:^^,'' ^^•^-'- ''^-^^^^j llBf .""."^.l»'"!fi'-&rt7-'^' i^fvll^^^''- '■-. -- >J S^T" ■i^;4' vt^/ r^*f' /t ■*Y:ssv\- €mmll ^nivmii^ | lihxM^ BOUGHT WITH THE INCOME FROM THE SAGE ENDOWMENT FUND THE GIFT OF HettrQ m. Sage 1S91 a.^isfoj adrjj.^ 9724 '-nu^tpy APR 2m% ^^P 5l9e fi^T - % MAR 2 7 1956 K^ ^airi^^-f^"?^.' ,~ :A. "^'"^, •1969 i*ii^ j^^t^^^rTTC) AN ''^, -s . ;.." ;^ifffs^'(i5- ■ Cornell University Library HJ2326.S46 P9 1908 olin 3 1924 030 264 331 Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924030264331 American Economic Association Quarterly Formerly published under the title of Publications of the American Economic Association THIRD SERIES. ISSUER QUARTERLY. Vou XX, Nu. 4. FslCEt $4.00 PER YEAR PROGRESSIVE TAXATION IN THEORY and PRACTICE by EDWIN R. A. SELIGMAN DECEMBER 1908 published by the American Economic Association Prtnceton, N. j. LONDON: SWAN SONNENSCHSIN & CO. Entered as second class matter May 5, 1908, at the post oiEceat Princeton, N. J., under the Act of Congress of July 16, 1894. PRICE, IN PAPER, $i.2S; IN CLOTH $1.73 AMERICAN ECCfJOMIC ASSOCIATION Organized at Saratoga, September 9, 1885. EX-PRESIDENTS •Francis A. Walker i Arthur T. Hadley, ,„; Massachusetts Institute of Technology. Yale University. ' flpHiKegS F. Dunbar, Richard T. Ely, " , , Harvard University. University of Wisconaih. John B. Clark, Edwin R. A. Seligman! Columbia University. Columbia University^ ' Henry C. Adams, Frank W. Taussig, University of Michigan. Harvard University. Jeremiah W. Jenks,? Cornell University. OFFICERS FOR THE YEAR igo8 President Simon N. Patten, University of Pennsylvania. yice-Presii^Mis Davis R. Dewey, Mass. Inst, of Technology. James B. Dill, East Orange, N. J. John M. Glenn, New York City. Secretary and Treasurer WiNTHROP M. Daniels, Princeton University, Princeton, N. J. Publication Committee Jacob H. Hollander, Chairman, A. W. Flux, Johns Hopkins Univeisityv Baltimore, Md. McGill Univeisity Charles J. Bullock, David Kinley, T """^w*^ University. University of Illinois. James W. Crook, William A. Scott. Amherst College. UUiversfty of Wisconsiii. Editor of the Economic Bulletin E. W. Kemmerer, Cornell University, Ithaca, N. Y. Executive Committee Elected Members — Ex'Offlcio Members — The President The Ex-Phesioents The Vice-Presidekts J The SBCHETAI.y.T^I^^B The Chairman Pobl. Com, Frank H. Dmok, Dattmonth CoUme f «>nw C. Emwy, Yale Unlv«t2ty JPB^. Gray; Univeraity ol Mto«5t« B, H. Mever, Uniirerait, V WwcS Heurv R. Seaoer, Columbia o2?r4y Inqukiesand other comniunicattons regarding membership, BieetiiiKs and thr «.„.„< « Eamemic Aaacmttim, Princeton University, Princeton, N. jT ^-io J4 20 -25 i^ 10 -12^ Yi 2S -30 154 over 30 2 The total payment was so arranged that incomes under £60 were exempt, incomes from £60-200 paid from one hundred and twentieth to one-tenth of the respective amounts, i. e., five-sixths of one per cent to ten per cent, ^ As the statements of Dowell, History, etc., ii, p. 220 and iii, p. 87, are very incomplete and partly inexact the ofBcial figures are here given as contained in the First Report from the Select Committee on the Income and Property Tax, i8S2, pp. i-S, and in the act itself, Statute 38 George II, chap. 16, "The Aid and Contribution Act." 603] Progressive Taxation in Theory and Practice 41 while all incomes over £200 paid ten per cent.^ Parents of four to seven, eight to nine, and ten or more children, could claim ten, fifteen and twenty per cent abatement respectively. When Pitt introduced his general income tax in 1799,* after the comparative failure of the Triple Assessment, the same arrangement was retained as to the total exemp- tion of £60, as well as to the graduation between £60- 200, and the ten per cent rate on all incomes over £200. Minor changes were made in abatements allowed for children. When the general income tax was repealed and the system of schedules introduced in 1803, the system of graduation was somewhat altered.* £60 were free as be- fore ; from £60-70 the rate was three pence in the pound, and the rate increased one penny for every additional ten pounds income, until £150 was reached, above which the rate was uniformly one shilling in the pound. In 1805 one-quarter was added to the rates, but the graduation in the smaller incomes still proceeded on the same principle. In 1806, when the rate of the tax was fixed at ten per cent, the limit of total exemption was decreased from £60 ' The exact figures were as follows : On incomes from £ 60- 65 the tax was not to exceed 1/120 of the income. 65- 70 70- 75 7S-80 and so on to loo-ios I OS-no iio-iiS and so on to 150-155 155-160 160-165 and so on to over 200 "'The Tax on Property and Employments." 39 George III, chap. 13- *"An Act for granting a Contribution on the Profits arising from Property, Professions, Trades and Oifices," 43 George III, chap. 122. 1/95 " 1/70 " 1/65 " 1/40 " 1/38 " 1/36 " 1/20 " I/I9 " I/I8 " I/IO " 42 American Economic Association [604 to £50, while the system of abatement was so changed that for every pound income below £150 one shilling tax should be deducted. Thus at £50 the charge was 100^. The abatement was looi. The tax was os. 51 " " " I02S. " " " 99J. " " " zs. 52 " " " 104J. " " '• p&fi " " " 6i. 149 " " " 29&f. " " " IS. " " " 2973. 150 " " " 300J. " " " OS. " " " 300s. Moreover the abatements were limited to incomes from labor, and the allowance for children was abolished, be- cause of the frauds practiced. The tax was repealed in 181 6. When it was reintro- duced in 1842 the system of graduation was not adopted, but all incomes below £150 were entirely exempted. In 1853, however, the principle of graduation was again applied, but in a simplified form. The limit of total ex- emption was changed to £100; on incomes from £100-150 the rate was ^d. in the pound; on incomes above £150 it was yd. In 1863 another change was made by which the rate was made the same on all incomes, but with the pro- viso that incomes below a certain sum should be absolutely exempt, while on incomes up to another limit a definite and unchangeable amount should be deducted. This principle still exists at present, although the figures have been slightly altered. Thus in 1863 £100 were exempt, while on incomes between £100-200 an abatement of £60 was made. In 1873 an abatement of £80 was allowed on incomes under £300. In 1876 the limit of absolute ex- emption was again raised to £150, while on incomes under £400 an abatement of £120 was made. In 1894 the abatements and exemptions were again extended. On incomes between £160 and £400 the abate- ment was raised from £120 to £160, and on incomes between £400 and £500, £100 were now deducted. In 605] Progressive Taxation in Theory and Practice 43 1898 this last abatement was increased to £150, and two new classes were added, so that the arrangement became the following, the limit of complete exemption remaining at £160: On sums from £i6o-£4CX) the abatement is £160 " " " 400- 500 " " " ISO " " " 500- 600 " " " 120 " " " 600- 700 " " " 70 the full rate being levied only on incomes of over £700. This is the system enforced at present; but the move- ment for the adoption of a more general progressive sys- tem has attained such proportions that a select committee was recently appointed to consider the whole subject. The committee brought in its report in 1906. It recommended an extension of the limit of abatements to £1000,® but favored leaving the assessment of the tax according to schedtiles, through stoppage at the source as at present. It stated, however, that on incomes over £5000 it was practicable to introduce a system of general progression by levying what they called a "super-tax" assessed through personal declaration on the income as a whole. The committee also recommended the introduction of the principle of differentiation between earned and unearned "'Graduation of the income tax by an extension of the existing system of abatements is practicable. But it could not be applied to all incomes from the highest to the lowest, with satisfactory results. The limits of prudent extension would be reached when a large increase in the rate of tax to be collected at the source was necessi- tated, and the total amount which was collected in excess of what was ultimately retained became so large as to cause serious inconve- nience to trade and commerce and to individual taxpayers. Those limits would not be exceeded by raising the amount of income on which an abatement would be allowed to £1,000 or even more." Re- port from the Select Committee on Income Tax; with the Pro- ceedings of the Committee, 1906, no. 365, page 8, sec. 30, para- graph I. 44 American Economic Association [606 incomes, stating it to be their opinion that this was prac- ticable if Hmited to earned incomes of not over £3000. In the budget of 1907 the principle of differentiation was accepted, and "earned" incomes up to £2000 henceforth pay -e«iy 25 per cent of the full rates. Up to the present time, however, (1908) a super-tax scheme has not been introduced by the government. In England, therefore, the principle of graduation has been applied to incomes only in the sense of a degressive tax. The general theory is that of proportional taxation, but a slight allowance is made through the system of abatement on the smallest incomes. At present, outside of the degression in the income tax, graduation is found only in the so-called death duties or inheritance tax. The old probate duty and account duty as changed in 1881 varied from ij/a per cent to 3 per cent, while the estate duty levied in 1889, imposed an additional tax of i per cent on successions over £10,000, thus increasing the progressive nature of the charge. In 1894, however, a new estate duty was imposed to replace these three duties. The estate duty was graduated ac- cording to the following scale : Estates. Rates. £100 to 300 30 sh. 300 " 500 50 " SOD " 1,000 2% 1,000 " 10,000 3% 10,000 " 25,000 4% 25,000 " 50,000 4!/^% 50,000 " 75.000 5% 75,000 " 100,000 514% 100,000 " 150,000 6% 150,000 " 250,000 6^% 250,000 " 500,000 7% 500,000 " 1,000,000 7^% Over 1,000,000 8% 607] Progressive Taxation in Theory and Practice 45 In 1901 the estate tax on estates exceeding £150,000 was increased as follows : iiSo.ooo to 250,000 yijo 250,000 " 500,000 Sio 500,000 " 750,000 99!, 750,000 " 1,000,000 lO'^o 1,000,000 " 1,500,000^ fiifc 1,500,000 " 2,000,000 I 2,000,000 " 2,500,000 )■ 2,500,000 " 3,000,000 Over 3,000,000 10% on first million and 12J0 14% 15% on re- mainder. In addition to this estate duty payable on the value of the estate as a whole, collateral heirs are still chargeable with the legacy and succession duty, rising from 3 to 10 per cent according to relationship, and payable on the dis- tributive shares of what remains after the estate duty is paid. The highest actual rate is thus about 23 per cent.'^ As is pointed out by the Select Committee of 1906 on the income tax, if the income tax and the death duties be regarded together as a form of the taxation of in- comes, there is already a very substantial graduation of taxation on incomes derived from large estates, and a differentiation between large incomes derived from per- sonal exertion and those derived from inherited prop- erty.^ ' Cf. for details. West, The Inheritance Tax, 2nd ed., 1908, pp. 62-64. Columbia University Series in History, Economics and Public Law, vol. iv, no. 2. ^ Report from the Select Committee on the Income Tax, igo6, p. 8. The application of the progressive principle to the income tax in England had previously been discussed unfavorably by G. H. Blun- don, "A Progressive Income Tax," in The Economic Journal, v (1895), p. 527- § 7- Germany. In Germany the progressive principle has been intro- duced in both commonwealth and local finance, first in the income tax, then in the inheritance tax, and finally in the unearned increment taxes. ^ The most important instance was until recently that of the Prussian income tax. Originally instituted in 1820 as a class tax, or species of graduated poll tax, it was divided in 185 1 into a class tax and a classified income tax. This latter tax was so arranged that the lowest income in each class paid a rate of three per cent. In 1873 the system was slightly modified, the rate in the class tax varying approximately from three-quarters of one per cent to two and a half per cent, while in the income tax the maximum was still three per cent. Finally, in 1891, the class tax was abolished and the income tax was made somewhat more progressive than the class tax had been. Incomes below 900 marks are exempt; incomes from 900 to 1050 marks pay six marks tax, i. e., 62/100 per cent of the mean. The scale is then so fixed that the rate gradually rises until four per cent is ' Cf. in general for the income taxes Handworterbuch der Staats- wissenschaften, 3rd ed., 1909, vol. iii, where all the latest details are given. Cf. also Gustav Schmitt, Systematisch-Kritische Darstellung der sur Zeit in Deutschland und Oesterreich bestehenden allgemein- en Einkommensteuergesetze, 1900. See also M. v. Heckel, Die Fort- schritte der direkten Besteuerung in den deutschen Staaten, 1904, and the same author's Lehrbuch der Pinanswissenschaft, i, 1907. The most recent and comprehensive account will be found in the authori- tative official document entitled Denkschriftenband sur Begriindung des Entwurfs eines Gesetses betreffend Aenderungen im Finanz- wesen. Band I, Das Finanzwesen der offentlichen Korperschaften Deutschlands, 1908. An account of the German income taxes will also be found in the British blue book, Reports from his Majesty's Representatives abroad respecting Graduated Income Taxes in Foreign States. Miscellaneous, no. 2, 1905. Cd. 2587. 609] Progressive Taxation in Theory and Practice 47 reached at an income of 100,000 marks ($25,000), be- yond which point the rate remains the same.^ In 1906 an amendment was adopted appHcable to Hmited Hability companies. Up to that time corporations had been sub- ject to the same scale of the income tax as individuals; but an income of 3}^ per cent on the capital was in all cases exempt. Now this exemption was removed in the case of limited liability companies which are henceforth taxable on their entire income. The rates, however, are some- what higher, rising according to the scale printed on the next page but one. While a few of the smaller German commonwealths have a proportional income tax, almost all of the income taxes in the larger states are arranged on the progressive principle, some as in Prussia, with fixed taxes for each class of income, others with fixed rates for each class. In almost every case, however, the number of classes is large, so that the increase of rate is very gradual. In Baden the progressive principle is applied in a peculiar way through what is known as Steueranschldge, or tax- able valuations. For each class of assessed income only a certain sum is taxable, the amount being only one-fifth of the lowest assessed income in the first class (900-1,000 " From M. 900 to 1,800 the tax increases 3 marks for every 150 1,800 " 4,500 tt 5 it '* 300 4,500 " 6,500 tc 14 tt " 500 6,500 " 7,500 tt 16 a tt 500 7,500 " 9,000 tt 20 It t( 500 " 9,000 " 9,500 " 24 it tt 500 9,500 " 10,500 (( 24 it t( 1,000 10,500 " 30,500 tt 30 (f tt 1,000 30,500 " 32,000 tt 60 ti ft 1,500 32,000 " 78,000 tt 80 tt tt 2,000 78,000 " 100,000 tt 100 tt it 2,000 Above 1,000,000 marks the tax increases 200 marks for each 5,000. Cf. Kolisch, Das Einkommensteuergesetz vom 24 Juni, 1891, zum prak- tischen Gebrauch bearbeitet, Glogau, 1893. 48 American Economic Association [610 marks) and gradually increasing until when the income is 25,000 marks, the total assessed income is also the total taxable income. The rate, as fixed every year by law, is then levied on these taxable valuations. This system, it will be recognized, is the same as that formerly practiced in the case of the progressive direct tax in Athens. The income tax was first applied in Bavaria in 1899, and in Wiirtemberg in 1903 ; in Baden and Saxony the system is somewhat older, the Saxon law, however, having been amended in 1902, the Baden law in 1900 and again in 1906. In order to bring out clearly the differences in the methods of graduation, the rates for the important com- monwealths which possess a general income tax are ap- pended : PRUSSIA (1891). Income, Marks Tax, Marks Income, Marks Tax, Marks 900-1050 6 4200- 4500 104 10SO-1200 9 4500- sooo 118 1200-1350 12 5000- ssoo 132 1350-1500 16 5500- 6000 146 1500-1650 21 6000- 6500 160 1650-1800 26 6500- 7000 176 1800-2100 31 7000- 7500 192 2100-2400 36 7500- 8000 212 2400-2700 44 8000- 8500 232 2700-3000 52 8500- 9000 252 3000-3300 60 9000- 9500 276 3300-3600 70 9500-10500 300 3600-3900 80 10500-11500 330 3900-4200 92 11500-12500 360 and so on. Up to 30,500 increase of 30 for every 1000 marks. " 32,000 " " 60 " " 1500 " 78,000 " " 80 " " 2000 " 100,000 " " 100 " " 3000 From 100,000-105,000 marks the tax is 4,000 marks. For every additional 5,000 marks the tax is 200 marks more. The Prussian rate thus begins at .67 per cent, on $225 and reaches 4 per cent, at $25,000. 6ii] Progressive Taxation in Theory and Practice 49 PRUSSIA (1906). TAX ON LIMITED LIABILITY COMPANIES. Income, Marks. Tax, Marks. Income, Marks. From Tax, Marks. 900-1050 7 1050-1200 10 I2OO-I350 14 1350-1500 18 1500-1650 24 165O-180O 30 1800-^100 36 2100-2400 42 2400-2700 48 2700-3000 56 3000-3300 66 3300-3600 y6 3600-3900 86 3900-4200 96 4200-4500 112 4500-5000 132 5000-5500 148 5500-6000 164 6000-6500 180 and so on. Up to m. 9,500 the tax increases m. 20 for every 500 marks " 46,500 " " 40 " " 1,000 " 48,000 " " 60 " " 1,500 " 100,000 " " 100 " " 2,000 " On incomes from m. 100,000 to 104,000 the tax is m. 4600 and increases by m. 180 for every additional m. 4000.° The rate therefore begins at .78% on $225, and rises to 4.6% on $25,000. BAVARIA (1899). Income, Marks. Tax, Marks. 4200- 4600 40 4600- SOOO 45 5000- 5500 50 5500- 6000 57 6000- 6500 64 6500- 7000 72 7000- 7500 80 7500- 8000 90 8000- 8500 100 8500- 9000 112 9000- 9500 124 9500-10000 136 loooo-iiooo 150 11000-12000 165 12000-13000 180 13000-14000 200 and so on. "The new law will be found in Schanz, Pinam Archiv, vol. xxiii (1906), pp. 582 et seq. Income, Marks, Tax, Marks, o- 500 ^ 500- 750 I 750- 900 2 900-1050 3 1050-1200 4 1200-1400 5 1400-1600 6 1600-1800 8 1800-2000 10 2000-2200 12 2200-2400 15 2400-2700 18 2700-3000 22 3000-3400 26 3400-3800 30 3800-4200 35 50 American Economic Association [612 Up to 22,000 an increase of 20 m. for every 1,000 marks " 34,000 " " 30 " " 1,000 " " 41,000 " " 40 " " 1,000 " " 50,000 " " so " " 1,000 " Above 50,000 m. the tax remains at 3%.* WttRTEMBERG (1903). The Wiirtemberg law of 1903 is arranged in 96 classes. As these would be too bulky to print entire, we add only a few of the typical lower classes : Class. Income, Marks. Tax, Marks. 1 500- 650 2 10 1,850- 2,000 18 20 3,350- 3,500 53 30 4,850- 5,000 121 40 6,800- 7,000 204 50 9,700-10,000 340 60 14,500-15,000 549 70 24,000-25,000 956 75 29,000-30,000 1175 Above 30,000 marks the rate of tax is as follows : 76 30,000- 35,000 4% 80 50,000- 55,000 4.20% 85 90,000-100,000 4-45% 90 140,000-150,000 4.70% 95 190,000-200,000 4-95% 96 200,000 and over 5%° BADEN (1906). Income, Marks. Steueranschlag (Valuation) Marks. 900-1000 200 looo-iioo 250 II00-I200 300 and so on. 2000-2100 750 2100-2200 825 and so on. 3000-3100 1500 3100-3200 1600 and so on up to 10,000 marks. * Details will be found in Schanz, Finanz Archiv, xvii (igoo), p. 773. "The law is printed in Schanz, Finanz Archiv, xxi, (1904), pp. 115 et seq. ■613] Progressive Taxation in Theory and Practice 51 On incomes from 10,000 to 20,000 m. the first 10,000 m. are valued at 9,000 marks, and every 500 marks additional is valued at the full amount. On incomes from 20,000 m. to 25,000 m. every 500 m. is valued at the full amount. On incomes over 25,000 m. every 1,000 m. is valued at the full amount." SAXONY (1902). Income, Marks. Tax, Marks. Income, Marks. Tax, Marks. 400- 500 I 3400- 3700 90 500- 600 2 3700- 4000 105 600- 700 3 4000- 4300 120 700- 800 4 4300- 4800 140 800- 950 7 4800- 5300 160 950-1100 10 5300- 5800 180 1100-1250 13 5800- 6300 200 1250-1400 16 6300- 6800 221 1400-1600 20 6800- 7300 242 1600-1900 26 7300- 7800 263 1900-2200 36 7800- 8300 285 2200-2500 46 8300- 8800 307 2500-2800 56 8800- 9400 330 2800-3100 67 9400-10000 354 3100-3400 78 loooo-iiooo 380 and so on. Up to 20,000 marks the tax rises 40 m. for each 1,000 marks. " 34,000 " " " " 45 " " 1,000 " " 73,000 " " " " 50 " " 1,000 " " 100,000 " " " " 60 " " 1,000 " Over 100,000 marks the rate remains at 5%.' The principle of graduation has been appHed in Ger- many also to the local income taxes. In Prussia, for °The rates in Baden were slightly altered in 1894 and again in 1900 and 1906. For the 1894 rates see Schanz, Finanz Archiv, xii, (1895), p. 173. The figures in the text are for the new law of 1906, Finanz Archiv, xxiv, (1907), p .153. For the earlier history see Max Voigtel, Die direkten Staais- und Gemeindesteuern im Grossherzog- tum Baden, 1903. ' The law of 1902 will be found in full in Schanz, Pinans Archiv, XX (1903), pp. 258, 279. The earlier law of 1894 will be found ihid. xii, (1895), p. 191. 52 American Economic Association [614 example, we find such graduated local taxes running up to as high as ten or twelve per cent of the income.® The German state income taxes ought, therefore;^ really to be called degressive rather than progressive taxes, the normal rate which is usually reached at in- comes of 100,000 marks being four per cent in Prussia and Hesse, and five per cent in Saxony and Wiirtem- berg. The highest rates in any of the German states are found in the old Hansa towns, where they reach the fig- ure of eight per cent. In these cases, however, it must be remembered that the tax includes local as well as state ' imposts. Recent years have witnessed the application of the pro- gressive principle to inheritance taxes also. The move- ment began in Baden in 1899, spread to Hamburg and Liibeck in 1903, to Bremen in 1904, and to Anhalt and Reuss (younger line) in 1905. In 1906, however, a pro- gressive inheritance tax was adopted for the entire Ger- man empire. The basic rates, arranged according to rela- tionship, are as follows : Per Cent. Children and other direct descendants exempt Parents, brothers and sisters and their children 4 Grandparents, parents-in-law, step-parents, children- in-law and step-children, grand nephews and nieces and adopted children 6 Brothers and sisters of parents and relatives by- marriage in the second degree, in collateral lines 8 All other cases 10 Inheritances under 500 marks exempt And in the case of parents, grandparents and adopt- ed children, 10,000 marks exempt " Cf. the details for each town during the seventies in Neumann, Die progressive Einkommensteuer im Stoats- und Gemeinde-Haus- halt, pp. 1 14-125. For later details see the literature mentioned on p. 46. 615] Progressive Taxation in Theory and Practice 53 Per Cent. Over 20,000 marks (or in the first 4% class over 50,000 marks) the rates are increased i/io for each further sum, at first of 20,000 or 25,000 marks, and afterwards of 50,000 or 100,000 marks. On inheritances over 1,000,000 marks or more the rate is 2^ times the basic rate, making the maxi- mum charge 25% The progressive rates apply to the entire amount of the inheritance, and not, as in France, only to the respective fractions." Germany thus now enjoys the distinction of having the highest maximum that is found in any of the leading European countries. In the project presented to the Reichstag at the end of 1908 it is proposed tO' raise these high figures to a still higher level. The progressive principle has still more recently been applied in Germany in connection with the tax on the un- earned increment, or increased selling value of land ( Wertsuwachssteuer) .^° The unearned increment tax was introduced in Cologne in 1905, and has now spread to a number of towns, more especially Frankfurt a/M, Dortmund, Essen, Gelsen- kirchen, Hanau, Liegnitz, and to some of the suburbs of Leipsic and Berlin. The character of the progressive rates may be illustrated by the system in force in Cologne. The increase of value on which the tax is payable is inter- preted to mean the difference between the last price paid for the property at any sale and the present price. To the last price paid, however, are to be added, (a) in the case of unimproved land, interest, not compounded, at the rate "See Schanz, Finanz Archiv, xxiii, (1906), p. 784; also West, The Inheritance Tax, 2nd Edition, (1908), pp. 35, 36. ^° C/. K. Kumpmann, Die Wertzuwachssteuer. 1907; R. Brun- huber. Die Wertsuwachssteuer, 1906 ; A. Wagner, Ziir Rechtfertigung der Zuwachssteuer, igo6; Boldt, Die Wertzuwachssteuer, 1908; Damaschke, Jahrbuch der Bodenreform, passim; R. C. Brooks, "The New Unearned Increment Taxes in Germany,'' Yale Revieiv, xvi, (1907), pp. 237, et seq. 54 American Economic Association [6i6 of four per cent from the time of the last sale to the pres- ent sale; (b) expenditures incurred for the improvement of the land and costs of new buildings or re-buildings; (c) five per cent of the last price to represent stamp tax, transfer tax, and certain fees. If certain parcels of the whole tract have been sold at a loss, the loss may be de- ducted provided that the losing sales occurred at the same time as the profitable sales, or within a period of three years previous. With these limitations, the rates are as follows : An increase of value of lo per cent or less is exempt. An increase of value in excess of ten per cent is taxed at the following rates : Increase of value in excess of io%. Tax rate {.cfo). 10-20 10 20-30 II 30-40 12 and so on. The rate of tax increases one per cent for each ten per cent increase of value, up to a rate of twenty-five per cent on an increase of value in excess of 160 per cent. These rates, however, are applied only in case less than five years have elapsed since the last sale. If more than five, and less than ten years have elapsed, only two-thirds of the above rates are applied; if more than ten years, only one-third. In the other towns, the initial rate and the rate of pro- gression vary considerably. In some cases the minimum rate is only three per cent and in others five per cent. The rate of progression varies from one per cent tax for each ten per cent increase of value, as in Cologne, up to ten per cent tax for each five per cent increase of value. The maximum limits vary still more widely. In Paderborn, Dortmund, Essen and Hanau the highest rate of tax is fifteen per cent in case of an increase of value over 75, 617] Progressive Taxation in Theory and Practice 55 80, 140 and 200 per cent respectively. In Frankfort the maximum is twenty-five per cent tax where the increase of value is over 130 per cent. Gelsenkirchen has the highest maximum with a rate of thirty per cent where the increase in value is over 155 per cent. The results of this experiment with the progressive tax- ation of the unearned increment of urban land will be watched with interest. Thus far the yield has been on the whole insignificant. A study of progressive taxation in Germany would not be complete without reference to the so-called Staffel- steuern or graduated taxes on spirituous and malt liquors. ^^ The tax on alcoholic liquors (Branntweinsteuer) be- came in 1887 an imperial tax on distilleries (Brennsteuer) with two separate graduated scales which were merged by the law of 1902 into a single scale. According to this act, the tax begins with a production of 200 hectolitres of pure alcohol when the rate is two marks per hectolitre. From 200 to 400 hectolitres the tax increases by half a mark for every additional 100 hectolitres; above 400 hectolitres it increases by half a mark for every addi- tional 200 hectolitres, until it reaches a maximum of six and a half marks for 1800 hectolitres. The tax on malt liquors (Brausteuer) is not an impe- rial tax. But apart from the separate beer taxes in Bavaria, Wiirtemberg and Baden, most of the other Ger- man states have formed a North German Union (Nord- deutsche Brausteuer gemeinschaft) which adopted in 1906 a general law on the subject.^^ According to this act the "For a general discussion of these taxes, see Josef Dierschke, Progressive Besteuerung des Grossbetriebes bei einigen Verbrauch- steuern, 1903, and Clement Charpentier, La Progression dans les Impots Indirects en Allemagne, 1908. " See especially E. Struve, Zur Frage der Brausteuerstaffelung in der nord-deutschen Brausteuergemeinschaft, 1906. 56 American Economic Association [618 tax is graduated according to the amount of raw materials employed. Breweries using during the fiscal period 250 metric quintals or less, pay 4 marks. Above that limit the tax is as follows : Quintals Tax per Hectolitre, in marks 250- 500 4-So 500-1,000 5.00 1,000-2,000 5.50 2,000-3,000 6.22 3,000-4,000 7.00 4,000-5,000 8.00 5,000-6,000 9.00 Over 6,000 10.00 In Bavaria, according to the law of 1888, the general rate is six marks per hectolitre. But breweries using less than 6,000 hectolitres of malt pay only five marks per hec- tolitre for the first 2,000. If they use more than 10,000 hectolitres the rate increases by a quarter of a mark per hectolitre for the next 30,000 hectolitres, and by half a mark per hectolitre for everything above 40,000 hecto- litres. In Wiirtemberg graduation was introduced in 1893. In 1900 the rates were changed as follows: The normal tax is five marks per quintal of malt used. Up to 1000 quintals, however, the tax is fixed at 70 per cent of the normal rate, for the next 1000 quintals at 80 per cent, for the next 3000 quintals at 100 per cent, for the next 4000 quintals at no per cent, for the next 10,000 quintals at 120 per cent. In Baden the progressive rate dates from 1896. For a production up to 1500 quintals of malt the tax is eight marks for the first 250 quintals, and 10 marks for the remainder; from 1500 to 5000 quintals the rate is eleven marks, and above 5000 quintals the tax is twelve marks. The system of graduation was also applied in Germany to the sugar tax in 1896. But as a consequence of the 619] Progressive Taxation in Theory and Practice 57 abolition of sugar bounties by the Brussels Convention the entire system of sugar taxes was abandoned in 1903. It will be seen from the above that the German system of progressive indirect taxes on liquors has for its object the desire to protect the small producer against the com- petition of his larger rival. Much the same end was sought to be achieved by the progressive tax on depart- ment stores (Waarenhaussteuer) , which is found in sev- eral of the German states, and which is graduated accord- ing to the amount of sales ( Umsatzsteuer) . In Prussia this tax dates from 1900. The tax begins at the rate of one per cent, when the sales amount to 400,- 000 marks, and increases slowly until it reaches two per cent at 1,000,000 marks. In Bavaria, according to the law of 1899 the range of the tax is greater, varying from one-half of one per cent to three per cent. In Baden, ac- cording to the law of 1904, the graduation is considerably more marked. The rate begins at two per mill for sales of 200,000 marks, and increases one per mill for each suc- ceeding 200,000 marks up to 1,000,000 marks. Above that the rate increases one per mill for each successive 100,000 marks until it reaches ten per cent.^* The pro- tection of the small shop keeper, which was the avowed aim of this progressive tax, in pursuance of the famous middle-class policy {Mittelstandspolitik) , has, however, not been achieved.^* "For details of the various German laws see v. Heckel, Lehrbuch der Finamwissenschaft, i, 1907, pp. 306-308. " Cf. Hans Gehrig, Die Waarenhaussteuer in Preussen: ein Beitrag zur Mittelstandspolitik, 1905. Dr. Gehrig declares the tax to have been a complete failure, and sees in the entire episode only another instance of the futility of seeking to check by government measures, and especially by any system of taxation, a natural economic evolution. § 8. Austria. In Austria the income tax is levied partly on the pro- gressive principle. The tax dates from 1849, but has been somewhat amended several times since, especially in 1868. According to the law of that date there were sev- eral schedules, to each of which a different rate of pro- gression was applicable. The first schedule included in- comes from business already subjected to the business tax; the second schedule comprised other incomes from personal exertions; the third schedule included incomes from loans, etc. In the first schedule the tax was origi- nally a proportional tax of five per cent, but the succes- sive amendments imposed additional increments on cer- tain classes, while adding smaller increments to other classes. The result was a progressive scale. In the case of certain associations and corporations falling within this schedule the progression was very rapid, ranging from two and a half to almost ten per cent. The law^ declared that when the income exceeded three hundred gulden, the first additional thousand gulden should be assessed at three-tenths of the amount, the second thou- 'Thus: Income, Assessment, Tax Rate, Tax, Rate of Income Gulden. Gulden. per cent. Gulden. per cent. i>ooo 300 8.S 25.5 2.SS 2,000 800 10 80 4 3,000 1,800 10 180 6 4,000 2,800 10 280 7 6,000 4,800 10 480 8 8,000 6,800 10 680 8.S 12,000 10,800 10 1,080 9 30,000 28,800 10 2,880 9.6 100,000 98,800 10 9,880 9.88 1,000,000 998,800 10 99,880 9.988 Cf. E. von Fiirth, Die Einkommensteuer in Oesterreich und ihre Reform, 1892, p. 46. 62 1 ] Progressive Taxation in Theory and Practice 59 sand gulden at five-tenths, and the remainder at its full value. In the second schedule the progressive principle was in- troduced already in 1849. From 630 to 1,050 gulden (600 to 1,000, old standard) the rate was one per cent, then rising one per cent for each 1,050 (old standard, 1,000) gulden until a maximum of ten per cent was reached. Owing to certain additions (Zuschldge), which varied from seventy to one hundred per cent in the different classes, the rates were from one and seven-tenths per cent to almost twenty per cent of the income.^ This seems an extravagantly high rate. In the third sched- °The exact figures are: Income, Tax, Rate, Gulden. Gulden. per cent. Under 630 o 630 10.71 1.7 1,050 17-85 1-7 1,275 25.52 2 1,995 49-98 2.5 2,100 63 3 3,150 126 4 4,200 210 5 5.250 31S 6 . 6,300 441 7 7,350 S88 8 8,500 7S6 9 9,450 945 10 10,500 1,155 II 12,600 1,575 12.S 15,750 2,205 14 18,900 2,83s 15 23,625 3,780 16 31,500 5,355 17 47,250 8,50s 18 94,500 17,955 19 1,050,000 209,055 19-91 10,500,000 2,099,055 19-991 Cf. Fiirth, op. cit, p. 47. 6o American Economic Association [622 ule, there was not so much a progression as a differentia- tion of the tax. In 1896 the system was again changed. The third schedule of the income tax was abolished and was con- verted into an independent tax on the income of capital (Kapitalrent'ensteuer) with the rates from one and one- half to ten per cent. The other two schedules were con- solidated into a general income and salary tax (Personal- einkommen- und Besoldungssteuer) , arranged according to a graduated scale. Incomes under 48,000 florins are arranged in sixty-five classes. Typical classes, with the tax thereon, are as follows : Class. Income, florins. Tax, florins* 1 600- 62s 3.60 10 950- 1,000 9.20 20 1,900- 2,000 30 30 4,200- 4,600 lOI 40 9,000- 9,500 272 50 18,000-19,000 670 60 36,000-38,000 1,390 6s 46,000-48,000 1,860 and so on. Up to 100,000 florins there is an increase of 100 £1. for every 2,000. From 100,000 to 105,000 flf. the tax is 4650 fl. On incomes over 105,000 fl. there is an increase of 250 fl. for every 5,000 fl. : that is, at the rate of five per cent.^ There is a supplementary tax on higher salaries, be- ginning at the rate of 0.4 per cent on salaries of 3,200 fl. and rising to 6 per cent on salaries over 15,000 fl. The progressive scheme has also been applied to in- heritance taxes for local purposes. Thus in lower Aus- 'Schanz, Finanz Archiv, xiv (1897), P- 167. See also R. Sieg- hart, "The Reform of Direct Taxation in Austria," Economic Jour- nal, viii (1898), p. 173. 623] Progressive Taxation in Theory and Practice 61 tria and in Vienna we find light progressive inheritance taxes imposed for special purposes. In lower Austria it is a school tax, beginning at one-quarter of one per cent for sums under 1,000 fl., and in Vienna it is levied for the hospital fund.* * Journal for the Society of Comparative Legislation, vol. v, p. 26. § 9- Switzerland. More interesting, because more distinctly due to the growth of democratic impulses, are the progressive in- come and property taxes in Switzerland.^ Here pro- gressive taxation is of recent date. It is indeed true that after the revolutionary movements of 1830 and 1848, when the Swiss were beginning to realize the inadequacy of the general property tax and were endeavoring to sup- plement it with an income tax derived from other sources than property, the income tax was made degressive, gen- erally sharply degressive. This was the case in Ziirich in 1832, where on incomes below eight thousand francs the rate descended from two and a half per cent to one- ^An article by Prof. Gustave Cohn, "Income and Prdperty Taxes in Switzerland," in Political Science Quarterly, iv (1889), p. 37, draws some general conclusions from the experience of Zurich. The article by Mr. R. H. Inglis Palgrave, "Progressive Taxation as levied in Switzerland," in Journal of the Royal Statistical Society, li (1888), p. 225, deals especially with the cantons of Baselstadt, Vaud and Uri. The English blue book Report on the different Systems of Graduated Taxation in force in Switzerland, (1892), deals with five cantons only: Vaud, Ziirich, Geneva, Grisons and Uri. The later report of 1905 on graduated income taxes, quoted above, p. 46, includes all the cantons. For complete and detailed information for the whole of Switzerland students must turn to Georg Schanz, Die Steuern der Schweis in ihrer Entwickelung seit Beginn des ip Jahrhunderts, five volumes (1890). Vol. i gives a general survey in pages 110-114, and the tables of progression for each canton in pages 367-379, while the details of the development will be found in volumes ii, iii and iv, and the laws themselves in vol. v. In the Quarterly Journal of Economics, i, 225, may be found the text of the law of 1886, imposing the progressive property tax in the canton of Vaud. A good account may also be found in Max de Cerenville, Les Impots en Suisse, 1898. In the interval between Schanz and Cerenville there were but few important changes in the progressive taxes. Since 1898 the changes have been still fewer. Cf. also the semi-official work of Dr. J. Steiger, Gr^ndziige des Finanzhaushaltes der Kantone und Gemeinden. Herausgegeben unter Mitwirkung des eidgenossischen statistischen Bureaus und Kantonaler Behorden. Bern, 1903. 625] Progressive Taxation in Theory and Practice 63 fiftieth of one per cent.^ The same is true of St. Gallen in 1832, of Zug in 1848, of Thurgau in 1849, and many- others. Some of the official commissions during these years recommended progressive taxes for the higher in- comes, as well as the extension of the graduated principle to the property tax. The public, however, was not yet prepared for this. In fact, in a few cases the degression in the income tax was again abolished, as in Zug in 185 1, and in Schaffhausen in 1862. The only exception to the statement that graduation was not applied to property is Baselstadt, where the income tax of 1840 was extended to the income from property as well, and where the rate varied from one-half of one per cent to three per cent for incomes over six thousand francs.^ The high progressive property tax in Neuenberg (Neuchatel) in 1848, where the rate varied from one per cent on 1,000-3,000 francs property to ten per cent on property over 500,000 francs, was an extraordinary measure and was not repeated.* The real impetus to progressive taxation was given by the Ziirich law of 1870, which applied the progressive scale to property as well as to income. During the seven- ties Graubiinden (Grisons), Glarus, Obwalden, Zug and Schaffhausen adopted the plan ; during the eighties Aar- gau, Uri,'Vaud; during the nineties Appenzell, Basel- land, Baselstadt, Lucerne and Solothurh followed. To- day progressive taxation of property or income is found in twenty of the twenty-five cantons, while the progres- sive inheritance tax is found in nine cantons, progressive taxation of some kind existing in twenty-one out of the twenty-five cantons. The system of progressive taxes on property or income in Switzerland may be classified into three groups : I. The cantons with a proportional property tax, but ' Schanz, op. cit, ii, p. ' Ibid., ii, p. 35. * Ibid., iv, p. SO. 64 American Economic Association [626 a progressive income tax. These are Bern, Freiburg, Obwalden, St. Gallen, Thurgau and Ticino. The rate of the property tax is the same, but the rate of the income tax varies from zero (in St. Gallen seven hundred francs income are entirely exempt), by slow gradations to over four per cent. The laws fix, not the rate of the tax, but the amount of the tax to be paid for each class of in- come.^ 2. The cantons with a progressive property tax. These are Geneva and Glarus. In Geneva the taxfe mobiliere applies only to personalty. If the property does not ex- ceed 50,000 francs, the first 3,000 francs pay nothing, the remainder pays one per mill ; if the property is between 50,000 and 250,000 francs, the first 50,000 francs pay forty-seven francs, and the rest two per mill; if the prop- erty exceeds 250,000 francs, the charges are as in the pre- ceding case, except that the surplus over 250,000 francs pays three per mill. In Glarus the general property tax is so arranged that on property less than 25,000 francs, the assessment is only sixty per cent of the true value, while on property above 100,000 francs an addition is made to the rate, ranging from one-tenth of one per cent to two per cent in the case of four million francs prop- erty.*' 3. The cantons with progressive property and income taxes. Most of the cantons with a property tax levy an income tax only on so-called earned income ; i. e., income not derived from property. But Baselstadt and Basel- land levy the income tax on incomes from property as well. Baselland, however, excepts interest on monied capital from the income tax.'' The progressive rates are much more sharply graduated in the income tax than in the property tax. For instance, in Baselstadt the rate ° Schanz, op. cit, v, pp. 309, 325, 353. ° Ibid., iii, p. 85. ''Ibid., i, p. 55. 627] Progressive Taxation in Theory and Practice 65 of the property tax is one, one and a half and two per cent, according as the property is below 100,000, between 100,000-200,000, or over 200,000 francs. The income tax is one per cent on incomes to 4,000 francs ; two per cent on the excess to 8,000 francs; three per cent on the excess to 12,000 francs, and four per cent on the remainder. Concessions are made for unmarried per- sons, and parents with small children for incomes from 1,200-2,400 francs. Calculating the property on a four per cent income basis, and including the additions levied for communal purposes, the rate of the entire property and income tax, when the income is derived from prop- erty, varies from less than two per cent up to nine and eight-tenths per cent of the income.^ In other cantons the rate of progression is smaller. So far as the technical methods of carrying out the pro- gressive principle are concerned, the Swiss cantons may be divided into four classes. The first class pursues the old Athenian plan, which in lieu of changing the rate assesses to the tax not the whole, but only varying pro- portions of the true property or income. Thus in Ziirich, In the property tax s/io of the first 20,000 francs are assessed. 6/10 " next 30,000 " " 7/10 " " 50,000 " " 8/10 " " 100,000 9/10 " " 200,000 " " 10/10 " " remainder " " In the income tax 2/10 of the first 1,500 francs are assessed. 4/10 " next 1,500 " 6/10 " " 3,000 8/10 " " 4.000 10/10 " remainder " Every one hundred francs income pays two francs, as often as every thousand francs property pays one franc. The same is virtually true in Freiburg. ' Cf. the table in Biicher, Basel's Staaiseinnahmen, p. 82, and Schanz, op. cit., i, p. 379- 66 American Economic Association [628 The second class follows the plan of capitalizing the income at different rates. Thus in Soluthurn® where both an income tax and a property tax exist, incomes above one thousand francs are considered as equivalent to prop- erty of ten times the amount ; but incomes from — 900-1000 francs are deemed to correspond to 8,000 francs property. 800- 900 " " " " " 6,000 " " 700- 800 " " " " 4,500 " 600- 700 " " " 3,000 " 500- 600 " " " " " 2,000 " " 400- 500 " " " 1,000 " " 300- 400 400 " " Incomes below 300 francs are deemed to correspond to property of the same amounts. In the third and fourth classes, which comprise the large majority of the cantons, the laws either prescribe a definite sum or rate to be paid by each class, or alter the rate for each class of property or income. Most of the cantons charge a fixed rate upon the entire property or income, according to the class in which it falls. But a few cantons, like Basel, Zug, Schaffhausen, Aargau and Vaud, divide the entire property or income, so that each successive portion or increment pays the rate assigned to that particular amount of the property or income.-^" In order to ascertain the tax on the entire sum, it thus be- comes necessary to make a series of arduous computations and additions. Geneva follows the same plan for its property tax, as does Ticino for its income tax. A peculiar feature of the Swiss taxes is that the pro- gressive rate is applied separately to the income tax and to the property tax. A taxpayer with 2,500 francs in- come from property and 2,500 francs income from labor ° Schanz, op. cit, ii, p. 457. "Ibid., i, p. 113. 629] Progressive Taxation in Theory and Practice 67 will be assessed separately for each, and will pay less than if he had 5,000 francs income, either from property alone or from labor alone. Only two cantons have attempted to apply the progressive system to the whole income, irre- spective of the source. They accomplish this by adding a certain percentage, not to the taxable property or in- come, but to the amount of the tax, figured on a propor- tional taxation of property and income. Thus in Aargau, every one who is assessed at from 40-70 francs tax must pay five per cent additional, from 70-100 francs tax ten per cent additional, and so on, until those who are as- sessed at over 500 francs tax must pay thirty-three per cent additional. So in Schafifhausen, those assessed at 25-50 francs pay five per cent additional, and so on until those assessed at over 500 francs tax pay fifty per cent additional. This plan possesses at least the advan- tage of simplicity. In most of the cantons the rate is determined for each assessrhent by the Grand Council, with a maximum rate which may not be exceeded without reference to popular vote. But in Basel, Geneva and Vaud the rates are fixed in the law itself. For the sake of completeness the rates of progression in each of the sixteen cantons are herewith appended in the following tables, the figures after the name of the can- ton signifying the year in which the law now in force was enacted : AARGAU.— ( ARGOVIE. ) — 1885. PROPERTY AND INCOME TAX. If normal tax varies from 40- 70 fr. an addition is made of 5% 70-100 " 100-200 " 200-300 " 300-400 " 400-500 " If the normal tax is over Soo fr. an addition is made of 33^% 10% 15% 20% 25% 30% 68 American Economic Association [630 APPENZELL A. RH.— (RHODES EXTfiRIEURS.)— 1897. PROPERTY TAX. Property Rate. I- 10,000 fr. Simple rate, generally 1% 10,001- 20,000 I. OS 20,001- 50,000 1. 10 50,001-100,000 1. 15 100,001-200,000 1.20 Over 200,000 1.25 INCOME TAX. Up to 2,000 fr. income the rate is i/io of 1%. From 2,000 to 10,000 fr. income the rate rises i/io of 1% for every one thousand francs. At 10,000 fr. income the rate is 1%. B AS ELLAND.— ( B ALE-CAMP AGNE. ) —1892. PROPERTY TAX. Property. Rate. From 1,000- 30,000 fr. Simple rate, generally 1%. " 30,001- 60,000 Addition of i/io for each 15,000 fr. " 60,001-100,000 " " i/io " " 20,000 " " 100,001-300,000 " " i/io " " 25,000 " " 300,001-400,000 " " i/io " " 50,000 " Above 400,000 fr. the rate is 2j4 times the simple rate. INCOME TAX. Income. Rate. 500- 700 fr. Yz the simple rate. 701- 900 J4 the simple rate. 901- 3,000 Simple rate. 3,001- 5,000 20% increase for each 500 fr. 5,001- 6,000 20% increase for each 1,000 fr. 6,001-12,000 30% increase for each 1,000 fr. Over 12,000 3 times the simple rate. B ASELSTADT.— ( B ALE-VILLE) .—1897. PROPERTY TAX. INCOME TAX. Property. Rate. Income. Rate. Up to 50,000 fr 1% Up to 4,000 fr 1% 50,000-100,000 i^% On surplus to 8,000 2% 100,000-200,000 2% On surplus to 12,000 3% Over 200,000 3% On surplus to 16,000 4% On excess over 16,000 S% 631] Progressive Taxation in Theory and Practice 69 BERN.— 1865. INCOME TAX. Rate per cent Income. Capital. Pensions, etc. Otlier Income Each so-ioo fr 2j^ 2 i^ " 150-200 S 4 3 " 25&-300 7^ 6 414 " 350-400 10 8 6 " 4S0-S00 I2j4 10 714 etc., etc. etc., etc. FREIBURG.— ( FRIBOURG. ) —1848. INCOME TAX. If the income does not exceed 1,500 fr., 5/10 are exempted. If the income does not exceed 5,000 fr., 4/10 are exempted. If the income exceeds 5,000 fr., 3/10 are exempted. GENEVA.— 1887. PERSONAL PROPERTY TAX. Property. , Rate n Up to 50,000 fr on first 3,000, i/io of i per cent on excess. 50,000-250,000 47 fr. on first 50,000, 2/10 of I per cent on excess. ,-, „ ( 47 fr. on first 50,000, 2/10 of I per cent on excess Over 250,000. \^' , , r \ up to 250,000, and 3/10 of i per cent on excess. GLARUS.— (GLARIS.)— 1891. PROPERTY TAX. Property. Rate. Property. Rate. TT J r ( 60 per cent of 400,001- 500,000 7/10 additional. Under 25,000 fr. J *^ ^ ' i o, « I assessment. 500,001- 000,000 8/10 C 60 per cent of 600,001- 700,000 9/10 assessment 700,001- 800,000 10/10 ' for first 800,001- 900,000 li/io 25,000-100,000 \ 25,000; full 900,001-1,000,000 12/10 rate for 1,000,001-1,250,000 13/10 remainder. 1,250,001-1,500,000 14/10 100,001-150,000 i/io additional. 1,500,001-1,750,000 15/10 150,001-200,000 2/10 " 1,750,001-2,000,000 16/10 200.001-250,000 3/10 " 2,000,001-2,500,000 17/10 250,001-300,000 4/10 " 2,500,001-3,000,000 18/10 300,001-350,000 6/10 " 3,000,001-3,500,000 19/10 350,001-400,000 6/10 " 3,500,001-4,000,000 20/10 70 American Economic Association [632 GRAUBUNDEN.— (GRISONS.)— 1881. PROPERTY AND INCOME TAX. PROPERTY TAX. Property. Rate. I- 20,000 fr pay full. 20,001- so.ooo. 50,001- 80,000. 80,001-110,000. 110,001-140,000. 140,001-170,000. 170,001-200,000. 200,001-230,000. 230,001-260,000. 260,001-290,000. 290,001-320,000 and over. . . . i/io addition for each 1,000 fr. 2/10 3/10 4/10 " " " 5/10 " " " 6/10 7/10 " •' " 8/10 9/10 " " " . 10/10 INCOME TAX. Income. Rate. Per cent. 1-800 fr ■%. 800-1,500 J^ 1,500-2,000 1 2,000-3,000 154 3,000-4,000 2 4,000-5,000 2j4 Income. Rate. Per cen t 5,000-5,500 fr 3 5,500-6,000 3^ 6,000-6,500 4 6,500-7,000 4^ 7,000-12,000 5 Over 12,000 sVi LUCERNE.— 1892. PROPERTY TAX. Property. Rate. From 1,000 to 100,000 fr..i.5% From 100,001 to 1,000,000 rate raised by i/io of 1% for every 100.000 fr. Over 1,000,000 fr 2^/^% INCOME TAX. Income. Rate. From 1,000 to 30,000 fr...ij4% From 30,001 to 84,000 fr. rate raised i/io of 1% for every 6,000 fr. Over 84,000 fr 25^% These taxes are levied every two years, so that the annual rates are only one-half as large. OBWALDEN.— (UNTERWALDEN-LE-HAUT.)— 1870. INCOME TAX. Income. Tax in fr. Income Tax in fr. 500 fr 0.50 800 fr 1.20 600 0.70 900 1.50 700 I. 1,000 2. From 1,000-2,900 fr. J4 of i per cent. Over 3,000 fr. i per cent. 633] Progressive Taxation in Theory and Practice 71 The above rates are payable for each yi of i per cent levied as property tax. In the last two classes 400 fr. may be deducted. ST. GALLEN.— (ST. GALL.)— 1863. INCOME TAX. For each i per mill of property. Income. Tax. See- 999 francs 1 f r. 1,000-1,499 2 1,500-1,999 4 2,000-2,499 7 2,500-2,999 II 3,000-3,499 16 3.500-3,999 22 4,000-4,499 30 4,500-4,999 40 5,000-5,499 51 Income. Tax, 5,500- 5,999 63 fr. 6,000- 6,499 ^6 6,500- 6,999 90 7,000- 7,499 105 7,500- 7,999 121 8,000- 8,499 138 8,500- 8,999 157 9,000- 9,499 177 9,500-10,000 200 Over 10,000 2j^ per ct. SCHAFFHAUSEN.— (SCHAFFHOUSE.)— 1879. PROPERTY AND INCOME TAX. Francs. Percent. When the tax varies from 26- 50 an addition is made of 5 51- 75 " 76-100 " " 101-150 " " 151-200 " " 201-250 251-300 301-400 401-500 Over 500 SOLOTHURN.— (SOLEURE.)— 1895. PROPERTY AND INCOME TAX. PROPERTY TAX. The rate is 54 of 1%. When tax is under 20 fr. the addition is o 10 IS 20 25 30 35 40 45 50 20- 30 " C ti " 10% 30- 40 " i 11 " 20% " " 40-140 " t tt " 10% for each 20 fr. tax " 140-200 " I 11 " 10% " " 30 " " " " over 200 " ' tax is doubled. INCOME TAX. The rate is 1%. The progression is as in the property tax. 72 American Economic Association THURGAU.— (THURGOVIE.)