§1' ' . ^■v HJ Introdution to public finance 3 1924 013 887 256 ^m fork Btste (HalU^ of Agrirultur^ At dornfU Intttfraitg Dttfara, N. $. ICtbrarji Cornell University Library The original of tliis 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/cu31924013887256 INTRODUCTION TO PUBLIC FINANCE •The?>C^o. INTRODUCTION PUBLIC FINANCE CARL C. PLEHN, Ph.D. ASSOCIATE PROFESSOR IN THE UNIVERSITY OF CALIFORNIA " Je rCimpose rien; je nepropose meme rien; fexpose''^ DUNOYER SECOND EDITION. REVISED AND ENLARGED Nefa gotit THE MACMILLAN COMPANY LONDON : MACMILLAN & CO., Ltd. 1900 All HghU reatrved COPTKIGHT, 1S96, By the MACMILLAN COMPANY. Set up and electrotyped August, 1896. Reprinted August, 897. Second edition, revised, May, 1900. NorfajaoTj ipress J. S. Gushing & Co. — Berwick St Smith Norwood MaBB. U.S.A. PREFACE This Introduction to Public Finance is intended to be an elementary text-book. It contains a simple outline of those things which are necessarj' to prepare the stu- dent for independent research ; a brief discussion of the leading principles that are generally accepted ; a state- ment of unsettled principles with the grounds for con- troversy ; and sufficient ' references to easily accessible works and sources to enable the student to form some opinion for himself. The references that are given are not so much for the purpose of sustaining the author's statements, which any advanced student or teacher can easily trace to their sources, as to enable the beginner to add to his information on points that are of necessity briefly treated here. Both the American and the English systems of taxar tion are badly in need of reform. Public opinion is gradually awakening to this need. Financial questions are widely discussed. There can be no doubt that the most pressing reforms of the close of the nineteenth century are tax reforms. The rapid extension of govern- mental functions — the invasion by the government of fields of activity that lie near to the welfare of the people — has given rise to great interest in the financial side of V VI PREFACE these activities. It is hoped that this work may be help- ful in the accomplishment of these needed reforms. The Introduction to Public Finance can be intelli- gently studied by any person already familiar with the general principles of Political Economy. Technical details and wearisome tables of statistics have been avoided wherever possible. Abundant references to sta^ tistical compilations are, however, given, so that such matters can be readily looked up if wanted. The coun- tries whose financial systems have been chiefly used to illustrate principles are England, Germany, Prance, and the United States ; other countries have been drawn upon only for particularly pertinent examples. A brief but complete history of the financial practices of the four countries named has been given. The countries most extensively studied are England and the United States. Although the book has been written from the point of view of an American, the author ventures the hope that it may not prove the less useful to English students. CARL C. PLEHN. Berkeley, Gal., August, 1896. TABLE OF CONTENTS INTRODUCTION Section 1. Definition, scientific cliaraoter, and relations of Public Finance. Sec. 2. History of the science. Sec. 3. Method and subdivisions of the subject. Sec. 4. Desirability and feasibility of a single method of classification throughout the whole sub- ject. Page 1 PAET I PUBLIC EXPENDITURE CHAPTER I The Nature of the State ; its Functions and their Classification Section 1. Political science sets no definite limits to the extension of State functions. Sec. 2. Public Finance finds a limit in the revenue-yielding strength of the State. Sec. 3. Public expendi- ture in early times. Sec. 4. Public expenditure in Greece and Rome. Sec. 5. Feudal expenditure and the beginnings of mod- ern. Sec. 6. Classification of expenditure. Page 17 CHAPTER II ExPENDITtTRE EXCLUSIVELY FOR THE COMMON BENEFIT Section 1. Expenditure for general administration. Sec. 2. Ex- penditure for the legislative department. Sec. 3. Expendi- ture for public buildings. Sec. 4. Expenditure for defence. Sec. 5. Expenditure for means of transportation. Si;e. 6. Ex- penditure for education. Sec. 7. Assistance of private industry and commerce. Page 33 vil viii CONTENTS CHAPTER III Expenditure for the Benefit of Individuals Section 1. Expenditure for charities. Sec. 2. Pensions. Sec. 3. Bounties and "protection." Sec. 4. Expenditure for the ad- ministration of justice. Sec. 5. "Betterment" of property. Sec. 6. Expenditure in public industries. Page 53 PART II PUBLIC REVENUES CHAPTER I The Character and Classification of Public Revenues Section 1. Early forms of revenue. Sec. 2. The growth of con- stitutionalism results in uniformity of the revenue systems of the different countries. Sec. 3. Different States find the same justification of taxation. Sec. 4. Compulsion is universal. Sec. 5. Classification of revenues, definitions of fees, taxes, and prices. Secs. 6 and 7. Further considerations on classifi- cation. Page 69 CHAPTER II The Classification of Taxes and Fees; Definitions Section 1. The measure of taxation distinguished from the justi- fication ; benefit theory and faculty theory. Sec. 2. Difficulties in the classification of taxes. Sec. 3. Direct and indirect taxes. Sec 4. Taxes on persons, property, and income. Sec. 5. Other classifications of taxes. Sec. 6. Classification of fees. Sec. 7. Economic revenues. Sec. 8. Definitions of various terms used. Page 83 CHAPTER III The Tax System Section 1. All nations use many different taxes; no single tax feasible. Sec. 2. What, in the opinion of nations, constitutes CONTENTS ix the ideal of correct or just taxation. The benefit theory ; the legal theory in the United States. Sec. 3. The faculty theory ; what constitutes faculty. Sec. 4. Other theories and progres- sion. Page 105 CHAPTER IV The Development or Taxation before the Industrial Revolution Section 1. Feudal dues commuted, and voluntary contributions be- come taxes. Sec 2. History of taxation in France. Sec. 3. History of Crown taxation in England. Sec. 4. History of local taxation m England. Sec. 5. Colonial taxation in America. Page 128 CHAPTER V The Development of Tax Systems since the Industrial Revolution Section 