition of Professors Macleod, Perry, and others is, that everything that can be bought or sold is property. Thus, even the random ideas of an anarchist are a form of wealth at present, just as the "goaks" of Artemus Ward used to be—because they have exchangeable value, and will bring a certain number of dollars to him, or to the reporter or interviewer who gives his notions to the public. So the beauty of an actress, the nimble legs of a dancer, the vocal sweetness of an opera singer, are also forms of wealth, since they have an exchangeable value when utilized. And hence the folly of the socialists, who suppose that by dividing property, or equalizing the distribution of land, they can secure equality of wealth, since diversities of human faculty and opportunities would instantly begin to make this imperfect distribution more unequal than before. Thus the Greek philosopher Aristotle, speaking of the division of land among all the citizens of his time, has the credit of shrewdly saying, "Either all kinds of property must be equalized, or all must be let alone." According to Webster's Dictionary, that "to which one has a legal title" is property. And in a report of a recent lecture, a leading American theologian is credited with saying to an assemblage of divinity students that "he adopted as the basis of his discussion of property the 'profound and perfect' definition of the Roman Catholic theologian Brownson, namely, that 'property is communion with God through the material.' And to realize and apply this definition is the great duty of the Christian teacher."

"The term property denotes a right over a determinative thing. Property is the right of any person to possess, use, enjoy, and dispose of a thing."—Eaton vs. Boston, 51 N. H., 504.

A more rational conception of the exact nature of property, or rather of what property consists, would, however, seem to lead to this conclusion, namely, that property, at least for the purpose of taxation, is always a physical actuality, with inhering rights or titles, the product solely of labor, and is always measured in respect to value and for exchange by labor.

Thus, for example, a fish free in the ocean is not property; but when it has been caught through the instrumentality of labor it becomes property. Property, furthermore, can not be created except by an application of labor of some kind to material substances, which because they are substances and in order to be substances must have both a corpus, or an entity, and a situs, or a situation. Human labor incorporated in things, and thus saved to those who acquire the things, is also what constitutes value or capital; and nothing can be capital but the existing results of previous labor, which can contribute to man's enjoyment and well-being.

It is interesting also to note in this connection how the etymology of the Latin words possessus and possideo, namely, po and sideo, to sit by or on, and from which in turn we have the English word possession—the common definition of property being something possessed—curiously harmonize with and confirm the conclusion that property must be always a physical actuality. For it is clear that it is only a material something, a visible and tangible entity, that one can sit down on, and not an invisible, intangible nothing, the fiction of law or of the imagination.

A limitation, little recognized by legal writers and authorities, on the exercise of the right of eminent domain (the name given to the power inherent in state sovereignty of making a compulsory purchase of private property for public use), also sustains the correctness of the definition of property as above given; inasmuch as this right is never conceded or made applicable to other than an actuality, and never to a mere representative of something that is not material. Thus one of the illustrations of Roman jurisprudence handed down by Tacitus was to the effect that an emperor was not allowed to appropriate the right to carry a stream of water through the lands of a private individual, but did pay damages for the injuries thereby accruing to the lands.

All investigation on this subject can therefore, it is believed, lead to but one conclusion, and that is that property is always "embodied or accumulated labor." And as political economy does not, and jurisprudence ought not to take cognizance of châteaux en Espagne, these are the only senses in which political economy and the law can legitimately reason about property.[1]

Examples of property which is apparently not the result of accumulated or of any labor, and so militating against these conclusions, will doubtless suggest themselves: such, for instance, as a diamond found upon the seashore, land squatted upon and obtained by preemption, bank stock, patent rights, copyrights, anuities obtained by gift or purchase, franchises, monopolies, and debts; but an examination will soon prove that the objections embodied in them are more specious than real. Thus, in the case of the diamond accidentally picked up, which is perhaps one of the most striking of all the examples that can be adduced in favor of the position that property can come into existence without the agency of labor, it may be said: first, that an exceptional fact like this can not constitute an adequate basis for the enunciation of a principle; and, next, that the value of this accidental diamond is solely determined by and represents the value of the labor which has been required to obtain all other existing diamonds. The moment the fact ceases to be exceptional, the moment diamonds can be had in abundance by merely picking them up, that moment their value will simply represent the cost of the physical effort requisite to pick them up. Again, if land squatted upon has any value as property whatever in the first instance, it is because it is the embodiment of the labor required to discover it, to conquer it, to defend and protect it; to effect all of which, taxes, which are the results of labor, may have been paid for centuries. If it acquires any additional value beyond this, after it has been

squatted upon, it will be simply because the results of labor have become connected with it, or the value of other land or other property the products of labor, for the use of which labor competes, are reflected upon it. In 1620 the land upon which the city of Boston stands could have been bought for a string of sea shells; in 1894 its value for assessment as property for taxation was probably in excess of $900,000,000. But in both instances the valuation was determined by one and the same standard: in the first, by the amount of labor required to collect and string the shells; and in the second, by the amount of labor and capital—which is the result of labor—which has been embodied in the land or become connected with it. Take away the labor and its accumulated results, and the site of Boston will be worth no more at the present time than it was in 1628, when William Blackstone first obtained it.