— 1849. [634 Income. Under 200 fr., 201- 400 401- 600 601- 800 INCOME TAX. Tax in fr. 0.3s 0.5s I. 2. 801-1,100 4. Over 2,600, ij4 fr. for every hundred fr. TICINO.— (TESSIN.)— 1864. INCOME TAX. Income. Tax in fr. 1,101-1,400 6 1,401-1,700 ID 1,701-2,000 16 2,001-2,300 23 2,301-2,600 30 For the first Francs From 400- 800 fr 400. . 801- 1,200 800. . 1,201- 2,000 1,200. . 2,001- 3,000 2,000. . 3,001- 5,000 3,000. . 5,001-10,000 5,000. . 10,001-20,000 10,000. . 20,001-40,000 20,000. . Over 40,000 40,000 1,250 5 URL— 1886. PROPERTY AND INCOME TAX. I. 2. 4- 10. 20. SO. 150. 450. For excess. Per cent. ■ ■ y^ .. H . .1 ..lY . .2 ■ ■3 • •4 Property. Tax. 2,000- 30,000 fr. . .50 fr. per 1,000 30,001- 50,000 60 .. .70 .. .80 .. .90 . .1.00 . .1.10 . . 1.20 ..1.30 . . 1.40 50,001- 80,000 . . 80,001-100,000 . . 100,001-150,000 . . 150,001-200,000 . . 200,001-250,000. . 250,001-300,000 . . 300,001-350,000 . . 350,001-400,000 . . Over 400,000 1.50 VAUD, PROPERTY AND INCOME TAX. Income. Tax. Up to 1,000 fr.. .25 fr. per 1,000 1,001- 2,000 35 " 2,001- 3,000 45 " 3,001- 4,000 60 " 4,001- 5,000 80 " 5,001- 6,000 1. 00 6,001- 7,000 1.20 " 7,001- 8,000 1.40 " 8,001- 9,000 1.60 " 9,001-10,000 1.80 " Over 10,000 . . . .2.00 " (WAADT.)— 1886. Rate Per Cent. Personal Property. I- 25,000 fr. .1 25,001- 50,000 1 54 50,001-100,000 ... .2 100,001-200,000 2^ 200,001-400,000 3 400,001-800,000 3^/^ Over 800,000 4 Real Property ^^'^^J Income. ^-^« I- 25,000 fr.. I I- 1,250 fr. .1 25,001-100,000 ii^ 1,251- 2,500.... I ^ over 100,000 2 2,501- 5,000 2 5,000-10,000 254 10,001-20,000 3 20,001-40,000 3y2 Over 40,000 4 635] Progressive Taxation in Theory and Practice 73 ZUG.— 1896. PROPERTY TAX. Property from 1,000-100,000 francs pays the simple rate. Above 100,000 francs, the property is put in classes of 100,000 francs each, so arranged that in each class every 1,000 francs pays % franc more than in the preceding class. Thus— if 100,000 francs.. pay.. I franc per 1,000 francs. then 101,000-200,000 ..pay . .1 " • iH " 134 " .2 201,000-300,000 301,000-400,000 " over 400,000 " INCOME TAX. If the rate of the property tax is one per mill, Income. Tax. I- Soo francs pay i franc per 100 francs. SOO-1,000 francs pay i^ francs per 100 francs. 1,000-7,000 francs rate increases 25 centimes per each 1,000 fr. Over 7,000 francs pay 3 francs per 100 francs. ZURICH.— 1870. PKOPERTY AND INCOME TAX. Property. Of the first 20,000 francs 5/10 are assessed. " next 30,000 " 6/10 " " 50,000 " 7/10 " " " 100,000 " 8/10 " " 200,000 " g/io " Of the surplus the whole is assessed. Income. O^ the first 1,500 francs 2/10 are assessed. " next 1,500 " 4/10 " " 3,000 " 6/10 " " 4,000 " 8/10 Of the surplus the whole is assessed. It is evident from these tables that there is a great di- versity in the practical application of the pi^ogressive sys- tem to property and income taxes in Switzerland. Some cantons apply it to local taxes, others declare that local taxation should be proportional ; some have a slight grad- uation, others a sharp progression; some apply it to one tax only, others to both taxes. In no two cantons are the rates or the classification identical. The following table shows the rate of progression in various cantons : 74 American Economic Association [636 INCOME TAX (on LABOR INCOMES). Rate of Tax on Income of _ o'°°>, o--°^ i M " B j= K i S • Canton. i i i J: o Si^-5 ,: So'S'i! i I "Ssgo o8g8 0000 S « ox 9 « o.q o % ° °- ° o- is 0-" °. a i" o" o o O O - ^Ofc-O ^°u.O Freiburg 1.7s 2.1 2.1 2.45 2.45 1.4 times 1.4 times Bern 1.2 2.1 2.55 2.82 2.98 2.3s " 2.48 " Obwalde.tt 0.12 0.24 0.34 0.5 0.59 4.17 " 4.92 " > Zug 0.4 I. OS 1.7 2.82 2.98 7.0s " 7.4s " Zurich 0.8 1.2 2.4 4.4 7.63 5.5 " 9.04 " Vaud 0.29 0.63 1. 13 1.81 3.44 6.24 " 11.86 " Graubunden . . 0.6 1.05 2.28 5.91 10.47 9-8s " 17.4S " Uri 0.00750.23 0.49 1.07 1.98 22,27 " 26.4 " GENERAL INCOME TAXES. Baselland 0.5 0.5 0.7 1.6 2. 3.6 " 4.0' " Solotliurn 0.2 0.46 0.69 0.98 1.4 4.9 " 7- " Ticino 0.6 1.4 2.5 5. II.8 8.3 " 27.3 Baselstadt "0.6 I. 1.8 4.6 Some cantons exempt a minimum of subsistence, some pursue the policy of abatements and allowances, some tax all property or income but according to different rates. Some cantons levy a fixed poll tax while others levy a graduated poll tax, the amount of the tax in- creasing with the progression in the property and in- come taxes. Whatever the minor differences, however, the tendency is everywhere toward the spread of the pro- gressive principle and the increase of the scale of pro- gression. The constitutional provision in some of the cantons that the progression should be a "moderate" one, is of little use in view of the elasticity of the term "moderate." As an actual fact, the highest rates do not generally exceed four or five per cent of the income, but in a few cantons like Glarus, Uri, Vaud and Baselstadt the rates are as high as six, seven and even ten per cent. That the number of persons assessed at the higher rates is very small is indeed true ; and it may also be concluded 637] Progressive Taxation in Theory and Practice 75 that the yield of the progressive taxes is in general very- little more than would be the yield of simple proportional taxes. The opponents, however, of the progressive prin- ciple, like Leroy-Beaulieu, forget that it is the function of progressive taxation not so much to obtain increased reve- nues as to apportion the burden more equably among the taxpayers. If the progressive tax is more just than the proportional tax, the fact that it would not yield a penny more revenue would in itself constitute no valid objec- tion. A more serious practical objection is the tendency to produce evasion, fraud or exodus of capital. It is ques- tionable, however, whether this objection has not been somewhat exaggerated. The danger is undoubtedly a real one, but there is actually far more evasion, fraud and exo- dus of capital under the system of the proportional prop- erty tax in America than under the system of the progres- sive property and income taxes in Switzerland. Those who will defraud the government or abandon their home because of tax rates are apt to do so at all events, pro- vided the tax is high enough ; and it has yet to be proved that a moderate progression will of itself bring about such baneful results. Certainly the experience of Switz- erland seems to point in the other direction. Statistics of evasion or exodus of capital are unattainable or worth- less ; but in all the important cantons which practice pro- gressive taxation, there has been a steady increase in the total valuation of property and income.^^ The very spread of the progressive system in recent years shows at all events that the Swiss cantons have not yet begun to experience any of the injurious consequences ^ In Ziirich, e. g., the assessed property had increased between 1870-1899 from 627 to 906 million francs, the assessed income from 43 to 88 millions. Schanz, ii, p. 416. Similar figures might be given for the other cantons, which practice the progressive system. Cf. Cerenville, op. cit., pp. 175-181 jd American Economic Association [638 which have been predicted for the last few decades. In those very cantons where the opposition was at first the loudest, the satisfaction is now general. There is no question of abandoning the vantage ground already won. As Switzerland is the most democratic country in Europe, so is it also the most striking example of the progressive system. Furthermore, in addition to the general property and income taxes, almost all the Swiss cantons levy inher- itance taxes, which are progressive in nine cases. ^^ In Baselland the rates are increased one-tenth in each class until amounts in excess of 400,000 fr. pay two and one- half times the normal rate. In Bern on any excess above 50,000 francs the rate is increased one-half. In Glarus and Zug the rates increase by arithmetical progression, the additional increments never exceeding one per cent in Glarus and two per cent in Zug. In Solothurn the basic rates of three to twelve per cent, arranged according to relationship, apply to inheritances between 100 and 5,000 francs; below 100 francs only half the rate is ap- plied; from 5,000-20,000 francs the rates are increased by one-fourth for every 5,000 francs. In Thurgau in- heritances over 6,350 francs pay one-fourth more; over 12,700 francs one-half more; over 19,000 francs three- fourths more; over 25,000 double rates. In Ziirich the rate increases one-tenth for each 10,000 francs until it becomes half as large again as the regular rate. In Uri the rate increases one-tenth for each 10,000 francs up to 200,000 francs, so that the tax on 200,000 francs would be triple the original rate. As the basic rates vary from one per cent for brothers and sisters to twenty-five per cent for distant relatives, this means that the maximum "C/. the details in Schanz, op. cit., i, p. ,158, and later details in West, The Inheritance Tax, 2d ed., igo8, pp. 42-44. Cf. also Ceren- ville, op. cit., p. 215. 639] Progressive Taxation in Theory and Practice yy rate is seventy-five per cent, the highest figure to be found in any country. This rate appHes, however, only to in- testate successions, and as wealthy people do not usually die intestate, the law is really only a paper enactment. As a matter of fact, the maximum rate has never been en- forced. In Schaffhausen the rates increase one-tenth for inheritances between 2,000 and 10,000 francs and one- tenth for each additional 10,000 francs up to 90,000 francs. Above that sum inheritances pay double rates. In the following tables will be found the rates of the inheritance tax in the principal cantons. ^^ Near relatives per cent. Bern i T-Yz Claris '/^■■■■4 St. Gall ^....6 Solothurn .... 3 .... 6 Schaffhausen 2 ....4 Thurgau 2 ... .4 Uri iy2....6 Zug ^....2>4 Zurich 2 3 More dist. relatives per cent. 2.... 6 4 4 9 4 3 2 I 6 Most dist. relatives per cent. 6.... 9 6 12 6. ...18 Strangers per cent. 10 IS loYz. .21 6 s 3 2. . 10. . .12 .10 • 9 ■ 4 • IS 10. . 10. . 10. . 10. . 6.. 2S-- , .20 .30 ..24 , .20 . .12 •7S . .10 ■ •IS Max. rates applicable on sums exceeding fr. 10,000 100,000 4,000 18,000 5,000 40,000 20,000 10,000 ' Compiled from Schanz, Die Steuern der Schweit, i, pp. 1SS-160. § lo. Holland. In Holland, up to 1892, the only example of progres- sive taxation for state purposes was a poll tax levied according to a graduated scale upon furniture, valuables, horses and mortgages. In 1892 and 1893 there was introduced a progressive system in a new combination of the property and income tax.^ The arrangement for progressive rates is as follows : Property under 13,000 florins is practically exempt; from 13,000 to 14,000 fl. the tax is 2 fl. ; from 14,000 to 15,000 fl. it is 4 fl. If the property exceeds 15,000 fl. but is less than 200,000 fl., the tax is 1.25 per mill for the surplus over 10,000 fl. Property of 200,000 fl. would therefore be taxed 237^ fl. For every 1,000 fl. above 200,000 fl. there is an additional tax of 2 fl. In other words, there is a deduction in all cases for a certain part of the property (10,000 fl.) ; there is a complete exemp- tion for a minimum of subsistence (13,000 fl.), and an abatement for a somewhat larger amount (15,000 fl.) ; and finally there is a slightly progressive rate. For if income on property is reckoned as four per cent, the prop- erty tax of 1.25 per mill (on sums below 200,000 fl.) equals an income tax of three and one-eighth per cent; while a property tax of two per cent (on sums above 200,000 fl. ) equals an income tax of five per cent. Owing to the deduction of 10,000 fl., as well as to the complete exemption of 13,000 fl. and the abatements for 13,000 fl. and 14,000 fl., the property tax computed as an income tax would vary from zero to almost five per cent. This will be seen from the following table : ^For details as to the discussions leading up to this tax, see Seligman, Essays in Taxation, 5th ed., 1905, pp. 322-330; and also E. M. Bossevain, in Schanz, Finanz Archiv, vol. xi, (1894), PP- 419-746, et seq. 641] Progressive Taxation in Theory and Practice 79 Property Tax Amount Percentaj fl. fl. Per Mill of Incom 12,000 0. 0. 0. 13.000 2. 0.15 0.37 14,000 4- 0.29 0.72 15.000 6.25 0.41 1.02 20,000 12.50 0.62 1-55 25,000 18.7s 0.75 1.87 50,000 50.00 1. 00 2.50 100,000 112.50 1.12 2.80 150,000 175-00 I.I7 2.92 200,000 237.50 I.I9 2.97 210,000 257.50 1.23 3.07 220,000 277.50 1.26 3-15 250,000 337-50 1-35 3.37 500,000 837.50 1.67 4.19 1,000,000 1,837.50 1.84 4.59 3,000,000 5.837.50 I-9S 4.86 5,000,000 9,837.50 1-97 4.92 10,000,000 19.837.50 1.98 4-96 20,000,000 39,837.50 1.99 4-98 In the income tax it was proposed to observe the same principle of graduation, but the rate was to be less. Since 200,000 fl. are equivalent to 8,000 fl. income, the original plan was to tax incomes from labor above a certain mini- mum two per cent up to 8,000 fl., and three and one-fifth per cent above that, instead of the three and one-eighth per cent and five per cent rates of the property tax. That is, incomes from labor were to be taxed three-eighths less than incomes from property. It was decided, how- ever, to make the minimum of subsistence higher in the income tax than in the property tax ; partly because of the existence of indirect taxes, partly for other reasons. The consequence was the necessity of two schedules in the in- come tax, one for incomes from labor alone, and one for the incomes of taxpayers already subjected to the prop- erty tax. In the former case the tax is levied only on the surplus above 650 fl. ; but as the property tax is levied only on the surplus above 10,000 fl. (which corresponds to an income of 400 fl.), the tax on incomes from property 8o American Economic Association [642 is levied on the surplus above 250 fl. (or the difference between 650 fl. and 400 fl.). The higher rate, therefore, begins in this case not with 8,000 fl. (as in the case of labor incomes), but with 8,200 fl. This would result in the following schedules, which, although seemingly- complicated, are the results of simple computations : Schedule A Incomes from labor income Tax (In florins) Schedule B (for those liable also to the property tax) 650- 700 I. 700- 7S0 2. 750- 800 2.7s 800- 850 3.SO 850- 900 4.2s goo- 950 s- 950-1000 5.75 1000-1050 6.50 1050-1100 7.25 1100-1150 8. 1 150-1200 8.75 1200-1250 9.50 1250-1300 10.25 1300-1350 II. 135Q-1400 11.7s 1400-1450 12.50 1450-1500 13.25 1500-1600 14. 1600-8200 14 -|- When property amounts to 13,000 fl. or 14,000 fl. Income Tax (In florins) 250- 300 2. 300- 350 2.7s 350- 400 3.50 400- 450 4.25 450- 500 5. 500- 550 S.7S S50- 600 6.50 600- 650 7.25 650- 700 8. 700- 750 8.75 750- 800 9.50 800- 850 10.25 850- 900 II. 900- 950 11.75 950-1000 12.50 1000-1050 13.25 1050-1150 14. Over 1050 14 -|- 2 florins for every 2 per cent on sur- plus over 1500 fl. Over 8200 fl., 148 fl. + 3.20 per cent, on hundred florins on surplus over 1050 fl. But if the income, together with 4 per surplus over 8200 fl. cent, on the taxa- ble property, exceeds 8150 fl., a tax of 1.20 per cent, is payable on the excess. When property varies between 15,000 fl. and 200,000 11. Income Tax (In florins) 250- 300 I.2S 300- 350 2. 350- 400 2.75 400- 450 3.7s 450- 500 4.2s 500- SSO S. 550- 600 5.75 600- 650 6.50 650- 700 7.25 700- 750 8. 750- 800 8.7s 800- 850 9.50 850- 900 10.25 900- 950 II. 950-1000 11.75 1000-1050 12.50 1050-1 100 13.25 1100-1200 14. Over iioo 14-)- 2 florins for every hundred florins on surplus over iioo fl. But if the income, together with 4 per cent, on the taxa- ble property, exceeds 8200 fl., a tax of 1.20 per cent, is payable on the excess. When property exceeds 200,000 fl., the tax is 3.20 on every hundred florins income over 200 fl.' Tor a discussion of certain changes which are being suggested 043 J Progressive Taxation in Theory and Practice 8i The progressive principle has also been applied to thev local income tax in Holland. Commencing with the year 1 85 1 the communes were given a rather wide latitude in matters of taxation. In 1865, however, the communal excises were abolished and several years later the local share in the commonwealth poll tax was restricted. This led the local bodies to seek a compensation in the imposi- tion of an income tax, and especially in the poorer prov- inces, like Groningen and Friesland, the progressive prin- ciple was welcomed. The graduation was frequently very marked. For instance, in Amsterdam the incomes were divided into five classes ; in the first two classes the incomes were taxed on one-quarter of the assessed valua- tion; in the next two classes on one-half and in the next class on three-quarters of the assessed valuation. More- over, in considering the assessed valuation the minimum of each class was taken as the basis. It is the Athenian and the Ziirich plan with a slight alteration. In the town of Terneuzen, on the other hand, where the number of the classes is much larger, the rate itself varied — the first class, from 300-399 florins, paying one-half of one per cent tax ; the second class, from 400-549 florins, five- eighths of one per cent, and thus gradually increasing until the nineteenth class, with incomes of 7,000 florins and over, paid four per cent.* The system of progression was pushed to such an ex- treme, however, that it led to a reaction. After much discussion the law of 1897 was enacted, which virtually prohibited any departure from proportional taxation, with the exception that an amount representing the minimum in the present system of progressive taxation in Holland, see an article by N. G. Pierson, "The Income Tax in Holland," Economic Journal, xvii (1907), p. 417. 'Denis, L'Impot sur le Revenu. Rapports et Documents prcsentes au . . . Conseil Communal de Bruxelles (1881), p. 45- 82 American Economic Association [644 of subsistence might be exempted in all cases, and with a further exception, which can best be put in the words of the law itself : "In levying a capitation or other direct income tax, no revenue may be left out of calculation, nor be calculated or estimated under their real amount, except in so far as in the case of variable incomes a mean value out of two or more years may be computed. "The amount of the tax must be the same percentage for all incomes, after deduction from all incomes of a sum necessary for livelihood, equal for all incomes or varying only according to the construction of the family. Devi- ation from this rule is permitted if existing regulations or special circumstances make such deviation desirable, and on condition that the distribution of charges do not vary considerably from that which would be obtained by adhering to the said rule.* In 1900, however, the liberals, who had been respon- sible for the general legislation of 1892, returned to power, and the rigor of the prohibition of 1897 was somewhat relaxed, without, however, restoring to the localities the complete freedom which they had previously enjoyed in the matter of progressive scales. The latitude which the localities now enjoy, however, has been suffi- cient to prevent any serious complaint on either side. * See the article by A. J. Cohen-Stuart, "Progressive Taxation in Holland," Economic Journal, viii (1898), pp. 328-332. § II. Denmark, Sweden and Norway. In Denmark and Sweden the progressive principle has - been accepted to a certain extent. In the Scandinavian countries it has been introduced only recently. In Den- - mark the law of 1903 imposed, for general state purposes, an income tax with a supplementary property tax. The property tax is proportional at the rate of 0.6 per mill. The income tax is progressive at the f olowing rates ■} Income Kate (%) Income Rate (%) (Kroni-i) (Kroner) Under 2,000 1.3 15,000- 20,000 2. 2,000- 3,000 14 20,000- 30,000 2.1 3,000- 4,000 1.5 30,000- 40,000 2.2 4,000- 6,000 1.6 40,000- 50,000 2.3 6,000- 8,000 1.7 50,000-100,000 2.4 8,000-10,000 1.8 100,000 or over 2.5 10,000-15,000 1.9 The interesting feature of the Danish income tax is that the minimum exemption varies with the character of the district. In Copenhagen the exemption is 800 kro- ner, in market towns it is 700 kroner, and in rural dis- tricts only 400 kroner. In the case of the local income taxes, which are somewhat older, however, there is no exemption at all.^ In Sweden the law of 1897, amended in 1902, imposes - a progressive income tax for general state purposes. The arrangement is as follows: Incomes below 1,000 kroner ' See Reports from His Majesty's Representatives abroad re- specting Graduated Income Taxes in Foreign States, 1905, English Blue Book, Command Papers 2587, pp. 100 et seq. ' Cf. Report on the Danish System of Taxation, Foreign Office, Misc. Series, 1907, no. 659. For the earlier rates in some of the local income taxes, see the U. S. Consular Reports on Taxation, , nos. 99-100 (1888), p. 326. 84 American Economic Association [646 ($275), are exempt; incomes from 1,000 to 4,000 kroner are taxed on only a portion of the full amount according to a progressive scale; from 4,000 to 6,100 kroner they are taxed on the full amount; above 6,100 kroner they are taxed on more than the actual amount, according to an ascending scale up to a maximum of 145,500 kroner, which sum is assessed as equivalent to 582,000 kroner, i. e., four times the real income. The normal rate of the tax is one per cent on the assessed income, so that the highest actual rate would be four per cent.^ In Sweden there is also a progressive income tax; but this is rather in the nature of a system of progressive fees than a real tax. In Norway we find both a progressive income tax and^ a progressive inheritance tax. The income tax is gradu- ated according to the following scale: Incomes rate 1000 kroner exempt 1000- 4000 kroner 2% 4000- 7000 " 3% 7000-10000 " 4% Over loooo " S% Up to 4,000 kroner only a part of the income is taxable, varying according to the number of persons dependent on the tax payer. Over 4,000 kroner an exemption of from 600 to 1,800 kroner is allowed, varying according to the number of dependent persons. The supplementary property tax, known as the Form- neskat, is not progressive, being at the rate of one-third of one per mill. There are, however, also local income taxes.* Finally, it must be mentioned that the Nor- ' Reports from His Majesty's Representatives abroad respecting Graduated Income Taxes in Foreign States, 1905, p. 116. The exact scale will be found on pp. 118-119. * Op. cit., pp. 121-122. 647] Progressive Taxation in Theory and Practice 85 wegian inheritance tax law of 1905 imposed rates rising from one per cent to four per cent in the case of children, and reaching ten per cent in the case of distant rela- tives.^ ' Schanz, Finans Archiv, xxiv, (1907), p. 194. § 12. France. After the sad experience with the forced loans at the end of the eightenth century, the history of which has been recounted above, nothing more is heard of progres- sive taxation in France until the Revolution of 1848. Early in that year the provisional government adopted a declaration that the tax system ought to aim at a more equitable distribution of the burdens.^ A little later in the same year the government issued a decree stating that in order to bring about really equitable taxation, the progressive principle ought to be adopted.^ Oddly enough, however, although this proposition was framed by the Minister of Finance, Garnier-Pages, who repeated the assertion later, the taxes that were actually im- posed were all proportional. A few months subsequently the new Minister of Finance, Godchaux, proposed a pro- gressive inheritance tax.^ But this also failed of adop- tion, largely owing to the objection of de Parieu, the chairman of the committee.* Until recently, the chief instance of progressive taxa- tion in France was to be found in the rental or occupancy tax paid by the tenant. It is a curious provision of the French system of local taxation, recalling the medieval * "Que le systeme de taxe de la Republique Frangaise doit avoir pour objet une repartition plus equitable des contributions pub- liques." — Decree of Feb. 29. " "Avant la Revolution, I'impot etait proportionnel, done il etait in juste. Pour etre reellement equitable, I'impot doit etre progres- sif." — Decree of April 20th. For the fiscal history of the revolution see Du Puynode, L'Adminisiraiion des Finances efi 1848-1849, (1849), pp. 65-78. ' David, "Du Pro jet de Decret relatif a I'fitablissement d'un Impot Progressif sur les Successions." Journal des Economistes, 1848, p. 25. 'For his views, see below, Part II. Cf. also Vautier, L'lmpot Progressif, p. 9; and De Retz de Serviez, op. cit, pp. 118-125. 649] Progressive Taxation in Theory and Practice 87 English firma hurgi, that according to a law of 1846 the taxe personelle et mobiliere might be assumed in a lump sum by the cities, and that the amount might be defrayed in part out of the proceeds of the octroi or local customs duties. The remainder was to be raised by a tax on rentals, which was made progressive, partly for the reason, already mentioned, that the greater the in- come the smaller relatively is the amount spent for house rent,^ partly in order to compensate the lowest classes for the burdens of the octroi, which they were deemed in great part to bear. Several of the French towns adopted this plan. The houses were arranged in classes according to the rental value. Below a certain figure they were en- tirely exempt. In the other classes the rate was grad- uated up to a definite maximum. In Paris the progres- sion ended very soon. Houses with rentals below 500 francs were entirely exempt (with some minor excep- tions). In the other classes the rate was fixed differently every year according to the needs of the city treasury. In 1890, houses with rentals up to 599 francs paid 6>4 per cent, to 699 francs 7J^ per cent, to 799 francs 8J^ per cent, to 899 francs 9>4 per cent, to 999 francs 10^ per cent, to 1099 francs 11^ per cent, and above 11 00 francs 11.72 per cent.^ In 1888 a bill was introduced by the government generalizing this tax and greatly ex- " See above, p. 28. "The rate for the last class varied from year to year, according to the centimes additionels. The figure in the text is for the year 1891. In 1892 it was 12.04% and in 1893 12.23%. See Stourm, Systemes Generaux d'Impots, 1893, p. 230. Cf. Dictionnaire des Finances, by Leon Say, ii, p. 854, sub verba "Personnelle-mobiliere." The figures and statements contained in Wagner, Finanzwissen- schafi, iii, p. 461, which are copied in the article by Heckel in the Handworterbuch der Staatswissenschaften, iv, (1892), p. 1182, are incorrect. They are all based on antiquated material. Formerly many towns pursued this practice. In 1890 only Paris and Versailles remained. 88 American Economic Association [650 tending the progression as well as the classification. But it was abandoned. In 1900, when the octroi on certain drinks was sup- pressed, Paris abandoned the progressive scale; but the law permitted the introduction of a slightly less progres- sive tax. Rentals under 500 francs were to be exempt, and on rentals above this figure the "assessable rental" (loyer matriciel) was to be reached by deducting from the actual rental a sum which, however, could never ex- ceed 375 francs. That is, in the case of a small rental of say 750 francs, one-half was deducted; while in the case of a rental of say 3,750 francs, only one-tenth was deducted. The law of 1903 authorized all departmental capitals and all communes of over 5,000 population to adopt this system, leaving the figures, however, to be fixed by them. The law of 1904 engrafted on this principle another, designed to reduce the tax in the case of large families. The deduction might be increased one-tenth for every dependent person'^ after the first, provided that the total deduction did not exceed double the minimum rental. This is the rule now in force in Paris and in several other cities.* Since 1901 France has also a progressive inheritance tax. In that year the tax, which until then had been graduated only according to relationship, was graduated according to the amount of the inheritance as well, and ' Dependent persons (personnes h la charge du contribuable) are defined to be "enfants ayant moins de 16 ans revolus, les ascendants ages ou infirmes, les enfants orphelins ou abandonnes et par lui recueillis." ' Cf. E. Allix, Traits Elementaire de Sciences des Finances et de la Legislation Financiere Frangaise, pp. 384-S ; Boucard et Jeze, Elements de la Science des Finances et de la Legislation Financiere Frangaise, and ed., (1902), ii, pp. 895 et seq.; and Cours Mementaire de Science des Finances et de Legislation Financiere Frangaise, (1904), pp. 34S et seq. 651] Progressive Taxation in Theory and Practice 89 was arranged in eight classes, the highest class repre- senting inheritances of over 1,000,000 francs. In 1902, five additional classes, with higher rates, were added; the highest class now representing inheritances of over 50,000,000 francs. The minimum and maximum rates are as follows : Relationship First Class 13th Class Up to 2000 fr. Over 50,000,000 fr Direct line 1% 5% Husband or wife 3.75 9 Brothers and sisters 8.50 14 Uncles and aunts, nephews and nieces 10 15.SO Grand uncles and grand aunts, grand nephews and grand nieces, and cousins german 12 I7-S0 Relatives of the sth and 6th degree 14 19.50 Rilatives beyond the 6th de- gree and strangers in blood 15 20.50° , For the sake of completeness, it might be added that in a few of the schedules of the impot des patentes or busi- ness tax we find a slight graduation in the scale, according to the number of employees, the amount of the transac- tion, etc. But the graduation is so slight that it deserves only a mere mention. On the other hand, the income tax projects, which are being so hotly discussed in France at present, contain some interesting progressive features, but at this date (1908) none of the bills has yet been enacted into law.^" °For details, see West, The Inheritance Tax, 2nd ed. (1908), pp. 25-26; Boucard et Jeze, Cours £lementaire, 1904, pp. 328 et seq. "The best survey of the recent projects will be found in Gaston- Gros, L'Impot sur le Revenu, 1908. Cf. also Revue de Science et de Legislation Financiere, 1903, p. 522; 1904, p. 509; 1907, p. 407; 1908, passim. § 13- Italy. In Italy the progressive principle is found in the case of both the income tax and the inheritance tax. The income- tax was introduced in 1864. It was amended several times, but it was not until 1894 that the principles of graduation as well as of differentiation were introduced. The tax is divided into five classes, according to the nature of the income. The differentia- tion is effected not by making a change in the rate of the tax, but by assessing to the tax different proportions of the true value. The scheme is as follows : Nature of Income Amount Rate of assessed tax on full A. Interest on capital owned by -estates, etc.. Full rate 20% B.i^ Interest on private capital 30/40 15% C. •'^ Mixed incomes from capital and labor. . . . 20/40 10% D.^ Labor incomes 18/40 9% E. '^ Salaries and pensions 15/40 75^% The graduation is accomplished in the following way : Incomes below 400 lire ($80) are exempt. In sche(fules B and C, incomes from 400 to 800 lire ($80 to $160) are subject to abatement as follows: Income Abatement 400-SOO lire 250 lire S00-600 " 200 " 600-700 " 150 " 700-800 " 100 " In schedule D incomes not exceeding 500 lire enjoy an abatement of 100 lire.^ The Italian income tax, although the chief type of the modern system of differentiation, is therefore an ex- ample only of slight degression. 'The account of the abatements given in the English blue book mentioned above, p. 46, is not quite accurate. 6S3] Progressive Taxation in Theory and Practice 91 The progressive principle has also been applied to the Italian inheritance tax since 1902. The tax is arranged in seven classes, the lowest class beginning at 300 lire and the highest class including sums of over 1,000,000 lire. In the case of the direct line the rate varies from eight- tenths of one per cent to three and six-tenths of one per cent, growing with the degree of relationship, until in the case of relatives beyond the sixth degree and strangers in blood, the maximum rate in the seventh class reaches twenty-two per cent. The rates apply only to the repre- sentative fractions of the inheritance.^ 'West, The Inheritance Tax, 2nd ed., (1908), p. 51. § 14- Australasia. Recent years have seen a great development in the ap- plication of the principle of progression in Australasia. It was there applied first to the inheritance tax, but it has spread of late to other forms of taxation as well, more especially to the land tax and the income tax. (a) Inheritance Taxes. We find a graduated inheritance tax in Victoria as early as 1870; but in most of the other colonies the pro- gressive principle was introduced much later. In Vic- toria the law of 1892 divided inheritances into thirty- seven classes, with £1,000,000 as a maximum, and with rates from one to ten per cent. In New South Wales the law of 1885 introduced five classes with £50,000 as a maximum, and with rates of from one to five per cent; but in 1 89 1 New South Wales adopted, with a few minor changes, the scale of duties then in force in Victoria. In Queensland, since the law of 1892, there are six classes, with £20,000 as a maximum, and with rates from one to ten per cent. In South Australia the law of 1893 adopted a rather complex progressive scale, with rates varying from one and one-half per cent on inheritances below £500 or £700 respectively, for near relatives, and rising to ten per cent on inheritances of over £200,000. In Tas- mania, since 1904 the rate varies from two to ten per cent for direct heirs, and from four to ten per cent for collat- erals. In New Zealand the law of 1881 imposed a tax arranged in nine classes, with rates as on the next page : 6s 5] Progressive Taxation in Theory and Practice 93 2% on the first £1,000 3 4 5 6 7 8 9 10 next 4,000 second 5,000 third 5,000 fourth 5,000 third 10,000 fourth 10,000 fifth 10,000 excess above 50,000 In 1885 the classes were diminished in number, but the rates were augmented, so that on inheritances up to f 1,000 the first £100 paid nothing, and the remainder paid two and one-half per cent; while inheritances between f 1,000 and £5,000 paid three and one-half per cent; those from £5,000 to £20,000, seven per cent; and inheritances of £20,000 or over, ten per cent. In several instances stran- gers in the blood are taxed more severely. In New Zea- land, for example, in the case of strangers the graduation extends to thirteen per cent of the inheritance, and in Queensland to twenty per cent.^ The chief provisions of the Australasian inheritance tax are reproduced in the following table :^ Amount Near Distant Strangers Maximum exempted relatives relatives rate applica- ble to sums exceeding New South Wales. £1,000 i- 5% 2-10% 2-10% £100,000 Victoria 1,000 i- 5% 2-10% 2-10% 100,000 South Australia. .. . 500 1^-10% Ij4-I0% Ij4-I0% (See note) Queensland 200 i- S% 2-10% 4-20% 20,000 West Australia.... 1,500 J^- 5% 1-10% 1-10% 100,000 Tasmania 200 2-6% 2- 6% 2- 6% 500 New Zealand (1904) loo ij4- S% 2^-10% 25^-10% 20,000 £200,000 for near relatives and £20,000 for distant relatives. * The laws themselves, with full details, will be found in two Eng- lish White Books on Graduated Income Taxes in the Colonies, 1905, Colonial Office, nos. 196 and 282. See also West, The Inheritance Tax, 2nd ed. (1908), pp. 66-76. Cf. Coghlan, Statistical Account of Australia and New Zealand, published annually, and the new Official Year Book of the Commonwealth of Australia, pubHshed for the first time in 1908. '' Compiled from Coghlan, Statistical Account of Australia and New Zealand, 1904. 94 American Economic Association [656 (b) Land Taxes. Australasia is not only remarkable for possessing the highest graduated inheritance taxes in the world, but it also had, at least up to the year 1908, the distinction of containing the only Anglo-Saxon state which has applied the progressive principle to the property tax. The demo- cratic jealousy of large estates, which is responsible for this movement, was first illustrated in the Victorian land tax. The Victorian law was enacted in 1877. All estates over 640 acres in size and valued at over £2,500, are taxed one and one-quarter per cent on the capital value after deducting £2,500. The valuation, however, is on a pastoral basis, according to the sheep-growing capacity, irrespective of the value of the land for dairy or agri- cultural purposes. In this sense the tax may be said to be slightly progressive. The rates are as follows :* Class Growing sheep per acre Value per acre 1 2 or more £4 n i^ 3 III I 2 IV Under one i In New South Wales the law of 1895, which is still in force, imposed a proportional tax of one per cent on the unimproved value of the land. In the other colonies, however, the tax is graduated. In South Australia the law was enacted originally- in 1884; but the progressive principle was introduced later. At present the tax on unimproved value of the land is J^d. in the pound, with an additional tax of J^d. per pound for the unimproved value of the land in excess of £5,000.* In the case of absentees who have been away from the ' See the Victorian Year Book, 1905, p. 138. * Coghlan, Statistical Account of Australia and New Zealand, 1904, p.' 677. 6s 7] Progressive Taxation in Theory and Practice 95 state more than one year, twenty per cent additional is imposed. In Tasmania the graduated land tax was introduced in 1902. The rates are as follows: 1/2 d. in the £ on the unimproved value under £ 5,000 5/8 d. '^ " " " " " " £ 5,000-15,000 3/4 d. " " " " " " " 15,000-40,000 7/8 d. " " " " " " " 40,000-80,000 I d. " " " " " " " 80,000 and over There is also a deduction of Ved. in the pound for mortgages.® It is, however, in New Zealand that we find the most interesting application of the progressive principle to the land tax. By the New Zealand "land and income assessment act" of September 8, 1891, land was divided into fourteen classes. Up to £5,000 value the ordinary penny rate in the pound was levied; for each succes- sive class an additional one-eighth of a penny was im- posed, until when the property exceeded £210,000 in value it paid two and three-quarters pence in the pound. ^ In the case of absentees (those absent from, or resident out of, the colony for three years or over) the scale of taxa- tion was increased twenty per cent in each case. A dis- tinction was drawn between the land proper and im- ° Coghlan, op. cit, pp. 68o, 681. "The rates additional to the normal penny rate were as follows: Property. Addition Property. Addition. £5,000-10,000 1/8 d. £90,000-110,000 I d. 10,000-20,000 2/8 110,000-130,000 I 1/8 20,000-30,000 3/8 130,000-150,000 12/8 30,000-40,000 4/8 150,000-170,000 13/8 40,000-50,000 s/8 170,000-190,000 14/8 50,000-70,000 6/8 190,000-210,000 15/8 70,000-90,000 7/8 210,000 and over 16/8 For further details and for the purposes of the measure, see the article on "Direct Taxation in New Zealand," by Sir Robert Stout, in the Sydney Quarterly, March, 1892. Cf. also C. Dilke, Problems of Greater Britain, i, p. 229. 96 American Economic Association [658 provements. In the case of the ordinary penny rate, im- provements up to £3,000 were exempt, and the amount of any outstanding mortgage was deducted, the mortgage being assessed to the mortgagee. When the value of the land, less such improvements and mortgages, did not ex- ceed £1500, an exemption of £500 was allowed, after which the amount of the exemption diminished one pound for every two pounds increase in the assessed value of the land, so as to leave no exemption when the value ex- ceeded £2,500. An important feature of the law was that the graduated system applied only to the unimproved value of the land. As to improvements, the tax was propor- tional. It is further to be noted that while in the case of the penny rate a deduction was made for mortgages on the land, no such deduction was made in the case of land upon which a graduated tax was payable, in so far as such graduated tax is concerned. Mortgagees, moreover, were never liable to the graduated tax. In 1903 the graduated land tax was increased to three per cent and on the lower class the rate was reduced. The scale now rose from i/i6d. to 3d. The rates were as follows : From :£s,ooo- 7,000 the rate was i/i6d. 7,000- 15,000 " rises i/i6d. for each i2,ooo 15,000- 30,000 " " i/i6d. " " 2,500 30,000-210,000+ " " i/i6d. " " 5,000 reaching 3d. at £210,000, and remaining at that figure, i. e., one and one-quarter per cent. Absentees, who were now declared to be those absent from the state for at least one year, were taxed fifty per cent additional.'^ In 1907 the rates were further increased. Up to £40,000 the old rates were continued, the rate on land of £40,000 to £41,000 unimproved value being eight s. per ' See details in Coghlan, A Statistical Account of Australia and New Zealand, 1904, p. 686. 659] Progressive Taxation in Theory and Practice 97 £100 (or what is equivalent to two-fifths of one per cent) ; for every additional £1,000 the rate is augmented by one- fifth of a shilling, the rate reaching a maximum at £200,000, when it amounts to £2 per £100, i. e., two per cent. After 1910, however, the new progressive scale on land over £40,000 is to be increased by twenty-five per cent in the case of all land other than "business premises," so that the maximum rate will be two and one-half per cent in place of the original one and three-fourths per cent. This is in addition to the one per cent proportional land tax. Moreover, absentees are now taxed fifty per cent higher, and are now defined as all those who have not been personally present for at least one-half of the period of four years immediately preceding the year of assessment.* In 1907 the land tax, both proportional and graduated, yielded only £147,342, or less than five and one-half per cent of the total revenue.^ (c) Income Taxes. In addition to the progressive inheritance tax and pro- gressive land tax, we also find in Australasia progressive income taxes. Victoria first imposed an income tax in 1895 for three years. £200 were uniformly exempted except in the case of absentees. In the case of incomes from personal exer- tion, the progressive rates were fixed as follows : 4cl. in the pound on the first iiooo over the exemption. 6d. " " " " " next 1000 " " 8d. " " " " all incomes over £2200. 'For details see New Zealand Official Year Book, 1907, p. 642. For the earlier history of the land tax, see the article "Taxation of Land Values in Australasia," The Economic Journal, xiv (1904). p. 401. 'New Zealand Official Year Book, 1907, p. Sio. 98 American Economic Association [660 On incomes from property the rates were doubled. The ■ scale of progression was changed in 1903, in 1904, and again in 1905. The 1905 scale, in the case of incomes from personal exertion is as follows : 3d. in the pound up to £500 4d. " " " SCO to 1000 Sd. " " " 1000 to 1500 6d. on incomes over 1500 In the case of property incomes, however, double rates-' are assessed. The minimum amount taxable is £157, there being an exemption of £100 on incomes between £157 and £500.^° In Queensland the income tax law of 1902 was amended in 1904 so as to provide for the following rates : On incomes from personal exertion, £100 are exempt. Incomes from £100 to 125 pay a fixed sum of 10 s. Incomes from £125 to 150 pay a fixed sum of £1. On incomes from £150 to 300 the rate is 6d. on every pound in excess of £100. On incomes from £300 to 500 the rate is 6d. in the pound without exemption. On incomes from £500 to 1000 the rate is 6d. in the pound for the first £500 and 7d. in the pound on the surplus. On incomes from £1000 to 1500 the rate is yd. in the pound for the first £1000 and 8d. in the pound on the surplus. On incomes over £1500 the rate is 8d. in the pound. In the case of incomes from property the rates are as follows :^^ Incomes from £100 to £120 pay £1. Incomes from £120 to £300 pay i s. in the pound over £100. Incomes over £300 pay i s. in the pound without exemptions. In South Australia the income tax was originally in- troduced in 1884, and is now in force as follows. In- comes from personal exertion pay 4j4 d. in the pound up ^^ Victorian Year Book, 1905, by E. T. Drake, Government Statis- tician, pp. 130, 131. " Coghlan, op cit., p. 677. 66 1 J Progressive Taxation in Theory and Practice 99 to £800, and yd. in the pound on the excess. On incomes from property the rates are 9 d. in the pound up to £800, and iSj-^d. in the pound on the excess. There is an ex- emption of £150 in all cases as long as the income is below £400. Beyond that point there is no exemption. Fur- thermore, there is no exemption at all for absentees who are defined as those who have been absent one year.^^ In Tasmania the arrangement is somewhat different. The ordinary rates are 6d. in the pound on incomes from business, and i s. in the pound on incomes from property. There is, however, an exemption of £100, and there are, moreover, various deductions, arranged as follows : From £100-110 the deduction is iSo I 10-120 " " 120-150 " 150-200 " " 200-250 " " 250-300 " " 300-350 " ^ 350-400 " In 1904 an important change was made, whereby the income tax proper was limited to income from property, and to corporate income, while all unearned incomes were henceforth subjected to the "tax on ability.''^^ This tax on ability, or non-inquisitorial income tax, as it is also called, seeks to ascertain the tax-payer's income by a ref- erence to the rental of the house he occupies. The tax- payer's income is determined according to the following schedule : When the assessed annual value of the house is under £30 the taxable amount is five times that sum. When the assessed annual value is from £30 to 40 the taxable amount is six times that sum. '^ Coghlan, op. cit, p. 678. . "An act to levy a tax upon persons in proportion to their means or ability. 4 Edw. VII, no. 17 (1904)- 70 60 50 40 30 20 10 100 American Economic Association [662 When the assessed annual value is from £40 to 60 the taxable amount is seven times that sum. When the assessed annual value is from £60 to 80 the taxable amount is eight times that sum. When the assessed annual value is from £80 to 100 the taxable amount is nine times that sum, and when it is iioo or over, the taxable amount is ten times that sum. When the taxable amount aggregates £60 and over, an exemption of £30 is permitted, and there is a further reduction of £10 for each child under the age of seventeen when the taxable amount is under £100. Furthermore, there is an additional exemption as follows : When the taxable amount is under £60 the amount of tax is 2s. 6d. " 60-100 " " " " ld.in£ " loo-iis " " " " 2d. " " " iis-iso " " " " 3d. " " " 150-400 " " " " 4d. " " " 400 and over, the amount of tax is 4d. in the pound for the first £400 and 6d. on the excess. There are slightly lower rates for occupiers of prop- erty partly occupied for business and for property occu- pied for agricultural purposes. There are also slightly different rates for lodgers.^* The Tasmanian ability tax is thus really a progressive rentals tax, like that found in France, but very much more elaborate in character. Finally, in New Zealand, the income tax law which has been in force since 1891, applies only a slightly progres- sive scale. The rate is 6d. in the pound on the first taxa- ble fi,ooo, and i s. on each additional £1,000. £300 are exempt except in the case of absentees. "For details see Coghlan, op cit., pp. 681, 683, and especially the full account of the system in the White Book entitled Further Return on Graduated Income Tax (Colonies), 19.05, Colonial Office, no. 282. This entire supplementary report of 71 pages is devoted to Tasmania. § 15- The United States. In the United States the progressive principle has been appHed to no less than six classes of imposts, namely, the house tax, the income tax, the business tax, the cor- poration tax, the inheritance tax and the land tax. The progressive tax on dwelling houses, wrhich was levied by the Federal government at the end of the eigh- teenth century, has been described, above, ^ and needs no further mention here. The next important illustration of the progressive principle is to be found in the income tax during the Civil War.^ (a) The Income Tax. The income tax, although discussed during the war of 1812, was first introduced into our national financial sys- tem during the opening years of the Civil War. The ori- ginal act of 1 86 1 provided for a proportional tax on the excess on all incomes over $800. This law, however, for several reasons not necessary to explain here, was never put in force. The first law actually executed, that of July I, 1862, provided for a general tax on so much of all in- comes as exceeded $600. From $600 to $10,000 the rate was three per cent; above that five per cent.^ The minor variations for different sources of income do not interest us in this place. The commissioner of internal revenue, in his first report, advocated a further graduation of the tax, making the full rate begin only with incomes of $20,000. He proposed a four per cent tax for incomes ' Page 29. °It is to be regretted that the account of the income tax, in Lalor's Cyclopedia of Political Science, ii, p. 480, should be so inaccurate. "Act of July I, 1862, §§ 89-93- I02 American Economic Association [664 from $5,000-10,000, a five per cent tax from $10,000- co.ooo, and a five and a half or six per cent tax above $20,000.* The plan, although with somewhat different figures, was adopted in the new law of 1864. Incomes were now divided into three classes. On incomes below $5,000 the rate was five per cent on the excess above $600; incomes from $5,000-10,000 paid seven and a half per cent ; incomes above $10,000 paid ten per cent.^ The spe- cial additional income tax of 1864 was, however, propor- tional, not progressive.® Secretary Fessenden, in his report for 1864, defended the progressive income tax in the following words : "The adoption of a scale augmenting the rate of taxation upon incomes as they rise in amount, although unequal in one sense, cannot be considered oppressive or unjust, inas- much as the ability to pay increases in much more than arithmetical proportion as the amount of income ex- ceeds the limit of reasonable necessity.^ Congress was evidently of his opinion, for it continued the principle, although in 1865 one of the classes was omitted. By this law all incomes below $5,000 paid five per cent on the excess over $600 ; while all incomes over $5,000 now paid ten per cent.^ After the Civil War was over, and the need of large revenues diminished, the rate of the tax was reduced and made uniform,^ and the limit of ex- emption was gradually increased until the tax itself came to an end in 1872. The interesting history of the tax, as * Report of the Commissioner of Internal Revenue for the Year ending June 30, 1863. p. 11. 'Act of June 30, 1864, §§ 116-123. ' Joint Resolution no. yy, July 4, 1864. ' Report of the Secretary of the Treasury, 1864, p. 15. ' Law of March 3, 1865, Thirty-eighth Congress, Second Session, chap. 78. ° Law of March 2, 1867, Thirty-ninth Congress, Second Session, chap. 169. 665] Progressive Taxation in Theory and Practice 103 well as a comparison with other taxes and a criticism of the results, must be reserved for another place, as the mere fact of graduation was, in itself, not of great impor- tance as compared with some of the other features of the tax. The principle of progression was also applied to the income taxes of the Confederacy during the Civil War. By the law of April 24th, 1863, all salaries, except those of naval and military officers, were taxed one per cent if not exceeding $1,500, but two per cent on any excess." All other incomes, from property, labor, etc., were taxed according to a much more severe scale. In- comes below $500 were exempt; from $500 to $1,500 the rate was five per cent; on all incomes over $1,500 and less than $3,000, five per cent was levied on the first $1,500 and ten per cent on the remainder; incomes be- tween $3,000 and $5,000 paid ten per cent; incomes be- tween $5,000 and $10,000 paid twelve and a half per cent; incomes of $10,000 and over paid fifteen per cent.^^ Special provision was made for joint stock companies and corporations. A general tax of ten per cent was lev- ied on their profits. But when they made a profit of be- tween ten and twenty per cent on their capital stock paid in, they were taxed twelve and a half per cent on the profits; in case the profits exceeded twenty per cent the tax was as high as sixteen and two-thirds per cent. The amendatory act of February 17, 1864, exempted salaries of $1,000, but made no changes in the rates. Graduated income taxes have not been confined to the national government. They are also found in the separate commonwealths, especially in the South. "In Matthews, The Statutes at Large of the Confederate States of America, p. 120 ; Statute iii, chap. 38, sec. 7. "^Ibid., sec. 8, vi. Cf. J. C. Schwab, The Confederate States of America, 1861-1865, ipoi, p. 300. 