1. The effect of the industrial and political revolution. Sec. 2. General outline. Sec. 3. Development of taxation in Prussia. Sec. 4. In France. Sec. 5. In England. Sec. 6. In America. Page 144 CHAPTER VI Excises Section 1. Comparison of excises and customs ; and direct con- sumption taxes. Sec. 2. Purposes and principles of the ex- cises. Sec. 3. Method of assessment. Sec. 4. Typical excises. Sec. 5. Proper field for excises. Page 169 CHAPTER VII Customs Duties Sections 1 and 2. Customs duties defined. Secs. 3 and 4. The pur- poses of customs duties, both fiscal and political. Protective and revenue tariffs. Sec. 5. The protective principle widely applied. Sec 6. The tax character of protective duties. Sec. 7. Customs duties as a source of revenue. Sec 8. History of cus- toms duties in England. Sec 9. The German customs union and the Imperial tariffs. Sec 10. History of the French tariff. Sec. 11. Tariff history of the United States. Page 182 X CONTENTS CHAPTER VIII Pkopertt Taxes Part 1. Tht, General Property Tax Section 1. Theory of general property tax and the objections to it based upon the experience of the United States. Sec. 2. Sci- entific judgment of the general property tax. Page 208 Part 2. Special Property Taxes Sec. 3. The land tax. Sec. 4. Building tax. Sec. 5. Taxation of capital. Sec. 6. Inheritance tax. Page 219 CHAPTER IX Personal Taxes Section 1. Poll tax. Sec. 2. Theory of the income tax. Sec. 3. Place of the income tax in the tax system. Sec. 4. Prussia income tax. Sec. 5. The British property and income tax. Sec. 6. Income taxes in the United States. Page 231 CHAPTER X The Incidence of Taxation Section 1. Incidence depends upon the system ; meaning of shift- ing and incidence. Sec. 2. Shifting may or may not defeat the purpose of the tax. Sec. 3. Shifting adds to the burden of taxation. Sec. 4. Shifting cannot take place when taxes are universal and equal. Sec. 5. Incidence of excises and cus- toms. Sec. 6. Incidence of the general property tax. Sec. 7. Incidence of special property taxes and of personal taxes. Page 248 CHAPTER IX Fees and Industrial Earnings Section 1. Connection between fees and industrial earnings ; development of fees into taxes. Sec. 2. Judicial and legal fees. Sec 3. Administrative fees. Sec 4. Special assess- ments. Sec. 5. Postal fees. Sec 6. Revenues from public property. Sec. 7. Revenue from public industries. Page 259 CONTENTS xi PART III PUBLIC INDEBTEDNESS CHAPTER I The Growth and Nature op Public Credit Section 1. Size of public debts. Secs. 2 and 3. The nature of credit. Sec. 4. Wherein public credit differs from private. Sec. 5. Economic effects of public borrowing. Sec. 6. Foreign and domestic loans. Page 278 CHAPTER II Forms of Public Debts Section 1. Funded and floating debts. Sec 2. Forced and con- tractual loans. Sec 3. Classification of debts. Sec 4. "Per- petual" bonds and redeemable bonds. Sec. 6. Terminable annuities. Sec 6. Lottery loans. Sec 7. The rate of in- terest. Sec 8. Debts of the treasury. Sec 9. Productive loans. Page 293 CHAPTER III Negotiation, Payment of Interest, Conversion, and Redemp- tion OF Debts Section 1. Two chief methods of negotiating public loans. Sec 2. Place of payment of interest, and other minor considerations. Sec 3. Conversion of the debt. Sec. 4. Debt payment and the sinking fund in England. Sec 5. Debt payment and the sinking fund in America. Sec. 6. Summary. Page 310 Xll CONTENTS PART IV FIN A NCI A L A DMINIS TR A TION CHAPTER I The Budget ; Administration of Expenditure ; Control and Audit Section 1. Importance of sound methods of administvation. Sec. 2. History of iiscal administration. Sec. 3. The budget in England, and appropriations in the United States. Skc. 4. Englisli control and audit. Sec. 5. Control and audit in the United States. Page 325 CHAPTER II Collection of the Revenues ; Custody of the Funds ; and the Public Accounts Section 1. Early methods of collecting revenues. Sec. 2. Collec- tion of customs duties and excises. Sec. 3. Assessment of direct taxes, "declaration," and equalization. Sec. 4. Con- venience of the contributor must be consulted in the collection of taxes. Sec. 5. Transfer of the public funds and custody of the public moneys. Sec. 6. Public accounts in England and America. Sec. 7. " Funds of account. " Page 340 CHAPTER III' Financial Administration of War ; Illustrated by the Expe- rience OF THE United States in the War with Spain Section 1. " Extra-ordinary " expenses. Sec. 2. Increased rates for old taxes. Sec. 3. New taxes. Sec. 4. Difficulties in the use of credit. Sec. 5. Situation of the United States Treasury at the oulbi'eak of war. Sec. 6. The tariff could not be changed. Sec. 7. Main resource internal taxes. Sec 8. Yield of new taxes. Sec. 9. Amount borrowed. Sec. 10. Preserva- tion of credit. Sec. 11. A popular loan. Page 354 Brief Bibliography for Advanced Students. Page 376 Index. Page 377 INTRODUCTION TO PUBLIC FINANCE INTRODUCTION TO PUBLIC FINANCE oXWo INTRODUCTION Section 1. Public Finance deals with the way in which the State acquires and expends its means of subsistence. It stands in somewhat the same relation to the State that Political Economy stands to the individual. If Economics may be defined as the science which deals with the activity of the practical reason in acquiring and applying those things that are provided in comparatively limited quantities, for the satisfaction of the external and temporal wants of man, then, adapting our defi- nition to somewhat the same terminology, Public Finance may be defined as the science which deals with the activity of the statesman in obtaining and applying the material means necessary for fulfilling the proper functions of the State. Public Finance is properly called a science, be- cause, (1) it deals with a definite and p^^ , limited field of human knowledge ; (2) called a sd- it admits of an orderly arrangement of its facts and principles, and contains many 2 INTRODUCTION TO PUBLIC FINAMCE laws of general progress belonging exclusively to its own field; (3) it admits of the application of scientific methods of investigation; (4) it foresees as well as explains a certain class of phenomena; (5) it is generally, if not universally, so regarded. A dependent It is, however, a secondary or dependent science. science. It is closely