Analyze next the alleged property in bank notes. The coin in the vaults of the bank, the vaults, the building, the books, the furniture, and other physical actualities—the results of labor—employed in transacting the business of banking, are the real property of the bank. The bank stock, so long as the bank exists, is merely a right to receive dividends. The creation of a bank obviously does not create any property. The notes discounted by the bank over its counter are inchoate titles to the debtor's property or to his rights to property; and the notes issued by the bank are inchoate titles to the bank's property or to its equitable rights to property. The bank, apart from its physical actualities and machinery, is simply a ledger recording credits and debits. But credits and debits are only convenient forms of bookkeeping, or the records of transfers of property and of rights, titles, and interests in property pre-existing. Credits and debits, moreover, stand to each other in the relation of an equation. There can be no credit without a debit, and no debit without a credit; strike out one side of the equation, and the other disappears of necessity. If there were no creditors there could be no debtors, and, vice versa, the moment debtors cease to be debtors, that same moment creditors cease to be creditors.[2]

Copyrights and patents are simply legislative enactments to protect pre-existing property. A manuscript, a painting, or an invention is the joint product of physical and intellectual labor, which the copyright or patent right protects, the same as other forms of law protect other visible and tangible property from robbery and spoliation. The relation which these instrumentalities sustain to property is clearly indicated by asking the question, whether there can be such a thing as a patent granted for what has never been reduced to a physical actuality; or a copyright given for the flight of fancy of a poet not embodied in the materiality of a manuscript or in the pages of a printed book. John Milton sold Paradise Lost to Samuel Simmons, bookseller, for five pounds ready money; but Gray's "mute, inglorious Miltons," who only imagined and never wrote, could never have obtained a copyright or any money offer whatever—no, not even reputation—for their imaginings, though for all that the world knows they might have been infinitely superior to the Milton who became glorious because he was not mute, in all that relates to mental attainment.

"A person can read from a book, can quote from it, use its ideas in speaking and writing, and even attempt to pass them off as his own, and he will find no legal obstacle to such action. But the moment he tries to duplicate the material form in which the ideas appeared, that moment he passes from the realm of the intangible to that of the tangible"; for the book, which is the concrete thing in which the author has embodied his ideas, is an entity, and because an entity representing embodied labor is property which the law will protect to the owner, and can also legitimately tax, if it will. There have been repeated decisions by the courts[3] that there can be no property in ideas—until, for example, an author through a copyright, or an inventor through a patent, has put his ideas in such tangible form that the Government can put its stamp upon them.

It is also exceedingly curious to note how Shakespeare, whose range and accuracy of knowledge were so wonderful, clearly perceived, and as clearly expressed, the whole essence of modern political economy and jurisprudence in respect to this immediate problem, when, in the following lines from A Midsummer-Night's Dream, he says:

"The poet's eye, in a fine frenzy rolling,
Doth glance from heaven to earth, from earth to heaven,
And, as imagination bodies forth
The forms of things unknown, the poet's pen
Turns them to shapes, and gives to airy nothing
A local habitation and a name."

In other words, according to Shakespeare, as well as according to political economy and common sense, however brilliant may be the

imagination of the poet or inventor, he has no property in his ideas or imaginings until he has reduced them through labor to an actuality. And then the value of the actuality produced for the purpose of exchange or sale, provided there is a copyright or a patent to prevent use without compensation, will be just in proportion to the effectiveness or desirability of the labor exerted upon or embodied in it. The standard for measuring the value of the work of a Shakespeare, a James Watt, and a street sweeper is one and the same.

Again, an annuity, like a bank stock, is a right to receive property, the result of previously accumulated labor, and its transfer by sale or bequest is simply a transfer of an equitable right; and a right of this character, in turn, is not property, but a title to pre-existing property. So, also, in respect to franchises, which, although often spoken of and regarded as property, are clearly nothing but rights. Thus, for example, a franchise of a railroad is simply a right to operate a road in a particular manner; and a legislature can not and does not create a railroad by creating or granting a franchise. At the same time, the value of a physical actuality may undoubtedly be increased by a franchise which gives a right to use such actuality in a particular way. A monopoly, also, like a franchise, is valuable, but its value consists in the fact that it gives to certain persons privileges that are taken from others, and the making of a monopoly no more creates property than does the making of a franchise.

Some persons, whose opinions are worthy of respect, have raised a point in discussing this question, that there is a distinction to be recognized between property and capital; and that both in law and political economy the latter does not necessarily conform to the definition that has been here given to the former. But can there be such a thing as capital which does not represent a physical actuality in the sense of embodied labor? Capital is the interest of a person in embodied labor over and above his debts, or his interest in legal or equitable rights to embodied labor, and can have no value, and is merely imaginary, except it has the right, title, or power to command embodied labor, or to exercise dominion over property the result of labor. All that we labor and toil for is embodied labor. We will not give our labor for the "baseless fabric of a vision," or our accumulated labor for the dreamy creations of a Berkeley or the imaginary castles of poets, except so far as they make them manifest in material forms or writings.

By some, also, the forces of Nature are regarded as property; but they are not so until dominated over and subjugated by man; and then only do they acquire value and become negotiable and subject to proprietorship. Gravity and electricity, as free forces, are incapable of sale and taxation; nor can they, in any rational view, be considered as property. According to recent decisions of the courts of the United States, electricity is not a manufactured product, and electric-light plants do not manufacture it, but only distribute it.

