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Popular Science Monthly/Volume 54/January 1899/Principles of Taxation: The Law of the Diffusion of Taxes XXX

PRINCIPLES OF TAXATION.[1]
By the Late Hon. DAVID A. WELLS.

XX.—THE LAW OF THE DIFFUSION OF TAXES.

PART I.

NO attempt ought to be made to construct or formulate an economically correct, equitable, and efficient system of taxation which does not give full consideration to the method or extent to which taxes diffuse themselves after their first incidence. On this subject there is a great difference of opinion, which has occasioned, for more than a century, a vast and never-ending discussion on the part of economic writers. All of this, however, has resulted in no generally accepted practical conclusions; has been truthfully characterized by a leading French economist (M. Parieu) as marked in no small part by the "simplicity of ignorance," and from a somewhat complete review (recently published[2]) of the conflicting theories advanced by participants one rises with a feeling of weariness and disgust.

The majority of economists, legislators, and the public generally incline to the opinion that taxes mainly rest where they are laid, and are not shifted or diffused to an extent that requires any recognition in the enactment of statutes for their assessment. Thus, a tax commission of Massachusetts, as the result of their investigations, arrived at the conclusion that "the tendency of taxes is that they must be paid by the actual persons on whom they are levied." But a little thought must, however, make clear that unless the advancement of taxes and their final and actual payment are one and the same thing, the Massachusetts statement is simply an evasion of the main question at issue, and that its authors had no intelligent conception of it. A better proposition, and one that may even be regarded as an economic axiom, is that, regarding taxation as a synonym for a force, as it really is, it follows the natural and invariable law of all forces, and distributes itself in the line of least resistance. It is also valuable as indicating the line of inquiry most likely to lead to exact and practical conclusions. But beyond this it lacks value, inasmuch as it fails to embody any suggestions as to the best method of making the involved principle a basis for any general system for correct taxation; inasmuch as "the line of least resistance" is not a positive factor, and may be and often is so arranged as to make levies on the part of the State under the name of taxation subservient to private rather than public interests. Under such circumstances the question naturally arises, What is the best method for determining, at least, the approximative truth in respect to this vexed subject? A manifestly correct answer would be: first, to avoid at the outset all theoretic assumptions as a basis for reasoning; second, to obtain and marshal all the facts and conditions incident to the inquiry or deducible from experience; third, recognize the interdependence of all such facts and conclusions; fourth, be practical in the highest degree in accepting things as they are, and dealing with them as they are found; and on such a basis attention is next asked to the following line of investigations.

It is essential at the outset to correct reasoning that the distinction between taxation and spoliation be kept clearly in view. That only is entitled to be called a tax law which levies uniformly upon all the subjects of taxation; which does not of itself exempt any part of the property of the same class which is selected to bear the primary burden of taxation, or by its imperfections to any extent permits such exemptions. All levies or assessments made by the State on the persons, property, or business of its citizens that do not conform to such conditions are spoliations, concerning which nothing but irregularity can be predicated; nothing positive concerning their diffusion can be asserted; and the most complete collection of experiences in respect to them can not be properly dignified as "a science." And it may be properly claimed that from a nonrecognition or lack of appreciation of the broad distinction between taxation and spoliation, the disagreement among economists respecting the diffusion of taxes has mainly originated.

With this premise, let us next consider what facts and experiences are pertinent to this subject, and available to assist in reaching sound conclusions; proceeding very carefully and cautiously in so doing, inasmuch as territory is to be entered upon that has not been generally or thoroughly explored.

The facts and experiences of first importance in such inquiry are that the examination of the tax rolls in any State, city, or municipality of the United States will show that surprisingly small numbers of persons primarily pay or advance any kind of taxes. It is not probable that more than one tenth of the adult population or about one twentieth of the entire population of the United States ever come in contact officially with a tax assessor or tax collector. It is also estimated that less than two per cent of the total population of the United States advance the entire customs and internal revenue of the Federal Government.