related to two other sciences, upon which it properly depends. These are Political Economy and Political Science. While, on the one hand, it draws largely upon the conclusions of these two sciences for its hypotheses, yet on the other it contributes much to them. Most of the prominent German writers on the subject regard Public Finance as a corporate part of Political Economy. It is properly so regarded, because the activities of the State that belong to this field are of such a nature as to consume wealth, produce wealth, and to interfere with the distribution of wealth. From Political Science we shall have to borrow many conclusions as to the nature of the State, and as to the functions of government. A determination of what the proper functions of the State may be is no part of our subject, but belongs wholly to Political Science. ^ In general it has been found best to assume that the functions now actually performed by the States are proper, provided they are not clearly 1 For discussions of tliat part of the subject the reader is referred to Bluutschli's Theory of the State, Wilson's State, Hoffman's Sphere of the State, and Crane and Moses' Politics. INTRODUCTION 8 contrary to some generally accepted principles of Political Science. We are thus relieved of the burden, assumed by many writers on the subject, of attacking or defending the actions of different governments in matters as to the propriety of which there is some question : for example, the propriety of the continuance or assumption of State OAvnership of railroads, or the State monop- oly of tobacco. All such matters will be treated purely from the fiscal point of view. Information concerning the facts with which the science of Public Finance deals can, in most in- stances, be definitely ascertained, and ' •^ ^ The Art of the conclusions drawn have often a Public Fi- sharpness and distinctness lacking in "'"*''^- many other parts of Political Economy and Po- litical Science. There is, consequently, the tempta- tion to create the corresponding Art of Public Finance. For when any science becomes at all "exact," it is easy and often desirable to point out possible direct applications of the truths learned. But although it is of the utmost importance that statesmen should be guided in their actions by cor- rect principles, it is in no sense the duty of the scientist, as' such, to make the application of the laws he may learn. Scientific investigation should precede, and ever remain independent of, any pos- sible use of the truths discovered. In no other 'way than by the search for truth for its own sake, can we obtain absolute clearness of view. 4 INTRODUCTION TO PUBLIC FINANCE Sec. 2. Public Finance, as a science, is older than Political Economy. Indeed, it is not incorrect to say Older than *^^^ ^* ^*® *^® forerunner of both the Political sciences to which it is now tributary. conomy. j,^^ ^^^ writings of the Cameralists dealt more fully with this part of the field of Political Economy than with any other. Public Finance as an art, and as the subject of more or less conscious study, necessarily arose as soon as there was a dis- tinct separation between the income of the Gov- ernment, or the State as such, and the income of the Prince : — that is, as soon as any direct levy was made upon the wealth of the citizens, or any prop- erty administered, to secure a revenue for an ac- knowledged public purpose broader than the mere support of the Prince's household. The necessity for officials properly trained to administer the vast princely and public revenues that flowed into the public coffers led to extensive studies in just this line ; and then the investigation into the origin and causes of the wealth of nations, as the foundation and source of public revenues, was the step which led to the birth of the greater science. The writers on the Cameralistic science (which, because it at first embraced but little more than the matter now included in Public Finance, may be properly claimed as our science under another name) were stronger in Germany than elsewhere.^ 1 For an account of them see Koscher, Geschichte der National Oekonomie in Deutschland. INTRODUCTION 5 On this account the science has always had a stronger hold there than in France or England. In those countries the lead of the Phys- oniy parts of iocratic doctrine, the powerful influ- '^^ subject j.,1 ct • ^ 1 I. 1 ■ treated by ence ot Adam omith, and, after his English time, the intensity and rapidity of in- ■enters. dustrial development, directed the attention of stu- dents in such fields to the more general and more absorbing questions. Although Adam Smith him- self devotes one book to the discussion of finance, and other writers of note give it passing attention, it was extremely slow in obtaining independent recog- nition. The predominance in both England and France of a theory of State which minimised the importance of government action may in part ac- count for this neglect. The one part of the sub- ject that did receive attention — namely, taxation — ■ dealt with an activity that was admittedly neces- sary. But other fields, like that of expenditure, were comparatively neglected. The same blind- ness which led English economists to underrate the importance of a study of consumption, except so far as it led to new production, prevented them from seeing anything worth studying in State ex- penditure beyond, possibly, its effect on new rev- enues. Hence it is that while Germany piled treatise on treatise, all deep, scholarly, and broad, covering the whole subject of Public Finance, we have had to wait until 1892 for a systematic treat- ment of the whole field in the English language, 6 INTRODUCTION TO PUBLIC FINANCE and we still await such a one in French.