What are Titles to Property?—But while political economy recognizes nothing as property except physical actualities, the law, for the sake of convenience, has so long treated titles as conveying the same ideas as property, that the profession and the public have very generally come to regard the two as equivalent or identical. Consideration is, therefore, next asked to this point.

Property being embodied and accumulated labor, it becomes endowed, in all places where the rights of labor are recognized, with the attributes and incidents of titles or evidence of just ownership or possession—inchoate, legal, or equitable—which inhere in the property, follow it, and form a component part of it wherever found. The fact that the ownership, interest, or title of a non-resident, as, for example, a bond and mortgage title to his debtor's property in another state or country, can be extinguished in the real and personal property of the debtor, by attachment or other process of law in the state where the debtor resides, and where his visible, tangible property has a situs, also leads up to and establishes as a principle of law that titles or incumbrances are connected with the owner, but inhere in the property, where the property is actually situated, as incidents, form a part and are inseparable from it, and include the equitable title or right of the creditor in the debtor's unsold and unincumbered property, but are not themselves property. Some economists befog themselves on this subject, as before shown, by first defining property as anything that can be bought and sold, and then, since a title—as, for example, a deed—can be bought and sold, accept the inference that a title is necessarily property. But let us analyze this definition and assumption. The creditor can, without doubt, sell and deliver a deed to a farm, but what is sold in such instances is the farm, including a right—namely, a right to have dominion over it. But it may be rejoined that a right of dominion is property. Let us, therefore, carry the analysis a little further. If a farm in California is property in the State where it is and where it is taxed, any right or title to the same farm, held in New York or England, be it in the nature of a deed, a mortgage, a partnership interest, or any other form of title, can not be the property; for the same thing certainly can not be property in two separate States and jurisdictions, and in two distinct forms and manifestations, at the same time. On the other hand, if it be assumed that the title to the farm is the property, and, as such, can be rightfully taxed where it (the title) is, then it stands to reason that the subject of the title, the farm in California, ought not to be also regarded as property and taxed in New York or England. In other words, if the title to the farm is property, then the farm is not really in California at all (unless the owner of the title resides there), but goes out of that State in the pocket of the individual who walks off with the title to it. We have all heard of such a concentration of meat that all that is valuable in an ox for food can be put into a quart can; but such a concentration of property as is here supposed is something much more remarkable; and admits of a man having a drove of oxen in his hand, ten acres of woodland in his hat, a church with a steeple in one coat pocket, and a four-story brick block and a mill privilege in the other.

To the Reader.—As the promulgation of ideas that are not in harmony with long-accepted lines of thought generally provokes controversy and expressions of dissent, which in turn often result in promoting self-education, the author, with a view of furthering such a result, would here ask attention to two letters, voluntarily written, when his views respecting the relations of titles to property were originally advanced by him (some years since) as a contribution to economic science; the first written by an eminent professor in one of the leading colleges of New England; and the second by an eminent merchant of New York, whose knowledge of economics was mainly the result of a long experience in practical business and financial transactions of great magnitude.

No. 1. "My Dear Mr. Wells:

"You are misled by the term titles, and are not only wrong, but, what is worse, are wrong in a superficial way.

"The real question relates to the nature of credit.

"I buy a piece of land for five hundred dollars and give my simple note for value received. The title to my land is my deed. My note has thereafter no connection whatsoever with the land, but it has value nevertheless. The bank buys it as a piece of property and holds it till maturity for the sake of the difference between its face and its price—i. e., for the discount. Your philosophy does not account for this proceeding; mine does.

"Your assertion is that things of value must have a 'physical quality.' I deny that utterly; nothing has value by means of a mere physical quality. Does not my annual service to the college have a value? I get, at any rate, twenty-five hundred dollars a year for it. I render no 'physical quality' whatsoever.

"My note is worth nearly or quite five hundred dollars, but it is not a title to anything; it is a claim on me. So are all credits—claims merely, not titles at all.

"You say if such things are value we might multiply values indefinitely. No; because we can not sell them indefinitely. So far as we can sell we make values. Even land and merchandise won't sell notes, with all their physical quality. Physical quality has nothing to do with it. The only possible test of property is sale. The reason why credits are more limited in their use than commodities and services is simply that they relate to future time, which is less certain than past and present time.

"Yours truly, —— ——."

With a desire to obtain an opinion on this interesting economic question from the merchant, the foregoing note was referred to his consideration by permission, and elicited from him the following rejoinder:

No. 2. "Professor—— seems to ignore the fact that debtors hold all their property which is not mortgaged or incumbered, as trustees to pay their creditors generally, and it is this same principle which gives value to unsecured credits.

"But the professor says, 'So far as we can sell we make values.' Does he mean that a counterfeit which is so good that it can be sold is a creation of value? Would a credit sell at all if it was not an inchoate right to the unsold and unincumbered property of the debtor? Of what value is a claim on a man if the claimant has no rights on the debtor's property? Such a claim would be no better than a claim on the northeast wind."

It is also important to note that while a deed to realty, properly executed and recorded, is regarded as the highest form of title, we have the decision of the United States Supreme Court (Fletcher vs. Peck, 6 Cranch, 87) that a deed is but an "executed contract" on the part of the grantor, not to resume the right in the thing granted; and if, therefore, a State can tax extraterritorial contracts, it may tax her citizens on deeds of land in other States.