104 American Economic Association [666 In Virginia the income tax has existed since 1843. It was at first a tax on salaries and professional incomes, and a partial tax on funded incomes. It afterwards be- came a more general income tax. In 1852 the tax was made degressive, but the graduated scale was applied only to personal incomes. On incomes derived from salaries and official fees, the rates were as follows : one-fourth of one per cent when the annual income exceeded $100, and such excess was not more than $250; one-half of one per cent when such excess varied from $250 to $500 ; three- fourths of one per cent when such excess varied from $500 to $1,000, and one per cent when such excess was more than $1,000.^^ Professional incomes of physicians, surgeons and dentists were taxed as follows : If the an- nual income exceeded $400 and the excess was less than $600, the tax was one-half of one per cent on such excess in addition to a $5 license tax ; if the excess varied from $600 to $1,000 the rate was three-fourths of one per cent; if the excess exceeded $1,000 the rate was one per cent.^^ In 1856 the progressive tax on incomes from salaries or fees was doubled; but the progressive rate previously applied to professional incomes was converted into a pro- portional rate.^* In 1861 the progressive rate on incomes from salaries or fees was abandoned and the graduated scale was thus dropped from the entire tax.^^ During the Civil War several other Southern states im- posed an income tax, two of them with a progressive scale. This was the case in North Carolina, described below, and in Georgia. The most remarkable example is that of Georgia. The " Va. Laws of 1852, chap. 17, sec. 2. " Va. Laws of 1852, chap. 17, sec. 13. " Va. Laws of 1855-6, chap. 9, sec. 28. " Cf. in general, D. O. Kinsman, The Income Tax in the American Commonwealtlis, 1903, pp. 40-45. 667] Progressive Taxation in Theory and Practice 105 law of 1863 made the tax proportional to the percentage of profits on the capital invested.^* If the income was twenty per cent of the capital, the tax was one-half of one per cent. If the income was twenty to thirty per cent of the capital, the tax was one and one-half per cent; and for every increase of ten per cent in the percentage of profits to capital, the rate increased one-half of one per cent ad infinitum. The result was that when the profits equalled the capital invested, the rate would be five per cent, and if the profits were ten times the capital, the entire profits would go as taxes. It actually hap- pened that with the depreciation of paper money several people made nominal profits on a small capital at these higher rates, and were thus assessed at practically all of their profits." In 1863 the law was changed, making the tax rate proportional to the amount, instead of to the per- centage, of the income. On all incomes over eight per cent of capital the rates were as follows -.^^ Income. Rate (%) Income. Rate (%) $1,000-10,000 s $30,000- 50,000 IS 10,000-15,000 714 50,000- 75,000 1714 15,000-20,000 10 75,000-100,000 20 20,000-30,000 12Y2 Over 100,000 25 The income tax law, after minor changes, which, how- ever, did not afifect the principle of progression, was re- pealed at the close of the war in 1866, having led to much trouble and dissatisfaction. '''"Georgia Laws of 1863, Extra Session, title xviii, sec. 156. Kins- man, op. cit.. pp. 93-96. "A brewer, for instance, invested $50 and made $1500, or 3000% on his investment. He was informed that his tax amounted to $2225. On remonstrating that this was more than the entire amount of property which he possessed, the tax collector is reported to have said: "Very well, give me all you have and I will take a note for the rest." Southern Watchman, June 17, 1863. " Ga., Laws of 1863-4; Regular Session, no. 75, sec. 2. io6 American Economic Association [668 In one of the border states also we find an example of a progressive income tax during the Civil War. In 1863 West Virginia adopted the old law of Virginia, which had, as we know, in the meantime been changed. Ac- cording to this law a progressive rate was imposed on incomes from any office or employment, except minis- ters of the gospel, with rates as follows ■}^ 54 of 1% if the income was between $250 and $500 1% " " " " $500 " $1,000 i^% " " " over $1,000 This attempt, however, to tax incomes was so unsuc- cessful that it was not repeated.^" We still have several instances of graduated income taxes in the United States. These are found in North Carolina, South Carolina and Oklahoma. In North Carolina the income tax dates from 1849. It was at first a tax on corri^ttircial and precarious incomes, but was gradually changed until it became a tax on in- comes from property not already taxed. The tax was or- dinarily proportional, with the exception of a few years during the Civil War. Thus, in 1864, the profits made by the exchange, or in the manufacture, of cloth and woolen goods, leather and leather goods, iron and tobacco, and the profits made in the manufacture of salt were taxed five per cent if the profits did not exceed $10,000. From $10,000 to -$20,000, however, the rate of the tax was twelve per cent. From $20,000 to $30,000 the rate was fifteen per cent.^^ In 1866, however, all incomes (except those from sal-^ " W. Va., Laws of 1862-3, chap, 64, sec. 8. ^ Kinsman, op. cit., p. 97. ^ N. C, Laws of 1864, chap. 27. 669] Progressive Taxation in Theory and Practice 107 aries and fees) were taxed according to a progressive scale as follows :^^ From $500-1000 1% 2000-3000 2 3000-4000 2j4 4000-5000 3 5000 and over 2V2 In 1867 the progression was materially reduced, the rates now being one-half of one per cent on incomes be- tween $500 and $3,000, and one per cent on incomes over $3,000.^^ In 1868 the new constitution prohibited the taxation of income derived from property already taxed, and in 1869 the income tax was again made proportion- al. ^^ It was not until 1893 that the principle of progres- sion was reintroduced. According to the law of 1893 the rate was five per cent on all profits and incomes derived from property not taxed; incomes from salaries and fees paid one-half of one per cent on the excess over $1,000; all other incomes paid the following rates -P Excess over $1,000 to $5,000, — Ys of l per cent. " 5,000 to 10,000, — 54 " I " " 10,000 to 20,000, — yi " I " " 20,000, I " The arrangement, it will be remembered, is the same as in some of the Swiss cantons, like Basel and Schaff- hausen. In 1895 the rates were slightly raised, as fol- lows :^® Incomes in excess of $1,000 to $5,000 paid }i of 1% " " " 5,000 to 10,000 " 54 " 1% " " " " 10,000 to 20,000 " 1% " 20,000 " 2% "^N. C, Laws of 1866, chap. 21, schedule A., sec. 8. "^ N. C, Laws of 1866-7, chap. 72, schedule A. " N. C, Laivs of 1868-9, chap. 108. Cf. also Kinsman, op. cit., p. 69. "^ North Carolina Revenue Act, 1893, schedule A, sec. 5. ""N. C, Laws of 189s, chap. 116, schedule A, sec. 5. io8 American Economic Association [670 These rates are still in force. The law, however, has been a complete failure, as a revenue measure. During the year ending 1902, the revenue from the income tax was precisely $i'8.2^ a«^> ^ >^:' t ' "', <> '-'^ The other existing example of a progressive income tax is in South Carolina. In that state, after the national income tax had been declared unconstitutional, a progres- sive income tax was introduced in 1897, '^i*^ the follow- ing rates :^* Incomes from $2,500 to $S,oao paid 1% S,ooo to 7,500 " T.y2% 7,500 to 15,000 " ,...2% 15,000 and over " 3% This also has until recently been a complete failure, the revenue in 1902 amounting to only $414 for the entire state. Beginning in 1905, however, a more energetic at- tempt has been made to enforce the law, with the result that the revenue has slowly increased. In 1907 it amounted to over $36,000, which is still a pitiful figure when com- pared with the yield of the property tax. The progressive income taxes now in force in the United States may thus be said to be in reality only paper taxes. Whether the same will be true of the latest attempt to levy a progres- sive income tax remains to be seen. This attempt is being made in the new state of Oklahoma. In May, 1908, a so-called professional income tax was imposed in Oklahoma. The tax is levied on all incomes from salaries, fees, professions, and property upon which a gross receipts or excise tax^® has not been paid, in excess " Cf. Seligman, "The Income Tax in the American Colonies and States," Political Science Quarterly, x (1895), p. 241. " South Carolina, Laws of 1897, no. 335. ■ ^ The gross receipt tax referred to means the so-called "gross revenue tax" of 1908, which imposes a tax on the gross receipts of all public service corporations, of all mining corporations and of petro- leum and natural gas companies. The rates vary in the case of 5,000 " 10,000 10,000 " 20,000 20,000 " 50,000 50,000 " 100,000 671] Progressive Taxation in Theory and Practice 109 of $3,500. The rates are as follows: 5 mills (J^ of 1%) on the excess over $3,500 up to $5,000 7^ " (34ofi%) " 12 " ( 1.2% ) •• 15 " ( 1.5% ) " 20 " ( 2% ) 335^ " ( 3/^% ) on all amounts over $100,000. Every tax payer is required to sign a certificate of his income. The assessor in the township is to send to the State auditor lists of income recipients who have not filled out the blanks. The auditor then may take such steps as he deems necessary to require any such person to make proper return of his income, and he may also sum- mon witnesses. The result of the Oklahoma experiment will be watched with interest. Outside of these few cases of a graduated income tax, the only examples of progressive taxation in the Ameri- can commonwealths were until recently found in connec- tion with the business taxes in the Southern states and with the corporation taxes, to which we shall now turn our attention. (b) Business and Corporation Taxes. In many of the Southern states and commonwealths the license or business or excise or occupation taxes, as they are variously called, are arranged by classes, each class of tax-payers paying a fixed sum, graduated accord- ing to sales or purchases or receipts or capacity or capital stock or number of years in operation or size of town. Examples of these are the Texas occupation tax on mer- public service corporations from one-quarter of one per cent on the gross receipts of water works companies to three per cent on the gross receipts of express and car companies. In the case of mining companies the tax is two per cent on coal and one-half of one per cent on lead, zinc, jack, gold, silver and copper. The latter rate also applies to asphalt, petroleum, mineral oil and natural gas com- panies. Oklahoma Session Laws of 1907-1908, p. 640. no American Economic Association [672 chants, which varies from $3 on purchases of less than $2,000 to $300 on purchases over $750,000 ; the Tennes- see tax on cotton seed oil mills, which varies from $15 to $350, according as the press uses from 1,000 to 100,000 tons ; and the Virginia tax on distillers of liquors, which varies from a rate of $30 for a daily capacity of 10 bushels of mash to $500 for a capacity of 300 bushels, with an additional tax of $200 for every successive 100 bushels. This system is, however, akin to the graduated scales in the French impot des patentes mentioned above^" and is of slight importance. The graduated corporation taxes, however, deserve a somewhat fuller mention. They are found in various states. In Maine the "excise tax" on railroad companies, originally enacted in 1881, varied from one-fourth of one per cent to three and a quarter per cent of the gross earnings, the lowest rate being applied when the earn- ings did not exceed $2,250 per mile, and the rate in- creasing one-fourth of one per cent for every $750 earn- ings per mile until the minimum rate was reached.^^ In 1893 the point at which the minimum rate was applied was limited to $1,500 per mile, and the tax was now made applicable to telegraph and telephone companies. ^^ In 1901 the rates were again altered so as to be one-half of one per cent when gross earnings are under $1,000 ; three- fourths of one per cent when gross earnings are between $1,500 and $2,000; and one-fourth of one per cent ad- ditional for each $500 of gross receipts, until the rate reaches four per cent. In Maryland, where railroads have been for many years taxed on their gross receipts, the law of 1896 graduated the tax at the rate of eight- tenths of one per cent on the first $1,000 gross receipts " P. 89. " Maine, Revised Statutes, title i, sec. 42. " Maine, Acts of 1893, ch. 166. 673] Progressive Taxation in Theory and Practice iii per mile, one and one-half per cent when the receipts vary from $1,000 to $2,000 per mile, and two per cent on all earnings over $2,000 per mile.^^ j^ Virginia the tax on telephone companies is graduated from 50c to $1.50 per telephone, according to the number of telephones. In Tennessee the tax on electric light companies is $20 for a capacity of under 2,500 lights, rising to $500 for a capacity of over 10,000 lights. These rates apply, how- ever, only in cities from 50,000 to 100,000 population. In the smaller towns the figures vary slightly. In the case of three commonwealths, the former gradu- ated system of gross earnings taxation applicable to trans- portation companies has recently been abandoned. Thus, in Wisconsin, the so-called "license fees" on railroads were, under the law of 1889, five dollars per mile on earn- ings under $1,500 per mile ; the same plus two per cent on the excess over $1,500, when earnings varied from $1,500 to $3,000; and four per cent when earnings exceeded $3,000 per mile.** In 1897 the rates were somewhat in- creased, but in 1903 the whole system was abolished. A graduated license fee, however, still exists for telephone companies, and for electric light and power companies. In the latter cases, when the gross receipts are less than $800,000, the tax is one and one-half per cent on the first $250,000 and two per cent on the rest; when the gross re- ceipts are over $800,000 the rates are increased to three and one-half and four per cent respectively. In Michigan the "specific tax" on railroads ranged from two to two and a half, three, three and a half, and four per cent, ac- cording as the earnings were less than $2,000 a mile, $2,000 to $4,000, $4,000 to $6,000, $6,000 to $8,000, or over $8,000, a mile.*^ In 1897 the rates were increased " Maryland, Act of March 27, 1&96. "Wisconsin, Annotated Statutes, 1889, § 1213. '^ Michigan, Laws of 1893, no. 129. 112 American Economic Association [674 so as to range from two and one-half to five per cent. In 1900, however, the entire system of taxation of gross receipts was abandoned. Finally, in Vermont, according to the law of 1882, the rate of tax on railroad companies was two per cent for the first $2,000 earnings per mile, three per cent for the first additional $1,000; four per cent for the next additional $1,000; five per cent for everything over $4,000 earnings per mile. In 1890, how- ever, the tax was made proportional.^^ (c) Inheritance Taxes. The next example of progressive taxation in the United States is to be found in the graduated inheritance taxes. The last few years have seen a decided impetus to the movement in favor of a graduated scale in this class of taxes. In 1898, during the Spanish War, the Federal govern- ment imposed a tax on legacies and distributive shares on personal property over $10,000. The minimum rates varied from three-fourths of one per cent to five per cent, being graduated according to relationship ; but the rates were increased one-half for sums between $25,000 and $100,000; doubled for sums between $100,000 and $500,000; multiplied by two and one-half for sums be- tween $500,000 and $1,000,000; and multiplied by three for sums over $1,000,000. The maximum rate was thus fifteen per cent on the highest amounts. The Supreme Court of the United States decided, however, that the rates were applicable only to the individual shares re- ceived by the legatees and not to the entire amounts left by the testator. This inheritance tax was repealed in 1902, when the need of a war revenue had disappeared. Progressive inheritance taxes are now, however, found ' Vt., Laws of 1890, chap. 3, p. 5. 675] Progressive Taxation in Theory and Practice 113 in several of the separate commonwealths. The move- ment began in Ohio, where a law was passed in 1894, applying the progressive principle to the tax on direct in- heritances over $20,000. The rates varied from one per cent on inheritances from $20,000 to $50,000, up to five per cent on inheritances over $1,000,000. This tax was, however, declared unconstitutional in 1895, and has since then not been replaced. ^^ Illinois followed in 1895 with a progressive tax in which the graduation applied, however, only to distant relatives or strangers. This tax was upheld as constitu- tional by the state courts and finally also in 1898 by the Supreme Court of the United States. From this time on, therefore, the progressive movement spread with increasing celerity. In 1901 the progressive principle was adopted in four states, Nebraska, Colorado, Washington and North Carolina. In the first three states the progressive scale does not apply to direct relatives, and in North Carolina, where it originally applied also to direct relatives, an amendment in 1903 made the gradua- tion applicable only to distant relatives. In 1903 the principle of progression spread to Wisconsin and Oregon, the graduated scale applying in Wisconsin to all rela- tives, and in Oregon to the more distant ones. In 1905 California, Minnesota and South Dakota accepted the pro- gressive principle, the first two applying the graduated scale to all relatives. In 1907, Idaho, Massachusetts and Texas fell into line and adopted the principle of progres- sion, the first two again applying the graduated scale to all relatives. The special Tax Commission of New York in 1907 recommended its adoption in New York, with rates higher than those that exist anywhere else in import- ant countries, and the new constitution of Oklahoma ex- ' West, The Inheritance Tax, 2nd ed., 1908, pp. 13S-6. 114 American Economic Association [676 pressly authorizes progressive inheritance taxes, an au- thorization which has been utilized in the recent law of 1908. This law is the most radical yet enacted in any part of the world, and hence deserves a fuller consideration. The Oklahoma inheritance tax is arranged in five classes, according to the grade of relationship, the first class being that of husband, wife, children or parents. In this class, on the first $5,000 above an exemption of $1,000 in the case of a widow, or of $5,000 in other cases, the rate is one per cent ; in classes two and three the first $2,000 in excess of the exemption of $500 and $250, respectively, pay one and one-half and three per cent respectively ; in classes four and five, the first $500 above the exemption of $150 and $100 respectively pay four and five per cent respectively. On the excess above these figures in class one the primary rate is to be increased one one-hundred-and-twenty-fifth of one per cent (0.(125%) for every $100 increase; in classes two and three the primary rate is to be increased one-fiftieth of one per cent (0.050%) for every $100 increase; and in classes four and five the primary rate is to be increased one-tenth of one per cent (o.i % ) for every $100 increase. If this enactment is to be interpreted according to the letter of the law,^* it means that in class five (distant rel- atives or strangers) the rates would be as follows: i/io of 1% for each $ioo excess 1% " " 1,000 " 10% " " 10,000 " 100% " " 100,000 " In other words, when the excess over the original $500 reaches $100,000 the entire excess will be confiscated. On the other hand, if the wording of the act is to be so "^ Oklahoma, Session Laws of 1907-1^08, 1908, pp. 733 et seq. 677] Progressive Taxation in Theory and Practice 1 1 5 interpreted that the 100 per cent increase means 100 per cent of the primary rate of five per cent, or double that primary rate, then we should reach the rate of 10% at an excess of $100,000 15% " " " " 200,000 20% " " " " 300,000 and so on until we reach 100% at an excess of $1,400,000 According to the one interpretation we should reach an entire confiscation at the low figure of $100,000; ac- cording to the other interpretation at the somewhat higher figure of $1,400,000. But in both cases it will be a con- fiscation of the excess of the whole inheritance above the sums mentioned. In the other classes the points at which complete confiscation is reached are considerably higher. Of the thirty American states which now tax inheri- tances, fourteen, as we have seen, apply the progressive principle. In six states, California, Idaho, Massachusetts, Minnesota, Wisconsin and Oklahoma, the progression ap- plies to all classes of heirs and successors. In six states, Colorado, Illinois, Nebraska, North CaroHna, Oregon and South Dakota, it applies only to distant relatives and strangers. In two states, Texas and Washington, it ap- plies to all collateral heirs. For direct heirs the rate rises to two per cent in Massachusetts (at $100,000) ; to three per cent in California, Idaho and Wisconsin (at $500,- 000) ; to five per cent in Minnesota (at $100,000), and to an indefinite rate in Oklahoma. For collateral heirs the rates rise to nine per cent in Massachusetts and Min- nesota (at $100,000) ; to six per cent in Colorado, Illinois, Nebraska and Oregon (at $50,000) ; to ten per cent in South Dakota (at $50,000) ; to twelve per cent in Texas (at $500,000), and Washington (at $100,000) ; to fifteen per cent in California, Idaho and Wisconsin (at $500,- ii6 American Economic Association [678 000) and in North Carolina (at $50,000) ; and to one hundred per cent in Oklahoma. The exemptions range from $2,000 in Wisconsin to $20,000 in Illinois, and the maximum rates are, as indi- cated above, applicable to sums over $50,000 in Colorado, Illinois, Nebraska, Oregon, North Carolina and South Dakota; to sums over $100,000 in Massachusetts, Minne- sota and Washington, and to sums over $500,000 in Cali- fornia, Idaho, Texas and Wisconsin. During the year that the Federal inheritance tax was in force the com- bined inheritance tax in North Carolina, for instance, reached the enormous sum of thirty per cent on the maxi- mum amounts of personal property. The striking point about the progressive inheritance tax in the United States is that the constitutionality of the progressive principle has now been definitively con- firmed by the Supreme Court. In the Illinois cases it was claimed that progressive taxation was in violation of the rule of equality required by the Fourteenth Amend- ment. The Court, however, denied this, stating that the rule does not require exact equality of taxation. It only requires that the law imposing the tax shall operate on all alike under the same circumstances. The tax is not on money, but on the right to inherit, and hence a condition of inheritance; and it may be graded according to the value of that inheritance. The condition is not arbitary, because the amount of the tax is determined by that value; the tax is not unequal in operation because it does not levy the same percentage on every dollar; it does not fail to treat all alike under like circumstances and conditions both in the privilege conferred and in the liabilities im- posed.^® What distinction, if any, will be drawn in the -c^se of the confiscatory Oklahoma tax, remains to be seen. ' Magoun vs. Illinois Trust and Savings Bank, 170 U. S., 283. 679] Progressive Taxation in Theory and Practice 117 The progressive principle was also upheld in the Fede- ral inheritance tax. It was claimed that progressive tax- ation was repugnant to that clause in the Constitution which declares that all indirect taxes should be levied uniformly throughout the United States. The Supreme . Court held that the inheritance tax was an indirect tax, in the sense of the Constitution, and that the uniformity re- quired by the Constitution really meant only geographi- cal uniformity.*" Thus the progressive principle has beenv definitely established in the United States. (d) Land Taxes. Finally, it is worthy of especial note that a novel appli- cation of the progressive principle is to be found in the recent legislation of Oklahoma. In this state a unique attempt is being made to restrict large estates in land by the imposition of a progressive land tax. The official title of the tax, which was enacted in May, 1908, is, "The graduated tax on land holdings in excess of 640 acres of average taxable lands ay-d on incomes, rents and profits of lands held by lease or rental contract in excess of 640 acres. "*^ The tax is supplementary to the ordinary real estate tax, but is levied only on land exclusive of improve- ments thereon. The rates, in addition to the ordinary real estate tax, are as follows : In the case of — $640- 1,280 average taxable value, J4 of 1% on such excess. 1,280-3,000 " " " I % on such excess. 3,000- 5,000 " " " 2% " 5,000-10,000 " " " 5% " 10,000-25,000 " " " 10% " " The "average taxable value" is declared to be $20 per acre. Three hundred and twenty acres of land, how- 'Knowlton vs. Moore, 178 U. S., 41. ' Oklahoma, Session Laws of 1907-1908, 1908, p. 725. ii8 American Economic Association [680 ever, are in all cases exempt from this tax. The tax, hence, does not apply to urban property. Similar rates, levied on the lease holder, are imposed in the case of incomes, rents and profits from land. In such cases, however, the tax is assessed according to acreage, irrespective of value. The law is to go into effect in July, 1909, and its operation will be awaited with the greatest interest. It is the first attempt to apply in the United States a system somewhat similar to that found in New Zealand. § 1 6. Canada and other British Colonies. In Canada progressive taxation has been applied prima- rily to the inheritance taxes. The progressive scale was first introduced in two provinces in 1892. In Ontario the rates for certain direct relatives were two and one-half per cent, when the estate was between $100,000 and $200,000, and five per cent when it exceeded $200,000. In Nova Scotia the two and one-half per cent rate ap- plied only to the excess above $25,000 and the five per cent rate to the excess above $100,000. For other rela- tives and strangers the tax in both provinces was pro- portional, or rather it was graduated according to rela- tionship, not according to the amount of the estate, being five per cent for certain relatives and ten per cent for distant relatives and strangers. Prince Edward's Island followed in 1894 with rates on near relatives of one and one-half per cent on estates be- low $50,000, and of two and one-half per cent on sums above that amount. British Columbia in the same year adopted a succession duty with rates varying from one to five per cent according to the amount, but with half rates for direct heirs. More recently the rates have been increased, except in Prince Edward's Island and Nova Scotia, and have spread to other provinces. In New Brunswick the rates on direct relatives now vary from one and one-quarter to five per cent, according to the amount, while distant relatives pay ten per cent, and in cases where the property goes to any person outside of the province, the rates are doubled. In Manitoba the rates for all classes of heirs vary from one per cent to ten per cent on estates over $500,000 In Ontario, since 1907, the rates for near relatives vary I20 American Economic Association [682 from one to five per cent on estates over $200,000; but additional rates are levied on estates over $100,000, the rates varying from one per cent up to three per cent on sums over $800,000. Thus the maximum rate for di- rect heirs is eight per cent. In the case of more distant relatives the rate varies from five to ten per cent on sums over $450,000. In Quebec there is now also an inheritance tax with the highest rates now in force in Canada. In the case of direct heirs, the rates are the same as those in Ontario, but in the case of collateral heirs the rates rise to fifteen per cent on the largest amounts. The following table will show the character of the rates ■} Collateral Heirs, Direct Heirs. Rate % Exemption. Rate % Exemption. British Columbia S -10 $S,ooo i^- S $25,000 Manitoba i -10 4,000 2 -10 25,000 New Brunswick S -10 5,000 lyi- 5 50,000 Nova Scotia 5 -10 5,000 2^- 5 25,000 Ontario 5 -10 10,000 1-8 50,000 Prince Edward Island.. 2j4- 7/4 23,000 ij^- zj/i 10,000 Quebec 5 -15 i - 8 5,000 We also find a few examples of the progressive scale in some of the other English colonies. Thus, in the Cape of Good Hope, a progressive income tax was imposed by the act of 1904. All incomes over £1,000 pay 6d. in the pound on so much of the income as is between £1,000 and £2,000; 9d. in the pound on so much as is between £2,000 and £5,000; and in addition, i s. in the pound on so much of the income as exceeds £5,000.^ In the Leeward Islands, incomes from £50 to £100 are taxed two and one-half per cent, and incomes over £100 ^ Report of the Special Tax Commission of the State of New York (1907), p. 131. Cf. also in general West, The Inheritance Tax, 2nd ed., 1908, pp. 76-85. ' Cf. Return on Graduated Income Taxes in the Colonies. Colo- nial Office, 1905, no. 196, pp. 21-22. 683] Progressive Taxation in Theory and Practice 121 pay three and one-half per cent ; £50 being exempt in each case. In St. Vincent the income tax law in 1904 imposed the following rates : Incomes of £50 exempt From £50 to 100 20 s. per £100 100 to 200 30 s. " joo 200 to 300 40 s. " 100 Over 300 60s. " 100 § 17- Other Countries. In addition to the countries discussed above, we find the appHcation of the progressive rate also in Spain, in Mexico and in Japan. In Spain, the progression is appHed to only a very small extent. The law of 1900 introduced a slight graduation in that part of the tax on personal incomes which is im- posed on the salaries of state officials. The rate varies from fifteen to twenty per cent, according to the amount of the salaries of active government officials, with some- what different rates for other classes of salaries.^ In Mexico there is a very slightly progressive inheri- tance tax since 1901. The rates of the Federal inheri- tance tax are arranged in two classes, with the dividing line at 10,000 pesos. The rates for descendants, hus- band and wife vary from one-half of one per cent to one per cent; for ascendants, from one to two per cent; and for relatives from the second to the fourth degree, from three to four per cent. In the case of more distant rela- tives, the tax remains proportional.^ In Japan the progressive principle has recently been applied to both the income tax and the inheritance tax. The income tax was created in 1887, but the progressive rates were introduced somewhat later. In 1908 the nor- mal rates were as follows : on corporations, two and one- half per cent ; on interest from bonds, public and private, two per cent; on all other incomes, arranged according to the following twelve classes: ^ Cf. Reports from His Majesty's Representatives Abroad re- specting Graduated Income Taxes in Foreign States, 1905, pp. 132-133- ' For details, see West, op. cit._. p. 58. 685] Progressive Taxation in Theory and Practice 123 Incomes. Rate 100 to 300 yen i% 500 " 1.2 1,000 " i.S 2,000 " 1.7 3,000 " 2. 5,000 " 2.5 10,000 " 3. 15.000 " 3.5 20,000 " 4. 30,000 " 4.5 50,000 " 5. 100,000 " 5.5 During the war and since that time the rates have been increased so that the addition amounts to from ten per cent to twenty-seven per cent, of the normal rate in the various classes.^ The Japanese inheritance tax, which was introduced in 1905, also has progressive rates that have been arranged in such wise that the rate begins at one and two-tenths per cent and increases gradually until for inheritances between 70,000 and 100,000 yen the rates vary from four to six and one-half per cent. Beyond that point the rate increases one-half of one per cent for each additional 50,000 yen, up to 1,000,000 yen, when the progression ceases.* ' Cf. the Eighth Financial and Economic Annual of Japan, Tokyo, 1908, p. 21. * Cf. the Seventh Financial and Economic Annual of Japan, Tokyo, 1907, pp. ig, 21 and 26. The Eighth Annual does not contain the details. § i8. Conclusion. From the above review it is evident that the tendency toward progressive taxation is almost everywhere on the increase. Whether we deplore it or not, democracy is asserting itself more vigorously and it is precisely in the most democratic countries like Australia and Switzerland that the movement in favor of progres- sive taxation is the strongest. The results thus far, as we have seen, have not been of a character to justify the fears of the alarmists. In Switzerland the national pros- perity is on the increase, capital is growing and the prin- ciple of graduated taxation is no longer deemed debat- able. Its enforcement has given general satisfaction. It must be remembered, however, that the chief application of the progressive principle is found in the inheritance taxes, which are levied only once, and that in the case of the annually recurring property and income taxes the graduation has assumed the form of degression rather than progression. Under such conditions the edge is ta- ken off the ordinary objections to the system of gradua- tion. In Australia, Sir Charles Dilke tells us,^ the in- stitution of private property has not been weakened, nor has capital been driven away. The people are satisfied with the progressive principle and are extending its opera- tion year by year. In Germany and Austria, progres- sion, as a principle, is no longer seriously combated. Even in England a graduated income tax has become one of the planks of the radical platform, and a government ^Problems of Greater Britain, part vi, chap. i. This is confirmed in the recent testimony of Mr. Coghlan before the Select Committee mentioned in the next note. 687] Progressive Taxation in Theory and Practice 125 commission has reported in its favor.^ As the Hon. James Bryce writes in a recent letter: "Progressive in- heritance and income taxes are Hkely to figure largely in time to come in European politics." The same statement may be hazarded of American politics as well. The facts, therefore, seem to be in the direction of progressive taxa- tion. Let us endeavor to ascertain what the verdict of theory is. 'Report from the Select Committee on the Income Tax. 1906. no. 365. PART II THE THEORY OF PROGRESSIVE TAXATION CHAPTER I. THE SOCIALISTIC AND COMPENSATORY THEORIES. There is scarcely any topic of economic inquiry which has aroused the interest of scientists and would-be refor- mers to a greater degree than the theory of progressive taxation. Yet, with but few exceptions, almost every writer has simply advanced his own views on this topic, without reference to the work of his predecessors or with- out an adequate discussion of the arguments of his oppo- nents. It will be our purpose in what follows to collect every argument of consequence that may have been ad- vanced on any side of the controversy in order that we may attain a firm basis for our own conclusions. With a view of avoiding undue digressions, the detailed history of each important theory is relegated to the historical appendices. The arguments that have been urged in favor of pro- gressive taxation may be grouped in three classes which must be carefully distinguished. These may be called respectively the socialistic, the compensatory and the economic theories. The foremost scientific advocate of what is here termed the socialistic theory of progression is the German econo- mist, Adolf Wagner. Prof. Wagner distinguishes between the purely fiscal period in the history of public finance and the socio-political" p eriod . The essence of the first pe- riod consists m the simple endeavor on the part of the government to raise a revenue adequate to its needs. The essence of the second period consists in the predominance of social reasons over purely fiscal reasons. The state is no longer satisfied merely with raising an adequate rev- 130 American Economic Association [692 enue, but now considers it a duty to interfere with the rights of private property in order to bring about a more equitable distribution of weaUh. The fiscal policy looks merely to the needs of the administration; the "socio- political" policy looks at the relations of social classes to each other, and the best methods of satisfactorily adjust- ing these relations. The fiscal policy necessarily results in proportional taxation; the ^^so£ioi-politi€a4^'"f)0liey re- sults in progressive tax ation. The ethical demands of modern civilization are everywhere preparing the way for a transition from the old fiscal period to the incipient socio-political period. It is these ethical or social reasons alone which can logically serve as a basis for progres- sive taxation. This distinction of Wagner is, however, open to serious criticism. It is not true historically that the tax policy of various nations has been adjusted solely with reference to purely fiscal reasons. All governments have allowed social considerations in the wider sense to influence their revenue policy. The whole system of protective duties has been framed not merely with regard to revenue con- siderations, but also with the aim of producing results which should directly affect social and national pros- perity. Taxes on luxuries have often been mere sumpt- uary laws designed as much to check consumption as to yield revenue. Excise taxes have frequently been levied from a wide social, as well as from a narrow fiscal, stand- point. From the very beginning of all tax systems these social reasons have often been present. The attempt sharply to distinguish such periods historically, therefore, can scarcely be termed successful. But, on the other hand, it is not allowable to confound this undoubtedly social element in all fiscal policy with what Wagner calls the socio-political, or what might be 693] Progressive Taxation in Theory and Practice 131 termed not incorrectly the socialistic element. From the principle that the state may modify its strict fiscal policy by considerations of general social utility to the principle that it is the duty of the state to redress inequalities of fortune by taxation, is a long and dangerous step. It would land us not only in socialism, but practically in communism. If this were one of the acknowledged func- tions of government, it would be useless to construct any science of finance. There would be only one simple prin- ciple : confiscate the property of the rich and give it to the poor. The difference between the social element and Wag- ner's "socio-political" idea is virtually the difference be- tween social reform and socialism. We may indeed de- precate the existing conditions which affect the distri- bution of wealth. Where so much is spoken, however, of unjust arrangements, it is desirable to come to an un- derstanding as to what is really meant by the term jus- tice. To give an adequate discussion of this fundamental problem would indeed require a whole volume. It may, however, be permissible to put the conclusions tentatively and aphoristically as follows : Justice, so far as the action of the state is concerned, consists in holding the balance equal; in giving none an undue advantage; in affording each individual equal rights before the law and equal opportunities to develop his own talents and his own resources. Justice indeed demands that the state should do nothing consciously and purposely to increase inequal- ity of wealth ; but we clearly transcend the claims of jus- tice when we demand that the state should do away with all inequalities of wealth. Justice, in the sense of' equality, may indeed demand changes in the existing forms of taxation. This involves the problem of the equal treatment of all, as against historic inequality and_ 132 American Economic Association [694 its survivals in the tax systems of the world at present. In this sense, indeed, there is room and need for social reform; but it is a reform which consists in checking the continuance of old unequal laws, not in fostering the growth of new unequal laws. Legal justice means legal equality; but a legal equality which would attempt to force an "jj^equality of fortune in the face of natural in- equalities of ability would i3£-a -travesty of justice. We may inTleed grant the crying need for social reform. In so far, however, as the government is concerned, the possibility of reform lies rather in the general attitude of the legislator toward social and industrial matters. Es- pecially in the field of finance, the chief social reforms are to be found in the domain of outlay and expenditure rather than in that of revenue. They consist primarily in extending the benefits of governmental activity to the poor and needy, and in enabling even the lowest classes to participate, as far as possible, in the advantages of a progressive civilization. Even here it is a question how far it is wise to go ; and the answer depends not alone on fiscal reasons, but also on broader considerations of gen- eral governmental policy. In the field of public revenue, however, we do not deny for a moment that social consid- erations should play a role. But, as has been pointed out above, this has always been the case, and will always be so. Nor can we overlook the growing realization by the com- munity of the social characteristics of wealth, and of the increasing importance attached to the social origins and the social content of private property.^ But from this it is a far cry to Professor Wagner's "socio-political" de- mand that the state introduce progressive taxation in ^ See e. g. Seligman, Principles of Economics, ch. ix, and in its ap- plication to taxation, especially the Report of the New York Tax Commission mentioned at almost the close of this monograph. 695] Progressive Taxation in Theory and Practice 133 order to equalize social conditions. Progressive taxation may indeed incidentally accomplish this result, but if it cannot be defended on distinct and independent grounds, its advocates can with difficulty repel the charge that it is virtually a socialistic doctrine. To erect the "socio- political" demand into a separate and fundamental basis of taxation is a proceeding fraught with perilous possi- bilities. It may indeed be conceded that in the face of so car- dinal a point as the control of the land, it is perhaps competent for the government to take steps to prevent by fiscal methods a condition of land-holding which may come to be a menace to political tranquility and democratic progress. The attempt of a democracy to levy progres- sively higher taxes on very large estates is thus not so subject to criticism, even though it is a matter of serious doubt whether the desired end could not be better attained in some other way.^ But this is largely because of the fact that while progressive taxation may prevent 'the aggrega- tion of large plots in a few hands, it cannot lessen the amount of land itself ; whereas a similar attempt to apply the principle to property in general, might tend to a weak- ening of the motive to the accumulation of property. Thus Thomas Paine, who was very far from being a soc- ialist, advocated progressive taxation as a defense against primogeniture.* In the same way the land tax legislation 'This is the opinion of the man best qualified' to judge as to the results of the New Zealand legislation. See the reaedning of T. A. Coghlan in Minutes of Evidence, British Report of Select Com- mittee on the Income Tax, 1906, qu. 1328. ' "Admitting that any annual sum, say for instance, one thousand pounds, is necessary or sufficient for the support of a family, conse- quently the second thousand is of the nature of a luxury, the third still more so, and by proceeding on we shall at last arrive at a sum that may not improperly be called a prohibitive luxury. It would not be impolitic to set bounds to property acquired by industry, and 134 American Economic Association [696 of New Zealand and of Oklahoma, which has been de- scribed above, ought not properly to be called socialistic. So far, however, as the general "socio-political" theory is concerned we must conclude that the position is unten- able to the extent that it implies a conscious effort on the part of the government to levy higher taxes on tfee rich in order to reduce them to the level of the poor. This theory, moreover, is not new with Wagner. As far back as the end of the fifteenth century, when the whole Florentine republic was convulsed with the conflict over the progressive tax — la decima scalata^ — the distin- guished historian and publicist, Guicciardini, wrote two remarkable treatises in which he discussed the arguments for and against progression. In the first essay he really foreshadows many of the most important, of the recent theories on the subject, including what are termed in this work the economic theories; but he nevertheless lays the therefore it is right to place the prohibition beyond the probable ac- quisition to which industry can extend ; but there ought to be a limit to property or the accumulation of it, by bequest." "The following table of progressive taxation is constructed on the above principles, and as a substitute for the commutation-tax. It will reach the point of prohibition by a regular operation, and, thereby supercede the Aristocratical law of primogeniture." "The object is not so much the produce of the tax, as the justice of the measure.'' "But the chief object of this progressive tax (besides the justice of rendering taxes more equal than they are,) is, as al- ready stated, to extirpate the overgrown influence arising from the unnatural law of primogeniture, and which is one of the principal sources of corruption at elections." "It would be attended with no good consequences to enquire how such vast estates as thirty, forty, or fifty thousand a year could commence, and that at a time when commerce and manufactures were not in a state to admit of such acquisitions. Let it be sufficient to remedy the evil by putting them in a condition of descending again to the community, by the quiet means of apportioning them among all the heirs and heiresses of these families." Thomas Paine, Rights of Man, 1791. Cf. London ed. of 1817, part 2, pp. 99-101. •" * See above p. 22. 697] Progressive Taxation in Theory and Practice 135 chief stress on the argument that progressive taxation will lessen the disparity of fortunes and prevent the ex- cessive accumulation of wealth. Progressive taxation, in short, must be defended on general considerations of so- cial policy. Guicciardini himself, it is true, sides with the opponents of progression, whose arguments he develops in the second essay; but his first essay remains of great importance to-day as reflecting the arguments of the ear- liest literary advocates of the principle of progression. It is remarkable that it should have received so little atten- tion outside of Italy.^ Even a moderately progressive tax, says he, will not suffice to bring about justice and equality, because it would not restrict the rich man in the same degree as the poor man in the satisfaction of his necessities. For since we are all citizens of the same state and each the equal of the other, there can be no true equality or justice in taxation unless the taxes reduce us all to the same economic level.® For to have too much wealth does not do any one any good, but on the contrary is a dangerous thing not only • As Guicciardini died in 1540 the essays were probably written at the beginning of the sixteenth century. The two essays were first published separately under the title, "La decima scalata in Firenze,'' 1849, but were afterwards included in Guicciardini's Opere Inedite, vol. X, 1867, p. 353 et seq. The first one to call attention to these arguments was Canestrini, La Scienza e I' Arte di Stato desunta dagli Atti officiali delta Repubhlica Fiorentina.. Parte I.. L'Imposta sulla Ricchesza mobile e immobile, 1862, 219 et seq. Ricca-Salerno, Storia delle Dottrine Finanziarie in Italia, 1881, 36 et seq., 2 ed.1896, 73 et seq., also refers to them. Since the first edition of the present work appeared, Dr. Grabein has quoted liberally from Guicciardini in an article in Schanz, Finanz Archiv, xii (1895), p. 11-24. ° "Anzi il povere puo dolersi e chiamare questa gravezza ingiusta e ineguale, perche la non sconcia nelle cose necessarie i ricchi pari- menti come lui . . . Questa sarebbe la giustizia e la egualita delle gravezze, se le fossero di sorte, che cosi come noi siamo cittadini di una medesima citta, tutti oggi di pare I'uno all'altro, le ci riducessino anche tutti in uno medesimo modi vivere." 136 American Economic Association [698 for the body politic, but for the citizens at large, and even for the owners themselves.'^ If, then, we introduce the progressive principle we shall become truly equal as we reasonably ought to be.® Later on, not to speak of the mediaeval socialists, we find the same theoiry during the French Revolution. The Jacobins especially were ardent upholders of the principle. Thus, in 1793, in adopting the theory of progression, they declared that they desired to employ a progressive tax in order to reduce all fortunes to a level of 4,500 livres' income.* Robespierre thought that even this al- lowance was too liberal, and desired to make 3,000 livres the maximum. A little later, however, as will be shown below, he qualified his conclusions. Furthermore, Ramel, in presenting the scheme of progressive taxation to the Convention, which, it will be remembered, soon adopted the project,^^ made a distinction between a forced loan, levied only once, and a regular system of progressive taxes. "Even in the latter case," said he, "while the rate ought never regularly to reach 100 per cent, the object must be to lead gently to an equality of wealth. "^^ ' "L'avere troppe possession! non fa bene alcuno, ma infiniti danni alia citta, e ai cittadini e a quelli medisimi che I'hanno.'' ' "Cosi diventaremo tutti veramente pari, come ragionevolmente dobbiamo essere." ° "Impossible de mieux deraciner les fortunes : quant a celles que nous ne renversons pas d'un seul coup, nous les abattons par mor- ceaux, et contre elles nous avons deux baches. D'un cote nous de- cretons I'impot progressif, et sur cette base nous etablissons I'emprunt force; nous separons dans le revenu le necessaire de I'excedant; selon que I'excedant est plus ou moins grand, nous en prenons le quart, le tiers, la moitie et passe 9000 livres, le tout; au dela de sa mince reserve alimentaire la plus opulente famille ne gardera que 4500 livres de rente." Quoted in De Retz de Serviez, De I'lmpot Progressif, 1904, pp. 31-32. " See above, p. 33. " "Quelque syst^me de contribution progressive que vous adoptiez, il n'entrera jamais dans vos vues de I'etablir tel qu'a une somme 699] Progressive Taxation in Theory and Practice 137 Shortly afterwards Babeuf declared that progressive taxation, while it could not go to the root of the social evils, was a useful tool to split up property, to prevent large fortunes and to remove luxury. "L'impot pro- pressif," if it could be successfully assessed, "serait un moyen efficace de morceler les terres, d'empecher la cumu- lation des richesses, et de bannir I'oisivete et le luxe." But "cette maniere d'asseoir l'impot serait, tout au plus, un acheminement au bien ; elle pallierait le mal, mais elle n'en couperait la racine."^* The three methods of attain- ing equality were in his opinion the partition of land, sumptuary laws and progressive taxation.^* Since the French Revolution the same idea has almost uniformly been a part of the socialistic creed, whether among the communists, the early sentimental socialists or the American populists. In France, for instance, we find it developed by Decourdemanche, one of the disciples of St. Simon, ^* as well as by a number of writers in the quelconque il pose un terme a la fortune des citoyens. Vous ne met- trez point dei bornes ni a Feraulation ni a Tindustrie des citoyens ; mais vous ferez des lois sages, qui, apres avoir laisse aux hommes la jouissance du fruit de leurs travaux, rameneront par des voies douces, au niveau de I'egalite les fortunes qui en sont sorties.'' Cf. Gomel, Hisioire Financiere de la Legislative et de la Convention, ii, (1905), P- 115- "P. Buonarroti,CoB.s^ira.fJ07i pour I'EgalUe dite de Babeuf, 1828. i, p. 86. ^* Ibid., i, p. 85. Babeuf's early ideas were in favor of proportional taxation. He so interpreted the term faculty as used in the decrees of the National Assembly, in a pamphlet entitled: Reclamation de la Ville de Roye, relative au Remplacement de l'impot des Aides, et d I'execution des Decrets de I'assemblee Nationale qui prononcent que tous les Impots doivent etre repartis sur chaque Citoyen en pro- portion de. ses PacuUes, etc. 1790. See Victor Advielle, Histoire de Gracchus Babeuf et du Babouvisme d'apres de nombreux Documents inedits. 