^ It must not be understood that portions of the sub- ject were not investigated. There are, on the contrary, many important works on the various parts of the science. But what was entirely lack- ing until the appearance of Bastable's Public Fi- nance, in 1892, was an attempt to systematise the whole subject. Financial problems are becoming more important, because the functions of government which depend _,. , on them have grown in importance and The recent ° ^ growth of number. Our industrial, commercial, tn eres . ^^^ social organisation has become more and more complex, and it hence requires better and more efPective governmental organisation to keep it running smoothly. The more important it becomes to perfect our governmental organisation, the more do questions affecting the supply and application of material support rise into prominence. Whether we regard the constant expansion of the State's activities with favour or disfavour, it is equally important that the financial problems arising from these activities should be solved. Accordingly Pro- fessor Bastable's work has been followed by a flood of special articles, by the announcement of a treatise by Professor H. C. Adams, and by a translation of some of Professor Cohn's published writings on the subject. 1 Leroy-Beaulieu, however, covers all but expenditure in a masterly manner. INTRODUCTION 7 Sec. 3. On account of the close relation exist- ing between Public Finance and Political Economy, most of the discussions as to the proper jyj^ 3„,„g method for the latter bear with equal methods avaii- able as in force upon the former.^ But the nature poiuicai of the materials with which Public Fi- Economy. nance deals is such that in general the inductive method has a wider possible scope, and the deduc- tive a narrower field than in the larger science. The historical and comparative method is most ser- viceable for ascertaining the conditions under which different kinds of taxation work. The general ef- fects of taxation, its shifting and incidence, the effect of expenditure and public debts, can be best studied deductively. The deductions in this case are derived from the conclusions reached by the previous method, and from principles derived from Political Economy. Inasmuch as the purpose of the present book is merely to expound principles already determined by the science and to use the facts of financial practice rather as illustration than as proof of the doctrines advanced, it will not be necessary to acquaint the reader, in each case, with the method used to ascertain the truths stated. In the main, therefore, we shall follow what has been aptly called the method of instruction, which is in a sense an inverted induction, in which the principle is first stated and then sufficient facts are adduced to show that the principle is true. 1 Cf . Keynes' Scope and Method of Folitical Economy. 8 INTRODUCTION TO PUBLIC FINANCE The subject falls naturally into four parts: (1) Public Expenditure, (2) Public Revenue, (3) Pub- Divisionofthe lic Debts, (4) Financial Administration. subject. Of these, Public Expenditure and Fi- nancial Administration have, until recently, not been the subject of important works in the Eng- lish language, and, therefore, a few words in de- fence of their incorporation are necessary. Public Expenditure is as much a part of Public Finance as Consumption is of Political Economy. While it belongs peculiarly to Political Science to determine what the lines of expenditure shall be, just as it belongs to Ethics to teach the individual in what direction he should use his wealth, yet, when the lines of expenditure have been determined, its form, amount, and effect belong to Public Finance, just as the form, amount, and effect of consumption be- long to Political Economy. Consumption, or the satisfaction of wants, is the end and aim of all production and distribution. So is expenditure the end and aim of the collection of revenues and of the other financial activities of the statesman. To ex- clude, at least, a statement of the forms and the cus- tomary direction of expenditure would Mixpenditure •' '^ should be be to overlook the purpose of all the included. j.gg^_ g^^. ^j^gj.g jg g^..^ am,tjiej. consid- eration that emphasises the need of a statement of the general objects of expenditure. The amount of expenditure is generally determined first, and after that has been settled the required revenue INTRODUCTION 9 is obtained. In this Public Finance diifers mate- rially from Political Economy. In the broader science it is generally assumed that the individual cannot regulate his income by his wants, but must limit his wants to his income. In some cases this difference fades away. Cities often have to forego, temporarily at least, desirable improvements on ac- count of the increased burden they would impose on the finances. But in general we find that the mod- ern State is quite as likely to neglect some important and desirable function which it could perform, as to increase its functions beyond what would be wise.^ If this is true, and that it is so will be seen in the course of the discussion, then it would be well to ascertain the main features of expenditure at the outset. But we are not obliged to justify or con- demn the different lines of expenditure that are deemed by the leading nations to be wise or expedient.^ ' Cf. Cohn, Finanzwissenschaft, p. 183. ^ Another strong objection to entering into a discussion of the advisability of the different lines of expenditure, has been mentioned above in the paragraph showing that Public Finance should be studied as a, science and not as an art. If we discuss whether certain expenditures ought to be made, or should be enlarged, or curtailed, we are leaving the safe scientific ground of what is or will be. The danger of thus falling from the high plane of scientific impartiality to the level of political wrangling is fre- quently illustrated by the work of Leroy-Beaulieu. Bastable's work, although saved from anything like a similar failure by the author's masterly ability to defend his position, is yet certainly marred by too frequent judgments concerning the advisability of existing features of fiscal practice. 