This analysis of the meaning of property, from both an economic and legal point of view might be prosecuted with interest and profit to a much greater extent; but from what has been presented it would seem clear that nothing can not be something; or, in other words, that property is always a physical actuality, which has become valuable or property by some form of labor, and can not be created by mere paper documents, except to the extent of the value of the paper and the writing or printing upon it. Or, in other words, a title to property, a representative of property, can no more be property than a shadow can be a substance: and if this conclusion be true, then it would seem to follow, of necessity, that the act of making debts, bonds, verbal or written contracts, notes, book accounts, mortgages, warehouse receipts, titles, certificates of stock, or any form of salable or transferable rights, is not a creation or production of any new property, but simply an exchange, by contract or operation of law, of the rights and titles of parties in pre-existing property; and that any tax on any of these rights or titles is only another form of burdening the property which is the subject of the rights or titles. But some, in answer to the assertion that rights, debts, and titles are not property, for if they were we might make property by making rights and titles, might reply, "But we do make property in that way every day." But we can not do this indefinitely because we can not sell the title indefinitely; and why not? Let us, therefore, stop and think about it, and ask ourselves why we can not sell titles and credits indefinitely. We can sell property in the sense of embodied labor indefinitely. Why not titles and credits? The answer is simply that when we buy a title or credit we pay for and in a legal and economic effect buy the physical actuality, or right of dominion over it, which the credit or title represents, and nothing more. The moment one undertakes to sell titles or credits in excess of or separate from the embodied labor they are supposed to represent, we call the act swindling. Fancy a member of the legal profession appearing in court to defend such a person for selling a title, separate from an actuality, on the ground that such a title was property because he was able to sell it, and that somebody not keen was persuaded to buy it! Would the plea caveat emptor avail in such a transaction?

In other words, when the title does not inhere in the physical actuality, we give it a bad name, and the most imaginative do not call it property. A title which is really a title is never suspended or in abeyance. If a thing is embodied labor, some one, or a number of persons, has some form of title or dominion over it, and the title is inseparably allied to the thing; and therefore the sale of the title is the sale of the thing, because they are one and inseparable. Embodied labor, therefore, embodies all forms of title to the embodied labor. Credits and titles of themselves have no value, and separated from the things they represent, they can not honestly be sold at all. Who will buy them? We know the character of the men who will sell them, and their representatives will always be found in penal institutions.

If some other name be given to embodied labor than property, it will not diminish its power to satisfy human wants; and if, on the other hand, we call credits and titles property, they can not be eaten, or made of themselves in any form to satisfy wants, but they can represent things which will satisfy wants. It is interesting also to note that when attempts have been made to claim salvage for the recovery of bills of exchange, or other titles of property, from wrecks, the courts have decided that salvage in such cases is not allowable; and, therefore, have practically held that credits and titles are not property, but mere rights to property, and in the case of negotiable instruments, when destroyed by fire or otherwise, the right under the destroyed instrument still remains, and can be enforced in courts when identified.

Actualities, not Fictions, the Legitimate Subject of Taxation.—Enact such laws, also, in respect to taxing titles as we may, experience will prove that taxes can not be practically levied on imaginary things, or legal fictions, because it is some physical actuality, in the sense of embodied labor, that must, after all, and in the end, pay all taxes. Also, "taxes are generally demanded in money, and any tax law will be understood to require money when a different intent is not expressed" (Judge T. M. Cooley). If legislatures have the power of creating fiat property—that is, imaginary or fictitious property—it is beyond their power to make it pay taxes, for nothing less than omnipotence can make something out of nothing.

On the other hand, let us consider for a moment the converse of this proposition—namely, that titles are property, and, as such, ought not to be exempt from taxation. If this is so, then it would seem to follow that, by making titles, we can make property; and that when a man mortgages his farm for ten thousand dollars, the community have ten thousand dollars' worth of real estate and ten thousand dollars' worth of personal property, where, before the execution of the mortgage, there was only the specified value of the real estate. On the other hand, when the mortgage is paid off, ten thousand dollars' worth of personal property is destroyed, and by a parity of reasoning the State must be to that extent the poorer. A clear comprehension, then, of the facts, that property is embodied labor; that property can alone suffice to pay taxes; that rights, titles, and credits are but the representatives of property; and that, having subjected the property to taxation, there is no sense or equity in again assessing its representative, will at once divest the problem of taxation from many embarrassments which now seem to invest it, greatly simplify it, and go far toward the determination of sound and fixed tax principles.

Important decisions touching the question here under consideration that have recently been rendered by courts of high repute are also here worthy of notice. Thus, in California, the Supreme Court of the State has had before it the vexed question of taxation of mortgages, and the judges have decided, in accordance with justice and common sense, that, as mortgages do not in any way increase the body of wealth in a community, any tax laid upon them is laid upon a fictitious value; is in so far an imposition upon the taxpayer, and, inasmuch as it represents a second tax on real estate already taxed in the hands of the owner, is "double" taxation within the meaning of that term in the Constitution of California and other States.