1884, i, p. 491-492. " Decourdemanche, Lettres sur la Legislation dans ses Rapports avec I'Industrie et la Propriete. ize Lettre. Considerations gen- 138 American Economic Association [700 Revolution of 1848.^" In Switzerland the socialist theory- is found in its naive form in Obermiiller, who advocates a rate rising to fifty per cent.-^'^ In the United States the same doctrine has been advo- cated on analogous grounds, especially by the Populists. For over a decade, from 1888 on, the scheme was devel- oped in numerous publications by W. W. Marshall, under the name of "cumulative taxation." During several years, beginning in 1895, he even edited a special periodical on this subject. The Graduated Taxpayer, devoted, according to the prospectus, "to a system of taxation calculated to limit the growth of abnormal private fortunes, prohibit excessive combinations, trusts and monopolies, and lighten the tax burdens of the less wealthy who are now required to pay a share disproportionately large." Among his collaborators was Percy Daniels, Lieutenant-Governor of Kansas, and author of a graduated tax bill introduced into Congress about this time.^® With the disappear- erales sur les Finances. Extraite du Globe du i es Aout, 1831. Ibid., 146 Lettre, 6 Sept., 1831. " Such as Danre, Question de la juste Repartition de I'lmpot resolu aritimetiquement et Defense de I'lmpot Progressif. 1845. "W. Obermiiller, Das Giitergleichgewicht. Eine Losung der Frage: Wie ist dem Elende der arbeitenden Volksklassen abzuhelfen? Konstanz, 1840, p. 20. " The chief writings of Marshall are as follows : The Industrial Hand Book, Garden City, 1888; Cumulative Taxation, Winfield, Kan., 1890 ; The Tax Solution, Berlin, Pa., 1893 ; The Graduated Tax Payer, vol. I, no. i, to vol. Ill, no. 2, Berlin, Pa., 1895-1897; Industrial Charts Showing at a Single Glance the Bad Effects of Monopolistic Over-Profiting, the Prevention of the Same, and the Good Results to Follow, Berlin, Pa., 1895; Deprofitization, Chicago, 1899. The chief writings of Percy Daniels are: The Sunflower Tangle over Problems of Taxation, Girard, Kan., 1894; A Crisis for the Husbandman with Supplement containing Graduated Tax Bill, Gi- rard, Kan., 1889; A Lesson of To-day and a Question of To-mor- row, Girard, Kans., 1892. 70I j Progressive Taxation in Theory and Practice 139 ance of the Populist movement, however, the agitation for a graduated income tax to cut down the earnings of the large industrialist to the level of the small entrepre- neur subsided. Finally, even in the case of the economists we find the principle already expressed in the third quarter of the eighteenth century by von der Lith.^^ Since then it has been occasionally urged, as of late by the German economist, von Scheel.^" The great mass, however, even of the German economists, including most of Wagner's own pupils, repudiate^! the principle. ^^ The most recent development of the doctrine, how- ever, is to be found in France, where M. Dufay has be- come its prominent apostle.^^ M. Dufay contends that taxation has not only an economic or fiscal role to play, Other publications of sympathizers with this movement during' the same period were : Chas. M. Howell, Practical Methods of Equalizing Taxation and Limiting the Growth of Abnormal Private Fortunes. Berlin, Pa., 1895 ; M. Jacobson, An Ounce of Prevention to save America from having a Government of the Few, Berlin, Pa., 1895. ^° "Ein weiser Regent wird mithin die Steuern dazu anwenden, um die gemeldete Ungleichheit des Vermogens seiner Unterthanen zu vermindern. Wenigstens wird er dieselbe nicht durch die un- gleichen Anlagen vermehren." J. W. von der Lith, Neue vollstdndig erwiesene Abhandlung von den Steuern, 1766, sec. 36. Von der Lith, however, desires to apply this idea primarily to an excise on luxuries. It is only in time of great need that he would apply it also to the direct property tax. ^v. Scheel, "Die progressive Besteuerung." In Tiibinger Zeit- schrift fiir die gesammte Staatswissenschaft, vol. 31 (1875), p. 273. He bases his demand on what he calls the socio-political reasons, thus using the same term which Wagner later adopted. ^The most recent is M. von Heckel, Lehrbuch der Finamwissen- schaft, 1907. See vol. i, pp. 126 et seq. ^In a book entitled L'lmpot Progressif en France, 1904. The second edition, much enlarged, appeared in 1905. In 1906 he pub- lished a smaller work entitled L'lmpot Progressif sur le Capital et le Revenu. 140 American Economic Association [702 but what he calls a moralizing role. Taxation, he tells us, must "maintain within a just limit the particular appro- priation of wealth produced at least indirectly by the labor of all; it must maintain among men a certain real equality, correcting and attenuating the. effects of indi- vidual egoism and of extreme natural equality."^^ In other words, the role of taxation is "to free labor, instead of compressing or restraining it, as at present." Hence taxation must "abstract from capital its excessive power and give to labor a social and economic power which it still has to an inadequte degree."^* If, therefore, the "socio-political" argument were the only defense of progressive taxation, it is plain that it could not be successfully upheld. While Professor Wag- ner would undoubtedly warmly resent the imputation of socialism, there is in the fiscal domain, at least, a scarcely discernible line of separation between socialism and the socio-political theory.^" The "socio-political" argument, which undoubtedly lies at the basis of many of the de- mands for progressive taxation, must, therefore, be re- jected by those who are not prepared logically to enroll ^ "L'impot doit avoir pour objet de maintenir dans une just limite Fappropriation particuliere de la richesse produite au moins indi- rectement par le travail de tous; it peut et doit maintenir entre les hommes une certain egalite reelle, corrigeant ou attenuant les effets de I'egoisme individuelle et de I'extreme inegalite naturelle." L'lmpot Progressif en France. 2nd ed., 1905, p. vi. " "C'est non seulement un role economique, mais un role moralisa- teur qu'il doit jouer, un role d'affranchissment du travail au lieu du role de compression qu'il joue actuellement. II doit contribuer a enlever au capital ce qu'il a d'excessif dans sa puissance et rendre au travail une puissance sociale et economique qu'il n' a plus au- jourd'hui a un degre suffisant." Ihid. ^ Professor Wagner's views, which, as stated in the text, have found scarcely any acceptance in his own country, seem to be shared in part, at least, by Professor H. C. Adams, who somewhat objects to what he terms the vigor of the above attack. See his Science of Finance, i8g8, p. 342. 703] Progressive Taxation in Theory and Practice 141 themselves among the socialists. Unfortunately, how- ever, most of the middle classes, as well as many pro- fessed economists, have confounded the economic theory of progressive taxation with the socialistic theory, and have assumed that progressive taxation necessarily im- plies socialism and confiscation.^" This is, perhaps, the reason of the fierce denunciation with which the project of progressive taxation has often been met. Thus, at the time of the discussion of the first income tax in the English parliament, in 1799, Lord Auckland said that graduated taxation was outright rev- olutionary.^'^ The German statesman, Gentz, said at about the same period that progressive taxation was not much better than common thievery.^^ Some time previously, when Turgot, the celebrated French statesman, was pre- sented with a project of progressive taxation, he wrote on the margin: "We must execute the author, not the project."^' John Stuart Mill calls it "graduated rob- bery" ; Dupont maintains that progressive taxation is so- cialistic and revolutionary f° Leroy-Beaulieu claims that ^This is true of a whole host of writers in every language. The ablest American exponent of this view is Mr. David A. Wells. Cf. his "The Communism of a Discriminating Income Tax," (by which he really means "The Socialism of a Progressive Income Tax"), North American Review, March, 1880. Cf. for Italy, Garofalo, La Superstizione Socialista. 1895. " Progressive taxation "would be contrary to all the safety and rights of property" ; it would "be worthy only of the French Coun- cil of Five Hundred" ; and it "would amount to neither m.ore nor less than the introduction of a plan for equalizing fortunes," etc. Cf. The Substance of a Speech made by Lord Auckland in the House of Peers upon the Bill for granting certain Duties upon Income, 1799, p. 25. ^ Gentz, in Historische Journal, 1709, p. 3. Quoted in Murhard, Theorie und Politik der Besteuerung, 1834, p. 544. ^"11 faut executer I'auteur, et non le projet." " "L'impot progressif c'est veritablement le socialisme dans I'impot 142 American Economic Association [704 "its mother is envy and its daughter oppression" f^ Es- sarts characterizes it as the resuk of the envy of the "have- nots" which they subsequently seek to defend by sophis- tical arguments f^ Stourm thinks that it is an instrument of general spoliation and confiscation f^ and Umpfenbach describes it as the realization of communism and an ex- treme absurdity, fit only for a community permeated by murderous tendencies.^* Notw^ithstanding these extreme statements, however, it is erroneous to assume that progressive taxation neces- sarily implies socialism and confiscation. It is possible to repudiate the socialistic theory of taxation, and yet at the same time to advocate progressive taxation on purely economic grounds. One may in fact be an arch individ- ualist, and nevertheless believe in progressive taxation. We shall see the truth of this when we take up the argu- ments of the individualistic school of progressive taxation. . . . c'est evidemment Timpot revolutionaire." Etienne Dupont, De I'Impot, 1852, p. 23. "'■ "L'impot progressif a pour mere I'envie et pour fiUe roppression." Paul Leroy-Beaulieu, Traiie d'Economie Politique, 2nd ed., l8g6, iv, p. 764. "^ It is "la traduction du sentiment de I'envie du non-possedant contre le possedant, qu'on essaye apres coup de justifier par des raisonnements plus ou moins sophistiques." M. des Essarts in Discussions de la Societe d'Economie Politique, Sth annee, 1898. " "Un instrument du nivellement universal" which "'aboutit de lui- meme a la spoliation" "on s'empare de lui pour realiser I'egalite social par la suppression de I'heredite et la confiscation des fortunes au dela du necessaire. — R. Stourm, Systemes Generaux de l'impot, 1893, p. 240. " "Eine himmelschreiende Absurditat" suitable "fiir ein Gemein- wesen, welches von selbstmorderischen Tendenzen durchdrungen, die Annulierung des Privateigenthums und die Verwirklichung des Kommunismus unter heuchlerisch beschonigender Form herbei- zufiihren trachte" — Umpfenbach, Lehrbuch der Finamwissenschaft, i8S9. 705] Progressive Taxation in Theory and Practice 143 Before considering these theories, however, it may be well to notice briefly the views of those who occupy a middle ground and who uphold progressive taxation for reasons not directly connected with either the socialistic or the so-called economic arguments. We come thus to what may be termed the compensator y theories r>f pr o- gressive ^iiliTff'^''"" — President Walker, for instance; bases his defense of progressive taxation on two considerations : first, "the un- doubted fact that differences of property and income are due, in no small degree, to the failure of the state in its duty of protecting men against violence and fraud," and secondly, "that differences in wealth are, in a measure, due to the acts of the state itself, having no political purpose, as treaties of commerce, tariffs, currency legislation, em- bargoes, non-intercourse acts, wars, etc." He argues that where differences of wealth may fairly be presumed to be in a measure due to the state's own acts of omis- sion or commission, allowance shoiild be made therefor in the tax system. ^^ He concludes that "were the highest human wisdom, with perfect disinterestedness, to frame a scheme of contribution, I must believe that the progres- sive principle would in some degree be admitted." This defense of progressive taxation is in many re- spects interesting. It is, however, really not new with President Walker. Progressive taxation was first advo- cated at length on this ground in the remarkable work of a woman. Mile. Royer, which was crowned by the Council of State of Vaud, in Switzerland, at the time of the great international convention on taxation in Lausanne in 1860.^* Mile. Royer takes the ground that it is the duty "Walker, Political Economy, ist ed., 1883, p. 479-480. In the 3rd edition (1888) these passages are omitted although the general con- clusion is still retained. "Five monographs out of forty-five received prizes, — those of 144 American Economic Association [706 of the state to compensate individuals for the "accumu- lated results of legal iniquities," and that "the present ought to atone for the heritage of injustice bequeathed by the past." This can, however, in her opinion be ac- complished only through some form of progressive taxa- tion." The same idea, in fact, is already found in the French writer Villiaume, who upholds progressive taxation on the ground that "taxation ought to counterbalance the inequalities consecrated by custom and by law\'^^ Another earnest advocate of the compensatory theory is the noted economist, Courcelle-Seneuil. Progressive taxation, says he, is in itself neither good nor bad. Up to a certain point it is highly desirable; beyond that it becomes per- nicious. That is to say, since the possession of wealth obviously gives the rich many advantages over the poor, and since the legal conditions of society naturally favor the rich, a progressive tax which would attenuate and diminish these advantages of the rich would be desirable Proudhon, Lassaut (a Parisian lawyer), Mile. Royer, Professsor Walras and M. Romiol. Proudhon, Walras and Mile. Royer pub- lished their works, each of which will be noticed in the course of this discussion. "The characteristic passages are as follows: "L'ideal de la jus- tice distributive consi.«*e a reparer les inegalites et les torts de la nature. Au contraire, p. 179. ^ "Der einzige, wahre, richtige und brauchbare Massstab . . . ist . . . das reine Einkommen, dass jeder Abgabenpflichtige aus seiner Betriebsamkeit als Ueberschuss des dabei gehabten Giiter- aufwands nach seinen individuellen Verhaltnissen zieht, oder mit 75 1 ] Progressive Taxation in Theory and Practice 189 arly, a few years later, Fulda demands proportional taxa- tion of clear income, which he defines as the "surplus over the family expenses necessary to subsistence, and over what is needful to maintain one's capital at the original figure.^* Malchus, who at times seems to hesitate some- what when considering the bases of taxation, finally con- cludes that equality and universality of taxation depend on the fact that every one gets an equal protection from the State.^* Therefore, he thinks, every one should be taxed in proportion to his clear income.^® Murhard, who gives a good review of the opinions of his predecessors, and who in some places also seem to vacillate between the two the- ories,^'' finally emerges as a decided opponent of progres- sive taxation, on the express ground of McCulloch that the only just theory is the leave-them-as-you-find-them theory, which to him means proportional taxation. ^^ He^ however, qualifies this later, by showing that taxes must be proportional only to clear income, according to the anderen Worten sein individuelles reines Einkommen." Ibid., iii, p. 187. " "Der Ueberschuss fiber die Bedurfnisse seiner eigenen und seiner Familie absolut nothwendigen Unterhaltes und fiber die nothwen- digen Erfordnisse, die die jahrliche Unterhaltung seines bereits er- worbenen stehenden und umlaufenden Kapitals fordert." Fulda, Handbuch der Finanzwissenschaft. 1827, § 140, p. 151. " They depend "auf den gleichen Schutz ffir Erstrebung seiner individuellen Zwecke, und auf den gleichen Antheil an dem Genuss der Staatsanstalten." Malchus, Handbuch der Finanzwissenschaft, 1830, i, p. 152. "" "Die Grosse des Beitrags muss mit der Grosse dieses disponi- blen reinen Einkommens moglichst proportionirt werden.'' Ibid., i, p. IS8. " Murhard, Theorie und Politik der Besteuerung, 1834, pp. 24, 80. ^ Murhard quotes the Edinburgh Review article of 1833 (without knowing that it was written by McCulloch), and makes that the basis of his argument. Ibid., pp. 540-553. Meyer, Principien der ge- rechten Besteuerung," 1884, p. 41, is therefore wrong in asserting that Murhard is the originator of this doctrine. Cf. above p. 728. igo American Economic Association [752 views of Behr and his successors.^® Finally one of the latest writers to accept this theory was Biersack. Bier- sack indeed thinks that the ideal standard of taxation is the relative measure of advantages that accrue to the in- dividual.^" This he finds in the proportional clear in- come. Unlike some of his predecessors, however, he re- stricts the "necessary" income to what is absolutely requi- site for the individual, not for his family or dependents.^^ Other more recent writers, who know nothing of the clear-income theory, advocate degressive taxation, not on theoretical grounds, but primarily for practical reasons. Among modern French writers on public finance Chailley is one of the most noted. He is to be distinguished from most of his countrymen in that he advocates an income tax, as a compensatory tax, "impot de redressement." Like most of the French writers, however, he still follows the give-and-take theory of taxation.*^ Curiously enough, he favors what is known as the "discriminating" theory in the income tax, i. e., a differentiation in the rate ac- cording to the source of income. But he opposes pro- gressive taxation for the same reason as Leroy-Beaulieu. Yet again illogically, he advocates the exemption of the minimum of subsistence, "because the poor cannot pay it."^^ Accordingly, he hereby declares himself a partisan of the degressive principle.^* Some of these writers are frank enough to confess that they are not logical. Thus the Italian publicist Benvenuti, ^ Murhard, op. cit., pp. 447-463. °° "Das Verhaltniss in welchem die Einzelnen an den vom Staate gewahrten Vortheilen participiren." Biersack, Ueber Besteuerung, 1856. ^ Ibid., p. 40. " Chailley, L'lmpot sur le Revenu, 1884, p. 408. " "II s'agit seulement de ne pas exiger d'un revenu minime ce qu'il ne peut pas payer." Ihid., p. 420. ** "Ce serait I'impot degressif." Chailley, op. cit, p. 423. 753] Progressive Taxation in Theory and Practice 191 who also clings to the give-and-take theory and objects to progressive taxation, concedes that the advocates of the exemption of the minimum of subsistence are not logical.^^ He claims, however, that "logic must be tem- pered with equity" — and hence concludes that the exemp- tion is an "incontestable necessity." We might feel tempted to retort with his own answer to Pescatore: "How can one deny that what is necessary is just?"^^ It is a poor argument which defends degressive taxation, even though illogical, because it is just; and which op- poses progressive taxation on the ground that it is unjust, although the same reasons of justice lie avowedly at the basis of each. When we abandon logic, controversy is at an end. The gradual development of theory from degressive to progressive taxation is seen in Sismondi. Sismondi clings firmly to the give-and-take theory, and maintains that on this account the minimum of subsistence must be exempted. "Taxation being the price paid by the citizen for his enjoyments, we must never demand a tax when there are no enjoyments."*^ In an eloquent plea he points out the grave danger of infringing on this mini- mum**' — an argument which clearly holds good only on °° "Si, e vero, i fautori dell' imposta proporzionale, ammetando il minimum, non sono coerenti al loro principio. Un professore di logica dovrebbe sgridarneli." Benvenuti, Le Imposte, Teoria e Pratica, 1869, p. 90. "" "Poiche come negare che sia giusto cio che e necessario." Ibid., 77- ""L'impot etant le prix que le citoyen paie pour ses jouissances, on ne saurait le demander a celui qui ne jouit de rien; il ne doit done JMiais atteindre la partie du revenu qui est necessaire a la vie du contribuable." Simonde de Sismondi, Nouveaux Principes d'Sco- nomie Politique, 1819, book vi, chap. ii. The quotation is from the 2nd ed. (1817), vol. ii, p. 170. " "II y a dans le salaire une partie necessaire qui doit conserver la vie, la force et la santee de ceux qui le per?oivent, afin que la 192 American Economic Association [754 the assumption that the tax is not shifted. Sismondi, however, goes further. Inasmuch as most of the pubUc expenses are destined to protect the rich against the poor, it is just "that the rich contribute not only in proportion to their wealth, but something in addition, in order to maintain this order which is so advantageous to them."^® Sismondi shows how this may be done, and although he thinks that we may admit the principle of proportion "with these slight modifications,"*" it is apparent that the "slight modifications" in reality constitute a system of progressive taxation. Sismondi, thus almost against his will, abandons the theory of proportional taxation. Finally, there is a class of writers who deduce from the give-and-take principle the doctrine of progressive taxa- tion in its entirety. The earliest and most important ad- vocate of this theory is the celebrated Jean Jacques Rous- seau. Rousseau, it is true, advanced as one of the argu- ments in favor of progression the point made by Montes- quieu as to the sacrifice incurred by the curtailment of necessaries.*^ His chief defense, however, rests on the consideration that under existing conditions the wealthy travail se continue, afin que la salaire qui pour eux est un revenu, mais qui est un capital pour ceux qui payent, puisse rendre a ces derniers les fruits qu'ils en attendent, et continuer, d'annee en annee, a imprimer le mouvement a la machine sociale. Malheur au gou- vernement qui touche a cette partie ; il sacrifie, tout ensemble, et des victimes humaines et I'esperance de ses future^ richesses." Sis- mondi, op. cit. p. 168. "'' "La plus grande partie des frais de I'etablissement social est des- tinee a defendre le riche contre le pauvre ; parceque, si on les laissait a leurs forces respectives, le premier ne tarderait pas a etre de- pouille. II est done juste que le riche contribue, non seulement en proportion de sa fortune, mais par dela meme cette proportion, a soutenir un ordre qui lui est aussi avantageux." Ibid., p. 155. '" "Avec ces legeres modifications, on peut done admettre la regie generale que chacun doit contribuer au maintien de la societe en proportion de son revenu." Ibid., p. 157. " See below, historical appendix five. 755] Progressive Taxation in Theory and Practice 193 secure more benefits from government than do the poor. He gives a most vivid picture of the situation at that time in France, showing the wretched condition of the lower classes.*^ ""Un troisieme rapport, qu'on ne compte jamais, et qu'on devrait toujours compter le premier, est celui des utilites que chacun retire de la confederation sociale, qui protege fortement les immenses pos- sessions du riche, et laisse a peine un miserable jouir de la chaumiere qu'il a construite de ses mains. Tons les avantages de la societe ne sont-ils pas pour les puissans et les riches? Tous les emplois lu- cratifs ne sont-ils pas remplis par eux seuls? Toutes les graces, toutes les exemptions ne leur sont-elles pas reservees? Et d'autorite publique n'est elle pas toute en leur faveur? Qu'un homme de con- sideration vole ses creanciers, ou fasse d'autres friponneries, n'est- il pas toujours siir de impunite? Les coups de baton qu'il distribue, les violences qu'il . commet, les meurtes memes et les assassinats dont il se rend coupable, ne sont-ce pas des affaires qu'on assoupit, et dont au bout de six niois il n'est plus question? Que ce meme homme soit vole, toute la police est aussitot en mouvement et mal- heur aux innocens qu'il soupgonne. Passe-t-il dans un lieu dan- gereux ? Voila les escortes en campagne ; I'essieu de sa chaise vient- il a se rompre ? Tout vole a son secours ; fait-on du bruit a sa porte ? II dit un mot, et tout se tait: la foule I'incommode-t-elle? II fait un signe, et tout se range : un charretier se trouve-t-il sur son pas- sage? Ses gens sont prets a I'assomer; et cinquante honnetes pie- tons allant a leurs affaires seraient pliitot ecrases, qu'un faquin oisif retarde dans son equipage. Tous ses egards ne lui coutent pas un sou; ils sent le droit de I'homme riche, et non le prix de la rich- esse. Que le tableau du pauvre est different ;plus I'humanite lui doit, plus la societe lui refuse ; toutes les portes lui sont fermees meme quand il a le droit de les faire ouvrir ; et si quelquefois il obtient justice, c'est avec plus de peine qu'un autre n'obtiendroit grace : s'il y a des cor- vees a faire, une milice a tirer c'est a lui qu'on donne la preference; il porte toujours, outre sa charge, celle dont son voisin plus riche a le credit de ce faire exempter — a moindre accident qui lui arrive, chacun s'eloigne de lui, si sa pauvre charrette renverse, loin d'etre aide par personne, je le tiens heureux s'il evite en passant les avanies des gens lestes d'un jeune Due; en un mot, toute assistance gratuite le fuit au besoin, precisement parce qu'il n'a pas de quoi la payer, mais je le tiens pour un homme perdu, s'il a le malheur d'avoir I'ame honnete, une fiUe aimable, et un puissant voisin." Rousseau, Dis- cours sur I'Oeconomie Politique, Geneva, 1758, pp. 61-62. 194 American Economic Association [756 After calling attention to several minor points Rous- seau sums up the relation between the poor and the rich in the following words -^^ "You need me for I am rich and you are poor : let us make a compact. I'll permit you to have the honor of serving me on condition that you give me the little that you have left in return for the trouble I am taking in ordering you about." The conclusion from all this is, in Rousseau's opinion, the progressive rate, for taxation ought to be imposed not only in propor- tion to the wealth of the taxpayer but in a ratio based on a consideration of their relative superfluities.** And he adds, rather maliciously : "Operation tres important et tres difficile que font tous les jours des multitudes de com- mis honnetes gens et qui savent I'arithmetique, mais dont les Platon et les Montesquieu n'eussent ose se charger qu' en tremblant et en demandant au ciel des lumieres et de I'integrite."*^ The most exhausive defense of progressive taxation in the 1 8th century, however, is made by Graslin in an anony- mous work designed to review the doctrines of the Physiocrats, or, as they were then called, the Econo- mists.*® Graslin starts out from the benefit theory of taxation. Every one, he tells us, needs to be protected, " "Resumons en quatre mots le fait social des deux etats. Vous avez besoin de moi, car je suis riche, et vous etes pauvre: faisons done un accord entre nous: je permettrai que vous ayez I'honneur de me servir, a condition que vous me donnerez le peu qui vous reste pour la peine que je prendrai de vous commander." " "Si I'on combine avec soin toutes ces choses, on trouvera que, pour repartir les taxes d'une maniere equitable et vraiment propor- tionelle, I'imposition n'en doit pas etre faite seulement en raison des biens des contribuables, mais en raison compose de la difference de leur conditions et du superflu de leurs biens." '' Ibid., p. 63. " Essai analytique sur la Richesse et sur I'Impot, ou Von refute la nouvelle Doctrine £,conomique, qui a fourni d, la Sociite Royale d'Agriculture de Limoges les principes d'un programme qu'elle a puhlie sur I'Effet des Impots indirects. 1767. An elaborate expo- 757] Progressive Taxation m Theory and Practice 195 and this need of protection is among otir chief wants. It therefore constitutes an element of wealth like other forms of wealth; and as a consequence a tax represents an exhange of the wealth of production in return for other wealth in proportion to the relative values of each. This, he says, is the primitive law of taxation.*^ Civili- ation, however, upsets this primitive arrangement and brings about a state of affairs which completely inverts the natural order. For now some contribute to the mass of wealth more than they get out of it, and vice-versa. Consequently, since those who get out of it more than they put in ought to pay for the wealth common to all, it fol- lows that they ought to be taxed accordingly.*® This, however, he tells us, leads by a somewhat different train of reasoning to the progressive principle.*® It is precisely here, however, that Graslin leaves the basis of the bene- fit theory and adopts that of the faculty theory. He may, therefore, more properly be considered under that head a little later.50 sition of his general doctrine will be found in J. Desmars, Un Pre- curseur d'Adain Smith en France. J. J. L. Graslin, 1900. ■" "Le besoin de la protection qui tient un des premiers rangs dans I'ordre des besoins pour les hommes en societe, donne un veritable valeur de richesse a la puissance protectrice, qui, sous cette con- sideration, est une partie de la richesse de la nation. . . L'impot consiste done dans I'echange de la richesse de protection contra les autres richesses, en raison des valeurs relatives de chacune. C'est la loi de la nature meme; c'est la regie primitive de 1' impot." Op. cit., pp.324, 328-9. " "L'ordre meme de la nature etant interverti par I'ordre social, dans lequel les uns mettent a la masse de la richesse beaucoup plus qu'ils n'en retirent; ceux, qui retirent de la masse plus qu'ils n'y mettent, doivent etre charges de I'achat de cette richesse commune a toute la societe; et cela en raison de I'avantage qui en revient a chacun d'eux." Ihid., p. 329. " "Ce que nous ramene par des considerations dififerentes a la loi de la contribution dans une raison toujours progressive des facultes de chaque contribuable." Ihid., p. 330. °° See below, historical appendix five. 196 American Economic Association [758 Another and perhaps better known advocate of this tendency is the celebrated Condorcet. Condorcet starts out by maintaining the necessity of exempting the mini- mum of subsistence. A proportional tax on the income exceeding a given sum, he tells us, is a progressive tax on the whole income; and this is in complete ac- cord with the principles of the most rigorous jus- tice.^^ (In reality it is degressive taxation on the whole income. Scientific terminology, however, it must be re- membered, was not yet well developed in his day). We must go further, however, says Condorcet. There are some public expenses which have a special value to the rich, without losing their value common to all. In fact, we can never really encourage the useful arts without producing a perfection which will be of especial benefit to the wealthy. Hence the rich ought to pay an addi- tional sum because of certain exclusive benefits that accrue to them from governmental activity. This is the second sense in which progressive taxation is just.^' Condorcet " "La partie de ce revenu, necessaire a la subsistance de la fa- mille, ne pent etre imposee . . . C'est done sur I'excedant seul que rimpot doit etre place. . . Voila done un impot proportionnel sur la portion du revenu excedant 400 livres, mais progressif sur le revenu entier et cette distribution est absolutement conforme aux principes de la plus rigoureuse justice." Condorcet, Sur I'lmpot Pro- gressif, 1792, in Guillaumin's edition of Melanges d'Economie Po- litique, i (1847), p. 567. " "Or il existe des depenses dont I'utilite n'est au dessus des pri- vations occasionees par I' impot que pour ceux auxquels il n'ote qu'un veritable superflu. . . . Ensuite la meme depense ne peut-elle avoir pour le riche une utilite dont il profite seul, sans qu'il ne perde rien de I'utilite commune a tous? . . II serait done tres juste de dire: tous les revenus sont proportionnellement imposes; mais, au-dessus d'un certain terme, I'excedant paiera proportion- nellement une autre contribution. . . . Celle-ci sera destinee a faire payer par les riches certains avantages exclusifs qu'ils retirent de depenses, faites a la verite pour I'utilite generale, mais dont il resulte necessairement des jouissances qui ne peuvent etre que pour 759] Progressive Taxation in Theory and Practice 197 goes on to point out some limitations on the rate of gradu- ation. In principle, however, he favors progression be- cause jf his belief in the greater benefits to the virealthy. Similar ideas were common at the time of the French Revolution. Thus, the pamphleteers, Noilliac and Delau- nay, as well as Roland, the future minister, upheld pro- gressive taxation on the ground that the rich derived more benefit from the government than the poor.^^ In the same way Vernier, one of the prominent mem- bers of the Convention, published early in 1793 a mono- graph in which he defended the progressive principle, since the rich man has far more interest in the mainte- nance of the social order than the poor man, and since he derives more advantages from it, the tax, he thinks, ought to be "tellement combinee qu'elle soit en raison com- posee des avantages qu'on retire de la societe."^* Vernier, however, adds to this defense, in which he quotes from Rousseau, two other arguments which show that he was an eclectic. Thus he accepts the socialistic theory when he says that one of the objects of the progressive tax is to "detruire ces inegalites, ces loupes monstrueuses du corps politique qui devore tout ce qui les environne;" and finally he follows Montesquieu'^ in claiming that "il en coiite moins aux riches de prendre sur leur superflu qu'aux pauvres de prendre sur leurs besoins."'® A little later in the year Robespierre espoused the eux seuls. Voila encore un second sens dans lequel I'impot pro- gressif est conforme a la justice." Condorcet, op. cit., pp. 568-569. °' Noilliac, Le plus fort des Pamphlets. L'Ordre des Paysans aux Etats Generaux, 1789, p. 21 ; Delaunay, Bases Generales d'un Systems d'Imposition, 1793, pp. 11-12; Roland, in Le Financier Patriote. Cf. Lichtenberger, Le Socialisme au XVIIIe Siecle, 1895, pp. 401, 429, 438 et passim. "Vernier, L'lmpot sur le Luxe et les Richesses. ™ See below, historical appendix five. "Tor his practical proposition, see above, pp. 33-34. 198 American Economic Association [760 same idea, and posited the question as to whether any- thing could be more clearly inherent in the nature of things or based more firmly in eternal justice than the ob- ligation to contribute progressively in accordance with benefits received.^'^ He desired the principle to be conse- crated in the new constitution in the following article: "Les citoyens dont les revenus n'excedent point ce qui est necessaire a leur subsistence doivent etre dispenses de contribuer aux depenses publiques, les autres doivent les supporter progressivement selon I'etendue de leur for- tune."^* Later on, however, Robespierre changed his mind as to the exemption of the minimum of subsistence.*® The chief modern advocate of progressive taxation as the outcome of the give-and-take theory is Joseph Gar- nier. Garnier makes a distinction between the progres- sive tax and what he calls the progressional tax. In the former case the progression is rapid and unlimited, and the tax is therefore absurd, because it is simply a means of spoliation. In the latter case, that of the "rational and serious progressive tax," the progression increases very slowly and stops at a moderate maximum, so that it can never exceed a definite and limited portion of the income. This is what he calls the progressional tax, or the rational progressive tax. While he hotly opposes the first spe- cies, Garnier strongly upholds the second, and objects to most of the French writers for confounding the two. In reality, however, notwithstanding Garnier's explanations, "' "En matiere de contributions publiques, est-il un principe plus evidemment puise dans la nature des choses, et dans I'eternelle jus- tice, que celui qui impose aux citoyens I'obligation de contribuer aux depenses publiques progressivement selon les avantages qu'ils reti- rent de la societe." °° Gomel, Histoire de la Legislative et de la Convention, 1902, i, p. 464. ^ See above, p. 184. Cf. also Robespierre's monograph entitled, Sur I'Impdt Personnel, 1790. 761] Progressive Taxation in Theory and Practice 199 there is no substantial difference in principle. They are both progressive taxes. The real basis of Garnier's defense of the progressive tax, in the sense of a moderate progression, is that the protection afforded by the state increases faster than the increase of property. This he regards as a self-evident fact, and is content with simply positing it as an axiom. Since protection increases more than proportionally to property, taxation must increase progressively. That, he tells us, is the really legitimate, really rational, ideal tax.®" It is true, indeed, that Garnier later refers to the possi- bility of basing the principle of progression on some other reason, when he asks, "In case of public expenses for other purposes than for security, is it not legitimate for the rich to pay more than the poor?"®^ He does not at- tempt to develop this idea, however, so that Garnier's ""L'impot ideal vraiment legitime, vraiment rationnel est celui qui equivaut exactement aux avantages que le contribuable retire de la societe et surtout a la valeur de la securite qui lui est garantie. Or la question est de savoir si ceux qui ont de forts revenus et une belle situation dans la societe ne sont pas proteges plus que proportion- nellement a leur fortune. Si Ton trouvait que les citoyens plus aises sont proteges progressivement, c'est a dire que la protection qu'ils resolvent est plus que proportionnelle a leur avoir physique et morale, ils devraient contribuer plus que proportionnellement ; alors la legit- imite de I'impot progressif ne saurait etre combattue, et la difiSculte ne serait plus que dans les moyens d'application. Dans ce cas, toutes les reformes financieres devraient tendre a etablir une proportion progressive, si je puis dire, plus juste et plus equitable que I'egalite de I'impot qui n'est la plupart du temps qu'une monstrueuse inegalite; encore plus juste et plus equitable que la simple proportion (souvent improportionnelle en fait)." Jos. Garnier, Trait e des Finances, 4th ed. (1883), p. 69. Cf. first edition (1858), p. 25. The idea is found already in his Elements d'Economie Politique, ist ed. (1846). , " "Quand il s'agit de depenses publiques autres que celles de la securite, quand il s'agit de depenses de luxe, d'agrement, etc., ne semble- t-il pas legitime que le riche et I'aise payent plus largement que le pauvre, que le citadin paye plus que le campagnard." Ibid. 200 American Economic Association [762 contention may be said to rest on the principle of pro- tection. In Germany several writers have maintained that the give-and-take theoiy leads to progressive taxation, wrhicti they uphold on that account. In one of his earlier works Qsenhart asserts that "the benefits which individuals do or can derive from governmental institutions increase in geometrical progression."^^ So Judeich thinks that the state offers a great many advantages which may theoreti- cally be enjoyed by all, but most of which are practically enjoyed only by the wealthier classes. Hence to tax every one in a strict proportion would be unjust.^* One of the most interesting discussions of progression is that of the French engineer, Vauthier, who was in- spired by the Revolution of 1848.®* Vauthier takes it for granted that taxation must be regarded as an insu- rance-premium, but he denies that the insurance-premium idea leads necessarily to proportional taxation. He points out that it is really not the pieces of property, but the in- dividuals, that insure themselves, and that as soon as we grant this we abandon the right to absolute private prop- erty and supplant it by the idea of property as a social " "Denn der Vortheil, welchen ein Jeder von den offentlichen An- stalten hat oder haben kann nimmt nicht bios einfach mit seinem Ein- kommen zu, sondern steigt in zusammengesetzten Satzen in geomet- rischer Progression." Eisenhart, Philosophie des Staates, ii (1844), p. 197. Later on, it is true, in his special work on taxation he for- mally abandons the give-and-take theory completely. Eisenhart, Kunst der Besteuerung (1868), pp. 5-9. " "Der Staat bietet eine Menge Vortheile, welche zwar von alien Unterthanen benutzt warden diirfen, die aber nur von den Wohl- habenden benutzt werden konnen. Es ware ungerecht, den we- niger Bemittelten im gleichem Verhaltnisse zu besteuern, da er nicht im Stande ist, im gleichen Verhaltnisse die Einrichtungen des Staates zu gebrauchen.'' , Judeich, Die Rentensteuer im Konigreiche Sachsen dargestellt" (1857), pp. 111-112. "L. L. Vauthier, De I'lmpot Progressif. Etudes sur V Application de ce Mode de Prelevement a un Impot quelconque, 1851. 763] Progressive Taxation in Theory and Practice 201 institution. If, however, property is a social category, society has a perfect right to modify the form and con- tent of private property, and is hence justified in making taxation progressive if it thinks that the results would be socially advantageous.®^ Vauthier's defense of the pro- gressive principle is really negative rather than positive. He is concerned chiefly with reviewing the arguments generally advanced in opposition. The chief objection of the day was that the problem of assuring the regularity and continuity of the progressive scale was mathemati- cally insoluble. This objection he seeks to meet by a se- ries of carefully framed formulae, constructed according to a progressively diminishing rate of geometrical in- crease until the increase itself stops when the rate of the tax reaches fifty per cent of the income."* He attempts, furthermore, to show how the scale is applicable to other imposts in addition to the income tax.*'^ Finally, while Vauthier declares that he is far from ex- aggerating the importance of the progressive principle, and while he is willing to concede that an erroneous appli- *" "Mais I'impot, dit-on, est le prix de la protection donnee a la propriete, c'est Tassurance que chacun consent a payer pour jouir en paix du fruit de son travail. De la decoule, inevitablement, I'idee de la proportionnalite. J'admets cette convention tacite, cette sorte d'assurance mutuelle des individus pour la protection de leurs pro- prietes. . . . Mais . . . ce sont en definitive les individus qui s'associent a propos de la propriete, et la necessite de cette conven- tion, a laquelle nul ne peut se soustraire, fait perdre a la propriete son caractere de droit individual, pour lui imprimer profondement le cachet d'institution sociale. La societe a done le droit de modi- fier la forme de la propriete et de regler la question de I'impot comme toutes autres, au mieux de I'interet de ses membres et suivant ce qui lui parait, a une moment determine, la consequence la plus logique et la plus avancee possible de la loi de justice. EUe peut done adopter a sa volonte I'impot progressif au lieu de I'impot propor- tionnel." Vauthier, op. cit., pp. lo-ii. "Ibid., chap, iv, pp. 32-50. "Ibid., chap. 5-7, pp. 50 and 76. 202 American Economic Association [7^4 cation of the principle might lead to very serious evils,®* he concludes that the difficulties of application are in reality very slight; that the fears of arbitrariness in the system and of fraud in the returns are illusory ; that the social influence of a progressive tax, far from being spo- liatory in character, would favor agricultural improve- ments; and that the fiscal returns would be at least as great as in the case of a proportional tax, with the added advantage of exempting the lower incomes. The most remarkable atempt to prove that the give- and-take principle leads logically to progressive taxation was made by the French engineer Fauveau, in another work where the mathematical method is applied to taxa- tion. Fauveau discusses four possible bases of taxation, namely that taxes should be based on the hypotheses : ( i ) that every one owes to society what he gains from the social protection; (2) that every one owes to society what it cost society to protect him; (3) that every one ought to receive from the social protection an equal moral advantage; (4) that society ought to impose on every one an equal moral sacrifice.*® Here we are concerned with the first two hypotheses only. The others we shall take up later.''*' Fauveau objects to the assertions of Thiers and Moli- nari that the insurance theory leads to proportion. In- surance companies, says he, fix the premiums not alone in proportion to the amount of property insured but ac- cording to the risks; so that the same amount of prop- erty may often pay different rates of insurance. Now "Dans I'etat actuel de notre constitution economique nous pen- sons qu'une application mal faite donnerait lieu, sans grands avan- tages, a des perturbations enormes et souleverait une repulsion des plus vives.'' Op. cit., p. 12. ^ G. Fauveau, Considerations Mathematiques sur la ThSorie de I'lmpot (1864), p. 12. '"Below, historical appendix five. 765] Progressive Taxation in Theory and Practice 203 100,000 francs of property which belong to one man would (if there were no social protection) stand a much greater chance of being pillaged than the same amount belonging to several individuals. The premium of in- surance would have to be made up of all the infinitely- small premiums for insuring each particular element of the large property; for one runs the risk of losing not only the whole of the property but all the amounts infe- rior to the whole J^ After a lengthy computation, brist- ling with mathematical formulas, Fauveau concludes that taxation regarded as an insurance premium must increase more rapidly than the value of the property insured, but less rapidly than the square of the value. ''^ In other words, the insurance theory of taxation leads to progres- sion. On the other hand, if we desire to proportion taxation to the cost of benefits received, Fauveau thinks it impos- sible to settle on any definite rate. The cost of punish- ing attacks made on security of property grows less rap- idly than the value of the property; but the cost of pre- venting possible attacks is progressive, just as are the insurance premiums. He maintains, however, that in this case it is impracticable to frame any mathematical proportion. '^^ These arguments, as we have already seen, are not very convincing. ''* It is interesting, however, to " "C'est que chaque individu doit, pour etre assure de la possession de son bien, une somme qui se compose de toutes les primes iniini- ment petites dues pour se faire assurer chacun des elements de ce bien, car on court risque d'etre vole non seulement de la totalite de son bien, mais de toutes les sommes inferieures a cette totalite." Fauveau, op. cit., p. 24 ""'L' analyse mathematique prouve que I'impot doit croitre plus rapidement que la valeur des biens assures, mais moins rapidement que le carre de la valeur de ces biens.'' Ibid., p. 26. " Ibid., % 32. " See above, pp. 154-156. 204 American Economic Association [766 note how the defenders of the benefit theory advance, by a gradual evolution, to a point where they virtually advo- cate progressive taxation. Let us now leave this whole school and investigate the arguments of those who propound, on the contrary, what is known as the faculty theory of taxation. CHAPTER III. THE FACULTY THEORY. The faculty theory of taxation is very old. That a man should contribute to the public burdens in propor- tion to his^ibility o r faculty is a principle which dates back to the middle ages, both in theoretical literature an^ in practical legislation, and which may even be found in its main outlines in the writings of the Greek philoso- phers. The word "faculty" is the usual one in Latin and French tax laws and is the general term employed in all the early American laws, so that "faculty" seems to be a peculiarly appropriate term to use in American discus- sions. For a long time, however, the best practical test of faculty was supposed to be general property. Thus all through the middle ages when local taxes were levied at all, they were assessed on general property on the principle juxta bonorum facultatem or pro bonorum fac- ultate.^ In England the most familiar instance of the use of the word ability is that of the Elizabethan poor law, which provides for the taxation of every inhabitant of the par- ish "according to the ability of the parish" — a term in- terpreted to mean property.^ It had been so common to identify faculty with property that when the words abj- '- Cf. the chapter on "The General Property Tax," in Seligman, Essays in Taxation. ' Stat. 43 Eliz., chap. 2, sec. i. For the gradual change in the in- terpretation of the word see the volume entitled, The Local Taxes of the United Kingdom, published under the direction of the Poor Law Commissioners, 1846, p. 8 et seq. For earlier examples of the use of the term "ability" see E. Cannan, The History of Local Rates in England, 1896, ch. I. 2o6 American Economic Association [768 lity or faculty were first used in American colonial legis- lation they were held to be tantamount to property.® Later on, the interpretation of "faculty" was somewhat altered. From meaning property, it now began to de- note revenue or income. It was, however, still inter- preted to imply a proportional tax, — proportional now no longer to property but to income. We see this idea carried out in legislation. Thus, not to speak of the me- diaeval town taxes in Europe, we find in the revenue laws of the American colonies toward the middle of the eigh- teenth century the word "faculty" used to designate the 'Returns and gains" as over against the "visible estates" ar property ; and the tax was expressly called the "faculty tax" or the "assessment on the faculty."* Similarly dur- ing the French Revolution the principle was repeatedly laid down that taxation should be according to faculty, or according to estates and faculties, — faculty being pre- sumed to stand for revenue as over against property.® ' See the above-mentioned chapter on "The General Property- Tax." The American writer Gale holds that the rule of taxing people according to their respective abilities means that the taxes must be assessed according to their respective "estates or visible abilities." Cf. the anonymous work (by S. Gale), An Essay on the Nature and Principles of Public Credit, 1784, p. 171. *See the laws of Massachusetts Bay (1646), Plymouth (1643), Connecticut (1650), New Haven (1649), and Rhode Island in the chapter on "The General Property Tax." in Seligman, op. cit. " "La contribution commune doit etre egalement repartie entre tons les citoyens en raison de leur facultes." "Declaration des Droits de I'Homme et du Citoyen." 26 Aoiit — ^3 Novembre, 1789, §13. Re- peated word for word in the Constitution of 1791, §13. "Toutes les contributions et charges publiques seront supportees proportionnelle- ment par tous les citoyens et par tous les proprietaires a raison de leurs biens et facultes." Acte constitutionnel sur les' Impots de 12 Oct. — 6 Nov., 1789, § I. "Les contributions seront reparties entres tous les contribuables a raison de leur facultes." Constitution du 5 Fructidor, An III (i79S), § 306. The work of Helie, Les Consti- tutions de la France," 1880, contains all the clauses referred to. See PP- 32, 53, 269 and 461. 769] Progressive Taxation in Theory and Practice 207 Throughout the French Revolution, however, with only one exception," the faculty tax was held to mean a pro- portional, not a progressive tax. And even in this one exceptional case, as we have seen,''^ the Convention re- fused to apply the interpretation to taxes in general, mak- ing it applicable only to forced loans. The attempt in 1793 to put this interpretation into the Declaration of Rights of the new Constitution, was a failure. In 1795 Villetard again endeavored to convince the legislature that the word "faculty" in the Constitution necessarily implied progressive taxation. He was, however, unable to overcome the opposing arguments of Dauchy* or to carry the Assembly with him. In the cahiers also the overwhelming mass of docu- ments, some of which use the term faculty, advocate pro- portional taxation. This is a perfectly explicable phenom- enon when we remember that one of the chief objects of the Revolution was to abolish the manifold exemptions and to bring about equality of taxation.