10 INTRODUCTION TO PUBLIC FINANCE Financial Administration is properly regarded as the fourth division of the subject, because it is as necessary to know liow a State gets its revenues as to know whence it gets them and for what it spends them. This department, too, deals with a large num- ber of technical details which would only cumber the other parts if taken up in connection with them. Of the four divisions. Public Revenue is necessarily „ , , the largest : probably for reasons akin Needed re- o r j forms make to those that influenced previous Eng- u ic eve- ji j^ writers to give taxation their ex- nue the most 6 important clusive attention. It is here that the '""^ ' most urgent reforms belong, and hence the need of understanding existing conditions is most pressing. The distribution of the various financial activities among the different divisions of the government, federal, national, or local, will be noted in connection with the discussion of each part of the subject. Sec. 4. The continued lack of any systematic treatise on the subject has left classification in a Uniform most chaotic state. From the point of method of view of form, merely, this is the most seri- classi/ication • -r. foraiiparts ous defect m Bastable's pioneer treatise of the subject, q^ ^\^q subject. It lacks uniformity in the methods of classification. In the present work the attempt has been made to use the same method of classification from beginning to end. It is that suggested by Professor Cohn for all public charges, and afterwards developed in a somewhat different INTRODUCTION 11 way by Professor Seligman.^ The charges made by the government upon individuals vary in character according as the special benefit conferred upon the individual is made the exact or the partial measure of, or is not allowed to affect at all, the burden im- posed upon him. Public Revenues and Public Debts have already been classified in this way, and it is very easy to classify Public Expenditure and Administra- tion in the same way. The nature of this classification and its appli- cability to the whole subject may be explained by reference to the well-known customs of „, , , ThR nature of our large athletic clubs. For member- thu ciassifica- ship, and the usual privileges of the club, *^°^^l^ ^'^"^^^^ each member is assessed the same sum, practice of .. /.,i ,1 .J.J. i,-!, athletic clubs. irrespective of the actual extent to which he uses the club, and without reference to his ability to pay, that being assumed for this purpose to be equal to that of every other member, and certainly without reference to any known ability to pay more. This fee is justified by the common benefit con- ferred. If, however, the member makes use of the dining-room, or asks for special privileges such as the private use of the club quarters, grounds, boats, appliances, etc., he pays an additional sum, meas- ured, generally speaking, by the special benefit con- 1 Cohn, Finanzwissenschaft, pp. 104-118, esp. pp. 117, 118; Seligman, Quarterly Journal of Economics, May, 1892 and 1895. Hints of the same classifications are found in Malclius and Hoff- jjian, 12 INTRODUCTION TO PUBLIC FINANCE f erred upon him. Again, if the club is in debt, or proposes to enlarge its facilities, not infrequently a subscription paper is passed around and each member is urged to contribute, not the same amount all others have subscribed, nor yet in proportion to the use he makes of the club, but "as much as he is able." And lastly, there are not infrequently cases where poor but promising athletes have been admitted, in order that the club may have the glory of their prowess, and have been excused from dues. Now there is an almost perfect analogy between such a club and the State in respect to the con- tributions demanded, the benefits conferred, and the method of operation. Generally speaking, the State endeavours, in collecting revenues, to impose an equal ^ burden upon all for the support of those functions that are regarded as conferring a common benefit, and a special burden for the support of those activities which confer a special benefit, and under certain circumstances to increase the burden imposed upon the very wealthy, who are regarded as able to bear more ; and lastly, to tax all for the support of the poor. Not that the State always succeeds in its endeavour, nor that all States recog- nise equally the desirability of the attempt; for in Public Finance expediency necessarily plays a large part. But most States have come to recog- nise more or less clearly these ideals, and their policy can be conveniently summarised in this way, 1 What is meant by " equal " will be discussed later. INTRODUCTION 13 The various activities of the State can be easily classified, according to the degree of common or special benefit they are supposed to state activi- confer upon the citizens, or tax-payers. *'«« <^onfer COTYhTftOTh bSYlB^ The various groups shade into one an- fit or special other, of course. But the extremes are 6e»«^«- perfectly clear and fundamentally different. Thus, it is universally admitted that the functions of the general administrative and legislative departments are of such a character as to give a common benefit, for which, ideally, every one should pay according to some scheme of supposed equality. But at the other extreme there are many things done by the State which confer so special a benefit as to justify a special charge. For example, when the State carries a passenger or a box of freight over its rail- road, or carries a letter, or provides the citizens with china or tobacco, it confers a special benefit. Between these two extremes there are any number of grades, according as the predominant thought is that of common w special benefit, when both ideas are present. But there is one more consideration that must be introduced. There are a certain num- ber of State activities which it is in the interest of the whole to have performed, but which accrue to the special benefit of certain classes, who on account of poverty are unable to pay for that benefit; and if the State is to perform these functions, it must call upon the other classes for assistance, excusing the poorer. Theoretically, the support of the poor 14 INTRODUCTION TO PUBLIC FINANCE and defective classes is an activity conferring a common benefit upon all the other members of society, and hence they are called upon to contribute accordingly. If we consi^Jer it the moral duty of society as a whole to help the weak, then the relief of the poor confers a common benefit. It is the same if we look upon poor relief from a less altruistic point of view, and consider that society is merely protect- ing its own interest, as, for example, in isolating the feeble-minded, so that they shall not propagate their weakness. Without going farther into details, which will receive attention later in the book, it is now clear that this method provides a feasible way of classify- ing