In 1875 the following case came before the Supreme Court of New York (General Term) under the following circumstances: The administrators of a citizen being taxed by the proper tax authorities of the State for a large amount of personal property, put in a schedule of personal assets consisting mainly of certificates of stock in various railroad and mining companies, with a plea for abatement. The court, after consideration, through Noah Davis, P. J., rendered the following decision: "We are of the opinion also that the commissioners erred in including in their assessment the stocks of corporations created by and under the laws of other States. Such corporations are taxable, and we must presume, in the absence of proof, that taxes in their respective home States are duly assessed and collected upon their capital stock or property. The stocks in such corporations, held by individuals here, are simply representatives of capital or property employed in business in other States, the title of which is vested in and controlled by the artificial person created by and residing in such States. They represent an interest which is or may become a membership in the corporation and evidence of a right to participate in divided profits and in the ultimate dividend of surplus after the payment of debts and obligations of the corporation. The stock certificates are not themselves the property, but are evidences of the rights just mentioned; to be possessed, enjoyed, and enforced under and in conformity with the laws of the State which created the body corporate."

The views thus expressed respecting the inconsistency and undesirability of directly taxing titles, credits, obligations of indebtedness, and instrumentalities of exchange are so generally and thoroughly accepted by the statesmen, financiers, and economists of Europe, that no recognition of this form of taxation can, it is believed, be found in any of their fiscal systems. In England the very idea would be scouted; and in France, where the need of great revenues is most imperative, and resort has been had to almost every other device and expedient for collecting contributions from its people, the taxation of titles and credits has never been contemplated. Some years since (1879), when the State of California adopted a new Constitution, and, in virtue of the statutes subsequently enacted under it, made subject to additional taxation bonds, moneys, promissory notes, certificates of indebtedness, and shares of stock in corporations otherwise taxed, the utter absurdity of such action was thus strikingly demonstrated in one of the San Francisco papers by the following humorous illustrations:

"A has a horse; B has nothing, but is honest and industrious. B buys A's horse and gives his promissory note for one hundred dollars. The horse previously taxed as property in A's hands is now taxed as property in B's hands, and A is taxed—just as much as be was before—on B's note, which is property also. That is to say, the new Constitution holds that by a mere stroke of his pen, B, who has nothing, and can give himself nothing, can instantaneously create as much property for others as others may happen to think that he will some day be able to acquire. Truly the performance of the man who causes two trees to grow where but one grew before is of so little comparative benefit that he might be justly censured for a sin of omission.

"Let us suppose that B had given not a written but an oral promise. Ought not A to be taxed on that? If not, why not? Because an oral promise is not an evidence of debt? not a ‘credit?’[4] But how if there were witnesses? Oral promises are credits, however; nay, even implied promises are. You have to pay—the courts will make you pay—your tradesman's account whether you have ever passed your word or not.

"Now a 'credit,' be it promissory note, mortgage, certificate of deposit, or what you will, is not only not property, but is proof that the bolder has parted with property that he once had. His paper credits, which merely certify that in consideration of certain advantages (interest, freedom from cares of management, etc.) he has surrendered his property to another, have no function but that of enabling him at some future time not to resume his own, for it is no longer his, but to acquire its equivalent from the present owner. The more a man has of these things, which it is proposed to tax as property, the poorer he is—not necessarily poorer than a man with none, but poorer than himself was before he got them. It is only by surrendering them that he can become again as wealthy as he was.

"Is he then to escape taxation, living at his ease on his interest, while the man who pays it bears the expense of government for both? Let us see if under the present system the latter does anything of the kind. X wants a thousand dollars of Z, for which he can afford to pay, say, sixty dollars a year. But if the State government is going to exact from him ten dollars, he can afford to give Z but fifty, with which that person must be content, or X will either get the money from another or not take it at all. It is clear, therefore, that the lender really pays the tax, the borrower being unaffected directly; what he pays to the State he would otherwise have to pay to the lender. Indirectly he is affected thus: Taxation of the principal, by reducing the interest, reduces also the volume of borrowable money by driving a part of it into more profitable investment, and the scarcity so created tends to restore the rate of interest, the cause thus counteracting its own effect, as the slackening in the speed of a steam engine is the agent that increases its velocity.

"Reverting to the matter of the horse, we find that quadruped in the possession of B and a note for one hundred dollars in the hands of A. Relying on B's payment of the note, A purchases a hundred dollars' worth of flour from C, giving his note. C knows that A is good for the amount, and gives his own note for a hundred dollars for a barrel of whisky to D, who then feels rich enough to purchase a thousand cigars, at ten dollars a hundred, from E, satisfying him with a note. At the end of a month D's hospitable friends have burned all that gentleman's cigars; C, in one protracted, solitary revel, has gone through his barrel of whisky like a rat through a water pipe; A's family and retainers have consumed his flour like a flame in flax; and B's charger, broken by the weight of the financial superstructure reared upon his patient person, lies dead wise on the plain, with daisies at his bead and at his feet. But he has left a legacy of taxable 'solvent credits' that does honor to his memory better than a monument of brass, and

" 'Nothing beside remains round that colossal wreck!'

"Working for a dead horse is, however, proverbially disheartening, and it is some years before B has put by enough money to discharge his debt to A, and has thereby rendered him unable to pay C, whose habit of being supinely drunk has made the expensively befriended D whistle in vain for the wherewithal to pay E. But finally B hands a hundred dollars to A, who hands it to C, who hands it to D, who bands it to E; and four hundred dollars' worth of taxable property, on which the government of this State had been living, like St. Simon Stylites on his capital, vanishes into thin air; for the notes go to the kitchen stove, and the new Constitution made no provision for taxing the ashes.