® The only two cases where progressive taxation was demanded in the cahiers will be mentioned below. Later on, in the French consti- tutions of 1814^° and 1830,^^ the term faculty tax seems to be used in the sense of a proportional tax on property. It was, however, not so understood by the legislature, which continued the revolutionary system of taxation ° See the law of 1793, p. 214 of this monograph. ' See above, pp. 33, 34. " Dauchy, Rapport contre le Systenie de I'Impot Progressif fait a la Seance du 10 Frimaire de Van V , au Nom de la Commission des Finances. Cf. Stourm, Bibliographic, etc., p. 261. " A. Lichtenberger, Le Socialisme et la Revolution Frangaise, 1899, p. 26. ""Les Frangais contribuent indistinctement, dans la proportion de leur fortune, aux charges de I'fitat." Charte Constitutionelle du 4 Juin, 1814, § 2. In Helie, op. cit., p. 886. " Charte Constitutionnelle du 7 Aoiit, 1830, 82 ; Helie, ibid., p. 988. 2o8 American Economic Association \.770 according to revenue; and in the constitution of 1848 the old words "faculty and fortune" are again employed to designate the proportional tax.^^ The idea that faculty or ability is measured by income obtained a firm foothold in theory through the celebrated maxim of Adam Smith that "the subjects of every state ought to contribute ... as nearly as possible in pro- portion to their respective abilities, that is in proportion to the revenue which they respectively enjoy," etc. For some time, as a result, the theorists regarded the propor- tional income tax as the ideal, which ought to be substi- tuted for the whole existing system of taxation. It was not long, however, before a slightly different in- terpretation was put on faculty. Income was still re- garded as the test of faculty, but the definition of income was altered, or rather only a portion, in lieu of the whole, of the income was henceforth regarded as the standard of ability.^^ Only that" part of income which exceeded what was necessary for existence was declared taxable. The idea, as we know, had already been developed by the advo- cates of the give-and-take theory of taxation, like Steu- art, Bentham, Forbonnais and a whole host of German writers in the first half of this century. But the clear- income theory, as it is called, was adopted also by the ad- vocates of the faculty principle. That is to say, taxation a"s demanded by the faculty principle should be propor- " "Chacun contribue a I'impot en proportion de ses facultes et de sa fortune.'' Constitution du 4 Nov., op. cit., 1848, § 15'. In Helie, op. cit., p. 1104. "* A curious and little known interpretation of the term "ability"' is found in the eighteenth century in the administration of the Eng- lish local poor rate. The "ability" of the taxpayer was normally to be found in the actual rent of his property, but the court held that some regard should be paid ad statum et facultates and interpreted this to mean the number of the family. Cf. the case in I Bott., 119. It has already been pointed out that the English income tax later On made abatements according to the size of the family. 771 J Progressive Taxation in Theory and Practice 209 tional indeed, but proportional only to that part of the income which exceeded a definite sum. In other words, the minimum of subsistence should be exempted. It is readily seen that the resulting tax would not be strictly proportional, but that it would be graduated as to the en- tire income, although it would be proportional to a certain excess of income. The entering wedge, which thus began to modify the conception of faculty, was soon pushed further in. The original idea, as we have seen, was that of production. Whether the product was taken as it was received, in the shape of income, or as it permanently remained in the shape of property, is immaterial so far as this point is concerned. Both property and income, as tests of fac- ulty, had regard to conditions of production. As soon, however, as a demand was made for the exemption of the minimum of subsistence, a new factor was introduced, — namely, the conditions of consumption. What the indi- vidual received or produced in the way of income was no longer the only consideration; the ability to apply this product to the satisfaction of his necessary wants became an equally cogent factor. It was, however, only a step to enlarge the conception of consumption. Not alone the satisfaction of necessary wants, but the satisfaction of all wants, now became the watchword. Faculty was declared to consist not alone in the power of production or the extent of product, but also in the power to use the product in order to satisfy all one's wants. The conditions which limit faculty are to be found not only in the amount of the income, but in the demands that are made upon the individual in disposing of his income. In other words, the idea of burden, or of sacrifice, was introduced. Equality of pressure, or equal- ity of sacrifice, now became a fundamental consideration ; 2IO American Economic Association {.77^ and faculty, or capacity to pay taxes, was henceforth de- clared to be measured by that proportion of his product or income, the loss of which would impose upon the indi- vidual an equal burden or sacrifice with his neighbor. The doctrine of faculty as reinvigorated by the con- ception of sacrifice was made the starting point of a new scientific movement. Some writers, like the German Rau, declared the two ideas virtually synonymous. Some, like John Stuart Mill, entirely dropped the conception of faculty, and maintained that the only test of just taxation was equality of sacrifice. Finally, other more modern authors have sought to combine the two ideas, contending that the conception of faculty can really be grasped only when interpreted in the light of equal sacrifice, or when conditioned by it. What, now, were the conclusions drawn from this doc- trine of equal sacrifice, — a doctrine which, as we shall see, is by no means so new as it has been generally as- sumed to be, and which is found in many of the writers who have almost universally been passed over in the his- tory of the science of finance? The argument may be expressed as follows : All individual wants vary in intensity, from the abso- lutely necessaiy wants of mere subsistence to the less pressing wants which can be satisfied by pure luxuries. Taxes, in so far as they rob us of the means of satisfying our wants, impose a sacrifice on us. But the sacrifice involved in giving up a portion of what enables us to sat- isfy our necessary wants is very different from the sac- rifice involved in giving up a portion of what enables us to satisfy our less urgent wants. If two men have incomes of one thousand dollars and one hundred thousand dol- lars respectively, we impose upon them not equal, but very unequal, sacrifices if we take away from each the 773] Pi'ogressive Taxation in Theory and Practice 211 same proportion, say ten per cent. For the one thousand dollar individual now has only nine hundred dollars, and must deprive himself and his family of necessaries of life ; the one hundred thousand dollar individual has nine- ty thousand dollars, and if he retrenches at all in his ex- penditures, which is vei-y doubtful, he will give up only great luxuries, which do not satisfy any pressing wants. The sacrifice imposed on the two individuals is not equal. We are laying on the one thousand dollar man a far heav- ier sacrifice than on the one hundred thousand dollar man. In order to impose equal sacrifices we must tax the richer man not only absolutely, but relatively, more than the poor man. That is, the tax must be not proportional, but progressive; the rate must be lower in the one case than in the other. Since our wants shade imperceptibly into each other, from absolute necessities, to comforts, to comparative luxuries, to extreme luxuries, logic would require the progression to be, gradual. This doctrine was soon assailed from several sides. Some, like Leroy-Beaulieu, opposed it simply because they denied the validity of the sacrifice theory as over against the benefit theory. They may, however, be passed over here, as they have already been discussed under the head of advocates of the benefit theory. Others,. like Mill, asserted that the doctrine was "too disputable entirely," without clearly showing, however, in what way it could be disputed. For they still believed in the equal- ity-of-sacrifice doctrine, although they did not desire to go beyond the exemption of the minimum of subsistence. Others, again, among recent writers, have accepted the conclusion as to progressive taxation, but maintain that the premises should be slightly altered. Others, finally, have pointed out that the conclusion itself should be somewhat changed. 212 American Economic Association [774 Let us take up the last point first. If we accept the argument, so it was said, it follows that the rate of pro- gression should continually increase until finally the whole income or property would be swallowed up by the tax. This is a common objection, and one of the favorite argu- ments with opponents of progressive taxation. It may be traced as far back as the last century. Jollivet, for ex- ample, called the progressive tax the vulture which con- sumes its own entrails.^* In answer to this it was pointed out that the progressive rate would satisfy the demands of theory by applying only to the successive increments of property or income, so that the hundred per cent rate, even if it were ever reached, would never apply to the entire income, and that the tax therefore could never con- fiscate the whole. Many of the advocates of progressive taxation, moreover, hold that the rate of progression ought itself to be degressive. This was deemed to fol- low logically from the argument above. For if the in- tensity of our wants differs very considerably with dif- ferent objects, the loss of a given sum of money will affect the poor man and the rich man very unequally; because in the one case it trenches upon necessaries, in the other case it does not. In proportion, however, as we approach the less necessary wants, the difference in in- tensity diminishes, until finally, when we deal with large deductions from large incomes, there is virtually no dif- ference in the intensity of the wants because these amounts serve to satisfy wants for extreme luxuries, the loss of which will be of equally little importance. There- fore the rate of taxation should gradually increase up to a certain point, after which the progression of the rate should decrease with the difference in the intensity of the " "L'impot progressif, en derniere analyse, c'est le vautour de- chirant ses propres entrailles." J. B. M. Jollivet, De l'impot Pro- gressif, et du Morcellement des Patrimoines, 1793, p. 96. 775] Progressive Taxation in Theory and Practice 213 wants, until finally when the point is reached beyond which the wants are of equally little inyjortance, the rate should be the same. In other words taxation should be progressive, but the rate of progression should itself gradually decrease. Equality of sacrifice therefore leads to degressively progressive taxation. We come, now, to those writers who accept the conclu- sion, but desire a change in the premises. For instance, some, like the recent Austrian economist, Meyer, while approving progressive taxation, think that the premises prove too much. If the doctrine of equal sacrifice is to be interpreted as meaning that the intensity of the wants, which remain unsatisfied because of the tax, must be equal, then the tax would have to take from the larger income the whole difference between it and the smaller in- come, as only thus could equality of sacrifice in the sense indicated be attained. But this, they hold, would be rank communism. These writers, therefore, propose to meas- ure the equality of the sacrifice in a different way, — not by the intensity of the wants that remain unsatisfied be- cause of the tax, but by the degree in which the tax in- creases the intensity of the last wants that are actually satisfied. The stress is laid upon the satisfied, not the unsatisfied, wants. This objection, however, is of little weight, because it ascribes an arbitrary meaning to the word "equal." When economists speak of equal sacrifice they mean relatively proportional sacrifice. When we advocate equality of taxation, we certainly do not mean that the identically same amount should be taken from each one ; for that would involve the grossest inequality. When we say that taxes should be equal, we mean that the bur- den should be proportional. Whether the proportion should be a strict numerical or a relative proportion — 214 American Economic Association \.77^ that is, whether the rate should be the same or different — depends on the answer we give to certain fundamental questions. It is perfectly conceivable, for instance, that a truer proportion might be found through a so-called progressive tax, than through what is commonly called a proportional tax. That was the view of Robespierre and the French Convention when it decreed progressive taxa- tion in the following words : "In order to attain a more exact proportion in the division of public burdens which every citizen should support according to his faculties, a graduated and progressive tax shall be established on lux- ury and property, real as well as personal."-'' In the same way, when we say that the sacrifice should be equal, we mean with John Stuart Mill, "that each person shall feel neither more nor less inconvenience from his share of the payment than every other person experiences from his." "Equal" sacrifice is thus merely a rough way of expressing the idea of "proportional" sacrifice. In assuming that "equal sacrifice" necessarily implies that "the intensity of the wants that remain unsatisfied be- cause of the tax" must be equal, these objectors really confound equal sacrifice with arithmetical equality. All that is implied in the doctrine of equal sacrifice is that the pressure must be relatively proportional, not that it must be identically the same. It is the same mistake as to as- sume that equality of taxation means that every one — rich and poor — should pay precisely the same amount. The amount paid is identical or equal in one sense, and yet such taxation would be grossly unequal in the usual sense "La Convention Nationale decrete comme principe que, pour at- teindre a une proportion plus exacte dans la repartition des charges que chaque citoyen doit supporter en raison de ses facultes, il sera etabli un impot gradue et progressif sur le luxe et les richesses tant foncieres que mobilieres." Loi du i8 Mars, 1793. In Helie, Les Constitutions de la France, 1880, p. 359. yTj'\ Progressive Taxation in Theory and Practice 215 of the term "equal taxation." Equality as used in taxa- tion does not mean sameness, but relative proportional- ity." It makes no difference, therefore, whether we lay the stress on the satisfied or on the unsatisfied wants. The explanation is identical in both cases. Granting the grad- uation in human wants, a tax which takes away the possi- bility of satisfying some wants changes the intensity of the last want actually satisfied, just as it in the same way changes the intensity of the next urgent want that re- mains unsatisfied. We are simply looking at the same fact from two different standpoints. The theory is not al- tered a whit. If the imposition of a tax makes me aban- don my outlay for amusements in order that I may be able to purchase clothing, the intensity of my last want actually satisfied is increased (because the desire for cloth- " Professor Edgeworth has recently made an attempt to distin- guish between equal sacrifice and proportional sacrifice, each of them a sub-division of a larger genus which he calls "like sacrifice." See "The Pure Theory of Taxation," in The Economic Journal, vii, 1897, p. SS7. From the mathematical point of view this is of course possible. Equal sacrifice would then denote the sacrifice of an abso- lutely equal amount of utility, proportional sacrifice would denote that of an equal proportion of utility. The distinction is, however, of no practical importance, because the demand for absolutely equal sacrifice in the formal mathematical sense has never, so far as I know, been advanced by any one. Equality in the ordinary sense of the term just as frequently implies relative equality as absolute equality. Webster e. g. defines equality as "agreement in quality or degree." Equality in degree, or relative equality, is precisely what Edgeworth calls proportional sacrifice. Not only has "equal sacrifice" in discussions in taxation always meant proportional sac- rifice, but Edgeworth himself in the latter portion of his essay uses the terms interchangeably, telling us expressly that "it has seemed best, as most agreeable to usage, to employ the term "equal" gene- rally, covering proportional as well as equal in the proper sense." Op. cit., p. 566, note i. 2i6 American Economic Association [77^ ing is more pressing than that for amusements), but the intensity of my next urgent want that remains unsatisfied is equally increased, because I now cannot afford amuse- ments, while formerly I could afford amusements but could perhaps not afford more expensive enjoyments. This, then, was the theory of progressive taxation rest- ing on equality of sacrifice. A number of recent Dutch writers, who had already in the seventies accepted the fi- nal-utility theory of Jevons, applied his theory to the doc- trine of progressive taxation just discussed. According to that more modern nomenclature the theory might be put as follows :''■'' Every satisfaction of human wants implies the exis- tence of utility in the commodity which provides this sat- isfaction. The value of any commodity, however, is nothing but the expression of our estimate of its marginal or final utility, i. e., the serviceableness of the last usable or marginal increment of the supply to satisfy some par- ticular wants. Since the intensity of our wants and there- fore their marginal or final utility decreases as we as- cend from the lower or more pressing to the higher or less urgent wants, and since larger incomes afford the means of satisfying these less intense wants, a strictly proportional tax would involve smaller sacrifices in the case of the larger incomes. Strict equality of sacrifices in the sense of relatively proportional diminution of bur- den thus involves progressive taxation. It is a well estab- lished fact, however, that the number of wants increases as their intensity diminishes. The urgent wants of exis- tence are very pressing indeed, but limited in number ; the less urgent wants continually increase in number and vari- ety with wealth and civilization. After a certain point, " For a fuller statement of the modern theory of marginal utility, see Seligman, Principles of Economics, ch. 12. 779] Progressive Taxation in Theory and Practice 217 therefore, the differences between the intensity (and the marginal utility) of wants diminishes with the increase of their number and area, until finally when we come to the very large incomes the possibility of satisfying almost all wants becomes equal. Hence while taxation should be progressive, the rate of progression should itself diminish until ultimately the tax becomes proportional. The necessity of progressive taxation resting on this gradual decrease of the marginal utility of wants was worked out arithmetically by some of the Dutch authors by constructing the following tables. Each individual is assumed to have an income which he values at a certain percentage; i. e., the marginal utility of each successive grade of income diminishes as the income increases. In order to ascei'tain the enjoyment of satisfactions, which would be diminished by a tax, we have simply to multiply the amount of each grade of income by the marginal util- ity. If, for instance, C had an income of $3,000, of which the marginal utility of the first $1,000 was 100 per cent, of the second 95 per cent, and of the third, 91 per cent, he would have this quantity of enjoyment : $1,000 at 100 per cent $1,000 $1,000 at 95 per cent 950 $1,000 at 91 per cent 910 $2,860 In this way we may construct the following table : A has an income of $1000 /which he values for the sat- \ isfaction of his wants at [100 100.00 fo s'.^., $30.00., ThisisS- specially new dis- "" "Die Progression der Intensitatsabnahme karili nur innerhalb gewisser Grenzen merklich sein. 1st man aber einmal bei den Be- diirfnissen von absolut sehr niedrigen Starkegraden angelangt, so konnen weitere Abstufungen nur mehr an sich hochst geringe Dif- ferenzen ergeben die sich der Messbarkeit entziehen." Grundlegung, p. Sii. Professor James, in his review of Sax's book in the Political Sci- ence Quarterly, v. p. 168, gives a partially erroneous account of Sax's meaning. James says, "the state may, therefore, for a given service, take very different sums from different private economies, because the final utility of the service varies with the amount of goods." This, however, is not Sax's meaning. If individuals were to pay taxes in accordance with the final utility of the services, we should practically be going back to the give-and-take theory of taxation which Sax expressly disclaims. It is not the final util- ity of the state service, but the final utility of the commodities taken away in the shape of taxes, which Sax emphasizes. The final utility, or value, of the state services has nothing to do with the question. It is the final utility of the commodities that the individual pays to the state which must be equal; and it is because the final utility of these varies inversely as the whole stock of goods that Sax demands pro- gressive taxation. We must be careful not to confuse the two no- tions, as does Professor James. Sax himself protests against a simi- lar confusion of which an Austrian economist is guilty. Cf., "Die Progressivsteuer,'' p. 91, note. 789] Progressive Taxation in Theory and Practice 227 covery. Now the only difference between the equal sacri- fice or marginal utility theory of his predecessors and the "equivalence" theory of Sax is a mere difference of words. The equal-sacrifice theory says that the tax must take away such amounts that the resulting pressure or the sacrifice of enjoyments may be relatively proportional; the "equivalence" theory says that taxation must take away relatively proportional amounts. But the taking away or giving up of anything involves a pressure or a sacrifice, whether the sacrifice be voluntary or com- pulsory. Hence, "equality of values taken" implies an "equality of sacrifice" to the individual. In fact, a "purely economic" theory of taxation is as impossible as a "purely economic" theory of value, if it is meant that "pure economics" can make abstraction of psychological and therefore of ethical considerations. As soon as we introduce the conception of human wants and the means of satisfying these wants, we are dealing with questions of sacrifice of enjoyments. Equality of taxa- tion, therefore, connotes an ethical problem, in the same sense that the general law of value and price connotes an ethical problem. The mediaeval theory of justum pre- tium, with its modern successors in the theories of fair wages, of reasonable railway rates, of trust prices, etc., shows how indissolubly are bound up the problems of ethics and economics. The problems of taxation are of no different kind. The situation is not altered in the least by regarding taxes as the satisfaction of collectivistic wants. If I have to spend money to support my relative, it is no less a sacrifice because these duties may be re- garded as the satisfaction of individualistic wants, i. e., wants which primarily affect me in the individual relations of my family. All the more must the compulsory sub- traction from my wealth by a tax be declared a sacrifice, 228 American Economic Association [790 even though it be regarded as the voluntary satisfaction of collectivistic wants. Hence, whether we call it the purely economic theory or the ethical theory of public finance is immaterial. The "equivalence" theory of tax- ation is simply another way of putting the marginal utility or equal-sacrifice theory. They do not oppose each other, they do not even supplement each other; correctly under- stood they are simply two distinct methods of explaining the same thing in slightly different words. It is impos- sible to take away relatively proportional values without inflicting relatively proportional sacrifices. So far has the modern theory of progressive taxation gone. But if, as we have seen, the equality-of-sacrifice theory taken by itself cannot lead to any fixed rate of pro- , gression, must we then range ourselves with those who maintain that progressive taxation is illogical and unjust; and that there are no substantial arguments in its favor, while the opposing arguments are numerous and convinc- ing? Is progressive taxation economically justifiable or not ? Is it theoretically sound and practically expedient ? These are the problems to which we must address our- selves after taking up somewhat in detail the various ad- vocates of taxation according to faculty. HISTORICAL APPENDIX III. THE FACULTY THEORY LEADS TO PROPORTIONAL TAXATION The earliest advocates of the faculty theory were con- cerned chiefly with a reform of obviously unjust systems of taxation. Their efforts were directed to bringing about some semblance of proportionality as over against the existing regressive systems. Thus we find the faculty theory at first used as a defense of proportion. One of the earliest writers on taxation was Bodin. Bodin, as is well known, was in favor of taxation only as a last resort in extraordinary exigencies, since in his opin- ion the state could and should support itself in other ways. In so far, however, as taxes are necessary, justice should be observed; and justice consists in apportioning taxa- tion according to family^ But faculty seems to Bodin simply to denote means or property.^ He does not ana- lyze the matter any further. In the same way many of the publicists of the seven- teenth century laid down the principle that the burdens of taxation should be in proportion to the faculty, or the powers, of each.^ The Dutch writer, Boxhorn, expressly ^"Sunt igitur ea vectigalia, si modo necessaria, probanda quae in omnes ordines pro singularum facultatibus exaequantur." Bodinus, De Republica, 1577, lib. vi. ^ "Pro cuiusque opibus ac fortunis." In the French edition of 1577, we read : "Que chacun debuoit porter, eu egard aux biens qu'il auoit." Les six Livres de la Republique, p. 644. ^Thus Botero says in his Delia Ragione di Stati," 1589: "Proprium est subditorum . . . per facultates principes magistratumque juvare." — Bocerus, De Jure Collectarum, 1617, "Deinde quantitas ilia distrib- uenda est pro virihus singulorum turn provinciorum turn civitatum etiam hominum."— Besold, De Aerario, p. 619: "Tributa ergo pro modo census et facultatum a singulis pensitabantur" — Klock, De Con- 230 American Economic Association [792 tells us that the tax should be proportional to property in order that the burdens and sacrifices might be equally- shared by all.* Among English writers, one of the first to uphold this theory was Sheridan. Sheridan, however, leaves us in doubt whether he finds taxable ability to consist in prop- erty or in expenditure. He holds that "all subjects, as well the meanest as the greatest, are alike concerned in the common safety, and should therefore, according to their respective interests of riches or enjoyments, bear the charge in equal proportions."* Again, at the begin- ning of this century, Frend expressed the common view in saying that "taxation is equitable when each member is taxed in proportion to his means of paying the tax." He goes on to explain that "the means, which an individual has to pay the demands of the state, must depend on the possession of the sum required by the state, or of property, which will procure that sum."^ This, he thinks, is the tribuHonibus, 1634: "Collecta per aes et librum, hoc est secundum facultatem patrimonii imponi debet . . . ut onera commensurata sint viribus eorum." Cf. Rau, Finanzwissenschaft, (sth ed. 1865), § 253; and Neumann, Die Steuer nach der Steuerfdhigkeit, 1887, p. 550. * "In tributis aequalitatis maxima habenda ratio, quae in eo po- tissimum versatur, ut par sit eorum ratio ac paria hie onera sentiant, quorum pares in diversis licet rebus positae sitaeque sunt opes." — Boxhorn, Institutiones PoUticae, lib. i, cap. 10, § 18, no. 9. For Box- horn's general views on finance, see Laspeyres, Geschichte der volks- wirthschaftlichen Anschauungen der Niederlander, etc. (1863), p. 239 et seq. ' "A Discourse on the Rise of Parliament . . . of Taxes, Trade, and of the Interest of England in reference to France. In a letter from a Gentleman in the Country to a Member of Parliament." [By Thomas Sheridan] 1677, p. 146. The book has been re- printed in facsimile by Saxe Bannister in his Some Revelations of Irish History, 1870. ' Wm. Frend, The Principles of Taxation or Contribution accord- ing to Means'' etc., 1804, pp. 33-34. In an earlier work devoted to a criticism of Pitts' income tax 793] Progressive Taxation in Theory and Practice 231 same as saying that "taxation, to be equitable, must leave the subjects in the same relative situation to each other, in which they M^ere the moment before the tax was paid."'^ Frend is thus the real founder of the leave-them-as-you- find-them theory of taxation. Among modern writers who have partly upheld the fac- ulty theory of proportional taxation, the most important is Parieu. Parieu maintains that the "social-dividend" theory, as he terms it, would logically lead to the "most absurd practical consequences and the most shocking in- humanity."® He considers it necessary to limit that the- ory by the doctrine of equality of sacrifice. The doctrine of equality of sacrifice, however, does not seem to him in itself a thoroughly safe doctrine, because it leads to pro- gressive taxation, or "tends irresistibly to social levelling as the ideal."® Parieu comes to the rather superficial con- clusion that it is possible to combine the social-dividend and the equality-of-sacrifice theories, so as to make of them a compound which is nothing else than purely pro- portional taxation.^" In other words, Parieu opposes the give-and-take theory as inadequate, but objects to the sacrifice theory only because it leads to progressive taxa- scheme, Frend puts the same principle in virtually identical language. See'Wm. Frend, The Principles of Taxation, lyiig, p. 11. ^ Ibid. p. 40. Walker, Political Economy, § 590, thus errs in as- cribing the origin of this principle to the author of the Edinburgh Review article. ' "II faut arriver jusqu'aux consequences pratiques les plus absurdes et aussi a I'inhumanite la plus choquante par la negation absolue de tout secours apporte a la situation de I'indigence et du malheur." Parieu, Trait e des Impots, p. 30 of 2nd ed. (1866). *"La theorie de I'egalite des sacrifices parait placee sur la pente irresistible qui conduit au nivellement social comme type de per- fection." Ibid., p. 26. ^° "II semble possible de rapprocher la theorie du contrat onereux et celle de I'egalite des sacrifices dans cette idee moyenne et simple qui proportionne I'impot aux biens particuliers.'' Ibid., p. 31. 232 American Economic Association [794 tion, which seems to him socialistic.^^ That is, he objects to a premise, not because of the untenability of the pre- mise, but because of the danger of the conclusion. This is not a very logical proceeding. On the other hand, a far larger number of the oppo- nents of the benefit theory modify their demand for pro- portional taxation by the introduction of the idea of the minimum of subsistence, or even of the so-called clear- income idea. Although they profess to advocate propor- tional taxation, they in reality favor degressive taxation. Let us study them a little more closely. ""La theorie de I'impot progressif parait partir de cette idee que la societe doit chercher a realiser par I'impot une egalite de situa- tion, non relative a la masse des biens et aux proprietes acquises, mais absolue pour la personne de chaque citoyen.'' Parieu, op cit., P-37- HISTORICAL APPENDIX IV. THE FACULTY THEORY LEADS TO DEGRESSIVE TAXATION. The chief representative of this tendency is John Stuart Mill. Although often regarded as the true originator of the equality-of-sacrince doctrine, Mill was not really the first to advance the idea. It is only the deplorable ignor- ance of the history of the science of finance among so many modern writers that could have ascribed to Mill doc- trines which had been expounded long before him. Mill, however, was indeed the first to draw from this principle the conclusion of degressive taxation. Mill strongly ob- jects to the quid-pro-quo theory, and lays down his general principle in the following words : "As in a case of volun- tary subscription for a purpose in which all are interested, all are thought to have done their part fairly when each has contributed according to his means, that is, has made an equal sacrifice for the common object ; in like manner should this be the principle of compulsory contributions; and it is superfluous to look for a more ingenious or re- condite ground to rest the principle upon."^ In another place he says : "Equality of taxation as a maxim of poli- tics means equality of sacrifice. It means apportioning the contribution of each person toward the expenses of government so that he shall feel neither more nor less in- convenience from his share of the payment than every other person experiences from his." Mill, however, thinks that the principle cannot lead to progressive taxation. The statement that "to take fioo from £i,ooo is a heavier impost than £i,ooo taken from ^Principles of Political Economy, book v, chap, ii, § 2; ii, p. 398, of Appleton's (1880) edition. 234 American Economic Association [796 £10,000, seems to me too disputable altogether, and even if true at all, not true to a sufficient extent to be made the foundation of any rule of taxation. Whether the person with £10,000 a year cares less for £1,000 than the person with only £1,000 a year cares for £100, and if so, how much less, does not appear to me capable of being decided with the degree of certainty on which a legislator or a financier ought to act." Mill thinks that the portion of truth which the doctrine contains "arises principally from the tax which can be saved from luxuries, and one which trenches in ever so small a degree upon the necessaries of life or what is conducive to the support or to the comfort of existence." Hence Mill concludes that the most equi- table plan is to exempt a certain minimum of income, but to tax everything else above that proportionally — a theory which he erroneously seems to think originated with Ben- tham. To this argument the rejoinder is obvious that the de- grees of income which are "conducive to the support or to the comfort of existence" vary with the standard of life, and that according to Mill's own theory no really equitable fixed minimum of subsistence can be determined. If equality of sacrifice is the only defense of the exemption of the minimum of subsistence, we could not stop with this ; for human wants shade into each other by impercep- tible gradations. It is worth mentioning also that Mill strongly favors a progressive rate in th6 case of legacy and inheritance taxes f and that he advocates differentia- tion in the rate of the income tax, according as the income ^In the first edition of his Principles Mill puts this as follows: "The principle of graduation (as it is called), that is, of levying a larger percentage of a large sum, though its application to general taxation would be a violation of first principles, is quite unobjection- able as applied to legacy and inheritance duties." Book vi, ch. ii, § 3. In the second edition, IVlill changes the emphasis : "The principle 797] Progressive Taxation in Theory and Practice 235 is a life income, or a perpetual income. It is remarkable that in espousing the latter demand Mill advances pre- cisely the same argument which he refuses to accept in the discussion of graduation. "It is not because the tempo- rary annuitant has smaller means," says Mill, "but because he has greater necessities, that he ought to be assessed at a lower rate." Yet the more urgent demands on the in- come of the life annuitant cannot be fixed by the govern- ment with any more "certainty" than the more urgent demands on the income of the poorer man. What is sauce for the goose is sauce for the gander. The reas- oning is exactly the same. It seems illogical to uphold differentiation of taxation and to oppose progression of taxation. Moreover, although Mill is such a strong- advocate of what he thinks is proportional taxation, it has been pointed out that he is really abandoning the whole contention. As Faucher truly says, "Exemption of any revenue is simply the entering wedge of progressive taxa- tion."* It is because this seems to him inevitable that Faucher objects to all income taxation. For progressive taxation, he thinks, reduces all to a common level of mis- ery.* The earliest important German writer to deduce degrer,- of graduation, though its application to general taxation would be, in my opinion, objectionable, seems to me both just and expedient as applied to legacy and inheritance duties." ^"On pose le premier jalon de I'impot progressif des que Ton affranchit de la taxe sur le revenu certaines classes de contribuables." Leon Faucher, "De I'Impot sur le Revenu," in his Melanges d'Econo- mie Politique et de Finance, i (1856), p. 57. * "Oui, I'impot progressif est au bout de I'impot sur le revenu. II en represente la fatalite. Aveugle qui ne la voit pas et insense qui la dissimule . . L'ideal de la loi agraire se trouve realise, car I'impot etend alors sur les citoyens un niveau commun de misere." Ihid., p. S9- — Cauwes, Precis du Cours d'Economie Politique, ii, p. 572, is in error in terming Faucher a partisan of progressive taxation. 236 American Economic Association [798 sive taxation from the faculty theory was Rau. Rau con- fesses that in general a certain sum of money has a higher value for its possessor according as it forms a larger part of the amount available for expenses. From this he draws the remarkable conclusion that all will be able to give up a proportional part of their property with equal sacrifices. Proportional taxation is the most equitable and just.^ In another part of his work, however, Rau explains that he means a proportional taxation of clear income only, ,by which he understands the exemption of the minimum of subsistence ; and this, he thinks, is fixed by the normal standard of life.^ Since this is exceedingly difficult of exact ascertainment, Rau has no objection to a tax on the whole income, which is graduated up to a cer- tain point, in order to effect a virtually proportional taxa- tion on the clear income. Later on, however, Rau is in- consistent enough to confess that the theory of sacrifice may logically lead to progressive taxation, which he re- jects because of its dangerous tendencies.'^ Somewhat later, another German writer went into the subject a little more fully. Umpfenbach is a stanch op- ° "Mann kann annehmen, dass eine gewisse Geldsumme fiir den Besitzer einen desto hoheren Werth hat, einen je grosseren Theil seines ganzen verwendbaren Gutervorrathes sie ausmacht und einen je grosseren Theil des gesammten ihm zu Gebote stehenden Giiter- genusses sie folglich entspricht . . Es warden daher Alle einen gleichvielsten Theil (Quote) der zu ihrer Verfiigung stehenden Gut- ermenge ungefahr gleich leicht oder schwer abgeben konnen." Rau, Finanzwissenschaft, 1832-1837, § 253. sth ed. (1864), iii, part i, p. 395- ' "Es ist gerecht und zweckmassig dass nur der Theil der ganzen Einnahme in Anschlag gebracht wird der den mittleren standesmas- sigen Unterhaltsbedarf des Arbeiters und seiner Familie iibersteigt, sowie iiberhaupt der mit einem Einkommen nothwendig verkniipfte Kostenaufwand in Abrechnung kommen muss." Ihid., § 391; iii, part 2, p. 170. ''Ibid., § 400; iii, part 2, 195. 799] Progressive Taxation in Theory and Practice 237 ponent of the give-and-take theory, and maintains that the only principle is to tax individuals according to their "economic capacity to pay."^ But this, he maintains, means proportional, not progressive, taxation, because in the eyes of the state equal revenue connotes equal faculty, for the reason that equal income yields equal enjoyment. The state has nothing to do with the subjective im- pressions of the taxpayer ; how far a man's income may suffice for the satisfaction of his comforts and luxuries is purely a subjective matter. The state has no right to inquire into this unless we are willing to say that it is the function of the state to level inequalities of fortune. The whole theory of progressive taxation is simply a re- sult of false sentimentalism.^ The only really legitimate kernel of progressive taxation consists in the exemption of a definite minimum of existence, because it is virtually impossible for the state to tax this.-'" The only other German writers of any importance who advocate the degressive theory are those who have been influenced chiefly by Mill. Both Bergius and Pfeiffer, the authors of bulky volumes on public finance, follow " "Die okonomische Steuerfahigkeit." ° "Fiir die Finanzpolitik kann auf Grund menschlich allgemeiner Werthschatzung als Regel nur gelten, dass gleich grosses Einkom- men gleich grosse Steuerfahigkeit hat, weil es in seiner Verwen- dung gleich grossen Genuss gewahrt. Regelmassig verschieden, was dann die Besteuerungspolitik vollig unbeachtet lasst, ist die Genuss- richtung ; regelmassig iibereinstimmend, worauf die Besteuerung fusst, ist die Genusshohe . . . Die Finanz lasst durch die Besteuer- ung von jeder gleichen Genusshohe gleichviel wegnehmen; aber sie ist nicht dazu da, um mit Hilfe und auf Kosten der Besteuerung der Subjectivitat dieser oder jener Einzelnen zu einer opulenteren Ge- nusshohe des Auskommens zu verhelfen, als deren Einkommen ent- spricht." Umpfenbach, Lehrhuch der Pinanzwissenschaft, 1859. Cf. 2nd ed. (1887), § 82, pp. 166-167. " "Mit Abzug des auf jedes Einkommen treffenden Existenz-mini- mums steht die einzige zulassige Steuerprogression fest." Ibid., p. 173- 238 American Economic Association [800 Mill almost word for word.^^ Pfeiffer, however, in de- manding the exemption of the minimum of subsistence, desires that an allowance be made for the number of chil- dren. Vocke also finds the limit of progression to con- sist in the exemption of the minimum of subsistence. ^^ And Helfferich takes virtually the same position.^* The advocates of degressive taxation as an outcome of the faculty theory of taxation are therefore very few in number. It is evident that their position is not a strong one, and that their attitude is based on a half-way reasoning. It is not surprising, then, that the great ma- jority of writers of this school should go the whole length and plead for progression as a necessary outcome of the faculty theory of taxation. With this far larger wing we have now to deal. " Bergius, Grunds'dtze der Finanzwissenschaft, 1865. Cf. esp. 2nd ed. (1871), pp. 407-410. — Pfeiffer, Die Staats-Einnahmen, 1866, i, p. 80; ii, pp. 26-34, 41 -45, 538. "W. Vocke, Die Abgaben, Auflagen und die Steuern, 1877, P- 473- '^ Heliferich, "Die allgemeine Steuerlehre" in Schonberg's Hand- buch der Politischen Oekonomic, 3rd ed. 1891, iii, p. 136. HISTORICAL APPENDIX V. THE FACULTY THEORY LEADS TO PROGRESSIVE TAXATION. The advocates of this doctrine are so numerous that it will conduce to clearness to divide this appendix into six parts, taking up first the earlier and especially the eigh- teenth century writers, then dealing in turn with the de- velopment during the nineteenth century in France, Eng- land, Germany, and Holland, and closing with a discus- sion of the most recent history in America and Great Britain. The earliest statement of this principle is found in the first essay of Guicciardini, at the end of the sixteenth century.^ Equality of taxation, we are told, consists not in everybody's paying the same rate, but in the pay- ments being so arranged as to impose the same burden on all.^ If both a poor man and a rich man pay to the state one tenth of their incomes respectively, even though the rich man's one-tenth is far more than that of the poor man, the poor man, in order to pay his one-tenth undergoes a far greater sacrifice than the rich man in paying his.^ For expenditures are of three classes, neces- saries, comforts and luxuries. A man with fifty ducats income cannot even satisfy his necessaries, and if he pays " For the essay of Guicciardini, see above, p. 13s. '"La egualita di una gravezza non consiste in questo, che chias- cuno paghi per rata tanto I'uno quanto I'altra, ma che il pagamento sia di sorte che tanto s'incommodi I'uno quanto I'altro.'' Op. cit. p. 3SS. ° "Quando un povero paga in commune una decima delle entrate sue e un ricco paga una decima ancora che la decima del ricco getti piu che quella del povero, pure multe piu si disordina il povero di pagare la sua decima che il ricco la sua . . . ." Ibid. 240 American Economic Association [802 a tax he must do without some absolute necessities; he who has one hundred to one hundred and fifty can pay- twelve or fifteen per cent in taxes, and will give up only comforts. But the recipient of from two hundred and fifty to three hundred ducats income can pay as much as one-fourth or one-third in taxes, and yet give up only what he would have spent in superfluities or what he would have added to his capital.* Guicciardini, however, soon abandons this tack in order to take the more frankly socialistic attitude.^ ' "Le spese che fanno i cittadini sono di tre ragioni : alcune sono necessarie, altre si fanno per commodita, altra sono totalmente su- perflue. Chi ha di entrata 50 ducati o manco, non puo con questa entrata supplire alle necessita e se di questi ha a pagare una decima, bisogna che stremi alle spese che gli sono necessarie; il mediocre, chi ha di entrata 100-150 ducati, he il panno piu largo e paga una decima e un quarto, o una decima e mezzo col resecare le spese della commodita, ma non si restringe nelle cose necessarie ; colui chi ha di entrata 250-300 ducati, se bene paga il quarto et il terzo delle en- trate sue, non solo non restringe le spese necessarie, ma neanche manca alia commodita, spende quelli che avrebbe dissipato in spese superfine o accumulati nella cassa." " See above, p. 135. A. The Eighteenth Century. Coming to the eighteenth century, the eariiest adhe- rent to the progressive principle based on the faculty the- ory is the German Councillor Charles of Bayreuth, who wrote a treatise in French in 1722.1 Councillor Charles or Rath Karl, as he was called in Germany, objected to the ordinary property tax because the same rate in the proportional tax would hit a man living in Paris more severely than one living in the country. It must be as- sumed, says he, that the prince is desirous of increasing the wealth of his subjects and of affording every one an equal facility to enrich himself. A purely mathematical equality in taxation will not suffice. What is needed Is a geometrical relation.^ Accordingly he proposes to di- vide the population into three classes, arranged accord- ing to the estates, for, says he, that which constitutes the wealth of a peasant does not make a nobleman rich, be- cause of the difference in their positions.^ If we take by * Traite de la Richesse des Princes et de leurs £tats et des Moyens Simples et Naturels pour y parvenir. Par. M. C. C. D. P. d. B., AUe- mand a Paris, 1722. An account of this is given in the article "Ver- mogensteuer" in the P olicey-und-Cameral-Magazin von J. H. L. Ber- gius, vol ix, 1774, pp. 44-46, from which the following quotations are made. It is fully treated in J. W. von der Lith, Neue vollstdn- dig erwiesene Abhandlung von den Steuern, 1766, esp. pp. 203-208. I have not been able to find a copy of the French original. It does not seem to be in the National Library in Paris. "'Die Absichten des Fiirsten" gehen dahin "die Reichtumer seiner Unterthanen und des Staats zu vermehren, und einem Jedem eine gleiche Leichtigkeit zu verschaffen, sich zu bereichern . . . Eine blose arithmetische Gleichheit, vermoge welcher Jeder nach dem zehnten Theil seiner Einkiinfte geschatzet sei wiirde keineswegs die- jenige Wirkung thun . . . Vielmehr ware es weit rathsamer bey- den Anlagen ein geometrisches Verhaltniss zu bestimmen." '"Denn dasjenige was den Reichthum eines Bauern ausmache, mache einen Edelmann nicht reich, well dieser ein weit mehreres bedurfe um sich in seinem Stande, zu unterhalten, als ein Bauer in dem seinigen." 242 American Economic Association [804 taxation from a nobleman ten livres from one hundred, which constitute his entire income, we are taking a part of the necessary means of his existence; but if a peasant pays the same amount it takes only his superfluities, which should be the true and only subject of taxation. Further- more, in each class the same argument would apply, and therefore the rate should be progressive. Accordingly, if we tax the wealthy ten per cent the less wealthy ought to pay only five per cent and so on.* One of the earliest defenders of the same doctrine was Montesquieu, although his argument is not uniformly con- sistent. Montesquieu, as we know, gave the celebrated definition of taxes which classes him among the partisans of the benefit theory.^ Yet, when speaking of the pro- gressive tax in Athens, he upholds it on entirely different grounds. "In the personal tax," says Montesquieu, "the proportion which would exactly follow the proportion of property would be unjust. The Athenian tax was just, although not proportional. If it did not follow the proportion of property, it followed the proportion of wants. It Was held that every one had an equal amount necessary to his subsistence; that this necessary por- tion ought not to be taxed; that the useful came next, and that it ought to be taxed, but less than the super- fluous.* We see from this passage that Montesquieu *"Es zahle zu einer Zeit in welcher jedermann den zehnten Theil von seinen Einkiinften der Obrigkeit zinsen miisse, der Arme in dem arithmetischen Verhaltnisse, nicht so viel als der Reiche." " See above p. 163. ' "Dans I'impot de la personne, la proportion in juste seroit celle qui suivroit exactement la proportion des biens ... La taxe etoit juste, quoiqu'elle ne fut point proportionnelle ; si elle ne suivoit pas la proportion des biens, elle suivoit la proportion des besoins. On jugea que chacun avoit un necessaire physique egal; que ce necessaire physique ne devoit point etre taxe; que I'utile venoit en- suite, et qu'il devoit etre taxe, mais moins que le superflu." Mon- tesquieu, De I'Esprit des Lois, book xiii, chap. vii. 805] Progressive Taxation in Theory and Practice 243 defends progressive taxation because the curtailment of luxuries involves less sacrifice than the curtailment of necessaries. But he adds immediately: "It was thought that the size of the tax on the superfluous would prevent the superfluous."'^ This would seem to imply the socio- political or socialistic theory of progressive taxation, that it is the duty of the state to remedy inequalities of wealth. Montesquieu must therefore be regarded as inconsistent, although in the main he may he classed under the division here discussed. A similar charge of inconsistency can be brought against Graslin, the author of the most elaborate defense of the progressive principle in the eighteenth century. Graslin, as we have seen above,® is an ardent defender of the benefit theory of taxation, but when he reaches the crucial point he adroitly slips in the faculty theory and attempts in a very remarkable way to interpret benefit in terms of faculty. Taxes are indeed, says he, nothing but a return for pro- tection. The rich man, however, presents so to speak, a greater surface to protection than the man in comfort- able circumstances. Owing to his social position, his wealth and his enjoyments, he therefore really gets more of this kind of satisfaction of wants, for we must inter- pret the payments which one makes in exchange for pro- tection in the light of the satisfactions which he gives up ; and the rich man in paying a proportional tax has to re- trench only in his extreme luxuries, while the other has to sacrifice objects of necessity rather than of comfort.^ ' "Que la grandeur de la taxe sur le superflu empechoit le superflu." 'Pp. 194-195. '"Le riche presente une plus grande surface a la protection que le citoyen aise. II prend plus en quelque fagon de cet objet de besoin, par le rang qu'il tient dans la societe, par ses possessions et ses jouis- 244 American Economic Association [806 Confronted by the objection that this is not an ex- change of value for equal value, Graslin states that the exchange must be interpreted in the light of a relation to individual wants. Exchange in general is the barter of a superfluity for a necessity, or of a superior want for an inferior want ; but protection has a different value for dif- ferent people, because its value varies according to the value of things given in return ; and this value depends on the relation of wealth to wants. The greater the wealth the less is the value of what is given up by the taxpayer. Hence the general law of taxation is that the tax must g^row progressively faster than the comfort of the tax payer; if his comfort is doubled, the tax must be more than doubled.