In the investigations made in 1871, by a commission created by the Legislature of the State of New York to revise its laws relative to the assessment and collection of taxes, it was found that in the city of New York, out of a population of over one million in the above year, only 8,920 names, or less than one per cent of this great multitude of people, had "any household furniture, money, goods, chattels, debts due from solvent debtors, whether on account of contract, note, bond, or mortgage, or any public stocks, or stocks in moneyed corporations, or in general any personal property of which the assessors could take cognizance for taxation"; and further, that not over four per cent, or, say, forty thousand persons out of the million, were subject to any primary tax in respect to the ownership of any property whatever, real or personal; while only a few years subsequent, or in 1875, the regular tax commissioners of New York estimated that of the property defined and described by the laws of the State as personal property, an amount approximating two thousand million dollars in value was held in New York city alone. Later investigations show that this state of things has continued. Thus, in 1895, out of a population of about two million, it was estimated that only seventy-nine thousand, or not over four per cent of the inhabitants of the city, were subject to primary taxation, and that one half the whole amount collected in that year was paid by less than a thousand persons. In the city of Boston, where the tax laws are executed in the most arbitrary manner, the ratio of population directly assessed is somewhat greater, but aside from the poll tax, which is a per capita and not a property tax, only 7.27 per cent of residents paid a property tax in 1895 out of a population of 494,205. In one of the smaller cities of Massachusetts, where persons and property are capable of more thorough, supervision than larger numbers and areas—namely, the city of Springfield, with a population of about fifty thousand—the report of its tax officials shows that for the year 1894-'95 the number of persons and corporations assessed on property (mainly real estate) was 7,745, or one for every 6.4 of its citizens, while 10,560 other citizens were assessed for a poll tax of two dollars only. Of the total amount of taxes assessed—namely, $735,948—the above number, 10,560, paid only $21,120; and this is the experience generally throughout the United States, as it will be in every country under a free popular government, where arbitrary inquisitions and arrests of persons and seizures of property are not allowed, and where a soldier does not practically stand behind every tax assessor and collector.

The time (1871) when the personal investigations above referred to were made was when the masses of the city of New York were moved with indignation at the misuse and private appropriation by a few officials (Tweed and his associates) of the municipal revenues raised by taxation, under cover of instituting public improvements, and which finally led to their prosecution, imprisonment, or self-imposed exile; and the questions which naturally suggested themselves were: If only some forty thousand of the million in New York city paid the taxes, what interest had the other nine hundred and sixty thousand who never saw the face of a tax assessor or collector in opposing corruption? What, in an honest administration of the city government and in a reduction of taxes? Must it not be for the interest of the many that the expenditures of the State shall always be as large as possible? Must they not be benefited by exorbitant taxes on the owners of property, and a distribution of the money collected, even if stolen by corruptionists, but spent by them lavishly on enterprises that will furnish new opportunities for employment or amusement for the masses? Clearly, so far as any personal experience growing out of any direct assessment and levy was concerned, ninety-six per cent of the population of the city had no more cause of personal grievance by reason of the unlawful taking of money from the city treasury than they would have had at the taking of an equivalent amount from the municipal treasuries of London, Paris, or any other city.

The answer to these questions is to be found in the fact, as John Adams once remarked, that "if the Creator had given man a reason that is fallible, he has also impressed upon him an instinct that is sure." And this instinct teaches the masses everywhere, though they have never read a book on political economy, or heard any one discourse learnedly on the principles of taxation, that if taxes are increased, either by a lawful or unlawful expenditure of public money, they can not in any possible way avoid paying some portion of its increase; or, in other words, that increased taxes meant increased cost of living, through increased rents, increased price of fuel, clothing, and provisions, and possibly diminished opportunity to labor through such increased cost of the products of labor as would limit and restrict markets or consumption. In short, that taxes inevitably fall upon them through the increased price of all they consume, even if they pay nothing to the tax collector directly. A large proportion of the masses of the city of New York in 1871—'72, who paid no taxes directly, accordingly and spontaneously joined hands with the comparatively few of their fellow-citizens who did pay in resisting extravagance and corruption.[3]

We are thus led up and forced to the recognition of two propositions, or rather principles, in respect to taxation that can not be invalidated. The first is, that it is not necessary that a tax assessor or collector should personally assess and levy upon every citizen of a State or community in order that all should be compelled to contribute of his property for the support of such State or community; second, that there is an inexorable law by which every man must bear a portion of the burden of public expendiures, even though the official assessors take no direct cognizance of him whatever.