"Charles Young takes a pig in payment for his paper—like for like. Being a Jew, Mr. Young has conscientious scruples against eating pork, so he sells his pig to a butcher, taking his note. The butcher, finding the animal more than usually intelligent, thinks it would be wrong to hide the light of its political sagacity under a bushel of salt, and sells it alive to Clitus Barbour to represent that statesman, who helped to launch the new Constitution. Clitus gives his note for the pig. Becoming jealous of its rivalry, he sells it to Governor Kearney (taking his note), whose parlor it graces for a season, but, being detected in an indiscretion, the Governor sells it to General Howard, who gives his note. General Howard wants this pig to write letters favoring the new Constitution; but, as it scorns to prostitute its intellect that way, its less scrupulous owner parts with it to the congregation of Metropolitan Temple, whose pulpit it now fills, they giving their note and a benediction.

"The foregoing pig is now represented by five promissory notes and a benediction not taxed. None of these notes bear interest, nor are they of any benefit to their holders except as they may enable them, at a stated time, to get something of the same value as something previously renounced. The various notes make a trail of papers like that left by the ‘hare’ in the boys' game of ‘hare and hounds.’ Now comes the assessor under the new Constitution, and, in obedience to a righteous provision taxing property used for religious purposes, assesses that porker in the bosom of the church. Then he strikes the paper trail extending out through secular spaces into an editorial office, and, having assessed the grunter where it is, he again assesses it where it was last, and again where it was the time before, and so on through the whole series, until that not very valuable flitch of bacon, which has ‘dragged at each remove a lengthening chain’ of ‘solvent credits,’ has been the innocent cause of six payments into the State treasury. Beyond Mr. Young the assessor does not trouble himself to go, for on the ranch of a granger who is so intelligent as to exchange pigs for his papers the pachyderm's trail consists of tracks in the mud, and these the new Constitution neglected to declare to be property."

Money Property.—But, after all, says some objector, "notwithstanding your many and plausible arguments—your statement that all the world except the United States have done away with the old, atomic, inquisitorial system of taxation—I do not like your proposed reforms, and for the reason mainly that they exempt ‘money property!’" It is most important, therefore, to inquire what is "money property," and also its relations to local taxation.

All capital or property is accumulated labor, labor being the source of all property. Hence any attempt to excite prejudice against capital or property, or to attack either, is an attack upon labor itself.

"Moneyed property" is generally understood to mean evidences of debt, which are not in a strict sense property; but rights to property, or assignments of property, according to the amount of interest of the creditor.

What is a Mortgage?—A mortgage may be defined to be a species of conveyance of property—mainly real estate—for the species of conveyance of property—generally real estate—for the security of a debt, generally created by a loan of money, and can not be regarded as a complete, but rather a conditional or quasi-title of the property covered by the conveyance. It is not so much property as a deed; and neither is property except to the extent of the value of the paper and the labor of writing or printing it, and still both are very valuable as conveying rights to property. The property is the real estate conveyed or mortgaged, and a tax on the land and another tax on the deed, or a tax on the land and another tax on the mortgage which covers the land, will in effect be a double tax on the land. This tax may be made a quadruple tax: first on the land, then on the deed of the land, then on the mortgage which is on the land, and then on the lease which the landlord may grant to the tenant.

The following curious instance of hardship in taxing mortgages actually occurred in one of the counties of central New York under the existing system: A worthy farmer and his wife, finding themselves becoming incapacitated through age from taking practical care of their little farm, sold it for five thousand dollars, and allowed the purchase money to remain in the form of a mortgage, with the expectation of living on the interest paid annually by the purchaser from the profits of the farm. The town being very small, the fact of the sale and the consideration paid became known to every one, and the assessors were compelled, in opposition to their usual practice, to tax the old man to the full amount of the mortgage, as personal property. But the year in which this was done happened to be a year in which the town, anxious to avoid a draft of men for the army, to which the old man was not liable, put up the rate of taxation to more than the legal rate of interest, in order to provide sufficient money to purchase recruits. The result was that the poor old man and his wife found that not only was all their income from the mortgage swept away by the tax collector, but they were even obliged to go out for days' work, in order to pay a balance of taxation and provide means of support; and this, too, while the identical farm for which the mortgage was given was taxed at one fifth its true value, and other investments of other citizens of an invisible and intangible character undoubtedly escaped taxation altogether. And this we call equality in taxation.

Tax Indebtedness is to Tax the Borrower.—If any one doubts that a tax on indebtedness is a tax upon the borrower, or the property which the indebtedness covers, that question can be easily solved by an honest, uniform tax on all State, county, town, and city bonds hereafter issued, by making them all subject to an annual tax of one, two, or more per cent, and by providing that the tax shall be deducted at the time of the payment of the interest. Is there any one who believes that these bonds will sell in the market at the same high rate that they would command if by law they were free from taxation?

We can also test the effect of an honest, uniform tax upon mortgages by providing that mortgages hereafter made shall operate to reduce for assessment the valuation of the land mortgaged to the amount of the mortgage, and that the mortgagor shall pay the tax on the mortgage, and deduct the tax from the principal or interest, when paid to the mortgagee. But who believes, under such a law, that any money would be loaned at the legal rate of interest?