public activities and public revenues. When we once have a satisfactory classification of revenues, it is easy to classify debts, inasmuch as they rest upon the revenues. The administrative features of the financial bureaux will fall naturally into place also. A single method of classification, therefore, will pervade the work from beginning to end. The classification will help us to get at the economic ■ ^ , , features of expenditure, reveal the iusti- Advantages of r ' j this classifieds ficatiou and measure of taxation, and *''°"' show us the essential character of each kind of public debt; namely, the kind of credit upon which it is based. It must not be understood that the assignment of any activity to a particular group is permanent. Activities that were once regarded as conferring INTRODUCTION 15 special benefit — as, for example, a large part of the administration of justice — come in time to be re- garded as of common benefit. Such changes often proceed with rapidity, ani the stages are not passed through synchronously by all States. ' There are, for example, many cities which toward public let private individuals provide the water "f ""''«* •^ ^ changes. A supply. Others provide it themselves, general move- on precisely the same terms as indi- '««"«/««'«;<« ^ •' the idea of viduals would, while others provide it common bene- much as they do other special privileges, ■^'' regarded as conferring both special and common benefits; and very probably the time is near when most large cities will regard it quite as much a matter of common benefit to provide each and every citizen with at least a certain amount of water at the cost of the general taxes, as they now regard it a matter of common benefit to dispose of the sewage, a function which was once considered the duty of each citizen, and is still so regarded in many cities. But however mutable our classes may be, they are clearly discernible, and it is generally only by slow degrees that we find cities proceeding from one end to the other of the systematic grouping. While there seem to be general tendencies, which transfer all activities from the special someactivi- benefit to the common benefit plan, there «««« ^™«« '° ^^ regarded as of are a few exceptional cases where the common bene- movement is the other way. The support fi'- of religion is such an instance. Originally almost 16 INTRODUCTION TO PUBLIC FINANCE the sole object of State expenditure, this has now, after passing through various ups and downs, come to be regarded as of such special benefit that it is being gradually excluded- from the sphere of the State, and left to private support. PART I PUBLIC EXPENDITURE CHAPTER I THE NATURE OP THE STATE, ITS FUNCTIONS AND THEIR CLASSIFICATION Section 1. The State is the centre of Public Finance. The State requires money and services for the performance of its functions. The first question is what is the nature of the State, and what are its functions ? To answer this we shall have to borrow a little from Political Science. The best recent authorities on Political Science seem to an- swer the question, " What is the State ? " with a more or less expanded but not essentially modified restatement of Aristotle's famous dictum : " It is manifest that the State is one of the things that exist by nature, and that man is by nature a political animal." The State is an organism into The state an which the individual is born, and through organism. which alone he can hope to reach his highest devel- opment. Upon its existence, and the perfection with which it performs its functions, depends the degree c 17 18 INTRODUCTION TO PUBLIC FINANCE parti of social organisation possible. The State seems to be God-given to enable society to organise on a grand scale for the accomplishment of practical ends far beyond the reach of the individual, — ends upon which the welfare of the individual depends.^ The two opposing theories as to the proper sphere of the State, Individualism and Socialism, stand for two grand truths. The one for the truth that the individual, if he is to accomplish his manifest des- tiny, must be allowed or assured room enough for the free exercise of his powers so as to develop them, r .. . . ,. and to expand. Such individual devel- and Socialism opment is necessary for the advance of reconcilable, go^iety. The second, that the State affords the individual the surest means of obtaining the assistance of his fellows, so necessary to his own complete manhood. The way of reconciling these two theories is pointed out in the Christian doctrine that true freedom consists in perfect obedience to the law. Anything short of perfect obedience to the highest law is failure to attain the highest freedom. The constant intrusion of the State on fields of The extension activity previously given to the individ- of state func- ^^^ -^ ^ natural result of the constant tionsnotjusti- fiabieapriori. increase in the separation of employ- ments, necessitating more extensive organisation. As the individual becomes more and more depend- ■r 1 Cf . Kidd, Social Evolution ; for detailed analysis of the nature of important modern states see Burgess, Political Science and Comparative Constitutional Law. Chap. I THE NATURE OF THE STATE 19 ent for the completeness of his own life on his fellows and their faithful performance of the duties assigned to them, the organisation of the State be- comes correspondingly more perfect. As regards this increasing importance of organisation, the following will fairly summarise the practice of advanced na- tions. It is impossible to approve on a priori grounds of every intrusion of the State into fields hitherto set aside for the individual. Only when such in- trusion does not lessen individual power, energy, ambition, and ability to advance, is it permitted. And only when it promises definitely to increase the importance of the individual, in the long run, is it desirable. The burden of proof is therefore in each concrete case thrown upon the persons who would have the State advance into new fields. There is no absolute limit to, but only a general presumption against, the assumption of new functions by the State. Sec. 2. If Political Science cannot in the nature of things give us any definite, theoretical limits to the expansion or the contraction of State functions, can such limits be found in Public Finance ? If the common statement that " the State regu- lates its income by its expenditure and Finance set not its expenditure by its income " is ««!' '"'"* *" altogether true, there can be no limit set expansion by Public Finance to the possible expan- "f state a of 77) if IP ^ ? sion of State functions. But there are as a matter of fact many important exceptions recog- 20 INTRODUCTION TO PUBLIC FiNAtfCE part! nised.