^" It will be seen, therefore, that Graslin sances. S'ils donnaient, I'un et I'autre, un echange de la pro- tection, des objets des memes besoins, il serait juste qu'ils donas- sent chacun une portion des ces objets, proportionnelle a celle qu'ils regoivent dans I'objet total de la protection. Mais le riche, qui donnerait le dixieme de son revenu, ne donnerait, c'est-a-dire, ne serait prive, que des objets des derniers besoins; au lieu que le cito- yen simplement aise, qui n' a que les objets de necessite et d'utilite en donnant une dixieme de la fortune, donnerait peut-etre une moitie des objets d'utilite. Le dernier donnerait done plus que le premier, en recevant moins. Graslin, Essai analytique sur la Richesse et sur I'lmpot, 1767, p. 285. ""L'echange considere dans la rapport direct et absolu de chaque homme a ses divers besoins est un troc d'une chose superflue contre celle dont il a besoin, ou d'une chose qui, sans etre superflue, est I'objet d'un besoin inferior ... II n'en est pas de meme de la protection, qui est un objet, de besoin incommunicable. ... La protection, qui doit etre achetee par deux hommes dont I'un est beau- coup plus riche que I'autre, a une valeur tres differente pour chacun d'eux, parcequ'elle n'est qu'en raison du rang que tient le besoin de cet objet dans I'ordre particulier et respectif de leurs besoins; consequemment, le riche, qui possede tous les objets de besoin su- perieurs et inferieurs a celui de la protection, s'il donne la plus grande partie des objets inferieurs a celui-la, aura toujours fait un echange plus avantageux que I'homme qui, possedant tres peu d'ob- jets de besoin inferieurs a la protection, les donnerait tous en echange de cet objet de besoin." Ibid., pp. 289-290. "La protection 807] Progressive Taxation in Theory and Practice 245^ really injects into his idea of benefit the conception of sacrifice, and that he is able to save the situation only by an interpretation of benefit which really abandons the entire contention. We should, therefore, scarcely be tempted to agree with those who assert that Graslin un- derstood the subject better than any one else in the eigh- teenth century. ^^ Montesquieu's views are accepted in part by Rousseau when he says that in levying taxes we must consider "le rapport des usages, c'est-a-dire, la distinction du neces- saire et du superflu. Celui qui n'a que le simple neces- saire ne doit rien payer du tout ; la taxe de celui qui a du superflu pent aller au besoin jusqu'a la concurrence de tout ce qui excede son necessaire."^^ Rousseau proceeds to demolish the argument that according to one's station in life, what is superfluous to one is necessary to an- other.^^ Rousseau's chief defense of progressive taxa- tion, however, rests as we have seen, on a quite different argument.^* Montesquieu's theory had a very wide influence on the thought of his time. His doctrine was accepted, for in- stance, by the Chevalier de Jancourt, the author of the article on taxation in Diderot's Encyclopedia. Jancourt varie dans sa valeur relativement aux objets de besoin." Graslin, op. cit., p. 291 . . . "La loi generale de I'impot est qu'il doit augmenter dans une proportion toujours croissante de I'aisance du contribuable ; c'est-a-dire qu'il doit etre plus que double, si I'aisance est double." Ibid., p. 305. ""La progressivite, qu'il a mieux comprise et mieux exposee que personne au dix-huitieme siecle. Lichtenberger, Le Socialisme au Dix-huitieme Siecle, 189S, p. 320. Desmars recognizes the hiatus in Graslin's logic, which, however, he simply qualifies as "chose sin- guliere." Desmars, Vn Precurseur d'Adam Smith, etc., p. 134. "Rousseau, Discours sur I'Oeconomie Politique, 1758, p. 60. """C'est un mensonge : car un grand a deux jambes aussi qu'un bouvier, et n'a qu'un ventre non plus que lui." Ibid., p. 6a. " See above, pp. 192-194. 246 American Economic Association [808 confesses that from the point of view of the benefit theory everyone secures the same advantages from government. Notwithstanding that fact, however, he demands progres- sion in very much the same terms as Montesquieu.^^ After quoting Montesquieu he proceeds : "Such a tax which would impinge by steps of five, ten, thirty, fifty louis on the frivolous expenses of every fam- ily in easy circumstances, and which would cause a restric- tion of their expenses in proportion to the easiness of their circumstances, would suffice, together with current reve- nues, to defray all the expenditures of government, as well as the outlays for a just war, without the laborer's ever hearing anything about it except in the public prayers."^® Tifant de la Noue favors progression for much the same reason. "It is not enough," says he, "for the citizen to have the right of possession. He must also be pro- tected in his right' of enjoyment.^'' The protection of the sovereign is due especially, in his opinion, "to those whose ^ "Cette tax est encore admissible pourvu qu'elle soit proportion- nelle, et qu'elle charge dans une proportion plus forte les gens aises en ne portant point du tout sur la derniere classe du peuple. Quoique tous les sujets jouissent egalement de la protection du gouverne- ment, de la surete qu'il leur procure, I'inegalite de leurs fortunes et des avantages qu'ils en retirent, veut que les impositions, viennent pour parler ainsi en progression geometrique, deux, quatre, huit, seize, sur les aises; car cet impot ne doit pas s'etendre sur le ne- cessaire." — Jancourt, article "Impot" in the Encyclopedie. ""Tel impot qui retrancherait par an cinq, dix, trente, cinquante louis sur les depenses frivoles de chaque famille aisee, et cette re- tranchement fait a proportion de I'aisance de cette famille, suffirait avec les revenus courans pour rembourser les charges de I'etat ou pour les frais d'une juste guerre, sans que le laboureur en entendit parler que dans les prieres publiques.'' " "Ce n'est point assez pour le citoyen d'avoir le droit de posseder ; il faut encore qu'on le maintienne dans la liberte de jouir." Tifant de la Noue, Reflexions philosophiques sur I'Impdt. oil I'on discute les Principes des £conomistes et oil I'on indique un Plan de Per- ception Patriotique, accompagne des Notes. 1775. See Lichtenber- ger.Le Socialisme au XVIII sidcle. p. 322. 809] Progressive Taxation in Theory and Practice 247 genius is their sole capital, and who have only this means of assuring their subsistence by the duties which they levy on the whims of the land owners and the capitalists." His practical proposals are summed up as follows : A pro- gressive duty on articles of food, according as they are to be put in the category of necessities or of luxuries ; a simi- lar progressive duty on all other commodities ; a progres- sive poll tax arranged in the same way ; and a tax on that part of fixed property which is nothing but luxury or ex- treme wealth. "For," says Tiffant, "a tax on solid and fixed incomes appears to me to be the best kind of profits on which to impose the burden."^® As we approach the Revolution, we see Montesquieu's influence extend more widely. It is true, as we have learned above, ^^ that most of the cahiers advocate propor- tional taxation. We find, however, the progressive prin- ciple proclaimed in two cases. In one of these it is stated that taxation according to faculty means that double com- fort implies a double impost. ^^ In the other it is stated that taxation ought to be arranged not proportionally, but " "A ceux dont le genie est I'unique capital, qui n'ont que ce moyen pour assurer leur subsistance par les droits qu'ils prelevent sur les fantaisies des possesseurs des terres et sur celles des capitalistes." " "Un droit progressif sur les denrees, en raison de leur approxi- mite du besoin on du luxe; un droit dans une progression pareille sur tous les autres objets; une capitation progressive dans la meme raison; un impot sur la partie des immeubles qui n'est que luxe ou richesse decidee; une taxe sur les rentes solides et fixes me parais- sent les profits les plus robustes sur lequels puisse rouler I'impot." For a similar defense of progressive taxation in the works of Helvetius and Rabelleau, see Lichtenberger, op. cit, pp. 264, 401. " P. 207. ^"L'impot sur les personnes sera etabli et reparti eu egard a leurs facultes de maniere que celui qui a' le double de I'aisance paie le triple des impositions des aises de sa classe et ainsi de suite." Cahier du Tiers-Etat de Renne. See Gomel, Histoire FinancUre de I'Assemblee Constituante, 1896, i, p. 120. 248 American Economic Association [810 according to the relative sacrifices that people are called upon to make.^* Among the pamphleteers of the Revolution itself, the defenders of progressive taxation were more numerous. Perhaps the most prominent of these was Gosselin.^^ Gos- selin is discussing the single tax of the "Economistes." He confesses that it might be a good thing to have equal- ity in wealth; but in default of that we must at least tax the rich on their luxuries and expenses.^* The practical method of accomplishing this is to divide the population into ten classes according to their wealth, and to tax the first class one-fiftieth, the second, one-fifty-fifth and so on ad infinitum. Other upholders of the progressive principle on the same ground were Deverite and Du Fourney de Villiers. Deverite gives a sharp criticism of modern society, and paints in lurid colors the unhappy lot of the workman who is a "mulct des armees." He pays more taxes than the rich, and yet, taxes ought to be in an ascending, growing ratio to wealth, and should increase with the degree of ^ "La repartition (de I'impot) doit etre faite de maniere que le pauvre paie peu, rhomme aise d'avantage, et le riche beaucoup, non seulement sur une regie proportionee, mais en raison combinee des sacrifices que chacun peut faire sans nuire a ses besoins." Cahier du Baillage de Brian le Vigan. See Lichtenberger, Le Socialisme et la Revolution Frangaise, 1899, p. 26. Cf. Rouviire, Histoire de la Revolution Frangaise dans le Department du Gard, 1887, i, p. 478. Also De Retz de Serviez, op. cit. p. 73. ^ Gosselin, Reflexions d'un Citoyen addressees aux Notables sur la Question proposees par un grand Roi (Frederic II) -."En quoi consiste le bonheur des peuples et quels sont les moyens de le pro- curer" ou sur cette autre: D'ou vient la misere, et quels sont les moyens d'y remedler? Paris, 1787. Cf. Lichtenberger, Le Social- isme Utopique, 1898, pp. 150-151, and Le Socialisme au XVIIIe Siecle. 1895, pp. 434-440. ^ "Ce serait bon si tous les biens se trouvaient egalement par- tages. II faut done, en attendant, tacher de faire tomber sur les 8iiJ Progressive Taxation in Theory and Practice 249 superfluity; for wealth augments indefinitely, at the ex- pense of those that have little.^' De Fourney de Villiers attacks the present distribution of wealth, and suggests a new method of classifying peo- ple according to their property. According to this dis- tribution he thinks the poor of every order, far from paying, would have the right of abatement. Those who have only enough for the necessaries of life would nei- ther pay nor receive anything, since the real wants do not grow in proportion to one's superfluities. If the people in easy circumstances are held to pay one-twentieth, the rich ought to pay two and one-half fold, the opulent fivefold and those who are bursting with wealth, tenfold.^* As this division is, however, impossible, he contents himself with the demand that the wealthy pay most of the taxes. Progression is advocated also by Le Peletier de Saint- Fargeau,^^ and by Carnot^^ in his Plan d'Education Na- tionale, as well as by Noilliac, although for another rea- son.^^ riches la plus grande partie de I'impot, ce qui ne peut avoir lieu qu'en imposant ce qui sert a leur luxe et leur consommation." ^ "Las impots devraient etre en proportion geometrique ascendante avec les fortunes et croitre avec les degres du superflu." "L'opu- lence s'accroit indefiniment aux depens de ceux qui ont peu.'' Deve- rite. La vie et les Doleances d'un pauvre Diable pour servir de ce qu'on voudra aux prochains Stats — Generaux, 1789. Cf. Lichten- berger, Le Socialisme et la Revolution Frangaise, p. 38. " "Selon cette distribution les pauvres de tout ordre, loin de payer, auraient droit a des soulagements. Ceux qui n'ont que le necessaire ne paieraient ni ne recevraient, et comma les besoins reels ne crois- sent point en raison du superflu si les gens aises davaient payer un vingtieme, les riches en devraient payer deux et demi, les opulent cinq, les regorgeants dix." Du Fourney de Villiers, Cahier du Quatriime Ordre, 1789. Quoted in Lichtenbergar, op. cit., p. 39. " Lichtenbergar, op. cit., p. 197. ^ Correspondence generale de Carnot, published by E. Charavay, 1892, i, p. 187; quoted in Lichtenbarger, op. cit. p. 126. " Saa above, p. 197, Lichtenbergar, Le Socialisme au XVIIIe Steele, 250 American Economic Association [812 Montesquieu's ideas spread also to Germany, where we find several writers at least positing the question of pro- gressive taxation, even if they did not defend it. Thus Justi cites the statement of Montesquieu as to the Athe- nian progressive tax, and after comparing the progressive scale with the then usual practice, adds, "Ich iiberlasse den Lesern zu urtheilen welche Grundsatze am richtigsten sind."^" So, also, Scheidemantel quotes Montesquieu approvingly,*^ and Struensee advances the same idea. Proportional taxation, he tells us, does not impose the same burden, for if we take away 30 units from A, who has 300 units of income, and if we take away 300 from B who has 3,000 units of income, we impose a very unequal sacrifice on them. The one has not enough to eat, and the other perhaps gives up a few pleasure trips. Where is the justice in this ?*^ p. 322, note 3 quotes another earlier pamphlet in defense of the pro- gressive principle: Memoire sur une nouvelle Imposition etablissant que I'Impot doit tomber sur le superflu et non sur le Necessaire ah- solu." " Justi, Staatswirthschaft, 175S, pp. 5-6. "^ "Athen beurteilte die Auflagen nach geometrischen Verhaltnis- sen, andere Nationen haben das arithmetische Mass vorgezogen: ich wiirde zwar den Gebrauch der Athenienser fur besser halten — ein Reicher kann weit leichter dreissig von Hundert als der Diirftige, fiinf vom Hundert entbehren.'' Justi, Staatsrecht nach der Ver- nunft, 1770, pp. 2.267." ""'Wo blebit nun die Gerechtigkeit? Jener kann sich nicht mehr satt essen, dieser stellt vielleicht jahrlich ein paar Lustreisen ein." K. A. V. Streuensee, "Ueber die Mittel eines Staats bei ausseror- dentlichen Bedtirfnissen, und besonders in Kriegszeiten, Geld zu erhalten." In Ahhandlungen iiber wichtige Gegenstande der Staats- wissenschaft. 1800. Pp. 212-13. B. The Nineteenth Century. French Writers. Very much the same ideas were developed in the nine- teenth century. Among the earhest of the French wri- ters was the economist, Montyon. Montyon holds that not only must the sum necessary to existence be exempt, but the revenue which is devoted to the satisfaction of wants not far removed from necessities, must be very lightly taxed ; while fortunes whose product exceeds what is necessary both for necessaries and for comforts belong in far greater part to the state. ^ Montyon pleads in especial for a diminution of the rate in favor of fathers o£ large families. The most celebrated French advocate of progressive taxation in the nineteenth century, however, is J. B. Say. Say maintains that taxation is a sacrifice made to public order; but public order cannot demand the sacrifice' of whole families. Hence, the minimum of subsistence must be spared. When we go beyond that. Say confesses that uncertainty begins. The line that separates superfluities from necessities is not fixed, but relative. "All that we know is that after a certain point there is in every income an imperceptible progression, so that a family can satisfy ever less necessary wants, until the wants become almost ' "Non seulement Timpot personnel ne doit point morceler ce qui est absolument necessaire a la subsistance du contribuable ; mais par une suite de ce principe, il doit etre gradue dans une telle pro- portion de la fortune, qu'un revenu qui ne fournit que quelques dou- ceurs d'existence si proches des besoins qu'elles peuvent se confondre avec eux, et que, sans elles, I'existence serait un mal pliltot qu'un bien, ne soit greve que d'un impot tres leger, si toutefois il en doit supporter aucun; un revenu qui confere une plus grande aisance doit etre plus fortement impose; et dans une grande fortune, les produits qui excedent ce qu'exigent les besoins et I'aisance, peuvent en tres grande partie etre consacres aux besoins de I'Etat." Mon- 252 American Economic Association [814 unfelt."^ Say gives the classic example of two families with 300,000 and 300 francs income respectively. A pro- portional tax of ten per cent would leave the one family 270,000 income, which would scarcely affect the satisfac- tion of its wants at all ; but it would leave the other fam- ily only 270 francs, and thus rob it of the necessary means of existence. "A tax which is simply proportional to in- come would hence be far from just. I shall go further and shall not hesitate to say that the progressive tax is the only just tax."^ In another work, after stating that the protective theory logically leads to proportional taxation, he asks : "Is not a simple proportional tax heavier for the poor than for the rich ? Ought the man who earns only enough to feed his family to be taxed in exactly the same proportion as the man who, because of his ability, his orig- inal capital or his landed property, earns enough not only to defray all the expenses of a luxurious life, but who, in addition, yearly adds to his capital? Do you not find in this demand something that shocks your feeling of jus- tyon, Quelle Influence ont les diverses Especes d'lmpots sur la Mo- ralite, I'Activite et I'Industrie des Peuples, 1808. In Melanges d'Eco- nomie Politique (Guillaumin's Collection des principaux £cono- mistes) ii (1848), p. 391. - ' "Tout ce qu'on sait, c'est que les revenus d'un homme ou d'une famille peuvent etre modiques au point de ne pas sufBre a leur ex- istence, et que depuis ce point jusqu'a celui oii ils peuvent satisfaire a toutes les sensualites de la vie, a toutes les jouissances du luxe et de la vanite, il y a dans les revenus une progression imperceptible, et telle qu'a chaque degre, une famille peut se procurer une satisfaction toujours un peu moins necessaire, jusqu'aux plus futile qu'on puisse imaginer; tellement que si Ton voulait asseoir I'impot de chaque fa- mille, de maniere qu'il fut d'autant plus leger qu'il portat sur un revenu plus necessaire, il faudrait qu'il diminuat, non pas simplement proportionnellement mais progressivement." J. B. Say, Traite d' Sconomie Politique, 1803, book iii, chap, ix ; 8th ed., 1876, p. S48. ' "On voit done qu'un impot qui serait simplement proportionnel au revenu serait loin cependant d'etre equitable . . . J'irai plus loin, et je ne craindrai pas de prononcer que I'impot progressif est le seul equitable." Ibid., p. 549. 815] Progressive Taxation in Theory and Practice 253 tice?"* In other words, Say bases his demand for pro- gressive taxation on the theory of sacrifice. Since Say, but few French writers have until very re- cently advocated progression. Those that have done so have, however, generally been overlooked. Let us take them up in their historiqal order. Esmenard du Mazet defends progressive taxation on the express ground that every citizen must make an equal sacrifice, that is, a sacrifice which will make them all equally feel the privation imposed upon them by the tax. "The possessor of 20,000 francs income who is taxed 2,000 francs, is less affected by the tax than he who with 1,000 francs pays 100. Otherwise we would have to ad- mit that all our wants were equally urgent.^ More re- cently the Belgian economist Denis has taken a similar po- sition, although he maintains that the contest between the principles of proportion and progression is interminable as long as there exists an inequality in wealth.® The most subtle attempt to prove that the sacrifice the- ory leads to progressive taxation was made by Fauveau, who applies the mathematical method. Fauveau, we re- member, maintained that even from the standpoint of benefits taxation must be progressive.'^ But the equality- of-sacrifice theory, in his opinion, leads to the same result. 'J. B. Say, Cours Complet d'£conomie Politique Pratique, 1829, part viii, chap, iv; Brussels ed. (1844), p. 495. " "Tous les citoyens doivent faire, dans I'interet de la chose pub- lique un sacrifice egal, c'est a dire qui leur fasse egalement sentir la privation que ce devoir impose . . . Ainsi done, et le sentiment interieur et I'experience sent d'accord pour nous faire adopter dans le repartition de I'impot una autre base que la simple proportion de la fortune." Camille Esmenard du Mazet, Nouveaux Principes d'£.conomie Politique, 1849, ii, p. 283. '"Je considere I'opposition des deux tendances comme indefec- tible aussi longtemps que subsistera I'inegalite des richesses." H. Denis, L'lmpot, 1889, pp. 89-91. ' Above, p. 202. 254 American Economic Association [8i6 The moral sacrifice imposed on individuals by taxation, does not depend alone, he thinks, on the amount of money- taken. The loss of the same sum of money is far more burdensome to the poor than to the rich, because in the first case it trenches on necessities, in the second on super- fluities. Hence the moral value of a man's fortune does not increase as fast as its mathematical value. ^ The moral value of a given amount of property may be con- sidered a function of its mathematical value, a function which increases less rapidly than the variable. The moral sacrifice, hence, is the difiference between the moral value of a man's fortune before the payment of the tax and after its payment. Great mathematicians like Laplace and Poisson have shown that the moral increase of wealth may be deemed proportional to its mathematical increase and inversely as the total value of the fortune, whenever this increase is infinitely small. Hence taxation based on equality of sacrifice must be progressive, al- though the rate of progression must be less than in the case of taxation looked upon as an insurance premium.* ° "La perte d'une meme somme d'argent est beaucoup plus penible pour le pauvre que pour le riche, parcequ'au premier c'est le neces- saire, au second c'est superflu qui se trouve enleve. On compren- dra aisement qu'en consequence de cette verite la fortune d'un homme n'a pas pour lui une valeur morale qui croisse aussi vite que sa va- leur mathematique, tout accroissement de bien egal diminuant de valeur alors qu'il rapporte des choses de moins en moins necessaires." Fauveau, Considerations Mathematiques sur la Theorie de I'Impot, 1864, p. 33. " "On peut done considerer la valeur du bien d'un individu comma une fonction de la valeur mathematique de ce bien, fonction qui croit moins rapidement que la variable . . . Le sacrifice moral impose a chacun c'est la difference de la valeur de la fortune de I'individu avant le payement de I'impot et apres . . . L'accroissement moral de la fortune peut etre considere comme proportionnel a son accroissement mathematique et en raison inverse de la valeur totale de la fortune, toutes les fois que cet accroissement est infiniment petit . . . A ce point de vue I'impot doit etre progressif." Ibid., pp. 35 and 41. 817] Progressive Taxation in Theory and Practice 255 The exact rate is expressed by Fauveau after several pages, filled with operations in differential calculus, in a formula two lines long, which it is not necessary to repro- duce here. C. The English Writers. The English writers have hitherto been almost en- tirely neglected by the historians of public finance. The earliest advocacy of progression resting on faculty, is to be found in the writings of a celebrated divine, Dr. Paley. He lays down his views in the following words : "A tax, to be just, ought to be accurately proportioned to the circum- stances (or more correctly perhaps to the amount of the property) of the persons who pay it. But upon what, it might be asked, is this opinion founded, unless it could be shown that such a proportion interferes the least with the general conveniency of subsistence? Whereas, I should rather believe, that a tax constructed with a view to that conveniency, ought to rise upon the different classes of the community in a much higher ratio than the simple proportion of their incomes. The point to be re- garded is not what men have, but what they can spare; and it is evident that a man who possesses £i,ooo a year can more easily give up £ioo than a man with f loo can part with £io; that is, those habits of life which are reasonable and innocent, and upon the ability to continue which the formation of families depends, will be much less affected by the one deduction than by the other. It is still more evident that a man of £ioo a year would not be so much distressed in his subsistence by a demand from him of f lo, as a man of £io a year would be by the loss of £i."^ Paley then goes on to discuss whether "the simple, the duplicate, or any higher or immediate proportion of men's incomes," is the real ideal. The same idea is also worked out by the English so- * Paley, Elements of Political Knowledge, chap, xi, sec. iv, "Taxa- tion." In his collected works, ed. 1830, iii, p. Sll. 819] Progressive Taxation in Theory and Practice 257 cialistic physician, Charles Hall, at the beginning of the nineteenth century. The present method of taxation, ac- cording to Hall, is not justly proportioned. ^ "We have observed," says he, "that the present mode is— if a person of one hundred pounds a year pays ten pounds, a man of one thousand pays one hundred pounds a year. In this case the former gives up something highly useful if not necessary to his family, whilst the latter gives up nothing but what is in a much less degree useful, and bordering on such as are superfluous. What a man of ten thous- and a year gives up is in a still less degree useful, and approaching still nearer to what is superfluous. It would be desirable that the part each rich man should pay toward the taxes should be regulated by some gradually increasing series ; to increase, for instance, as the squares of the income of each person, or in some arithmetical or geometrical proportion; this would entirely prevent any arbitrary and partial assumptions, as is the case at pres- ent, where it is evidently in favor of the rich, and that in a greater ratio as they are more rich." Hall proceeds to point out that such a tax would really be no grievance, but would, on the contrary, bring a far greater equality. A fuller exposition of the doctrine is contained in the work of Craig, who is the first English writer to devote a separate volume to problems of public finance. Al- though Craig sometimes uses language that seems to im- ply the give-and-take theory, his defense of progression is based primarily on the equality-of-sacrifice doctrine. Thus he says : "The taxes which each inhabitant pays to the state consist of the quantity of enjoyment of which he is deprived. ... It seems reasonable that the portion ' Charles Hall, The Effects of Civilization on the people in Euro- pean States, 1807. The above quotations are made from the 2nd edi- tion, 1813, pp. 206 et seq. 258 American Economic Association [820 of enjoyments so yielded by individuals should correspond to that which they respectively retain."^ Craig divides all enjoyments into three classes : necessaries, gratifica- tions and superfluities. After a lengthy examination of the privations occasioned to individuals by the diminu- tion of each of these various classes, he concludes that "taxes, if proportioned to wealth, occasion more severe privations to the poor than to the rich," and that "the proportion of the public burdens laid on each individual ought to increase in a quick progression, according to his wealth."* Craig also attempts to prove that the state is compelled to assume certain expenditures directly traceable to the demands of the wealthy, and that hence the "pre-eminently wealthy" ought to pay more than in proportion to their wealth. This, however, is plainly the give-and-take theory, and therefore open to some question ; and Craig is in the main content to base his de- mands for progression on the theory of privation of en- joyments of equality of sacrifice. Later on, he applies the theory of "sacrifice of enjoyments" not only to what he calls the principle of "gradation" of the tax," but also to what is generally known as the principle of differen- tiation, making a distinction in the rate according to the source whence the income is derived. Prop'Ortional tax- ation on all income would be grossly unequal. The ine- quality, he thinks, may be mitigated, not only by pro- gressive taxation, but "by making the rate depend partly on property and partly on income, "i. e., by capitalizing ' John Craig, Elements of Political Science, 1814, ii, p. 264. * Ibid., ii, pp. 270, 279. ° In discussing the first maxim of Adam Smith, he introduces the "important modification" by the assertion "that according to justice as well as expediency, the proportion which the taxes bear to the property of each contributor ought to increase progressively accord- ing to the wealth.'' Ibid., iii, p. 5. 82 1 ] Progressive Taxation in Theory and Practice 259 the income.** Craig, however, sees that even these ar- rangements would not bring about a complete equality of sacrifice. "Sources of inequality would still remain in the state of health of the contributor, in the probability of his employment being permanent, and in the various risks to which commercial speculations are necessarily, though very unequally, exposed." Buchanan, the acute commentator of Adam Smith, was also in favor of progressive taxation, and for very much the same reason. He tells us : "The injustice of fixing a common rate of contribution for all incomes, however various, is sufficiently obvious; since an income of f 10,000 per annum might pay, without any hardship, a proportion which, if exacted from a smaller income, would force a retrenchment, not of comforts merely, but of absolute necessaries. The rate of contribution to be equitable ought therefore to vary, gradually ascending, until it rises to its maximum among the highest incomes."^ The most comprehensive, and in fact the only elaborate work in English, devoted specifically to the income tax, is that of Sayer.^ Sayer takes it for granted that income is the best test of ability. "Considering equality of taxa- tion to signify taxation in due proportion to every one's means and ability to pay, that most just principle of tax- ""AIl revenue derived from annuities or professions might be brought to a capital, according to the number of years at which the life of the annuitant was valued, and the tax might then be levied on this fictitious property.'' Craig, op. cit., iii, p. 23. 'David Buchanan, Observations on the Subjects treated of in Dr. Smith's Inquiry into the Nature and Causes of the Wealth of Na- tions, 1817, p. 211. Mm Attempt to show the Justice and Expediency of substituting an Income or Property Tax for the present Taxes or a Part of them, as Affording the most Equitable, the least Injurious, and the least Obnoxious Mode of Taxation, 1833. It was published anonymously but was written by Benjamin Sayer. Cf. McCulloch, Literature of Political Economy, 184s, p. 339. 26o American Economic Association [822 ation, it seems to follow that income, which constitutes and evidences the means to pay, is the surest basis for equal taxation." Sayer maintains that income is far su- perior to expenditure as a basis of taxation, because a tax on income "admits practically of a gradation" or "grad- ually increasing scale of taxation, according to which the rate of it will become higher as the means for the contri- bution increase."® Another advantage of the income tax is that it admits of a proportionate reduction to per- sons having large families, "on the principle that taxation should be exacted in proportion to every one's ability to bear it, and as a man with a family to maintain is less lia- ble to bear taxation than a man without a family."^" Sayer defends the general theory of "the graduated scale of charge" for the reason "that the deduction which it makes from inferior incomes occasions a deprivation of the necessaries of life, while the deduction from large incomes deprives of luxuries only, or of such conveniences or enjoyments as can be spared without so much perso- nal distress and suffering as the want of absolute necessa- ries occasions."^^ He discusses some objections made to the principle, and although confessing that there are cer- tain doubts as to the practicability of carrying out the entire system of graduation, he nevertheless upholds pro- gressive taxation as in the main just and expedient. Say- er's whole discussion is noteworthy. Several years later, at the time that the principles of the English income tax were actively discussed, progres- sive taxation was again demanded. Buckingham based his contention on the clause of Adam Smith that people should pay in proportion to their respective abilities. "So " Sayer, op. cit., pp. 3, 4. ""Ibid., pp. 28, 248. "■Ibid., p. 219. 823] Progressive Taxation in Theory and Practice 2,6t long as a man with an income of £300,000 a year must be more able to pay thirty per cent of income tax than a man of £50 a year to pay five per cent, so long must the graduated scale be considered more just than a uniform one for all classes-''^^ Later on he explains that "the very wealthiest who paid the heaviest amount and the largest proportion of their incomes would after all be least inconvenienced by such payment, since it is not so much the amount that is contributed by them, as the sur- plus amount of fortune or income still left in their pos- session, which affects their happiness."^^ Among recent writers Sidgwick devotes some slight attention to the problem. He admits that the benefit principle, or the fee principle as he calls it, can be applied to taxation only in part if at all.^* The problem hence arises as to what is "the fundamental principle for the distribution of the burden of taxation in the narrower sense — that is, of the burden that remains to be allotted when the principle of payment in proportion to service re- ceived has been applied as far as reasonable." The an- swer in Sidgwick's words is that "the obviously equitable principle — assuming that the existing distribution of wealth is accepted as just, or not unjust — is that equal sac- rifice should be imposed on all, except so far as it is thought desirable to make taxation a means of redressing the inequalities of income that would exist apart from governmental interference."^® Sidgwick regrets this ex- ception, limiting it, however, by the one proviso that the "James S. Buckingham, National Evils and Practical Remedies, 1849, p. 351. Cf. also the Financial Reform Tracts, 1850, no. 27, p. 6. The subject is fully discussed from the same standpoint in another work by Buckingham, Plan of an Improved Income Tax, 184S, PP- 13-25. "/6jrf., p. 370. " H. Sidgwick, Principles of Political Economy, 1883, p. 555. "" Ibid., p. 562. 262 American Economic Association [824 community has to protect its members from starvation. The consequence of this is the exemption of the minimum of subsistence. "No one's income ought to be reduced by taxation below what is required to furnish him with the bare necessities of life." Sidgwick is tempted to go still further, and asks "whether in order to equalize the real burdens of taxation one ought not to lay a progressively increasing tax on the luxurious expenditures of the rich ?" "I must admit," says he, that in my opinion such a tax would be justifiable from the point of distribution alone."^® But he adds that "it is open to the practical objection that the progression, if once admitted, would be very difficult to limit, owing to the impossibility of estab- lishing any definite quantitative comparison between the pecuniary sacrifices of the rich and those of the poor, with a resulting danger that it would be carried too far and drive capital away," thus causing a loss to production which would more than outweigh the gain in equality of sacrifice''^ Sidgwick is therefore led to prefer the scheme of simply exempting savings from taxation. '° Sidgwick, op. cit., p. 563. "Ibid., p. 564. D. The German Writers. We come next to the German economists, among whom we find a far larger number of adherents of progressive taxation. The first of the Germans to demand progres- sion as the outcome of the faculty theory was Schon. He breaks completely with the give-and-take theory, and asserts that taxes should be in accordance with ability.^ A proportional tax would, in his judgment, really create economic inequality. It must be said, however, that Schon also partly advocates the socialistic theory in so far as he says that in democracies the cardinal point is to prevent great inequalities of wealth, and that progressive taxation is a far better engine for accomplishing this re- sult than the drastic measures of a Lycurgus. He naive- ly maintains, however, that in aristocracies and monarch- ies, on the other hand, inequality of wealth is unavoidable, but that progressive taxation is nevertheless to be de- manded as the most equitable system, although the rate of progression must be different.^ In democracies he proposes that the rate should increase arithmetically with every arithmetical increase in the income ; in aristocracies and monarchies the rate should increase with every doub- ling of the income.^ Just before and during the revolution of 1848 we find the demand again coming to the front. Schmitthenner ' "Fahigkeit" is the word he uses. Johannes Schon, Die Grund- s'dtze der Finanz, 1832, chap. 5, esp. p. 61. ^ Ibid., pp. 58-60. ° "Es darf (in Demokratien) nur die Abgabe im arithmetischen Verhaltnisse steigen, wenn die Einkiinfte im arithmetischen Ver- haltnisse wachsen; im Monarchien und Aristokratien miisste der Steuerfuss bios dann in arithmetischen Verhaltnisse wachsen, wenn das Einkommen eine Verdoppelung erlanget." Ihid., p. 60. 264 American Economic Association [826 regards progression as a conclusion from the principle of economy by which he thinks we must understand not a commutative or absolute, but a distributive or relative equality.* In the national assembly Freiherr von Gross suggested an income tax with progressive rates up to thirty-three and one-third per cent;^ and Baumstark de- mands that the rate should rise in a well defined progres- sion which the legislature must apportion to the respective conditions of the taxpayers, as the amount of their income progressively rises.® After the revolution of 1848 progressive taxation was not again advocated for several decades in Germany, al- though, as we have seen, the demand is frequently found in England. Recently this relation has been reversed. The English writers have not favored progression, but the Germans have done so. Let us consider, then, the chief German advocates of progression during the last generation. The eminent economist. Held, lays the chief stress on equality of sacrifice. If we accept equality of sacrifice as a principle, proportional taxation is, in his opinion, absolutely illogical. Held maintains that the principle of equality cannot possibly lead to any arithmetical relation between income and pressure of taxation as the only equi- table principle. This is all the more true because income * "Gleichheit unter der jedoch nicht eine kommutative oder ab- solute, sondern eine distributive oder relative gemeint sein kann, so dass also die Quote nicht fiir alle Personen und Steuerobjekte gleich, sondern sich nach der Leistungsfahigkeit richtet." — Schmitthenner, Grundlinien des allgemeinen oder idealen Staatsrechts, 1845, pp. 3S7-8. ° Freiherr von Gross, Allgemeine progressive Grund- und Ein- kommensteuer, Gleiches Maas und Gewicht fiir Deutschland. 1848. "That the rate "in angemessener Progression, welche der Gesetz- geber den Verhaltnissen anpassen muss, steigen sollte, sowie der Betrag des Einkommens in gewisser Progression steigt." E. Baum- stark, Zur Einkommensteuerfrage. 1850. 827] Progressive Taxation in Theory and Practice 265 itself does not seem a practicable standard by which to measure individual sacrifice. Income may, indeed, afford us a measure for the relative individual power to dispose of economic values ; but he who disposes of equal values is not able, on that account, either to enjoy equally or to suffer privation equally.^ Income, in other words, is no completely valid test of justice in taxation. Held con- cludes that proportional taxation is illogical, and that it is useless to endeavor to realize equality of sacrifice. The best taxes are those which lead to the least complaints.^ Yet, later on, in constructing his positive system, he in- cludes, as one of his fundamental demands, a progressive income tax.® The most noted of the German defenders of progres- sive taxation is Neumann. Neumann thinks that the principle of faculty is in reality not different from that of equal sacrifice. Were the ability to pay taxes an abso- lutely fibced quantity, like measure and weight, then, in- deed, it might be asked : What has faculty to do with sacrifice? But, in reality, faculty is not something defi- nitely fixed. When anyone has to fulfill a duty, whether to father or to fatherland, his ability to do so generally increases in proportion as he imposes efforts on himself; and, furthermore, it generally increases in proportion as he denies himself pleasures, enjoyments and the satis- faction of wants. In both cases, thus, the ability grows with the , sacrifice — the sacrifice of the effort and the sac- rifice of the denial. Sacrifice and faculty in this sense hence are not different things, but stand in the closest ' "Das tauschwerthe Einkommen des Einzelnen giebt uns ein Maas fur die vergleichsweise Macht der Einzelnen, iiber okono- mische Werthe zu verfiigen — aber wer iiber gleiche Werthe ver- fugt, kann desshalb nicht immer gleich Viel geniessen und gleich Viel entbehren." Held, Die Binkommensteuer, 1872, p. 113. ^Ibid., p. lis. 'Ibid., p. 189. 266 American Economic Association [828 relation to each other. In fact, it may be said that only through a recognition of the sacrifice imposed can the measure of ability attain a definite form, and thus be of any use for purposes of taxation.^" It might be claimed, indeed, that if two persons, with equal efforts, annually earn $1,000 and $10,000 respectively, their ability to pay taxes is as one to ten. This, however, is not true, because the state is not the only one to take advantage of their ability. The state must, so to speak, divide the taxpayer's ability with his family. The state must look at the sacrifices which the taxpayer is compelled to make. Of course, the state cannot take cognizance of all the in- dividual elements of each man's condition ; this would be as impracticable as it is impossible. The state has to deal only with the average men, average needs and average conditions. ^^ The principle therefore must be to appor- tion taxes in such a manner as to correspond to the ability ""Ware die Leistungsfahigkeit — oder richtiger gesagt die Fahig- keit zu bestimmter Pflichterfiillung beizutragen — ^bei A, B, C, u. s. w., eine feststehende Grosse, wie Maas und Gewicht bestimmter Bezeichnung, so hatte jene Annahme recht. Was hatte den jene Fahigkeit mit dem Opfer zu thun, das die Leistung auf erlegt ? ! In der That ist jene Fahigkeit aber etwas Feststehendes nicht. Wer zur Erfiillung seiner Pflicht zu leisten hat, gelte es dem Vater oder dem Vaterlande — dessen Befahigung hiezu wachst in AUgemeinen, je nachdem er sich Arbeitsmuhen auf erlegt, und sie wachst eben- falls im AUgemeinen, je nachdem er sich Geniisse, Freuden und die Befriedigung von Bediirfnissen versagt. In beiden Beziehungen also steigert sich die Befahigung mit dem gebrachten Opfer, dem Opfer der Miihe und dem der Entsagung. Und Opfer und Leis- tungsfahigkeit in dem hier in Rede stehenden Sinne sind also nicht disparate Dinge, sondern stehen in inniger Beziehung zu einander.'' F. J. Neumann, Die progressive Einkommensteuer in Stoats- und Gemeindehaushalt" 1874, p. 62. " "Natiirlich konnen freilich immer nur Durchschnittsmenschen, Durchschnittsbediirfnisse, Durchschnittsgefuhle und Durchschnitts- empfindungen in Anschlag gebracht werden." Op. cit., 1874, p. 63. 829] Progressive Taxation in Theory and Practice 267 to contribute to public purposes with generally equal ef- forts and equal sacrifices as over against other needs.^^ Neumann objects to the phrase equality {Gleichmds- sigkeit) of taxation as in itself affording no clue. If in- dividuals are taxed according to the number of their teeth or the length of their eyebrows, or their weight, we have, in one sense, an equality of taxation. What is it that should be equal? asks Neumann. What is the test or norm of equality? Some assume to find it in the mere fact of income, so that everyone will be left in the same relative position as before. They hence draw the con- clusion that proportional taxation of income is the only equal method. Neumann, however, objects that this is no principle of taxation, just as little as is the opposite idea that it is the function of the state to alter conditions of wealth. Secondly, he holds that even if we accept the principle, proportional taxation of income does not nec- essarily ensue. For in actual life the same percentage of income tax may afifect different individuals very dif- ferently, according as their whole economic condition changes. ^^ The logical conclusion from the principles of faculty and equality of sacrifice seems to Neumann to be progres- sive taxation. We do not tax individuals according to their faculty, if we tax A, with ten times as much income as B, only ten times as much. For, after satisfying his ne- cessary wants, A still has not only ten times as much left with which to discharge his duty toward the state, but far more than ten times as much. His faculty is greater. " "Nach Massgabe der Leistungs-, oder genauer gesagt, der Steuer- kraft, d. h. so zu vertheilen, wie es der Befahigung zur Leistung in Staat und Gemeinde bei etwa gleicher Anstrengung und etwa gleichen Opfern andern Bediirfnissen gegeniiber entspricht." Neu- mann, op. cii., p. 63. " Ibid., pp. 98-102. 268 American Economic Association [830 In the same way, it is undeniable that a tax of $15 is far harder to bear for a man with $300 income, than a tax. of $1,500 for a man with $30,000 income. The sacri- fice is greater. As the rate of the tax becomes higher,, the difference in the sacrifice is still more apparent. Thus, from the standpoint both of faculty and of sacri- fice, equality of taxation means progressive taxation.^* One of the chief objections to progressive taxation is that as the progression increases the tax must finally, confiscate a man's entire income. Such a view, however, overlooks the fact, says Neumann, that the progression is not to affect higher incomes as such, but only the sur- plus incomes ; since it is only these surplus amounts which generally subserve the less urgent wants. Moreover, there is a limit beyond which it is not true that equal amounts of high incomes subserve equally pressing wants. When we reach very high incomes they generally satisfy wants which are of equally little urgency, or which can be equally well dispensed with. In other words, be- yond a certain point the tax must become proportional. The rate of progression thus must itself be degressive, ultimately to arrive at proportional taxation. The ideal must be a degressively progressive tax.^^ While most of the minor German writers have fol- lowed Neumann's reasoning, the authors of two widely read textbooks on finance, Schaffle and Stein, rather ig- nore the theory of equality of sacrifice. Schaffle maintains that the state should levy its taxes according to "the actual capacity to pay."^*^ Property " Neumann, op. cit., p. 142. "Ibid., p. 146. "' "Der Staat soil alle Steuerkrafte nach Verhaltniss der wirklichen Leistungsfahigkeit belasten." A. E. F. Schaffle, Die Grundsdtze der Steuerpolitik, 1880, p. 75. Schaffle sums up his argument with but slight modifications in a latter work, Die Steuern, Allgemeiner 831] Progressive Taxation in Theory and Practice 269 and income represent only the average capacity, and therefore, thinks Schaffle, it is necessary to supplement di- rect by indirect taxation in order to ascertain the actual, "individual, concrete, momentary" capacity. ^^ In so far, however, as the average capacity is concerned — that w^hich is measured by property or income — ^the rate can- not be proportional. For taxable capacity is very differ- ent in the higher strata or property and income than in the lower strata. Large property or large income possesses immeasurably more capacity to bear taxes when taken in connection with ordinary needs, but especially so in the case of extraordinary needs. Hence the justice and equity of progressive taxation. But we cannot imagine, says Schaffle, that the progressive rate should ever reach one hundred per cent. In the actual structure of society large fortunes and incomes have important functions to fulfill, such as the duty of conducting large business en- terprises, the collection of capital, the employment of the fine arts, and the satisfaction of the extraordinary needs of an advanced civilization. Hence a limitless progres- sion would involve a crippling of necessary social ser- vices. ^^ Schaffle's theory depends upon his interpretation of "taxable capacity" or faculty. "Actual capacity," says he, is "the expression of the amount which the taxable economic unit can abandon to the relative support of the Theil, 189s, p. 218 et seq. The following quotations are from his ear- lier and more authoritative work. ""Die wirkliche — individuelle, conkrete, momentane — Leistungs- fahigkeit" as over against "die Durchschnittssteuerkraft." " "Die Steuerkraft verhalt sich einmal in den Hohenlagen der socialen Vermogens- und Einkotnmensschichten anders als in den Tiefenlagen. Grosses Vermogen, grosses Einkommen ist dem ord- entlichen, namentlich aber dem ausserordentlichen Bedarfsfalle ge- genubet schon in Durchschnitt ungleich steuerkraftiger." Schaflfle, Die Grundsatze der Steuerpolitih, 1880, p. 78. 270 American Economic Association [832 state, without crippling his own relative support."^® Or, as he puts it in another place, "the fundamental principle of public finance is the economically relative support of the State wants as over against a not less relative support of all non-state wants. "^'^ There are individual and col- lective wants, private and public wants ; and a truly eco- nomic method of dealing with the question must not subordinate the one set to the other. Schaffle unconscious- ly uses very much the same language as did Montesquieu more than a centuiy earlier.^^ It may be said in criticism of SchafHe that the reasons which he advances in defense of large fortunes are, in themselves, not very strong, and that his definition of faculty is not sufficiently precise. It does not afford any real test for determining how and to what extent we can measure the "crippling of one's relative support." So far as it has any meaning at all, it implies the consump- tion or sacrifice theory which Schaffle is so careful to avoid. The stress is really put upon consumption, not upon production. The theory thus finally resolves itself into an acceptance of the sacrifice doctrine. Stein, on the other hand, who upholds progressive tax- ation only in the later editions of his work, has not only nothing to say about equality of sacrifice, but regards faculty {Steuerkraft) exclusively from the standpoint of " "Die wirkliche Leistungsfahigkeit ist eben der Ausdruck dafiir, wie viel die steuerpflichtige Privatwirthschaft zu der im Budgetab- sciiied bestimmten verhaltnissmassigen Alimentation des Staates ab- lassen kann, oline die verhaltnissmassige Eigenversorgung zu ver- kiimmern." Schaiifle, op. cit., p. 23. '^ "Oberstes Princip der Finanzwissenschaft ist die volkswirth- schaftlich verhaltnissmassige Deckung des Staatsbedarfes gegenuber einer nicht minder verhaltnissmassigen Deckung aller nichtstaat- lichen Bedarfe." Ibid., p. 17. ^ The words of Montesquieu are : "Pour bien fixer ces revenus, il faut avoir egard et aux necessites de I'etat et aux necessites des citoyens." L'Esprit des Lois, xiii, p. 7. 833] Progressive Taxation in Theory and Practice 271 production. With every accumulation of capital the ca- pacity to form new capital increases, while the wants of the owner do not increase with its amount.^^ This he calls the "law of capital growth."