The following incident may here be cited as instructive: In one of the recent official hearings before a legislative committee of one of the States, a strenuous advocate of the popular doctrine that there was and could be no such thing as equality in taxation except by rigidly taxing everybody directly for all his property, of every description, both real and personal, and that to not tax immediately and directly was, in at least a great degree, to exempt from taxation, expressed himself as entirely opposed to any system of restricting assessments to a comparatively few things, on the ground that it would be a recognition in the United States of a system which in Great Britain had ground down the masses into poverty. He, however, obtained some new light on the subject of nondiffusion by being reminded that if the masses of England had been grievously oppressed by taxation, it had been under a system of many years' standing, which never in any way brings the tax collector in direct contact with nineteen twentieths of the entire population; the customs taxes of Great Britain being practically levied on only four articles—spirits, tea, coffee, and tobacco; and the inland revenue also on practically four—spirits, beer, legacies and successions, and stamps (on deeds, insurance policies, bills of exchange, receipts, drafts, etc.). Generalizing, then, on the basis of so broad a fact, how illogical and unscientific was the assumption that whatever persons, property, or business are not taxed directly are exempt from taxation!—and yet the practical exemplification of such a system, in the case of England, was a most efficient instrumentality for grinding the masses of her people down to poverty.

On the other hand, to generalize from the experience of an individual or a class in place of that of a nation or community, let us take the case of a person who passes all the year in transitu—moving backward and forward, for example, in a boat on the line of the Erie Canal, or between the head waters of the Mississippi and its mouth; a citizen of no one State, a resident in no one town, and buying all that he eats, drinks, and wears wherever he can buy cheapest. Does this man escape taxation because he has no permanent situs (residence as a citizen), and is unknown by any assessor? If he does, then his occupation is more profitable to the extent of the taxes he avoids than is that of the individual who, following analogous occupations, resides permanently in one location, and pays taxes regularly; or else some notable, easily discernible cause, as undue competition to obtain situations, will account for his exemption.

Let us next consider how practical experience definitely indicates the line of least resistance, in conformity with which those contributions of property or service which the State requires its citizens to make for its support, and are worthy of designation as taxes, diffuse themselves. Let us take first that form of indirect taxation which is known as customs, or taxes on imports, one from which the Federal Government of the United States has derived in recent years more than half of its revenue, and Great Britain more than one fourth of its total receipts from all forms of imperial taxes. That all such taxes as a rule diffuse themselves, and ultimately fall upon and are paid by final consumers, is capable of demonstration by a great variety of evidence. Every remission of customs duties on the imports into any country of its staple articles of consumption is followed by a reduction of cost approximately equal to such reduction, and a consequent increase in consumption. On the other hand, nothing is better settled than that an increase in customs taxes on imported articles as a rule increases prices and tends to reduce consumption. When Great Britain, in 1863, reduced her taxes (duties) on her imports of tea from 1s. 5d. to 1s. per pound, her importation of tea increased from 114,000,000 pounds in 1862 to 139,000,000 in 1866, and her per capita consumption during the same period from 2.70 pounds to 3.42 pounds; and again, when the duty was further reduced in 1865 from 1s. to 6d. per pound, the annual importations increased from 139,000,000 in 1866 to 209,000,000 in 1881, and the per capita consumption from 3.42 pounds to 4.58.

When by the act of October, 1890, the tax was removed from the imports of crude sugars into the United States, the price of the same went down almost immediately to an equal extent in all American markets; while the consumption of sugar in the country increased from an average of about fifty-four pounds per capita in 1890 to more than sixty-seven pounds in 1892. A like result has attended a similar experience in respect to this in other countries, and especially in Great Britain. Thus, the aggregate consumption of sugar by the British people in 1844 was returned at 237,143 tons. A reduction of taxes on its importation in 1864 increased its domestic use to 528,919 tons; a reduction of fifty per cent on existing rates in 1870 made it 695,029 tons; another reduction of fifty per cent in 1873 carried up consumption to 779,000 tons; and when, in 1874, all taxes on the imports of sugar were abolished, the annual domestic consumption increased in little more than a year's period to 930,000 tons. On the other hand, when by the tariff act of 1890 an additional tax of half a cent per pound was imposed on the import of tin plate into the United States, tin plate went up to an equal extent in price all over the country; and so also on pearl buttons, linen goods, and other articles of foreign production on the importations of which the tariff taxes were largely increased. By the tariff act of 1890, also, eggs, which could formerly be imported into the United States free of duty, were made subject to a tax of five cents per dozen. Since then the price of eggs imported from Canada into districts of the United States within the same sphere of territorial competition has been increased to the American consumers to almost exactly the extent of the import tax to which they are subjected. Thus, when the price of eggs was ten and a half cents per dozen in Toronto, they were sixteen cents in Buffalo and sixteen and a half to seventeen cents in New York. Such a result would be unaccountable if the Canadian farmers paid the duty on eggs sent by them to the United States.