^ Those exceptions are : (1) that statesmen in deciding as to the advisability of any new expen- diture necessarily consider the amount of burden it will impose on the tax-payers. The expansion of municipal activities in the last twenty-five years has been so rapid that at present any further expansion is, in many instances, at least temporarily checked by the difficulties in the way of meeting the cost. (2) There are some . instances where for political reasons income has outrun what was regarded as wise expenditure and new ways of spending have had to be devised. This is a decidedly more unfortunate state of affairs than the other, for such forced expen- diture seldom takes a wise direction. Witness the wholesale plundering of the United States treasury for pensions. (3) Expenditures may sometimes rise very rapidly, and necessarily so, at a time when it would be extremely unwise to attempt to increase the revenues. At such times the practice of nations, — a practice that has proven itself wise, — has been to let expenditure run beyond the income and borrow the difference. One of the prime requisites of a good system of public revenues is that the sums taken from the A limit set by people each year in the various ways the requisite ^j^^^ ^^ ^^ ^^^. ^^ possible. The of steadiness •' ^ in revenues, rcason for this wiU be made clear under the general consideration of revenue. That fact, however, forbids our determining the anmial reve- 1 Cf. Bastable, p. 42 ; Wagner, I., sec. 11. CHAP. 1 THE NATURE OF THE STATE 21 nues absolutely by the annual expenditures. The general practice of nations is to increase expendi- ture, (a) when it is absolutely necessary, (6) if not absolutely necessary, when it offers advantages which more than compensate for the increased burden on the revenues. The experience of nations has also shown that it is universally better to „ ,. •' Practice of do the public business, if expenses are nations recog- increasing rapidly, on a deficit rather "«»««««""'■ than on a surplus. If expenses are for a consider- able period quite uniform, the usual policy is to keep the revenues, as nearly as possible, equal to them, but not in excess of them, and when expenses can for some reason be lessened, some of the reve- nues may be applied to the amortisation of accumu- lated deficits. It would seem, then, that steadiness of revenue is treated as the more important consid- eration. Herein lies a limit, but not an absolutely fixed one, to the expansion of expenditure and of State functions. To sum up : the general character of public ex- penditure, especially as to Avhether imperative or not, as well as to its particular direction, summary of will depend primarily upon considera- *^^ argument as to the limi- tions which belong to Political science, tation of state Its amount will depend on the revenue- functions. yielding strength of the State, and upon the effect which such expenditure will have thereon. The danger made so much of by some writers^ lest, 1 Roscher, sec. 109. 22 INTRODUCTION TO PUBLIC FINANCE pArt i revenues being obtainable by compulsion, that com- pulsion be exercised for the benefit of interested persons, who gain particularly by the increased spending, is in a democracy replaced by the corre- sponding danger lest too meagre supplies be granted by the voters who must themselves pay the larger part of the revenues, and advisable or even neces- sary lines of expenditure be omitted or seriously curtailed. Sec. 3. Expenditure, like every other feature of Public Finance, changed radically in character and direction during the eighteenth century. Therefore, before proceeding to analyse present expenditure, we shall do well to take a brief survey of expendi- ture before this century. In the early stages of State life the forms of property were few, public life was identified with the family and with religious life. „ ,,. There was little call for definite public Puohc ex- '■ penditurein expenditure. The chief item was for ear y times. religious observances, and for these pur- poses only was there a distinct public treasury. Foundations for the support of religious observ- ances, as seen in Greece and Rome, are extremely old. The temples have their own groves, lands, mines, and flocks, receive contributions, and exact a tariff for their services. Materials for the study of this period are scant. Services of a public char- acter are performed by all citizens as a matter of course. In war they are the warriors, they furnish their own arms. Their reward is in the success of CHAr. I THE NA TURE OF THE ST A TE 23 their enterprise. By mutual effort, or the slave labour of conquered peoples, they build their fortress- cities, ships, roads, and temples. The simplicity of economic life forbids the rise of any proper system of public revenues. Taxes are levied on conquered peoples, but the free citizen is exempt. There is practically no division of labour in State matters which would call for a paid public service. Greece and Rome emerge from these primitive forms with a more complicated system of expenditure, but with relatively little advance in revenues. Sec. 4. In Athens we find a highly developed system of expenditures, almost communistic in char- acter, and greater than that of other Athenian ex- nations of Greece on account of the pendUure. sources upon which the city treasury might draw and the peculiar circumstances in which the city was placed.! The expenditure for public buildings and public works was particularly large, as were the extravagances of public festivals and sacrifices, of donations to the people, compensations for at- tending the assemblies, and the like. Peculiar to- Athens, among all the nations of that era, was the assistance rendered at the public expense to the poor and especially to the children of those fallen in war. Regular