-* He explains this more closely, however, as meaning that the capital-build- ing qualities vary really only with the periodical surpluses. A definite percentage of small capital possesses relatively more power to generate further capital than an equal percentage of large capital. A millionaire, he thinks, can never secure as much revenue out of each fraction of capital as a small trader. His percentage of profit is smaller. But the frequent reduplication of the smaller percentage finally makes the surplus larger than the less frequent reduplication of the higher percentage. Hence it is the surplus or the income, not the capital, which ought to be taxed progressively. Moreover, the rate of progression ought itself to decrease with the income.^* The point to be noted is that progressive taxation in Stein's judgment follows necessarily from the idea of production. Professor Wagner, as we know, bases his demand for progressive taxation on what he calls the socio-polit- ical principle. Nevertheless he regards this principle as an outcome of the faculty theory, as explained by the sacrifice theory. Faculty he conceives as depending on two sets of conditions, those which respect the acquisition '^ "Wohl ist es aber gewiss, das bei jedem Kapital die Kraft seiner Kapitalbildung mit seiner Grosse wachst . wahrend das Bediirf- niss seines Besitzers nicht in gleichem Grade grosser wird." Stein, Lehrbuch der Finanzwissenschaft, (4th ed, 1878), p. 421. ^ "Grossengesetz der Kapitalien." ^ "Der wahre progressive Steuerfuss soil auf der Zahl der Ein- kommenseinheiten beruhen, aber darf niemals als eirie rein geomet- rische, sondern nur als eine mit jener Zahl selbst abnehmender Progression auftreten." Op. cit., i, p. 451. Cf. sth ed. (1885), ii, p. 432. 272 American Economic Association [834 and possession of commodities, and those which respect the use to which these commodities are put in satisfying our own wants as well as those of others whom we are bound to look after. ^^ In both cases the faculty stands in the closest relation with the pressure of the tax, or the sacrifice occasioned by the tax. As regards the acquisi- tion of commodities everything depends on the manner of acquisition, whether entirely, partly or not at all through pure personal exertion. The same proportion of different kinds of income or property may thus represent a varying economic faculty or ability ; and in general the faculty may be said to increase as the element of labor decreases. Now, says Wagner, in the same way the vary- ing amount of the same income or property connotes a different faculty, in the sense that a greater amount of income means a more than proportional faculty. This argument, however, seems to be defective. Pro- fessor Wagner does not tell us why a varying amount of property connotes a different faculty. The larger sum may be the result of labor, the smaller one not. On this hypothesis the very reverse of the above argument would be true. From the standpoint of production Professor Wagner hence does not prove his case. He substantially rests his argument on the equality-of-sacrifice theory, from which he deduces progressive taxation, on the ground that the sacrifice varies with the varying amount of the "free" income.^® Here again, however, he stands quite or almost alone in trying to prove that the ^"Die wirthschaftliche Leistungsfahigkeit einer Person liegt in zwei Reihen von Momenten, solchen welche den Erwerb und Besitz VOH Sachgutern, und solchen, welche die Verwendung dieser Giiter zu eigner oder anderen pflichtsmassig zu ermoglichenden Bediirf- niss Befriedigung betreffen." Wagner, Finamwissenschaft, ii (2nd ed., 1890), § 184, p. 444. ="■ Wagner, op. cit., ii (2nd ed., 1890), § 184, p. 446. 835] Progressive Taxation in Theory and Practice 273 equality-of-sacrifice theory leads to progressive taxation, only on the assumption that it is the object of the state to remove inequalities of fortune. Unless we grant this, so rttns the rather dubious reasoning, equality of sacrifice can lead only to proportional taxation. ^'^ Dubious rea- soning, we say, because the sacrifice imposed on the indi- vidual depends on the property taken away from him, not on any theory of state activity. Professor Wagner's dis- cussion is colored all through by this peculiar view of what he calls the fundamental principle of taxation. Von Scheel takes about the same position as Wagner. He defines faculty as "the whole income (after deducting expenses of production) which can be demanded for pur- poses of taxation with due regard for the preservation of the standard of life.^* This standard of life, says von Scheel, must be envisaged from the socio-political point of view. In order to enable the lower classes to preserve this standard, taxation must be progressive, for the lower down we go in the social scale, the smaller will be the proportion of income to standard of life. It is the function of the state to preserve the balance between the classes.^® The socio-political argument of Wagner and von Scheel has already been criticised.*" We may, therefore, pass it over in this place. Much the same may be said of the very short discussion by Professor von Heckel in his re- '^ Wagner, op. cit., p. 4S5, and esp. 381-386. ^ "Das Maas der Steuerkraft des Staatsburgers ist sein gesammtes nach Abzug der sachlichen Produktionsauslagen fur seinen Haus- halt disponibles Einkommen, welches unter Beriicksichtigung und Wahrung seiner Lebenshaltung fiir die Steuer in Anspruch genom- men warden kann." v. Scheel, "Die progressive Besteuerung." In Tiibinger Zeitschrift fiir die gesammte Staatswissenschaft, vol. 31 (187s), p. 284. ^ Ibid., pp. 288, 292-296. " Above, pp. 130 et seq. 274 American Economic Association [836 cent treatise on the subject.^^ Professor Cohn, in his ad- mirably written work on the science of finance, also advo- cates progressive taxation,*^ but as it does not add any- thing of moment to Neumann's views, it also may be neg- lected here. The Austrian economist, Meyer, defines faculty vaguely as the "whole of the economic conditions which make it possible or easy for the individual to get together the tax."^^ That is to say, we must regard not alone his prop- erty and income, but the various modes in which he ac- quires the income and the calls upon him for consumption, or his necessary expenses. As soon, however, as we pay regard to his wants, we are dealing with the idea of sacri- fice. The principle of faculty receives its real interpre- tation only through the principle of equal sacrifice. But, asks Meyer, what does the principle of equal sacrifice mean? Sacrifice of what? The common argument that a proportional tax causes a smaller sacrifice in the case of large than of small in- come, because it takes away the means of enjoyment only from the less urgent wants, proves too much. For the same thing is true of every progressive tax. It is a neces- sary consequence of the differences in the satisfaction of wants. If we should attempt to arrange taxes so that they would always cut off the means of satisfying equally pressing wants, it would be necessary to take from the larger income the whole difference between it and the smaller income. This, however, is obviously absurd. It " M. V. Heckel, Finanzwissenschaft, i, 1907, pp. 184-185. " Cohn, Finanzwissenschaft, 1889, § 212. Cf. the English transla- tion by Veblen, under the title, The Science of Finance, 189S, pp. 310-332. " "Die Gesammtheit der wirthschaftlichen Momente, welche der Wirthchaft die Aufbringung der Steuer ermoglichen oder erleich- tern." R. Meyer, Die Principien der gerechten Besteuerung, 1883, p. 311- 837] Progressive Taxation in Theory and Practice 275 would be communism, not justice. ^^ In the same way- Neumann's theory does not seem to Meyer convincing. It leads logically only to the clear-income theory, or to the exemption of a certain minimum with proportional taxation thereafter.^^ Meyer endeavors to avoid these objections by declaring that the sacrifice in question consists not "in the intensity of the wants which remain unsatisfied, in consequence of the tax, but in the measure in which the tax increases the average intensity of the last wants actually satisfied."^^ He confesses that even this interpretation of equal sacri- fice cannot serve as more than a probable proof of the ne- cessity of progressive taxation. In the case of a low rate of tax, it is hard to say whether the sacrifices are equal or not. When we take high rates, however, the decision does not seem to him doubtful. In the case of a tax amounting to one-half or one-third of the income, a man who is reduced from $1,200 income to $600 or $800 must beyond all question curtail his wants far more than he who was reduced from $2,400 to $1,200 or $1,600. Inasmuch as it is legitimate to conclude that the effect of a smaller reduction of income will remain relatively the same, it may be asserted that the principle of equality of sacrifice connotes progressive taxation. *'' This theory of Meyer has been discussed in the body of "Meyer, op. cit, p. 331. "'This objection, as Cohen-Stuart, Bijdmge, etc., p. 119, points out, is not strictly true. °°Von dem hier vertretenen Standpunkte aus werden nun zwar die eben bekampften Begriindungen vermieden, indem wir das Opfer nicht in der Intensitat der in Folge der Steuer unbefriedigt bleibenden Bediirfnisse, sondern in dem Masse erblicken, in wel- chem die durchschnittliche Intensitat der letzen zur Befriedigung gelangenden Bediirfnisse in Folge der Steuer erhoht wird." Meyer, op. cit, p. 332. "/fcjU, p. 333- 276 American Economic Association [838 this chapter.^* We have seen that it rests on a mis- conception, and that in reaUty it does not alter the ac- cepted theory in any important particular. A recent ingenious attempt to defend progressive taxa- tion against the common charge of arbitrariness has been made by the Scandinavian economist Cassell. Cassell starts out from the doctrine of the exemption of the minimum of subsistence, but he puts a different interpre- tation upon the old conception of "necessaries." The necessaries of life, he thinks, differ with the grade of so- ciety. If, therefore, it is conceded "that a tax which is to produce an equal sacrifice must not take away any of those means which are needed to cover essential wants, then, for the sake of consistency, the deduction must be made greater for the higher classes of society."^* Or, as he puts it in another place :"The income which it is nec- essary for a person's economical existence, increases on an average with the total real income, but naturally more slowly than this."*" This is due to the fact that by "necessaries" we must understand not the necessaries of merely physical subsis- tence, but what Professor Marshall calls "the necessa- ries of efficiency."*^ Thus in a very simple way we reach a mathematical and defensible scale of progression, for "if the deduction increases more slowly than the in- come, then clearly the remainder increases more rapidly than the income. A proportional tax levied on the re- mainder is thus a progressive tax on the total income." In other words, equal sacrifice means deduction of the " Above, p. 213. " Cassell, "The Theory of Progressive Taxation," in The Econo- mic Journal, xi (1897), P- 48i- *• Ibid., p. 484. "A. Marshall, Principles of Economics, 4th ed., p. 137. '839] Progressive Taxation in Theory and Practice 277 necessaries of efficiency and a proportional tax on the re- mainder. The weakness in this interesting attempt to solve the problem of precision lies in the indeterminateness of the test proposed. This is virtually recognized by Dr. Cassell himself when he tells us that "views will diverge con- siderably when it comes to the arithmetical determination of the necessaries of efficiency of the different classes of society. If we allow very high margins for the fullest efficiency of the manual laborers, and for the lower mid- dle class, we will get a very strong progression. On the other side, if we think that the lower classes need nothing more than they have, indeed can make no good use of more, we should perhaps limit their deductions to the barest minimum of physical subsistence, and thus come to a nearly proportional scale. We see thus that the two principles which struggle with one another in the battle of progressive taxation, the democratic and the plutocratic principle, are still acting with full force in the limited field we have allowed for the discussion."*^ In reality, however, the limitation of the field to which Dr. Cassell refers is of very slight consequence when compared to the importance of the struggle between the two principles; for the range of a principle which leads either to "a very strong progression" or to a "nearly pro- portional scale" can not be called limited. As a matter of fact, therefore, the discussion is not materially advanced at all. ' Cassell, op. cit., pp. 487, E. The Dutch Writers. We come finally to the Dutch economists who have worked out the principle of progressive taxation through the application of the marginal utility theory to the doc- trine of equal sacrifice. The most prominent have been Pierson, Treub, van der Linden and Bok.-^ Their argu- ments, however, are approximately identical, and have already been summed up.^ Above all their chief the- ories have been supplanted by a more recent work, which deserves a fuller treatment. We refer to the book of Cohen-Stuart. Cohen-Stuart begins with defining equality of sacri- fice. Regarded from the subjective point of view, there are four consequences of a tax: (i) the sacrifice of the money taken; (2) the sacrifice of enjoyments which this money might have procured; (3) the sacrifice of the pro- portion which this amount of enjoyment bears to the total enjoyments at the disposal of the taxpayer — which he calls, for short, the sacrifice; (4) the moral effect pro- duced, or the pain. With the latter economics has noth- ' The chief passages may be found in : N. G. Pierson, Grondbeginselen der Staathuishoudkunde, 2nd ed.^ (1886), p. 312. Also an article in Gids, February, 1888, esp. p. 308. M. W. F. Treub, Ontwikkeling en verhand van de Rijks- Provin- ciate- en Gemeente-helastingen in Nederland, 1885, p. 517. Cort van der Linden, De theorie der Belastingen, 1887, pp. 89-. 100. W. P. J. Bok, De Belastingen in het Nederlandsche Parlement van 1848-1888, 1888, pp. 177-178. Two minor works are an article by A. W. Mees, "De progressieve inkomstenbelasting," in the (Dutch) Economist, 1889, p. 437; and Minderhoud to Sneek, "Bijdrage tot de Kennis der Inkomstenbelas- ting," in Vragen van den Dag, vol. iv (1889), no. 5. 'Above, p. 217 et seq. 841 J Progressive Taxation in Theory and Practice 279 ing to do. Now, equality of money sacrifice means that precisely the same sum be taken away from every one; equality of sacrifice of enjoyments means that all shall be deprived of equal enjoyments; equality of sacrifice means that everybody is to pay so much that the total enjoyment of each shall be diminished in relative pro- portion. That is, equality of sacrifice means "propor- tional sacrifice of enjoyments."^ Cohen- Stuart takes a long time to explain this, but it is in reality nothing new, being precisely what Mill expressed in other words.* Cohen- Stuart then discusses the idea of faculty (draag- vermogen), and accepts von Scheel's definition. Faculty necessarily implies exemption of the minimum of subsis- tence ; and since faculty is conditioned by equality of sac- rifice, the demand of just taxation reads as follows : To tax the individual in such a way that, above all, the amount of enjoyments of which he is deprived through the tax may be proportional to the total amount of en- joyments attainable through his economic condition, de- ducting that part which consists in the satisfaction of his absolutely necessary wants.^ '"GeUjk geldsoffer zoude dus verkregen worden, door ieder een gelijke som te laten opbrengen; gelijk genotsoffer, door ieder zooveel te laten opbrengen, dat alien een gelijke hoeveelheid genet derven; gelijk offer eindilijk, door ieder zooveel te laten betalen, dat het totale genet voor alien in dezelfde verhouding, evenredig dus, ver- minderd wordt, door m. a. w. te vergen een evenredige hoevelheid genot." A. J. Cohen-Stuart, Bijdrage tot de Theorie der Progres- sieve Inhomstenhelasting, 1889, p. 33. * Professor Edgwerth takes exception to this statement in his article on "The Theory of Taxation" in The Economic Journal, vii (1897), P- 557- But see above, pp. 214, 215. "'De belastingschuldigen zoodanig te belasten, dat voor alien de hoevelheid genot die zij door het betalen der belasting moeten der- ven, aan de totale hoevelheid, direct tengevolge van hun econom- ischen toestand, verkrijgbaar genot, met uitzondering van dat, het- welk in de vervuUing der behoeften van neoddruft bestaat, even- redig zij." Cohen-Stuart, op. cit., p. 58. 28o American Economic Association [842 This problem, he thinks, can be solved only by mathe- matics, since the relation between enjoyment and income is really a mathematical relation. Adopting the nomen- clature of his Dutch predecessors and of Jevons, he shows how the marginal utility of any commodity or of any quantity of income varies in some inverse ratio to the whole quantity. The curve which expresses this change he terms the line of utility (nuttigheidslijn) . He takes for granted that the line of utility will gradually fall, but then proceeds to discuss the question whether this necessarily leads to progressive taxation. We have already seen the acutely constructed tables® by which he proves that the arguments hitherto used may be turned into a defense of proportional, or of regressive, as well as of progressive taxation, and that progressive taxation cannot be declared to be a necessary result of a fall in the line of utility, in order to secure equality of sacrifice.^ He then proceeds with his attempt to show how a definite rate of progression may be logically and mathematically constructed, and how progressive taxation may be rescued from the charge of arbitrariness. This constitutes the really constructive part of the work. Cohen-Stuart starts with the hypothesis which was al- ready made by Bernouilli, the Russian mathematician, in 1 730, that the marginal utility of a definite part of income varies in inverse proportion to the- total income ; or in other words that the same percentage of income affords everyone an equal satisfaction, or that the owner of $1,000 will feel the loss of $1 just as little or as much as the owner of $10,000 will feel the loss of $10, or the owner of $50,000 the loss of $50. This would of course mean proportional taxation. If, however, we deduct a "Above, pp. 219 et seq. Cf. the review of Cohen-Stuart's book in Political Science Quarterly, vol. vii (1892), p. 337. ' Cohen-Stuart, op. cit., p. 123. 843] Progressive Taxation in Theory and Practice 281 certain minimum of subsistence (which Cohen- Stuart thinks an indispensable condition in ascertaining real taxable ability), we should have the following scale of rates of taxation, worked out by him in detail:^ Minimum exempt, $250. Minimum exempt, $500. Ratio of marginal to Ratio, etc.. Ratio, etc., Ratio, etc.. Income, total ability 2 per cent. z per cent. a per cent. I per cent. $S0O 0.69 1.38 0.00 0.00 1,000 1.38 2.73 0.69 1.38 2,000 2.06 4.07 1.38 2.73 5,000 2.9s 5.82 2.28 4.50 10,000 3.62 7.11 2.9s S.82 20,000 4.29 8.39 3.62 7.II 50,000 S-i6 10.05 450 8.80 100,000 5.82 11.30 5.16 10.05 200,000 6.47 12.51 5.82 11.30 500,000 ,7.32 14.10 6.67 12.00 1,000,000 7.96 15.28 7.33 14.10 Cohen-Stuart next proceeds on the supposition that the actual line of utility differs from his hypothetical line. Taking the figures of the last line, and assuming that the actual line curves either more or less than this hypotheti- cal line, he constructs the following three tables accord- ing as the marginal utility varies inversely as the cube root of the square or of the fourth power of the in- come. The truth, he thinks, certainly lies between these extremes : TAXES WHICH ARE TO PRODUCE EQUALITY OF SACRIFICE. According to the line According to the According to the Income. of the greater curve, hypothetical line. line of less curve $500 $10 $10 $10 1,000 25 20 16 2,000 64 40 25 5,000 220 100 46 10,000 5SS 200 74 20,000 1,400 400 117 50,000 3,500 1,400 293 100,000 7,000 2,000 58s 500,000 35,000 10,000 2,92s 1,000,000 70,000 20,000 5,850 ' op. cit., p. 132. 282 American Economic Association [844 It might appear that with these great variations in the figures the rate of progression of the tax would be very different. This, however, is not the case. In order to make a comparison he assumes that an income of $5,000 pays in each case a tax of four and a half per cent, with $500 exempted as minimum for subsistence. The result would then be as follows : According to the line Income. of greater curve. $500 0.00 1,000 1.04 2,000 2.30 5,000 4.50 10,000 6.57 20,000 9.11 50,000 10.33 100,000 II. 19 200,000 12.01 500,000 13.08 1,000,000 13.88 We see what a striking similarity in the percentages results, notwithstanding the great differences in the taxes paid. Since he has chosen two extremes, Cohen-Stuart thinks that he is justified in asserting that the mean (from which the extremes vary so little) is approximately the correct scale of progressive taxation. In other words, the conclusion is that when we neglect the minimum of subsistence, the theory of equality of sacrifice must result in a progressive scale which does not greatly vary from the original hypothetical scale, as long as we do not reach the very large incomes. In the case of very large incomes the rate of progression tends to de- crease until the progression turns into proportion. Thus, the general rule may be laid down : Arithmetical increase of the rate with geometrical increase of the income up to According to the original line. According to the line of less curve. 0.00 0.00 1.38 1.75 2.73 3.13 4-50 4-50 S.82 5-29 7.11 5-92 8.80 8.27 10.05 10.06 11.30 11.82 12.90 14.09 14.10 15-76 845] Progressive Taxation in Theory and Practice 283 a definite point when progression is replaced by propor- tion. » The investigations of Cohen- Stuart are acute and sug- gestive, but it cannot be said that he proves his point, or that he is able to lay down an approximately exact neces- sary scale of progression. His original table is confess- edly only hypothetical and arbitrary; and it is difficult to see how three hypothetical scales can prove the existence of one real scale. All three may be perfectly justifiable or completely unjustifiable in themselves ; but the mere fact that they approximately agree does not in the least prove that any of them is correct. They may all be wrong. We do not know whether the marginal utility is inversely proportional to the income, or to the cube root of the square, or to the cube root of the fourth power, or of any power of the income. One table is as good as an- other, but each is equally incapable of proof. Cohen- Stuart's tables depend not only on the arbitrary assump- tion of a definite ratio of marginal utilities, but also on the equally arbitrary assumption of a definite minimum of subsistence. As soon as we exempt a different minimum, or do not exempt any minimum at all, the scale is alto- gether changed. To measure the amount of sacrifice in such a manner as to produce a mathematical equality of rate is quite impossible. Mathematics cannot help us here, because the very first conditions fail us — the power to gauge with precision the mathematical relation of the marginal utilities. Psychological relations cannot be re- duced to exact quantitative forms. Thus Cohen- Stuart's ' "Arithmetische klimming van het percentage bij geometrische klimming van het inkomen, zoolandig men nit in zeer hooge per- centages komt." Op. cit., p. 168. 284 American Economic Association [846 laborious investigations do not succeed in creating any- thing more positive than did those of his predecessors.^" ^ The essay of Graziani, "La Ragione progressiva del Sistema Tributario in rapporto al Principio del Grado Finale d'Utilita," in Giornale degli Economisti, Serie Seconda, Anno ii, (1891), p. 156, follows the work of Cohen-Stuart, and accepts his conclusions, with- out recognizing the inherent weakness of the argument. In a later work, however, Graziani parts company with Cohen-Stuart, for the reasons mentioned above, but still upholds progressive taxation, basing his defense on the proposition that progressive taxation is necessary in order to attain equality of value, when the diminution in the marginal grade of utility takes place, not in the same propor- tion as the increase of income, but in a greater proportion. (See Graziani, Instituzioni di Scienza delle Finanze, 1897, p. 304.) On the other hand, the work of the Spanish economist Piernas-Hurtado, Tratado de Hacienda Publica, 1891, confesses that no exact or mathematical relation can be established. But the author neverthe- less posits the principle of "liquid assets," haheres liguidos. as the basis of taxation, meaning by this a determination of the individual economic situation, as gauged by the necessary expenses. This, he thinks, means neither proportional nor progressive taxation, but an adjustment to each individual case. Cf. vol. i, pp. 302, 312. This is obviously too vague to be made the basis of a scientific discus- sion. F. Recent English and American Writers. More recently another interpretation of the sacrifice theory has been advanced by Professors Edgeworth and Carver. Professor Edgeworth claims^ that the real ethical principle is not equal sacrifice but minimum sacri- fice. Starting from the Benthamite utilitarianism, he contends that the greatest happiness principle implies that "the total net utility theory procured by taxation should be a maximum." This, however, he thinks "reduces to the contention that the total disutility should be a minimum." It follows from this "in general that the marginal disutil- ity incurred by each tax payer should be the same."^ Hence, instead of "equal sacrifice" we should speak of "equi-marginal sacrifice,"^ i. e. that the margin of sac- rifice of each should be the same. Since the sacrifice of each would at this point be the least in amount, we have the realization of the principle of "minimum sacri- fice." Professor Edgeworth is too keen a thinker not to real- ize what this implies. He tells us that the "solution of the problem is that the higher incomes should be cut down to a certain level," or that "the richer should be taxed for the benefit of the poorer up to the point at which complete equality of fortunes is attained." Yet as a practical man he shrinks from this conclusion. "The acme of socialism is thus for a moment sighted, but it is immediately clouded over by the doubts and reservations." The "enormous in- terposing chasms which deter practical wisdom from '"The Pure Theory of Taxation," in Economic Journal, vii (1897), pp. SSI-S7I. ' Op. cit, p. SS3. ■ Op. cit, p. 564. 286 American Economic Association [848 moving directly toward that ideal" are, according to Pro- fessor Edgeworth, the dangers of any forcible equaliza- tion of wealth which appeared to Sidgwick to consist in a diminution of production and an increase of popula- tion,* and to Mill to consist in the menace to liberty. The objection will at once arise that a theory which according to the confession of its author is so com- pletely inapplicable is perhaps of no real validity. Its im- practicability renders it subject to grave suspicion. More- over, as has been well pointed out by Dr. Weston,^ not only is it by no means certain, even from the standpoint of "pure theory" that the largest sum total of utility is the real aim of political action, but it is also true that the minimum-sacrifice theory assumes as a basis of action a principle which is quantitatively as indeterminable as any- thing that is to be found in the equal-sacrifice theory of Mill, Sax or Meyer. As Weston furthermore says, it is "strange that one who is par excellence a mathematical economist should find satisfaction in a theory based on a principle that does not even permit of an exact mathe- matical expression," since, in the words of Edgeworth himself, "the reasoning from the principle of minimum sacrifice assumes no exact relation between utility and means."® The minimum-sacrifice theory is thus really not a whit more successful than the equal-sacrifice theory and pos- sesses the additional disadvantage of being less applicable to the problems of actual life. * It might appear from Professor Edgworth's statement that Sidgwick approved of the minimum sacrifice theory. This is, how- ever, not the fact. See above, p. 262. ° Stephen F. Weston, Principles of Justice in Taxation, in Co- lumbia University Studies in History, Economics and Public Law, vol. xvii, no. 2, (1903), p. 205. ' Edgeworth, op. cit., p. 567. 849] Progressive Taxation in Theory and Practice 287 Professor Carver, who reached similar conclusions at almost the same time, but in an independent fashion, lays down the principle somewhat differently.'' According to Professor Carver the really logical equality of sacrifice is the equality of marginal sacrifice, which is only another way of putting the principle of minimum sacrifice. The true criterion of justice in the distribution of the burdens of taxation is, according to him, the least evil to the least number. The evils of taxation, however, are two-fold — the sacrifice to those who pay the taxes and the repression of industry and of enterprise which the taxes occasion. The minimum of repression is secured by an equality of sacrifices; but the minimum of total sacrifice is attained by an extreme form of progressive taxation, which re- sults in the greatest inequalities of sacrifice and which would have the most violent and disastrous repressive consequences. Hence sacrifice alone cannot be considered as the most important consideration, and it is only by com- bining the two points of view that we can reach a prac- tical progressive scale.^ In another place, however, Professor Carver puts his thought a little differently. There are really two kinds of sacrifice — the direct sacrifice to the individual in hav- ing his income curtailed by the amount of the tax, and the indirect sacrifice. Any tax, which represses a desirable industry or form of activity, imposes a sacrifice not only upon him who pays it, but also upon those who are de- prived of the services or the products of the repressed in- dustry. Taxes should, therefore, be apportioned in such a way as to impose the. smallest sum total of sacrifice of 'T. N. Carver, "The Ethical Basis of Distribution," in the Annals of the American Academy of Political and Social Science, vi (1895), p. 97; and "The Minimum Sacrifice Theory of Taxation," in the Political Science Quarterly, xix (1904), PP- 66-79. 'Annals of the American Academy, vi, p. 99. 288 American Economic Association [850 these two kinds.'' This means a moderately progressive rate, because the drastic scale which would follow from the principle of direct sacrifice would have to be counter- balanced by the somewhat composite scale which would ensue from the principle of indirect sacrifice. The weakness of this ingenious argument is due to the fact that the indirect sacrifice of which Professor Carver speaks has no necessary relation to the progressive scale. The repressiveness of a tax is due far more to the nature of the tax than to any scale of graduation. In the case of certain taxes on production a high proportional tax would be exceedingly repressive; while in the case of other taxes, not even a progressive tax would be repres- sive. As Professor Carver himself points out, a progres- sive tax on land would not repress ownership of land, a progressive tax on inheritances would not repress inher- itance. The same argument might be applied to general income taxes, where the incomes cannot be brought into relation with any particular kind of production, and where a progressive rate would thus not repress any particular product. The argument, moreover, would equally apply to a general property tax, where the tax is assessed on no particular class of property, but on the total wealth of the individual. We must not confuse the two largely disparate facts. The indirect sacrifice of which Professor Carver speaks may have no connection at all with the direct sacrifice of the taxpayer, and according to Professor Carver's own doctrine there is no reason why taxes on general property or income or land or inheritances should not be arranged according to a well-nigh confiscatory scale.'" The mini- ' Political Science Quarterly, xix, p. 72. ""A progressive tax is therefore to be commended unless the rate of progression is made so high as to discourage the receivers of large incomes from trying to increase them." Political Science 851] Progressive Taxation in Theory and Practice 289 mum-sacrifice theory thus to all intents and purposes be- comes equivalent to the confiscatory or socialistic theory which has been discussed above. Hence neither in the version of Professor Edgeworth nor in that of Professor Carver does the doctrine of mini- mum sacrifice afford us any real help or constitute any im- provement upon the doctrine of equal sacrifice. Quarterly, xix, p. 79. No tax short of one hundred per cent would completely discourage this, and at all events it would take far more than the "moderately progressive tax," of which Professor Carver speaks, to accomplish this result. CHAPTER IV. CONCLUSION. We have thus far learned the chief arguments urged for and against progressive taxation. We have seen the inadequacy of the sociaHstic as well as of the compensa- tory theories in favor of, and the weakness of the benefit theory in opposition to, the doctrine of progression. We have analyzed more closely the equal-sacrifice doctrine and have found that it is inadequate to serve as the basis of a definite and infallible scale of progression. Are we then to abandon progressive taxation in theory ? Before answering this question, it will be desirable to revert to the fundamental conception of faculty or abil- ity, which is after all the best standard we have of the measure of general obligation to pay taxes, and to seek to ascertain what the faculty theory in its wisest interpre- tation can teach us in the matter. President Walker's definition of faculty is well known.^ Faculty, says he, is "the native or acquire d power cif_pro- duction." If, however, we analyze faculty more closely, in the sense in which we instinctively use the word in tax matters, we see that it means something more than that. It not only implies native or acquired power of production, but includes at least also the opportunity of putting these powers to use, as well as the manner in which the powers are actually employed and the results of their use as meas- ured by the^eriodicaror permanent accretion tolhe^fo- ducer's possessions. We have seen how the original idea was that represented by President Walker, but how this ^F. A. Walker, "The Bases of Taxation," in Political Science Quarterly, iii (1888), p. 14. 853] Progressive Taxation in Theory and Practice 291 was soon supplanted by the more real and practicable tests, first of property (or permanent accretion), then of in- come (or periodical accretion). But, furthermore, fac- ulty connotes an additional conception. It means not only powers of production or results of powers of production, but also the capacity to make use of these powers or of these results — the capacity in other words of enjoying the consequences of the exertions. It is this latter con- ception which has been developed by recent writers, al- though they have carried it to an extreme just as one- sided as that represented by the advocates of the earlier theories. The elements of faculty, then, are two-fold — those connected with acquisition or production, and those connected with outlay or consumption. What is the ap- plication to the topic in hand? If we regard only the first set of elements, it is evident that the possession of large fortunes or of large incomes in itself affords the possessor a decided advantage in aug- menting his possessions. The facility of increasing pro- duction frequently grows in more than arithmetical pro- portion. A rich man may be said to be subject tS a cer- tain sense to the law of increasing returns. The more he has, the easier it is for him to acquire still more. The initial disadvantages have been overcome. This was emphasized already by Adam Smith, when he said: "A great stock, though with gmall profits, generally increases. faster than a small stock with great profits. Money, says the proverb, makes money. When you have got a. little, it is often easy to get more. The great difficulty is to get that little."^ In fact the same idea was origin- ally pointed out by Rousseau two decades earlier as an additional argument for progressive taxation. "The dif- ficulty of acquisition," he tells us, "always grows in pro- " Wealth of Nations, book i, chap. 9. 292 American Economic Association [854 portion to one's needs. Nothing is made with nothing: that is as true in business as in physics. Money is the seed of money, and the first pistole is sometimes more difficult to earn than the second million."* While the native power of production in other words remains as before, this "acquired power" has greatly augmented. Hence, from the point of view of production faculty may be said to increase more rapidly than fortune or income. This element of taxable capacity would hence not illog- ically result in a more than proportionate rate of taxation. On the other hand, the elements of faculty which are connected with outlay or consumption, bring us right back again to the sacrifice theory. While the idea of faculty includes that of sacrifice, however, the two ideas are not coextensive. Faculty is the larger, sacrifice the smaller conception. Faculty includes two sets of considerations, sacrifice only one. While the sacrifice theory in itself, as we have seen, is not sufficiently cogent to lead to the de- mand for any fixed scale of progression, its influence in the other direction is assuredly not strong enough to out- weigh the productive elements of faculty, which seem to imply progressive taxation. In fact, we may go farther and say that the sacrifice theory, or consumption element in faculty, can certainly not be used as an argument in- evitably leading to proportional taxation. If it does not necessarily lead to any definite scale of progression, much less can it necessarily lead to a fixed proportional taxa- tion. But if we never can reach an ideal, there is no good reason why we should not strive to get as close to it as ' "La difficulte d'acquerir croit toujours en raison du besoin. On ne fait rien avec rien; cela est vrai dans les affaires comme en physique; I'argent est la semence de I'argent, et la premiere pistole est quelquefois plus difficile a gagner que le second million." Rous- seau, Discours sur I'Oeconomie Politique, 1758, p. 63. See above pp. 192-4. 855] Progressive Taxation in Theory and Practice 293 possible. Equality of sacrifice, indeed, we can never at- taki absolutely or exactly, because of the diversity of indi- vidual wants and desires. It is nevertheless most proba- ble, however, that in tile majoHty of normal and typical cases, we shall be approaching more closely to the desired equality by some departure from proportional taxation. In certain cases even, regressive tsixation might accom- plish the result best, in other cases proportional taxation would be the most serviceable. If we take a general view, however, and treat of the average man — and the govern- ment can deal only with classes, that is, with average men. — it seems probable that o^ the whole less injustice will be done by adopting some form of progression than by following the universal rule of proportion. A strictly proportional rate will make no allowance for the exemp- tion of the minimum of subsistence. It will be a heavier burden on the typical average poor man than on the typi- cal average rich man. It will be apt to be felt with rela- tively more severity by the average man who has only a small surplus above socially necessary expenses, than by the average man who has a proportionally larger surplus. It will in sho|± be likely in normal cases to curtail dispro- portionately the enjoyments of different social classes. Hence, if #e base our doctrine of the equities of taxa- tion on the theory of faculty, both the production and the consumption sides of the theory seem to point to progres- sive taxation as at all events neither more illogical nor more unjust than proportional taxation. It may, indeed, frankly be conceded that the theory of faculty cannot de- termine any definite rate of progression as the ideally just rate. To this extent there seems to be some truth in Mill's contention that progressive taxation cannot give that "degree of certainty" on which a legislator should act ; as well as in McCuUoch's assertion that when we abandon 294 American Economic Association [856 proportion we "are at sea without rudder or compass."* It is true that proportion is in one sense certain, and that progression is uncertain. The argument, however, proves too much. An uncertain rate, if it be in the gen- eral direction of justice, may nevertheless be preferable to a rate which, like that of proportion, may be more certain without being so equitable. ^ |alf a loa f is better than no bread. _ Stability is assuredly a good thing. It is highly questionable, however, whether a stability which is nec- essarily unjust is preferable to an instability that works in the general direction of what is recognized as justice. All governmental actions which have to do with money rela- tions of classes are necessarily more or less arbitrary. The fines imposed by the courts, the fixing of the rates of im- port duties or of excise taxes are always, to a certain ex- tent, inexact. In truth, a strict proportional tax, if we accept the point of view mentioned above, is really more arbitrary as over against the individual taxpayers, than a moderately progressive tax. The ostensible "certainty" hence involves a really greater arbitrariness. In the same way, the other arguments often advanced against progression seem to be in some measure destitute of foundation.^ *This familiar argument, as to the arbitrary character of pro- gressive taxation, is, perhaps, best put by Lecky, Democracy and Liberty, i, p. 286 et seq. "The objections commonly urged are well summed up in Bastable, Public Finance, 1892, pp. 285-289; 3rd ed., 1903, pp. 308-313. They are also impressively catalogued in the brief of ex-President Harri- son, Messrs. Guthrie and Prussing, acting as counsel for plaintififs in the Illinois Inheritance Tax Cases, before the Supreme Court of the United States in 1897. See esp. pp. 42 et seq. of the brief, as well as the oral arguments of Messrs. Guthrie and Harrison. Among the more important of the earlier arguments opposed to progressive taxation must be mentioned those advanced at the time of the French Revolution, especially by Dauchy, Saint-Aubin and JoUivet. Cf. Dauchy, Rapport contre le Systime de I'Impot Pro- 857] Progressive Taxation in Theory and Practice 295 The most common objection is that of confiscation. This can be traced back as far as the time of Guicciardini. Confiscation, he thinks, is an inevitable result of progres- sive taxation. "It lies in the nature of things that the be- ginnings are slight, but unless great care is taken the rates will multiply rapidly, and finally reach a point that no one gressif fait a la Seance du 10 Frimaire, an IV (Dec. I, 179s) ; Saint- Aubin, Encore quelques Reflexions sur I'Empruni ForcS, n. d. (1795) ; Jollivet, De I'lmpot Progressif et du Morcellement des Patrimoines, an V (1796) ; Jollivet, Petition au Conseil des Cinq Cents centre I'Emploi des Progressions dans les Contributions et les Emprunts Fords, II Thermidor an VII (1798). Jollivet, who made the most elaborate attempt to refute the progressive principle, sums up his objections as follows : "II detache I'individu de I'exercice de son Industrie et du droit de propriete qui en est la recompense. "II est contraire au pacte social et a la constitution. "II corrompt toutes les classes de la societe, riches et pauvres. "II detruit successivement les productions de la nature et de I'industrie par la division et le morcellement a I'infini des patri- moines ; de-la la disette, puis la famine. "II augmente I'interet de I'argent. "II viole ouvertement le principe de I'egalite proportionnelle entre les localites et les communes. "II intervertit les fortunes, en rendant plus riches qu'un autre celui qui I'etait moins. "II porte la corruption jusques dans ses propres agens. "II degrade les autres contributions publiques, et conduit tres rapidement a la banqueroute. "II apprend aux hommes a se mieux derober a I'impot. "II eteint en eux I'amour de la patrie. "Cet impot est done le plus redoubtable ennemi, I'adversaire le plus dangereux que la malveillance puisse jamais opposer a I'etab- lissement ou a la conservation de la republique. "Qu'est-ce done I'impot progressif. Une loi agraire deguise im- possible a realiser. Veut-on insister . . . Alors I'impot progressif se detruit de lui-meme, il ne pent avoir aucune duree, en un mot, il porte avec lui son principe de destruction, puisque sa matiere im- posable doit se derober successivement a tons les egards, et dispa- raitre enfin par la division et le morcellement des patrimoines. "Ainsi done, en derniere analyse, c'est le vautour dechirant ses propres entrailles." De I'impot Progressif, pp. 94-96. 296 American Economic Association [858 could have foreseen.^ The natural result of this is that virtue, industry and application are replaced by laziness, rapacity, treachery, foul words and worse deeds. ^ All of which things are as sweet morsels to the taste, the effects of which, however, will finally show that we have been dealing with a poison."* Although the substance of this argument has frequently been repeated in modern times, the objection that progression is confiscation because it must finally end by swallowing up the entire capital may be obviated, as we have seen, by making the rate of pro- gression itself degressive ; so that it would become impos- sible to reach one hundred per cent or any like percentage of large fortunes. The objection that it is a fine imposed on industry and, saving is really applicable not to progressive taxation as such, but to the whole system of taxation on property or income. The logical conclusion from this would be the demand for taxation only on expense; and even that would be to a certain extent a tax on industry. It is dif- ficult to see, however, why industry and saving should not be taxed, if they increase capacity to pay taxes ; and it is still more difficult to see how we can avoid taxing indus- During the revolution of 1848 the objections to progressive tax- ation were again vigorously advanced in France, especially by Parieu in a legislative committee report, and by Serviere and Charency in the legislature. These are all summed up and discussed in detail by Vauthier, De I'Impot Progressif, 1851, pp. g, 55. As to Parieu, see above, p. 231. ° "E la natura della cose che i principii cominciano piccoli ; ma si I'uomo non avvertisce, moltiplicano presto e scorrono in luoglio che poi nessuno a tempo prowedervi." Guicciardini, p. 337. Cf. op. cit, above on page 135. ' "D'onde in luogo della virtu, della industria, dello affaticarsi, nascono ozio, rapacita, ignavia e male parole e peggiori fatti." * "Le quali cose paranno al gusto cibi dolci, ma gli effetti mostre* ranno alle fine che sara stato veleno.'' 859] Progressive Taxation in Theory and Practice 297 try. Furthermore, it is a mistake to assume that larger fortunes are always the result of individual saving. The argument, in short, is not an argument against progres- sion, but against taxation in general. If a moderately progressive tax is really more equitable than a strictly proportional tax, progression will be less of a fine on thrift and industry than proportion would be. Again, the argument that progressive taxes are not productive of revenue is of slight weight. The con- tention has never been urged that progressive taxes yield less than proportional taxes ; at most it has been claimed simply that they do not yield more. The function of pro- gressive taxation, however, as has already been pointed out in a previous chapter, is not so much to secure in- creased revenue as to apportion the burden more equably among the taxpayers. If it is conceded that the progres- sive tax is more equitable than the proportional tax it is quite immaterial whether it yields more revenue or not. Finally, a somewhat widespread objection to progres- sive taxation is contained in the argument which has been well put by Lecky, when he tells us that highly graduated taxation realizes most completely the supreme danger of democracy, creating a state of things in which one class irnp_ases on another burdens which it is not asked to share, and impels the st^te into ^ast schemes of extravagance under the belief that the whole cost will be thrown upon others. "The belief is no doubt very fallacious, but it is very natural, and it lends itself most easily to the clap- trap of dishonest politicians. Such men will have no difficulty in drawing impressive contrasts between the luxury of the rich and the necessities of the poor, and in persuading ignorant men that there can be no harm in throwing great burdens of exceptional taxation on a 298 American Economic Association [860 few men, who will still remain immeasurably richer than themselves."^ The same point has been urged by an 7\merican, Mr. W. D. Guthrie, in an argument opposing the constitu-- tionality of the so-called "Dudley Bill" passed by the Legislature of New York in 1897, providing for a pro- gressive inheritance tax, and which was in consequence vetoed by Governor Black. "The great danger of all democracies," says Mr. Guthrife, "is that one class votes the taxes for another class to pay. Heretofore, our bul- wark has been that, as all taxes were equally and uni- formly imposed, classes could not be discriminated against, and this protected all. . . . Introduce the policy of graduated taxes, establish the doctrine that they are permissible under our system, and the whole burden of taxation can be thrown on a few rich."^" To this argument, which is obviously political rather than eco- nomic in character, it may be replied that the fears here expressed have not been realized in practice, and that the reasoning, if carried to its logical conclusion, would result in a complete distrust of democratic government as such. There is no advantage in conjuring up fanciful dangers which have been disproved by experience. While the theoretical objections to progressive taxation are thus in large measure destitute of foundation, it is possible to draw only this rather vague conclusion as to the general legitimacy of the principle of progression.-'^ ' Lecky, Democracy and Liberty, i, p. 287. "Argument of William D. Guthrie, submitted to the Hon. Frank S. Black, Governor of the State of New York, in opposition to the Dudley Bill, imposing a graduated inheritance or transfer tax, 1897, pp. 16, 17. "This is also the conclusion of Armitage-Smith in his Principles and Methods of Taxation, 1906, p. 52 : "On the whole the argument for graduation on a rational and moderate scale seems to be valid: it helps to satisfy the demands of equity and productiveness, if the 86 1 ] Progressive Taxation in Theory and Practice 299 The practical application of the principle on the other hand depends on a series of important considerations. In the first place we are confronted by the question of incidence. If the theory of general diffusion of taxation be true, it makes no difference whether we levy a propor- tional or a progressive tax. For, since the tax would ultimately be shifted to the consumer, the taxpayer would not be injured, while the consumer would bear the tax only in proportion to what he consumed. It is a singular fact that this questionable procedure of the advocates of the diffusion theory has always been overlooked. For the mostjieated opponents of progressive taxation have been, .like Thiers, advocates of the diffusion theory of taxation, without perceiving the weakness of their position. The diffusion theory of taxation, however, we know to be far from correct. ^^ Nevertheless, to the extent that taxes really are shifted from the taxpayer, the problem of pro- gression loses its importance. For if taxes are actually shifted, the rate in the first instance is of no essential consequence. It_is_only in so far as we assume that so-called direct taxes remain where they are put, that the considerations of faculty or ability are of any weight. How far this assumption is true has been investigated in another place. For the purpose of the theoretical discus- sion it may be taken for granted that the problem of pro- gression versus proportion must be treated on the hypoth- esis that the assumption is true. When we come to con- struct a progressive scale in practice, however, we must be careful to ascertain how far the assumption conforms to reality. A progressive scale of taxation which does principle be limited to a few direct taxes in a mixed system. It is also the general conclusion of Professor Henry C. Adams in his Science of Finance, 1898, pp. 352-353- " See Seligman, On the Shifting and Incidence of Taxation, 2nd ed., 1899. 