It is interesting to here ask attention to the opinions entertained and expressed by those whose situation and experience have qualified them to speak with authority: "The duty constitutes the price of the whole mass of the article in the market. It is substantially paid on the article of domestic manufacture, as well as that of foreign production" (John Quincy Adams). "I said it, and I stand by it, that as a general rule the duties paid on imports operate as a tax upon the consumer" (John Sherman). Mr. Blaine, in his Twenty Years in Congress, says, speaking of the increase of duties on imports by the tariff act of July 14, 1862, that it "shut out still more conclusively all competition from foreign fabrics. The increased cost was charged to the consumer." Mr. McKinley, in 1890, in a report introducing a bill for revision of the tariff of the United States, in the direction of increased rates of duties on imports, said it was not the intent of the bill "to further cut down prices," that the people were "already suffering from low prices," and would not be satisfied "with legislation which will result in lower prices." In an elaborate opinion given by the New York Court of Appeals in 1851 (see vol. iv, New York Reports), in which there was no suspicion of any issue of free trade or protection, the courts, in carefully considering the relative powers of the legislature and the judiciary in respect to taxation, assumed the proposition that "all duties on imported goods are taxes on the class of consumers" to be in the nature of a self-evident truth or economic axiom.

Henry Clay, in a celebrated speech in the United States House of Representatives in 1833, in advocacy of a protective tariff policy, candidly admitted that "in general it may be taken as a rule that the duty upon an article forms a portion of its price." But he subsequently qualified such admission by claiming that it does not follow that any consequent enhancement of its price is a tax on consumers, inasmuch as "directly or indirectly, in one form or another, all consumers of protected articles, enhanced in price," will get an equivalent. But this may be equally affirmed of all necessary and equitable taxation, and does not in any way antagonize the theory that the final incidence of the class of taxes under consideration falls on consumption.

But, notwithstanding these conclusions and the incontrovertible evidence by which they are supported, not a few persons occupying places of great legislative influence, and no small part of the general public, hold to the view that taxes on imports are really in the nature of premiums paid by foreigners for the privilege of selling their goods in the markets of the importing country, and do not fall on its people who consume them. That means that if the foreigner has a yard of cloth, or other commodity, which he sells at home for one dollar, and the United States imposes a tariff of fifty cents on it, he will then sell it for export to America at fifty cents. There is no instance mentioned in history where this has ever been done, but history unfortunately is rarely taken into account by the public in the discussion of these questions. In this connection the following historical incident is interesting and instructive: In 1782 an attempt by the Congress of the Confederation of the several American States to provide a system of revenue to defray the general expenses of the Confederation by duties on imports, which then was not permissible, was blocked by the refusal of the State of Rhode Island to concur in it, the Legislature of that State unanimously rejecting the measure for three reasons—one of which was that it would bear hardest on the few commercial States, particularly Rhode Island, which in virtue of their relations with foreign commerce monopolize imports, and lightest on the agricultural States, that directly imported little or nothing. Congress appointed Alexander Hamilton to draft a reply to Rhode Island, and in his answer he relied mainly on what he regarded as an incontrovertible fact, that duties on imports would not prove a charge on an importing State, but on the final consumers of imports, wherever they may be located.