A somewhat curious piece of practical evidence, in support of the truth of the above position, in respect to the taxation of mortgages, has been afforded by an experience of New Jersey. This State exempted, in 1869, all mortgages from taxation in certain of her counties and cities which lie contiguous to New York city; but this legislation, although operating to draw capital away from New York and into New Jersey, was not primarily effected for any such reason, but was brought about in this wise: New Jersey, in the first instance, enacted an honest, uniform law of taxing mortgages, and one, moreover, which could with the utmost certainty be executed, and similar in principle to that above suggested; namely, that the person giving the mortgage should pay the tax on it, and deduct the tax from the principal or interest in settling with the creditor. The result was that all mortgages falling due were immediately foreclosed, and as no new loans, moreover, could be made, the inhabitants of the growing counties near the city of New York, wishing to borrow money on land, or to sell land, found themselves in an uncomfortable position; so much so, that if the law taxing mortgages in this section of New Jersey had not been promptly repealed by the Legislature, the issue would soon have become a predominant one in the State elections; and hence the explanation of one of the most curious statutes in the history of American legislation which made one tax law for one part of the State and another and a different one for the remainder.[5] But the point of chief interest in respect to this whole tax experience to which attention should be especially directed, is, that it did not take the citizens of New Jersey a great length of time to find out that a borrower of money on a mortgage paid the tax, and that the lender was the tax collector, and only paid his part of a diffused tax, as all other persons living, consuming, buying, or selling in the State must pay; and that if the borrower could not legally pay the lender a rate equal to other net profits of investments, he could not borrow. A little experimental legislation in other States will, therefore, effectually explode the vague theory that taxes uniformly levied do not diffuse themselves; and although it is true that the persons or property primarily taxed do not charge the entire tax over to others, this very fact nevertheless shows that the tax is diffused with absolute equality upon the persons who originally may pay the tax, and upon those who finally bear their portion of it.

Loans on Mortgages prohibited in Rome.—Mommsen, in his History of Rome, states that at one period the lending of money in that country on mortgages was prohibited, and it is apparent that a uniform taxation of mortgages would amount to a prohibition as effectual as the prohibition which existed under the Roman law. The Roman patricians, in their legislation, wished to prevent the common people from becoming an independent yeomanry, and owning and acquiring real estate through the facilities of borrowing upon mortgages. No chimerical attempt had then ever been made to tax money at interest, and this purpose of having the soil cultivated on shares or by dependent tenants could best be obtained by a prohibition of all mortgages.

Now, it needs no argument to show that a system of onerous taxation of mortgages must have a tendency to re-enact the Roman policy, and that it is undoubtedly the true interest of the state, on both political and economical grounds, to encourage occupiers to become owners, who always give better attention and protection to their own property than to the property of landlords.

Purchasers of Government Bonds not Practically Exempt from Taxation.—The purchasers of United States, State, and municipal bonds or securities, which are nominally exempt from taxation, are in effect taxed, and uniformly taxed in the high price which they are obliged to pay for these securities by reason of their exemption from taxation. It is not only a sound principle of political economy that a tax upon money at interest is simply a tax upon the borrowing price of the borrower, causing an increased rate of interest, or a reduced price to be obtained for the obligation given; but this principle has been adjudicated by the highest court of the country, so far as a court of last resort can adjudicate a great principle in economic science. Thus, in the case of Weston vs. The City of Charleston (2 Peters, 449), the Supreme Court of the United States, through Chief-Justice Marshall, held that "a tax on Government stock is a tax on the power to borrow money on the credit of the United States." If, therefore, we except the borrower from taxation in the form of a decreased rate of interest, we grant him no special exemption or advantage, for his property, which is covered by the debt, has already in other forms been taxed, and the exemption will diffuse itself in the form of lower rate of interest, which will be the means of producing a higher price of labor, land, and personal property, until the exemption is completely diffused. Who will then be injured by taking the tax from money at interest? It is probable that he who now adds the tax to the rate of interest, and charges the borrower, and does not pay it to the State, may lose by the change. He will be obliged to enter the open money market and pay the market rate, as the purchasers of Government bonds now do, for evidences of debt that will be free from taxation in the hands of all persons; and the laws of trade will regulate his investment as they daily regulate the price of Government bonds, and will bring down his securities to a rate of interest not much above the rate paid by the national Government. The exemption applied to United States bonds, which is of no practical benefit to the present purchasers, in consequence of the increased price of the bonds, would be of no benefit if applied to the holder of other securities in an established and permanent system, except in freedom from the uncertainties and irregularities attending the exercise of arbitrary and irregular power. If the exemption is an exemption of everything of the same class, it is perfectly equal and fair, and its effect is diffused and equated; and the tax on another article, taxed in lieu of the exempted class of articles, is likewise equated and diffused, and if invisible and imponderable evidences of debt can not be taxed equally no injustice will arise if they are all free from primary taxation, and if the taxes of a permanent system are imposed on other things subject to positive and fixed rules of assessment. The daily price of United States bonds, therefore, is a constant lesson that an exemption of a security from taxation is an exemption of the borrower, and the same law of political economy will rule in respect to both private and public debts. Each State has, therefore, the power to put its borrowers on an equal footing with the General Government, and without injustice or inequality toward the borrower or the lender.