300 American Economic Association [862 not reach individual faculty at all is as unnecessary as it is illogical. Secondly, the defence of progression rests on the^ theory that it is applicable to general taxation, taken as a whole. It is based on the assumption that taxes are paid out of revenue, and that the whole system is framed with this end in view. It is obviously an immensely difficult task, however, to shape a whole system of taxa- tion so that the average general rate will be a moderately progressive one. Actual systems of taxation are of the most varied kinds. In some taxes it is impracticable to introduce a progressive scale, as they are by their very nature proportional, so e. g., tithes or poll taxes, — for a graduated poll tax is really not a poll tax at all but a class tax. In other cases the taxes in actual life are even regressive, as in the case of many of the indirect taxes. It would be impossible thoroughly to carry out the prin- ciple of general progression unless we had a single uni- versal income tax, or a single property tax. But no prominent writer to-day favors a single income tax, or a single property tax, or for that matter a single tax of any kind. Thus in advocating the system of progression we must have regard to the facts of the individual case, and to the general sentiment of the community. In the United States, for instance, the general property tax in its prac- tical operation is largely regressive, especially in so far as personalty is concerned. The tax reformers have quite enough to occupy their attention in the endeavor to make the rate really proportional, before bothering themselves with the more ideal stage of progression. It is all the more worthy of consideration, however, whether other taxes may not properly be levied according to the pro- gressive principle. It is more than likely that a number of moderate progressive taxes would after all simply 863] Progressive Taxation in Theory and Practice 301 result in securing an average proportional rate for the whole system of taxation. We have in fact seen^^ that some defenders of proportion in theory admit the legiti- macy of certain progressive taxes as a compensation for other really regressive taxes. In practice, then, it is pos- sible frequently to demand progressive taxes w^ithout being at all so extreme or so "communistic" as many persons believe. Thirdly, the defence of progressive taxation rests on the assumption of faculty as the basis of taxation. While this is indeed true of taxation as a whole, for general state purposes, it is questionable whether the principle of benefits is not of some weight in problems of purely local and municipal finance. A discussion of the contest be- tween these two principles and of the limits of their rela- tive applicability to different phases of public revenues would take us too far astray here. It may, however, be said that it is coming more and more to be recognized that within the domain of the taxitig power the principle of benefits should be followed to some extent in strictly local finance.^* If this is true, the principle of progression will be of rather more limited application to some of the charges employed for the support of local government; for the theory of benefits, as we have seen, leads logically to proportion, not to progression. Thus the practical sphere of the applicability of the progressive principle would be even more circumscribed. Finally, it must not be overlooked that high rates of progression may engender or augment attempts at fraud and evasion. That this is possible cannot be denied. As has already been pointed out,i^ however, the danger is "Above, p. 147- " For a discussion of these points see tlie chapter on "The Classifi- cation of Public Revenues" in Seligman, Essays in Taxation. ^° Above, p. 75. 302 American Economic Association [864 apt to be greatly exaggerated. We know that there is certainly more fraud in the countries of proportional taxes like America than in the home of progressive taxes like Switzerland or Germany. Nevertheless, it may be conceded that with progressive rates there would proba- bly be still more fraud than actually exists, even though the fears of the doubters in Australia and Switzerland have not been realized.^® Much depends on the manner in which progression is applied, and on the particular tax to which it is extended. Still more depends on the rate of the progression. The higher the progression the greater the likelihood that the results will be perceptibly bad. The objection, however, is really one against the abuse, not the use, of the progressive principle. If, therefore, we sum up the whole discussion, we see that while progressive taxation is to a certain extent de- fensible as an ideal, and as the expression of the theor- etical demand for the shaping of taxes to the test of individual faculty, it is a matter of considerable difficulty to decide how far or in what manner the principle ought to be actually carried out in practice. Theory itself cannot determine any definite scale of progression whatever. While it is highly probable that the ends of justice would be more nearly subserved by some approximation to a progressive scale, considerations of expediency as well as the uncertainty of the interrela- tions between various parts of the entire tax system should tend to render us cautious in advocating any gen- eral application of the principle. It remains to investi- gate as to how far the principle is applicable to the condi- tions surrounding us in America to-day. In last resort, however, the crucial point is the state of the social con- sciousness and the development of the feeling of civic obligation. " Above, pp. 76, 124. PART III. APPLICATION OF THE PROGRESSIVE PRINCIPLE TO AMERICAN TAXATION. -'^ § I. The General Property Tax. The preceding discussion has brought us to a general, but somewhat vague, conclusion in favor of the theory . of progressive taxation. Economists, however, must deal with what is actually practicable, as well as with what is ideally true. It is with this practical object in view that we now proceed to a consideration of the progressive principle in the light of the concrete facts of American public finance. In the case of the general property tax the progressive principle would seem to be of doubtful expediency, for several reasons. In the first place, the tax as actually ad- ministered is not progressive nor even proportional, but regressive. Our attempt to tax intangible personalty leads to a heavier burden on those who are at the same time honest and fairly well-to-do than on those who happen to be both dishonest and wealthy. Since the temptations to evade the tax are likely to gtow with its size, it may be assumed that fraud will increase in pro- portion to wealth. To augment the tax rate on the wealthier would therefore simply increase dishonesty. Progressive taxation of personal property would result in the less well-to-do classes bearing a still greater propor- tion of the taxes than they do at present. Instead of greater equality we should have greater inequality. Pro- gressive taxation of personalty under actual conditions would be an utter delusion. Secondly, progressive taxation of real estate would demand, as a preliminary condition, a complete reform of most of our tax-laws. As a general rule the Ameri- can commonwealths do not pay any attention to the ques- 3o6 American Economic Association [868 tion whether or not the realty is mortgaged. They generally tax the landowner on the full value of the land, and very frequently tax the mortgagee in addition on the amount of the mortgage. Now, unless we exempt the value of the mortgage from the value of the land, a pro- gressive rate on realty would create far more inequality than exists at present. Let us assume two land-owners, A, the owner of a $10,000 farm mortgaged for $5,000, and B, the owner of a $100,000 farm mortgaged for $95,000. The equity is the same in each case, and under a rational system of taxation both A and B would pay on only $5,000.^ Each would then be taxed on what he really has, in lieu of on what he has not. The prevalent American system, however, makes of the tax on real estate a real tax, not a personal tax: that is, the tax is levied not on the landowner as such, but on the land. If it were levied on the landowner the tax would be a per- sonal tax, that is, a tax on the person, and the government would be bound to take account of the existing debts. But as it is usually levied on the land, instead of on the owner, the government looks to the land alone and main- tains that the personal condition of the owner is immate- rial. If a progressive tax were introduced, A would pay, let us say, two per cent on $10,000 or $200, while B might pay five per cent on $100,000 or $5,000. B's entire equity would thus be swallowed up by the tax, and although he is actually in no better condition than A, he would have to pay not five times, but twenty-five times as much. Pro- * Unless, indeed, the mortgages in the hands of the mortgagees are exempt. In this case the government would be justified in making the land contribute its share; for it is immaterial to the mortgagor whether he pay the tax directly to the government, or indirectly by being charged a higher rate of interest on the loan, in case the mortgagee is taxed. Cf. Essays in Taxation, p. 35, and the limitations of the theory in the monograph On the Shifting and Incidence of Taxation, 2nd ed., 1899, pp. 266-268. 869] Progressive Taxation in Theory and Practice 307 gressive taxation under the existing system of real estate taxation would thus be a gross injustice, utterly ruinous to a large class of farmers. For whatever may be true as to the shifting of a proportional tax on land, it is evident that a progressive tax of this kind at all events can not be shifted. In fact every treatise thus far written on the in- cidence of taxation takes it for granted that we are dealing with a proportional tax. It would be interesting to trace in detail the qualifications to be introduced in the theory of incidence in the case of progressive rates, not only in the property tax, but in other taxes as well. Thirdly, the very fact that the property tax is in great part a real tax would militate against the introduction of the progressive principle. The basis of progressive taxa- tion, as we have seen, is the faculty theory of taxation, resolved into its elements of consumption and production. A progressive property tax can be defended only on the assumption that faculty increases with general property. When, however, in place of assessing the tax on the in- dividual as such, we assess it on his realty wherever it lies, and on his personalty wherever we. can locate it, we are looking not at the individual, but at the taxable object. The owner of a large piece of real estate may as a matter of fact possess less faculty or ability to pay taxes than the owner of a small plot, because he niay have very much less personalty. If we could reach personalty as well as. realty then, indeed, it would be immaterial. Since person- alty, however, evades taxation in the ratio of its extent and of the amount of the tax, a progressive tax on realty, under existing conditions, might intensify the actual ine- qualities. To tax A, the owner of a $10,000 farm (who has perhaps $1,000 personal property), five per cent, and to tax B, the owner of a $1,000 lot (who has the remain- der of his large fortune invested in intangible personalty, 3o8 American Economic Association [870 on which he pays nothing), only one per cent would be a travesty of justice. Fourthly, the chief practical objection to the introduc- tion of the progressive principle is that it would be ex- ceedingly difficult to apply it to the taxation of real estate, if the prevalent method of assessing the tax as a real tax be followed. The tax varies with the value of the lot, not with the property of the lot owner. Lot A may be worth more than lot B, but lot A may be owned by two persons, and lot B by only one person. Or the owner of the smaller lot B may have a hundred other small lots in other parts of the city, while the owner of lot A has only that one lot. A higher tax on A because it is the larger lot would be absurd. The large land owner, provided he distributes his holdings, would pay lower rates of taxation than the small land owner whose holdings are massed to- gether. The only result of this would be a tendency to divide land into fractional parts. It is true that such a method of taxation would tend to split up large estates. This was indeed one of the avowed objects of the graduated land tax in New Zealand, whose influence is already perceptible. The same idea is at the basis of the recent land tax legislation in Oklahoma, where the aim is to prevent the formation of large estates. The division or prevention of large estates, however, does not necessarily mean the abolition of large fortunes in landed property. It may indeed tend to prevent the suc- cessful competition of an agricultural country with its rivals in the world market, to the extent that cheap wheat raising depends on the economies of production on a large scale. There is no reason, however, why one man should not own a hundred small farms, rented out by him to cultivators, instead of a single large farm. Progressive land taxation would therefore not necessarily result in the 87 1 j Progressive Taxation in Theory and Practice 309 development of a class of small independent farmers or peasant proprietors. Small farms do not imply small in- dependent farmers ; they may mean small tenants or farm hands of a large farmer or a large landed proprietor. However, in the case of city real estate, where the chief complaints against the unearned increment are urged, there is but little doubt that large landowners would dis- tribute their holdings. The net economic result of a pro- gressive property tax levied on the land, instead of on the landowner, would thus be in the first place a change in the constitution of land fortunes rather than in their extent ; and in the second place a probable diminution in the capacity of the country to compete in the markets of the world. But the fiscal results would be insignificant. Ultimately the tax would tend to be levied only on the lowest class. For no plot would now exceed in size the smallest area on which the lowest rate is assessed. In other words, the progressive tax would virtually turn but to be a proportional tax. A progressive tax on land is not necessarily a progressive tax on the landowner. Considering, therefore, these four objections, it is plain that until a complete change is made in our system of the general property tax, it would be useless and worse than useless to introduce the progressive principle. We should be jumping from the frying pan into the fire. § 2. The Income Tax. We come next to the income tax. The income tax in the United States was until recently not a practical ques- tion. The few existing income taxes in our American commonwealths are even more farcical in their adminis- tration than the general property tax. It is utterly idle to suppose that the latter will be supplanted by the former, or that any better results could be obtained by attempting to assess a man directly on his income rather than on his property. For some kinds of property at all events are tangible, while the income even from tangible prop- erty is frequently more or less uncertain and inscrutable. At the same time recent events have shown that a federal income tax, either as a war measure, or as a tax supple- mentary to the existing sources of revenue, is within the range of practical politics. In this case it would perhaps seem that the progressive principle might not illogically be applied in the future, as it has been in the past. We might base the demand, so it might be urged, not only on the general economic theory of faculty, but also on the special compensatory theory. For, as we know, one need have no socialistic leanings to advocate the special com- pensatory theory. It will be remembered that Secretary Fessenden advocated the progressive income tax during the Civil War on the faculty theory,^ while on the Eu- ropean continent it is generally upheld on the special com- pensatory theory. The practicability of a graduated scale, however, depends to some extent on the methods of as- sessment and the extent of foreign investments. Where a large part of the income received by the citizens is derived ' See above, p. 102. 873] Progressive Taxation in Theory and Practice 311 from capital invested abroad, not only will the ascertain- ment of income be more difficult, but all the possible com- plexities of a double taxation will be introduced'.' ' Where, on the other hand, the income is derived chiefly from home sources, the problem will be simpler. From this point of view a progressive income tax would probably be attended with more difficulties in England than it would be in many other countries whose holdings in foreign investments are less extensive. A far more important consideration, however, is the actual form of the income tax itself. This is evidently not the proper place to discuss the details of income taxa- tion. It may be well, however, to recall the fact that there are two chief methods of assessing an income tax. The one method as exemplified in the most successful of all income taxes — the English — is to split the income into schedules, according to the source from which it is de- rived, each schedule or set of schedules being assessed separately by different officials. This may be termed the schedule or stoppage-at-source income tax. The other method, as in the Prussian tax and the American taxes during the Civil War, is to assess the income as a whole in a lump sum and to levy the tax directly on the income receiver, instead of in the first instance on the income payer. This may be called the lump-sum income tax. It is what the French call I'impot global.'^ Experience has shown that the schedule tax is far preferable to the lump-sum tax. England after experimenting with the latter long since abandoned it for the former. Yet it is plain that the progressive rate is very much more difficult of application to the schedule, than to the lump-sum, in- ^The British income tax committee of 1906 calls it the system of "direct personal assessment" as opposed to the "system of collection at the source." 312 American Economic Association [874 come tax. If an income is derived in equal proportions from each of, let us say, five sources or schedules, it would pay much less than an equal income derived wholly from any one source. Let us assume that the progressive scale is so arranged that the rate is fixed at two per cent for $10,000, and that it increases one per cent for each successive $10,000. A has an income of $50,000 derived equally from each of five sources. He will pay the normal rate, or two per cent, on each schedule ; that is, his tax will be five times $200 or a total of $1,000. B has the same income which happens to be derived entirely from one source or schedule. He must pay six per cent on $50,000 or a total of $3,000. An ostensible progression of rates would thus result in the same amounts of income paying very different amounts of tax. Such an inequality would be intolerable. We are thus reduced to the dilemma: A progressive income tax corresponds to the demands of ideal justice; but a lump-sum income tax, at least in Anglo-Saxon coun- tries, is in practice more or less of a failure ; and a sched- ule income tax is not susceptible of graduation. The de- sirable, therefore, is not practicable; that is, it is practi- cally undesirable. In other words, a really successful pro- gressive income tax is an infeasibility. The British Select Committee of 1906 seeks to cir- cumvent the difficulty by the ingenious expedient of what it calls a "super-tax." On the one hand the Committee is quite resolute in its determination not to abandon the stoppage-at-source features of the tax, stating that "direct personal assessment for the whole tax is not practicable in this country in the sense of being an expedient or de- sirable means of collecting revenue." On the other hand, however, it regards favorably the plan of imposing "a 8/5 ] Progressive Taxation in Theory and Practice 313 second tax, distinct and supplementary to the existing tax, to be levied on investments by direct personal assessment." This, which is called the "super-tax," is to be assessed only on persons with incomes over £5,000, and may, if desired, be graduated. The Committee recognizes that this new tax is open to the objections that may be urged against any lump-sum income-tax scheme. It thinks, however, that the interests of the exchequer will be pro- tected by the retention of the stoppage-at-source feature.^ It believes, furthermore, that the dangers of evasion will gradually be reduced to manageable proportions.^ The ' "It will be seen that this is a combination of the method of a direct personal tax with that of taxation at the source. That portion of the tax which is new and additional would be a direct personal tax, and some of the objections which have already been urged against the adoption of a direct personal tax in place of the system of collection at the source apply to this proposal. They are modified, however, to the extent that the tax which is now collected at the source would continue to be so collected, and consequently there would be no loss of revenue there as the result of failure to obtain full disclosure for the direct personal tax." Report from the Select Committee on Income Tax, 1906, sec. 8, p. 4. *"This proposal, in common with all proposals for direct personal assessment of the whole income, requires that a full statement of individual net income should be obtained from all persons upon whom the super-tax would be levied. It is true that, at the present time, about 700,000 persons do make a declaration of the amount of their net annual income. They are people with a total net income not exceeding £700 a year, and they make the declaration in order to obtain the abatement which the law allows upon such incomes. But it does not follow that other people with much larger and more complicated incomes would be equally willing to declare their actual income, when the object for which the declaration was required was that an additional tax should be levied upon them. It is one thing to require that information must be given before taxa- tion can be reduced. To demand the information with a view to increasing the taxation of those who supply it is totally different. The difficulty of discovering who had an income of fs,000 a year or more and ought to make a return has been insisted upon by several of the official witnesses. But we think that the difficulties have been exaggerated. In most parts of the country the surveyors 314 American Economic Association [876 Committee concludes that while the system of graduation through the imposition of a super-tax is practicable it offers some disadvantages and difficulties which have here been pointed out.^ Whether the difficulties can be over- come will be watched with interest when the scheme itself is adopted, as it probably will be before long, by Par- liament. In the American income tax of 1894, which was soon declared unconstitutional, the system was essentially the undesirable and discredited lump-sum of personal-income plan. In one point, however, the stoppage-at-source idea was introduced. Corporations were directed to pay the income tax on stock and bonds, and to withhold the amount of the tax from dividends or interest. Had a progressive tax been imposed, it would have been neces- sary to levy the highest rate on all dividends or coupons. For if the lowest rate were levied on, let us say, $10,000, it is plain that every one would split his corporate holdings into blocks of $10,000, and invest each of these in a dif- ferent corporation or assign interest in his holdings to dummies or obscure relatives. If, on the other hand, the highest rate were levied on all corporate holdings, it would lead to crying injustice unless individuals were allowed a rebate amounting to the difference between the highest and the lowest rate, whenever they could swear that their entire income fell within the limit at which the lowest rate was imposed. As soon as such an oath, how- ever, was permitted the whole advantage of assessing in- comes at the source would disappear, and the door would be opened to all frauds inseparable from a personal or of taxes would probably know who are likely to be enjoying large incomes. There would also, no doubt, be difficulty in checking the accuracy of the declarations. Here again, time would be required." Report from the Select Committee, etc., page 4, sections 9 and 10. ° Op. cit., paragraph 11. 877] Progressive Taxation in Theory and Practice 315 lump-sum income tax. The whole machinery of assessing the tax to the corporation in the first instance might as well have been abandoned. Congress accordingly acted correctly in refusing to accept the proposed amendment in favor of a progressive scale. The serious mistake, — not to mention minor points like the exaggerated minimum of exemption, — ^was the adoption of the personal lump-sum scheme instead of the scheduled or stoppage-at-source plan. That is a point, however, which does not directly affect the present discussion. Our decision must therefore be adverse to the applica- tion of the progressive scale to income taxes under actual administrative conditions in the United States. The ad- vantages of graduation turn out on closer inspection to be illusory. § 3- The Corporation Tax. In regard to the corporation tax the progressive, or rather the degressive, principle has already been applied in some of our commonwealths.-' From one point of view these progressive rates may indeed be defended. The larger the earning capacity of the corporation, the more valuable are the privileges received from the state and the greater are its chances of successful competition with smaller rivals. This implies the production side of fac- ulty. It is highly questionable, however, whether the more important consumption side of the faculty theory is appli- cable to corporations. A corporation is nothing but ^ fictitious entity, a juristic personality. It has no wants, no desires of varying urgency. We cannot properly predi- cate of it any equality or inequality of sacrifice. When the state taxes the corporation, it really seeks to tax the own- ers of the corporation, that is, the bondholders as well as the shareholders. It is not the corporations as such, but the individuals whose capital is invested in the corpora- tion, who are the real taxpayers. When we speak of the principle of equality of taxation, we ordinarily mean equality as between individuals. A corporation is simply an association of individuals, to each of whom the fiscal test of equality must be applied. This is evident from the fact that the tendency in all those states which endeavor to avoid double taxation is to exempt from the personal property tax the shareholders of corporations which are already taxed on their capital stock. ^ ' See above, pp. iii, 112. ' See the chapter entitled "The Taxation of Corporations" in Seligman, Essays in Taxation, and especially Francis Walker, Double Taxation in the United States, in Columbia Studies in History, Economics and Public Law, vol. v, no. I, 1895. 879] Progressive Taxation in Theory and Practice 317 There is no necessary connection between the total earnings of a corporation and the total earnings of a shareholder. In the first place the small corporation may- be owned by a few shareholders, while the stock of the large or more successful corporation may be distributed among hundreds or thousands of individuals. A progres- sive rate on the larger or more successful corporation might then involve an actually regressive rate on the shareholders. The rich stockholder in the small road would pay not more, but less, in proportion than the poor stockholder in the large road. Secondly, even assuming that the stockholders have equal shares in the two roads, we know nothing about their other sources of income. If all income were derived from corporate property alone, the matter would indeed be simple. In the existing complexity of industrial rela- tions, however, the revenue from corporate holdings may constitute the entire subsistence of one man, and an insig- nificant fraction of the total income of his neighbor. The faculty theory of taxation, especially from the consump- tion side, can be predicated only of the entire income of an individual. A progressive tax on larger corporations, then, is quite as likely to be a regressive rate on the par- ticular stockholder. Instead of having progression we should have "upside-down" progression. Only on the as- sumption that the progressive rate is applied to all incomes and to all other forms of property as well as to corporate income or property, would this objection be removed. Even then, however, the force of the first objection would not be diminished. Moreover, when we bear in mind the complications introduced by the facts of double taxation, due to the lack of harmony in our various commonwealth laws, the difficulties will be sensibly increased. A progressive corporation tax, then, does not neces- 3i8 American Economic Association [880 sarily mean a progressive tax on the individual share- holders, and still less does it imply a progressive tax on the individual bondholders. It may denote just the reverse. The application of the progressive principle to corporations is therefore of dubious expediency. § 4- The Inheritance Tax. The case is quite different, however, with the inherit- ance tax, a term commonly apphed not only to inherit- ances proper, but to successions of any kind, whether by gift, devise, bequest, or devolution in general. The two most significant developments in recent American finance are the growth of the inheritance tax and the extension of the corporation tax. In some commonwealths the entire state revenue bids fair soon to be derived from these two sources alone, thus greatly simplifying many of our per- plexing problems. The clamor for a progressive rate in the inheritance tax is constantly growing in the United States, and we have repeated examples of graduated suc- cession duties.^ It has already been noted that writers like John Stuart Mill, who are most conservative in their opposition to progressive taxation in general, nevertheless uphold the progressive principle in the case of inheritance taxes. There are three arguments on which it is possible to base progressive inheritance taxes. The first argument is that which rests on the limitation-of-inheritance theory. The tax is regarded by some merely as a limitation upon the legal privilege of inheritance imposed by the state in the public interest ; with the further qualification that it is the duty of the state to check the growth of inordinately large fortunes and to favor the diffusion of wealth. The progressive principle would be the most convenient way of attaining this result. This argument, however, is not entirely beyond ques- tion. For even if we adopt the theory that the tax is to be 'For an exhaustive discussion of the inheritance tax, see Max West, The Inheritance Tax, in Columbia University Studies in History, Economics and Piiblic Law, iv, no. 2, 2nd ed., 1908. 320 American Economic Association [882 regarded as the exercise of the state's power to regulate the privilege of inheritance, it does not follow that the state is under any obligation to redress existing inequali- ties in fortune. The state has, indeed, the right and the duty to put all on an equal plane of competition, and, with this end in view, it may enact laws which, although they seemingly restrict individual action, actually confer upon the members of society a wider and more real liberty. This is a very different thing, however, from settling upon an arbitrary limit beyond which the amassing of wealth is to become illegal, and from using the expedient of the pro- gressive scale in order to attain this end. The whole question, however, depends on the limits that we assign to the family idea of property. As Dr. West has well pointed out, the right of inheritance within the family is already greatly restricted by the freedom of bequest, while on the other hand inheritance and bequest are not only far from being natural rights, but are not even neces- sary consequences of the rights of private property. The second argument is that which we have learned to know, as the economic argument. This is more con- vincing, because it is based on a sounder theory of the in- heritance tax itself. According to this view, an inher- itance, using the word in the wider sense, is simply a fortuitous income, a chance accretion to property, which augments the faculty of the individual and which, just because of its accidental or unearned nature, is a most fit- ting subject of taxation. For since income connotes a regular periodical revenue the inheritance would normally not be affected by an income tax;^ and since the general ^ The income tax section of the tariff bill as passed by the House of Representatives in January, 1894, curiously enough contained a clause by virtue of which inheritances and successions were to be considered a part of the annual income. This would have tended to create much confusion. 883] Progressive Taxation in Theory and Practice 321 property tax is ineffective in its operation, the taxation of inheritances constitutes the best method of reaching the property, even if it is reached only once. All the consid- erations already urged, which apply to the progressive taxation of faculty, whether we find the test of faculty to consist in income or in property, apply with equal force to the inheritance tax. From the standpoint both of produc- tion and of consumption, true equality in taxable faculty means progressive taxation of inheritances. Moreover, scarcely any of the objections which attach to the progres- sive rate in the general property tax applies here. The third argument is what we have termed the special compensatory argument. This alone would suffice even if the other arguments were inadequate. For even granting that proportion is the ideal to be kept in view, it may be said with some measure of truth that our existing taxes fall with less severity on the wealthier classes. Not only are many of our indirect taxes regressive in their nature, but the general property tax, in its practical operation, is scarcely less objectionable in this respect. A progresive rate in the succession duties, especially where personalty is concerned, would simply tend to reestablish the desired proportionality. Advocates of general proportional taxa- tion in theory might, therefore, uphold progressive in- heritance taxes in practice. Perhaps the most vigorous defense of the progressive principle is to be found in a recent official report which shows so clearly the present temper of the American people that we venture to make a liberal extract : "Whatever the economic theory upon which we may support the idea of an inheritance tax at all— whether we believe in the theory that the state is entitled to a share in the estate of a decedent for the reason that it surrenders its right to take the whole estate to itself, or for the reason that it supplies the means and protection by means of which the deceased can distribute his property, or whether we adhere to the back-tax theory, or to the diffusion-of-wealth theory, or to the 322 American Economic Association [884 accidental-income theory — we all agree that it is not unreasonable that a larger percentage of a large fortune should be paid to the state than of a small one. The man who saves a little can, if he sees fit to do so, keep it in ordinary circumstances about him and distribute it virtually in person among those whom he wishes to have it after his death; but one of our modern enormous fortunes must almost necessarily be invested far and wide in enterprises of every description, with branches all over the country. The possessor of such a fortune has never seen most of it ; it is represented to him, in a large part, by a safe deposit box full of certificates of stock, bonds, contracts, mortgages, etc. The whole power of the state is essential not only to guard and to protect his interests, but to dis- tribute them after his death. More than that, it was the state itself by its laws granting to individuals of great ability and force free sway to exercise their powers and to make them productive, which gave them scope and opportunity to accomplish the enormous results which we see to-day. While it is true, therefore, that ability and vigor were necessary to accomplish the end, the great results achieved could never have been attained without the active assistance and protection of the state; and this assistance and protection are more necessary to the amassing of a great fortune than of a small one. This conception of the social aspects of private wealth has made great strides in recent years and is now recognized by not a few of our wealthy citizens themselves. Mr. Andrew Carnegie, in a recent and striking speech at a meeting of the National Civic Fed- eration, in New York in December, 1906, said, after describing the growth of many of the large fortunes of the country: 'Now, who made that growth? The growth of the American Republic — that is where that wealth came from and that is the partner in every enter- prise where money is made honorably; it is the people of the United States. ... I say the community fails in its duty and our legis- lators fail in their duty if they do not exact a tremendous share, a progressive share.' It is largely for some such reasons that it seems to your Commis- sioners that a great fortune may well be expected to contribute a greater percentage to the state when it passes to others than a small one. Your Commissioners believe that a graduated inheritance tax is defensible, not so much on the ground that large fortunes are a menace to the public, as on the theory that the ability to contribute to the support of government grows more rapidly than the amount of the fortune or the size of the estate."* 'Report of the Special Tax Commission of the State of New York, 1907, pp. 10-12. § 5- Other Taxes — Conclusion. As we have learned above, there are other taxes to which the principle of progression might be applied. The ultimate form which taxation in America is to assume is already discernible. National revenues in the future, as to a great extent in the past, will be derived from a well considered system of indirect taxes, possibly supplemented at intervals by some form of a constitutional income tax. State revenues will be derived almost exclusively from corporation taxes and inheritance taxes ; while real estate will be relegated to the local divisions. The one difficult point will still be the complete taxation of individual fac- ulty. The taxation of intangible personalty has always been a failure ; a direct tax on income would not succeed a whit better. Yet the question will continually revert as to how it will be possible to reach the entire individual faculty. The real estate tax indeed will reach one portion of this faculty, the corporation tax generalized and corrected will reach another large portion, and the inheritance tax will greatly lessen the inequality resulting from the non-taxa- tion of other elements of faculty. The gap, however, will not be entirely filled and it can be removed only by some forms of taxation which will indirectly and roughly it is true, but none the less surely, reach those earnings which are derived neither from land nor from corporate holdings. Such earnings are chiefly those from business and from personal exertions. It is highly probable, therefore, that the future system, based upon complete interstate comity and the avoidance of double taxation, will include some at- tempt to reach these earnings either through a taxation of rentals, both business and private, like that existing in 324 American Economic Association [886 France, Canada and Australia, or through a more skill- fully devised mode of business taxation. When these supplementary forms of taxation are created, to replace, in good part, our unworkable tax on intangible person- alty, it may be found that both the economic and the special compensatory theories will serve as the bases of a moderately progressive system. But in the latter tax es- pecially, the graduation may be more ostensible than real, because of the very rough approximation to actual tax- able capacity. The general conclusion of our investigation may now be put in summary form. It is to the effect that while progression of some sort is demanded from the stand- point of ideal justice, the practical difficulties in the way of its general application are well nigh insuperable. Pro- gression is defensible only on the theory that the taxes are so arranged as to strike every individual on his real income. In default of a single tax on incomes, however, which is visionary, practicable tax systems can reach individual incomes only in an exceedingly rough and round-about way. 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P. — Tratado de Hacienda Piiblica. 2 vols. 1891. Pierson, N. G. — Leerboek der Staatshuishoudkunde. Vol. ii. i8go. Proudhon, p. J. — Theorie de ITmpot. 1861. Systeme des Contradictions ficonomiques. 1845. Discours prononce a I'Assemblee Nationale le 31 Juillet. Quesnay, Franqois — Maximes Generales du Governement ficono- mique, etc. 1758. RaUj Karl H. — Grundsatze der Finanzwissenschaft. 1832-37. sth ed., 1865. Ricca-Salerno, G. — Storia delle Dottrine Finanziarie in Italia. 1881. 2 ed. i8g6. RiCAKDO, David — Principles of Political Economy and Taxation. 1817. Robespierre, M. M. I. — Sur ITmpot Personnel. 1790. 330 American Economic Association [892 RoscHER, WiLHELM — Finanzwissenschaft. 1886. RoTTECK, Karl von — Lehrbuch der okonomischen Politik. 1835. Rousseau, Jean Jacques — Discours sur rficonomie Politique. Writ- ten for the Encyclopedie. Vol. I of Works. RoYER, Clemence Auguste — Theorie de I'lmpot, ou la Dime Sociale. 2 vols. 1864. 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VocKE, N. — Die Abgaben, Auflagen und die Steuer vom Standpunkte der Geschichte und der Sittlichkeit. 1887. Wagner, Adolf— Finanzwissenschaft. Vol. ii. 1880. 2nd ed. 1890. Walker, Francis A. — Political Economy. 1883. 3rd ed. 1887. The Bases of Taxation. Political Science Quarterly, vol. iii, 1888. Wells, David A. — The Communism of a Discriminating Income Tax. North American Review. 1880. West, Max — The Inheritance Tax. Columbia University Studies in History, Economics and Public Law. Vol. iv, no. 2. 1893. 2nd ed. 1908. The Theory of the Inheritance Tax. Political Science Quar- terly, vol. viii, 1893. Weston, S. F. — Principles of Justice in Taxation. Columbia Uni- versity Studies in History, Economics and Public Law, vol. xvii, no. 2, 1903. INDEX OF AUTHORS. Adams, I40n, 299. AUix, 88n. Armitage- Smith, 298. Auckland, 141, 286. Babeuf, 137. Barere, 32. Bastable, 511, 29411. Batbie, 174. Baudrillart, 171. Baumstark, 264. Behr, 187. Beloch, I in. Benvenuti, 191. Bentham, 183. Bergius, 237. Besold, 229. Biersack, 190. Blunden, 4411. Boccardo, 180. Bocerus, 229. Bodin, 229. Boeckh, 11. ' Bok, 2i8n, 278. Boldt, 53n. Boucard, 88n, 89n. Botero, 229. Boxhorn, 229. Braun, 178. Brooks, S3n. Brunhuber, S3n. Buchanan, 259. Buckingham, 4n, 260. Bucher, 6sn. Cambon, 30, 31. Canestrini, 21, 25n. Cannan, 204n. Carnot, 32, 249. Carver, 287. Cassel, 276-277. Cerenville, 62, 73n, 76n. Chailley, 190. Chargueraud, is8n. Charles of Bavaria, 241. Charpentier, 6n, SSn. Chauvet, i48n, 172. Clamageran, 14, 16. Coghlan, 93, lOOn, I33n. Cohen-Stuart, 82n, 219-223, 279- 284. Cohn, 62n, i87n, 274. Compagnoni, 179. Condorcet, 196. Cooley, I48n. Courcelles-Seneuil, 144-5. Craig, 258. Daniels, 138. Danre, i38n. Dauchy, 217, 294n. David, 86n. Decourdemanche, 137. De Fermond, 28. Delaunay, 197. Denis, 8in, 253. Deverite, 248. Dierschke, 6n, SSn. Dilke, 124. Dowell, isn, i6n, 27n. Dufay, 139. DuPont, 141, 174. DuPuynode, 86n, 170. Edgeworth, 21 Sn, 28s. Eisenhart, 200. Ely, sn. Engels, 26n. Essarts, 142. Faucher, 177, 23s. Fauveau, 202, 253. Forbonnais, 184. Frend, i66n, 230. Fiirth, S9n. Gale, 20Sn. Gandillot, i62n, 182. Garnier, 4n, 198. Garnier-Pages, 86. Gaston-Gros, 8in, I47n. Gaudin, 37. Gehrig, 57n. Gentz, 141. Gilardeau, 146. Ginoulhiac, 148. Girardin, 171. Godchaux, 86. Gomel, 29n, 36n. Gosselin, 248. Grabein, 2n, is8n. Graf, 6n. Graffenried, 178. Graslin, 194, 243. 895] Index of Authors 333 Graziani, 284n. Gross, 264. Grotius, 159. Guicciardini, 135, 239, 295. Guiraud, iin. Guthrie, 294, 298. Hall, 257. Harl, 176. Heckel, 46n, 5711, 8711, 139:1,273. Held, is8n, 264. Helfferich, 238. Henning, 14811. Hobbes, 158. Hock, 178. Houdoy, 20n. James, 226. Jancourt, 245. Jeze, 88n, 89n. JoUivet, 36n, 212, 29511. Judeich, i6n, 26n, 200. Justi, 164, 250. Kessler, 177. Kinsman, io6n, i07n. Klock, 229. Krehl, 177. Kremer, 177. Kroncke, 177. Kumpmann, S3n. Lalor, lOin. Lecky, 297. Lecrivain, iin. Le Hardy de Beaulieu, 174. Lehr, 2n. Lepeletier, 249. Leroy-Beaulieu, 141, 147, 174, 211. Linden, von der, 278. Lith, von der, 139. Llandaff, 165. McCulloch, 166. Malchus, 189. Mallarme, 31. Marshall, 138. Mase-Dari, 2n. Mathieu-Bodet, 29n. Mazet, 253. Meyer, ism, i89n, 213, 274-276. Michaud, 174. Mill, 141, 148, l87n, 210, 214, 233- Mirabeau, 162, 164. Montesquieu, 163, 243. Montyon, 163, 251. Murhard, 189. Nasse, 147. Neumann, 2n, S2n, 265-268. Noilliac, 197, 249. Obermiiller, 138. Paine, 133. Paley, 256. Palgrave, 62n. Parieu, 26n, 39n, 86, 148, 296n. Pastor, 180. Pescatore, 191. Petty, 161. Piernas-Hurtado, 2840. Pierson, 8in, 278. Pfeiffer, 237. Pitt, 40. Platon, 13. Proudhon, I44n, 148, 172. Pufendorf, 160. Quesnay, 162. Ramel, 33, 136. Rau, 236. Retz de Serviez, 3in, 86n, I36n. Ricardo, 157. Ricca-Salerno, 179. Riverieulx, 147. Robespierre, 136, 184, 198, 214. Rodbertus, i2n. Roland, 31, 197. Romiol, I44n. Rotteck, 177. Rousseau, 184, 192-4, 24s, 291. Royer, 143. St. Aubin, 36n, 295n. St. Simon, 137. Sargant, 167. Sartorius, 176. Sax, 223-228. Say, J. B., 251. Say, L., 23. Sayer, 259. Schaffle, 268-270. Schanz, 27n, 38n, 49-5in, 53n, 6on, 62n-77n, 85n. Scheel, 139, 273. Scheidemantel, 250. Schlozer, i66n, 175. Schmitthenner, 264. Schmoller, lS7n. Schon, 263. Schonberg, I9n. Scialoja, 147. Senior, 167. Sheridan, 230. Sickenga, 26n. Sidgwick, 261. Sieghart, 6on. Sismondi, 191. Smith, 164, 208, 291. 334 American Economic Association [896 Sonnenfels, 186. Steiger, 62n. Stein, 271. Steuart, 185. Stout, 9Sn. Stourm, 28n, 3011, 3611, 8711, 141. Struensee, 250. Struve, SSn. Sully, 160. Thibault, 27. Thiers, 166, 169. Tifaut de la Noue, 246. Thuriot, 32. Treub, 278. Turgot, 141, 162. Umpfenbach, 142, 237. Vandal, 36n. Vauban, 160. Vauthier, 6n, 38n, 86n, 200, 296n. Vernier, 33, 197. Villetard, 207. Villiaume, 144. Villiers, 249. Vocke, i7n. Voigtel, S7n- Voorthuizen, 3gn. Wagner, 53, 87n, 129-32, 271- 273- Walker, 143, 145, i66n, 230n, 290. Wells, I4in. West, 4Sn, S3n, 9in, 31911. Weston, 286. Woodward, 185. Zeumer, ign. PUBLICATIONS OF THE American Economic Association THIRD SERIES. VOLUME IX 1908 PUBLISHED BY THE AMERICAN ECONOMIC ASSOCIATION LONDON : SWAN SONNENSCHIEN & CO. 1908 CONTENTS OF VOLUME NINE, THIRD SERIES NUMBER PAGES Handbook of the Association, 1908. I. Papers and Discussions of the Twentieth Annual Meeting, Madison, Wis., Dec. 28-30, 1907 1-311 2 Chicago Traction. By R. E. Heilman 312-442 3. Factory Legislation of Rhode Island. By John K. TowLES 443-561 4. Progressive Taxation in Theory and Practice. 2iid ed. By E. R. A. Seligman 562.896 Publications of the American Economic Association FIRST SERIES Volume I, i885 Price in paper I . Report of Organization of tlie American Economic Asso- ciation. Pp. 46. $ .50 2-3. *Relation of the Modem Municipality to the Gas Supply. By E. J. James. Pp. 66. .75 4. Co-operation in a Western City. By Albert Shaw. Pp. 106. .75 5. *Co-operation in New England. By Edward W. Bemis. Pp- 136. .75 6. *ReIation of the State to Industrial Action. By H. C. Adams. Pp. 85. .75 Volume II, 1887 1. Three Phases of Co-operation in the West. By Amos G. Warner. Pp. iig. .75 2. Historical Sketch of the Finances of Pa. By T. K. Worthington. Pp. 106. .75 3. The Railway Question. By Edmund J. James. Pp. 68. .75 4. Early History of the English Woolen Industry. By W. J. Ashley. Pp. 85. .75 5. Mediaeval Guilds of England. By Edwin R. A. Seligman. Pp. 113. .75 6. Relationof Modern Municipalities to Quasi-Public Works. By H. C. Adams and others. Pp. 87. .75 Volume III, 1888 1 . Statistics in College, by C. D. Wright ; Sociology and Politi- cal Economy, by F. H. Giddings; The Legal-Tender Decisions, by E. J. James. Pp. 80. .75 2. Capital and Its Earnings. By John B. Clark. Pp.69. .75 3. The Manual Laboring Class, by F. A. Walker ; Mine La- bor in the Hocking Valley, by E. W. Bemis ; Report of the Second Annual Meeting. Pp. 86. .75 4-5. **Statistics and Economics. By Richmond Mayo Smith. Pp. 127. I 00 6. The Stability of Prices. By Simon N. 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Part II — Papers and Discussions on The Management of the Surplus Reserve; Theory of Loan Credit in Relation to Corporation Economics; , State Taxation of Interstate Commerce; Trusts; Theory of Social Causation. , i -oo Theory of Social Causation. By Franklin H Giddings and others — re- printed from part 2. -5° 3. Monopolistic Combinations in the German Coal Industry. By Francis Walker. Pp. 340. '-25 4. The Influence of Farm Machinery on Production and Labor. By Hadley Winfield Qi»initan<;e. Pp. no. -75 VOLUME VT, 1905 Seventeenth Annual Meeting. I'apers and Proceedings published in two parts. 1. Part I Papers and Discussions on the Theory of Money (3); Open Shop or Closed Shop (4). Pp.226. i-oo 2. Part II Papers and Discussions on Government Interference with In- dustrial Combination ; Regulation of Railway Rates ; Taxation of RaU- ways (2); Preferential Tariffs and Reciprocity (3) ; Inclosure Movement; Economic History of the United States. Pp. 270. i-oo ,. ♦The History and Theory of Shipping Subsidies. By R. Meeker. Pp- 23°- i-oo. 4 History of pbta- Legislation in New York. By F. R. Fairchild. Pp. 218. i .00 Publications of the American Economic Association No. Price io paper VOLTTME VII, 1906 1. Eighteenth Annual Meeting : Papers and Discussions on TJieory of Distri- bution; Government Regulation of Railway -Rates (2) ; Mun^^gj Ownership (2) ; Labor Disputes (2) ; The Economic Future of the Negro (2).Pp. 325. 1,00 2. Railroad Rate Control. By H. S. Smalley. Pp. 147. l.oo 3. On Collective Phenomena and the Scientific Value of Statistical Data. By E. G. F. Gryzanovski. Pp. 48. .75 Handbook of the Association, 1906. Pp. 48. .25 4. The Taxation of the Gross Receipts of Railways in Wisconsin. By G. E. Snider. Pp. 138. 1. 00 VO LUME "V ITI , 1907^ 1. Nineteenth Annual Meeting :^^^k and AH^^H^ on Wages as Deter- mined by Arbitration ; Rbund^^^PMeetings (3); Western Civilization and Birth Rate; Economic History (2) "Government Regulation of Insurance (2); Trusts and Tariff (3) ; Child Labor. Pp.268. 1.00 2. Historical Sketch of the \ Finances and Financial Policy of Massachusetts from 1780 to 1905. By C. J. Bullock. Pp. 144. i.oo Handbook of the Association, 1907. Pp.50. .25 3. Tlje Laljor Legislation of Coniiecticut. By Alba M. Edwards. Pp. 322. i.oo 4. Th^ Growth of Large Fortunes. By G. P. Watkins. Pp. 170. i.oo VOLUME IX, 1908 Handbook of the Association, 1908. Pp.49. .25 1. Twentieth Annual Meeting: Papers and Discussions on Economic Theory; Round Table Meetings (4) ; Labor Legislation (3) ; Relation of the Federal Treasury to the Money Market (3) ; Public Service Commissions (a). Pp.311. I.2S 2. Chicago Traction. By R. E. Heilman. Pp. 131. i.oo 3. Factory Legislation of Rhode Island. By J. K. Towles. Pp. 119. i.oo 4. Progressive Taxation in Theory and Practice. Revised Edition. By E. R. A. Seligman. Pp. 334. (/« cloth ti-IS). 1.25 The entire Publications, 1886-1907, viz., first series, new series, Economic Studies, and third series, vols. 1-9, twenty-six volumes, in cloth, $86.00. Special price to libraries on application. The supply of complete sets is now below fifty. The price of the Third Series by volumes is the same as that of the first ser- ies ; see above. Cloth bound volumes will be sent, prepaid, to members, for fi cents each, in exchange for the unbound numbers, returned to the Secretary prepaid, and in good condition. Copies in half morocco are jo cents per volume more than those in cloth, ' .. Separate subscriptions by non-members, libraries, etc., I4.00 per jrear. Any single monograph may be obtained at the price given above. One-sixth dis- count to members and subscribers. 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