If the theory and assumption so confidently and generally asserted are to be accepted as correct, that the foreigner pays the protective taxes which a country levies on its imports, and that they do not fall upon or are not paid by its people who consume them, then it must follow that to the extent that a country taxes its imports it lives at the expense of foreign nations; and that, as Great Britain is the country with which the United States has the largest foreign trade, it must pay the largest share of the customs taxes of the United States, or a good share of its annual revenue from all sources. Attention is further asked to the exact practical application of this theory. Thus, the United States in 1895 imported $36,438,196 worth of woolen manufactures, on which it assessed and collected duties (taxes) to the amount of $20,698,264, or 56.80 per cent of the value of such imports. Certainly this was a pretty heavy tax on foreign nations in respect to the sales of only one class of these commodities; but it represented but a tithe of what the tariff taxes of the United States, if paid by foreigners, cost them. Thus they had to sell their woolens to the people of the latter country at less than half their value in order to compensate for the 56.8 per cent tax. But a nation engaged in foreign trade can not as a rule have two prices for the product of its industries; or one price for what it sells at home and another and different price for what it sells to foreigners. So the fifty-six per cent deducted from the cost of the woolens sold by foreigners to the United States necessarily had to be deducted not only from so much of their product consumed at home, but also from what they sent for sale to all foreign countries. A further practical application of this theory is worthy of consideration. As Great Britain imposes no protective duties or taxes on its imports, it evidently can not collect anything from other nations by the system of taxation under consideration. On the other hand, the aggregate value of its exports sent to foreign nations during the year 1892 was $1,135,000,000, and if these several nations taxed this value at the average rate which the United States imposed in 1894 on all its dutiable imports—namely, fifty per cent—Great Britain obviously had to pay some $557,000,000 in that year for the support of foreign governments; and while this has been the experience of Great Britain for more than forty years of this century, she has as a nation been increasing in wealth during this whole period.

Some of the recent official experiences of the Government of the United States that are pertinent to the topic under consideration are sufficiently curious to make them worthy of an economic record. In a speech introducing a bill into the United States House of Representatives, which subsequently resulted in the tariff act of 1890, the then chairman of the Committee of Ways and Means laid down the following proposition: "The Government ought not to buy abroad what it can buy at home. Nor should it be exempted from the laws it imposes upon its citizens."

This would seem to warrant the characterization of a discovery that the United States had some reliable and important source of revenue independent of taxation,[4] and that, by compelling the application of a part of this income to the payment of taxes to itself, the Government is placed upon an equality with the citizens. A legitimate criticism on this proposition is that the idea that all the income of the Treasury is derived from the people, and that to transfer portions of this income from one official recipient to another can have hardly any other result than an additional cost of bookkeeping, seems never to have entered the mind of the speaker.

Again, the United States tariff act of 1883 contained in its free list a provision for the admittance of "articles imported for the use of the United States, provided that the price of the same did not include the duty" imposed on such importations. Under the tariff act of 1890 this provision was stricken out of the statute, with the result that when the Government imported any articles for its own use which were subject to duties (as, for example, materials to be used in the National Bureau of Printing and Engraving), it was obliged, in virtue of its nonexemption from the laws which it imposed on its own citizens, to pay such duties itself. But as the Government has no authority to expend money for any purpose without the authority of Congress, the latter body accordingly authorized the Federal Treasury to apropriate money from its tax receipts and make payments with the same to the customhouse, which the customhouse was to immediately pay back into the Treasury. Just what process was gone through with to effect such a result the public was not informed, but probably the collector of customs drew his warrant on the Treasury, had the amount credited to his account, and then recredited to the Treasury. But, be this as it may, it is clear that the Government, under the conditions above stated, paid the tax on its imports; that the tax may be regarded in the light of a penalty on the Government for importing articles for its own use; and that the action of Congress in authorizing the Treasury to appropriate money for the payment of such taxes was a recognition or admission by that body that a tax upon imports neither puts anything in nor takes anything from the pocket of the foreigner. Does it not, moreover, invest with a degree of comicality a law enacted by the Congress of the United States for the purpose of taxing foreign importers, which necessitated the enactment by it of another law appropriating money to enable the United States to pay customs taxes every time on everything that it may import for its own use?[5] Finally, if the foreigner and not our citizens pays our customs taxes on imports, what is the object of placing by specific statutes any article on the free list? Why not let him continue to pay millions of taxes for us, as, for example, on sugar?