The Old and New Ideas in Taxation.—The first attempt made to tax money at interest was instigated against money lenders because they were Jews; but the Jew was sufficiently shrewd to charge the full tax over to the Christian borrower, including a percentage for annoyance and risk; and now most Christian countries, as the result of early experience, compel or permit the Jew to enter the money market, and submit, without let or hindrance, his transactions to the "higher law" of trade and political economy. But a class yet exist who would persecute a Jew if he is a money lender, and they regret that the good old times of roasting him have passed away. They take delight in applying against him, in taxation, rules of evidence admissible in no court since witches have ceased to be tried and condemned. They sigh at the suggestion that all inquisitions shall be abolished; they consider oaths, the rack, the iron boot, and the thumbscrew as the visible manifestations of equality. They would tax primarily everything to the lowest atom; first for national purposes, and then for State and local purposes, through separate boards of assessors. They would require every other man to be an assessor or collector, and it is not probable that the work could then be accomplished with accuracy. The average consumption of every adult inhabitant of the United States is at least two hundred dollars annually, or in the aggregate $1,500,000,000; and this immense amount would fail to be taxed if the assessment was made at the end of the year, and not daily, as fast as consumption followed production. All this complicated machinery of infinitesimal taxation and mediæval inquisition is to be brought into requisition for the purpose of taxing "money property," which is nothing but a myth. The money lender parts with his property to the borrower, who puts it in the form of new buildings, or other improvements, upon which he pays a tax. Is not one assessment on the same property sufficient? But if you insist upon another assessment on the money lender, it requires no prophetic power to predict that he will add the tax in his transactions with the borrower. If a tax of ten per cent was levied and enforced on every bill of goods, or note given for goods, the tax would be added to the price of goods, and how would this form of tax be different from the tax on the goods?

"Money property," except in coin, is imaginary, and can not exist. There are rights to property of great value. The right to inherit property is valuable; and a mortgage on land is a certificate of right or interest in the property, but it is not the property. Land under lease is as much "money property" as a mortgage on the same land; both will yield an income of money. Labor will command money, and is a valuable power to acquire property, but is not property. If we could make property by making debts, it can not be doubted that a national debt would be a national blessing. Attacking the bugbear of "money property" is an assault on all property; for "money property" is the mere representative of property. If we tax the representative, the tax must fall upon the thing represented.

  1. The statement is frequently made that all value is the product of labor. Adam Smith says, "Labor is the fund which originally supplies a nation with its wealth." McCulloch says, "Labor is the only source of wealth"; and all the early writers, in one form or another, say the same thing. Accepting under such circumstances an entire misconception of the true meaning of the word labor, the popular mind has been drawn to the conclusion that hand labor or muscular exertion is the producer of all value; and has added the corollary that hand labor is therefore entitled to the entire value thus produced. But when closely examined, the true meaning of the word labor will be found to be, all that a man can do, either with his muscle or his brain. On this crude misconception of the meaning of words, philanthropic systems have grown up, under which the weaker ones have lost heart, and the stronger ones have grown desperate, because the hard sense of humanity does not accept their theories. Also, through their influence, these ideas have reacted and are reacting on the laborers themselves, with rather lamentable results. Thus it is a very general complaint of the present time that the ordinary workman, the person commonly understood by the word "laborer," puts so little mind into his or her work that it is perfunctory to the last degree; concerns itself very little with results, but expends its efforts in a function whose sole end is to escape blame or actual discharge, and to get along with the least possible exertion; when the fact is, that the three functions of capital (which is accumulated labor), labor (in the muscular sense), and management (or brain power) must as a rule act conjointly, in order to insure the best results. "In more recent times, a truer appreciation of this word has arisen, but even yet has not been so absorbed into the general fund of knowledge as to bear practical fruits; and it needs to be constantly dwelt upon, set forth, reiterated, and explained, until it shall become a common possession of those who think." The reason why more attention has not been given to this subject by the earlier economists has been assigned to the fact that they drew their illustrations from a very primitive life, where the bow and spear figured prominently.—Address, American Social Science Association, 1893, by F. J. Kingsbury, LL. D.
  2. The Supreme Court of Alabama has recently decided that when a bank in that State owns real estate the same is not liable to taxation as a part of its capital stock.
  3. Some years since an action was brought in a United States court by one Kortenhaus against the American Watch Company, of Waltham, Mass., to recover royalties on an improvement in stem-winding watches that he made, and which, he averred, the defendants had put to use without his consent and without awarding him any compensation therefor. The plaintiff swore that he had submitted his invention to the company's inspection with the view of selling it, but it refused to purchase, and he discovered afterward that the company had adopted the improvement, and that he had made the mistake of not patenting it. The court dismissed the action, and ruled that there was no right of property in an idea as an idea, and that it could only be made property by letters patent. Had, however, a patent been secured upon the improvement, its value as property would have been undoubtedly very considerable.
  4. Promises, according to Professor McLeod, are property.
  5. And all mortgages upon estates, chattels, or personal property, taxable by law within said counties of Hudson, Union, Essex, and the city of Brunswick, Middlesex County, and the county of Passaic, except the townships of West Milford, Pompton, and Wayne, for State, county, township, and city purposes, shall be exempt from taxation when in the hands of any inhabitant, corporation, or association residing or located in said counties or cities." (Approved April 2, 1869.)—Laws of New Jersey, 1869, p. 1225.