 

  1. It is fortunate that Mr. Wells had practically completed his essays on taxation before death put an end to his activity. The manuscript of two chapters was found among his papers—one on the Best Methods of Taxation, and the other on the Law of the Diffusion of Taxes, begun in this number. The first manuscript has some pages missing, and it has been thought best to postpone its publication, in the hope that the missing pages may be found. It is evident that the last touches were yet to be put upon the chapter on the diffusion of taxes—a chapter that was to sum up the theory of taxation developed by the writer. So much of that summary is contained in it as to make the meaning of Mr. Wells unmistakable, and its publication is further amply justified by the number of practical illustrations and happy application of theory to fact, in the selection and explanation of which the author excelled. The entire series, which has been running in the Popular Science Monthly for more than three years, will now be collected in a volume—a worthy memorial to one whose powers of popular exposition of abstract problems placed him among the first of economists in the United States.
  2. On the Shifting and Incidence of Taxation, by Prof. Edwin R. Seligman, 1892.
  3. The assertion would not be warranted that the masses of New York were wholly unanimous in condemning Tweed, for a portion of them were undoubtedly well content with the situation. He had curried favor with the very poor and ignorant by distributing coal and flour, and making ostentatious presents of money; and these "charities" are remembered to this day in the poorer parts of New York city, and Tweed is esteemed by many as the victim of injustice, and a man who suffered because he was the friend of the people.
  4. Of the net ordinary receipts of the Federal Government ($385,819,000) in 1893, only about $12,000,000 was derived from sources that could not be regarded as taxes, and were mainly receipts from the sales and surveys of public and Indian lands ($4,120,000) and of other Government property.
  5. In 1897 the merchant tailors of the United States, who ought to know something about the incidence of a custom tax on imported clothing, united in a petition to Congress asking that Americans returning from Europe be permitted to introduce only two suits of foreign-made clothes free of duty; and in support of their request they comment as follows on a ruling of the Treasury in respect to this matter: "Under this ruling it was possible to enter free of duty vast quantities of foreign-made garments which had never been actually in use, and which were so imported solely because there exists a relative difference of at least fifty per cent in values between the cost of made-up garments in the United States and Europe, thus saving to the purchaser of garments abroad one half of their actual value upon arrival within the United States duty free." But if the foreigner who made and sold the goods in question was liable to pay the duty on dutiable clothing, and attended to his duty, there would be no profit to the returning tourist in importing clothing free of duty. It is further evident also that American tailors agree in opinion with Alexander Hamilton that the consumers of imported articles pay the customs taxes.

    The records of the commercial relations between the United States and Canada are exceedingly instructive on this matter. They all show that for the products which the Canadian sends to the United States, and on which somebody pays the duty, he receives exactly the same price as for those products which he sends to England, on which nobody pays any duty. This experience is exactly the same as that of the farmers of the Northwestern States of the Federal Union, who usually get the same price for their wheat furnished to a Minnesota flour mill, or for shipment to free-trade England, as to countries like France and Germany, where heavy duties are assessed upon its import. The term "usually" is employed, for producers in the United States and Canada alike do not always get as large a price for the articles they export as for the same articles they sell to their fellow-countrymen. Again, if it be true, as the advocates of extreme protection assert, that the foreign exporter and not the consumer pays the duties on goods sent by him for sale in this country, how does it happen that it is not true concerning the farm produce and live stock exported from Canada? And why should American farmers be exempt from this rule in sending their grain to Europe? Has anybody ever known of England buying American products any cheaper in New York than France or Germany, and is it not also true that the French or German or Italian consumer usually pays at least the amount of the duty levied by his Government more for American products than his English competitor has, whose imports are subjected to no duty? During the period from 1854 to 1866 there was, under the reciprocity treaty, practically free trade between Canada and the United States in live stock, wool, barley, rye, peas, oats, and other farm products, while subsequent to 1866, when the reciprocity treaty had been repealed, duties were imposed on all these articles on their import from Canada into the United States. During the first period Canadian horses, for example, sold under free trade for shipment to the United States at from sixty-five to eighty-five dollars each, while during the years next subsequent to 1866 the value of the Canadian horses imported into the United States was returned at from ninety-two to one hundred and four dollars each; thus showing that the United States tariff did not force the Canadian horse breeders to lower their prices in order to compensate American purchasers for the duties exacted. And as regards the other products mentioned, the official data show that in no case did the imposition of duties under the United States tariff reduce the prices paid by American purchasers to the Canadian farmers for their products. These are very commonplace, very familiar, and very convincing facts which ought to silence all this talk about the foreign exporter or anybody else but the consumer paying the duty; but it is not at all probable that they will.