expenditures are said to have varied from 400 to 1000 talents, or from 1410,400 to $1,026,000. Extraordinary expenses in time of 1 The outline in the text is necessarily very brief ; for a longer account see Boeckh, 27ie Public Economy of the Athenians, 24 INTRODUCTION TO PUBLIC FINANCE parti war were relatively small on account of the rendi- tion of voluntary services by the citizens. In Rome there was no distinct public budget in the earlier days of the republic. ^ The public wealth was not distinct from the private wealth of the citizens. With the increase of the prov- Sxpenditure inces and the receipt of tribute from in Rome. them Came regular methods of public expenditure. The items directly borne by the State were the cost of the priesthood, of buildings and other structures and roads, of the army, of the general administration, and of the distributions of food, grain for the city population, donations of money, oil, and wine. The army was first paid in 406 B.C. But for a long time afterward the remuneration amounted to little more than the re- imbursement of expenses. At first the Emperor was supposed to live from his own private prop- erty, but as he had control of all the public rev- enues, the distinction was difficult to maintain. The later courts were extremely extravagant. Greek, and especially Roman, expenditure had many features similar to modern expenditure. In classic civilisation, division of labour was suffi- ciently developed to render possible the pay- Divisionof ment of those who devoted all their ItZZ'n. t™« ^^. Thus in France the customs duties are not officially classed as indirect Exceptions m taxes, but form a class by themselves official usage. akin to direct taxes. In the United States at the time of the Civil War the income tax was viewed by the courts as an indirect tax, or at least not as a direct tax in the sense of the Constitution. i This decision, however, was reversed in 1895 by a bare majority of the same court, which decided that a similar income tax was a direct tax in the meaning: of the Constitution. This decision is in accord with the distinction made above. The principal direct taxes are : the land taxes, building taxes, property taxes, poll taxes, class taxes, income taxes, industry taxes; the indirect ^^^^ ^ taxes : the customs duties (with the ex- ing to each ception of the French), internal excise '" taxes, transaction taxes, most fees and licenses. The inheritance taxes, or death duties, as they are called in England, are not easy to classify. In the first sense they are direct taxes, and in the second they are indirect. This is, perhaps, the only impor- tant tax that cannot be easily classified, j,^^ inhen- The inheritance tax wherever it exists is tance tax hard used because it is expedient and with- '" '' "**'-'^- out much cost yields a large return. It is levied 1 Springer v. United States, 102 U. S. 508. See article "The Direct Tax of 1861," Quarterly Journal of Economics, July, 1889 ; Seligman, "The Income Tax," Forum, 1895. 90 INTRODUCTIOIsr TO PUBLIC FINANCE part ii at a time when the persons paying it are not in position to demand a strong justification. It is sometimes justified on the ground that it compen- sates for previously unpaid taxes. If this justi- fication holds, then the inheritance tax must be classed as a direct tax. Sec. 4. A few other terms which are often used as the names of different groups of taxes and help _ in a way to classify them must be men- Taxes on per- •' •' sons, property, tioned in this connection. We some- or income. times speak of taxes as being separable into (1) those on persons, (2) those on property, (3) those on income. These terms do not indicate the final source from which the tax is paid, but the basis upon which it is levied. 1. In the case of personal taxes the different per- sons who are to pay the tax are listed and assessed, either (1) individually, as in the case of per capita taxes, or (2) as representatives of a group, as in the family or hearth taxes, or (3) according to Personal some characteristic, as rank in life, office, .taxes. employment, age, etc., supposed to be indicative of the benefit they receive from the gov- ernment or their ability to pay. A complete sys- tem of such taxes might be built up, and it is possible to suppose that all the requirements of justice could be met thereby. 2. Taxes on property are those taxes which take the property owned by a person as the index either of the benefit received or of the ability to pay. CHAP. II CLASSIFICA TION OF TAXES AND FEES 91 These taxes may be considered as pursuing prop- erty wherever it is to be found, with little or no regard for the personality of the owner. Property They are not, of course, in any but the *'*="^»- most exceptional instances, paid out of property. But no particular regard is had to the real source of payment. They may be levied upon anj^ and every kind of property. They are sometimes called real taxes from res, things. But this usage has no established sanction in English ; in that language real taxes are taxes upon real estate. 3. Taxes on income in the broadest sense are all those taxes which make wealth in the . ... 1 1 • 1- Income taxes. process or acquisition the basis of assess- ment. These are of two principal kinds: (1) tliose which are levied upon the annual increment of wealth, as such, irrespective of the person who is the recipi- ent thereof. That is, they treat the various items of wealth increment as the basis of taxation without regard to the grouping of these increments into a whole in the income of any particular person, and consider the person, paying the tax, only in so far as he is an income producer through his own activities. This is the character of the British income tax. (2) Tliose which demand of each person, or seek to ob- tain concerning each person, a summary of the total income he receives. This latter tax is sometimes so treated as to make it difficult to distinguish it from a personal tax, for the different persons are listed and classed according to amount of income they receive. 92 INTRODUCTION TO PUBLIC FINANCE part il By a peculiar and entirely unwarranted use of com- mon English terms in a strange and foreign sense, Subjective property, income, and the like have been and objective palled the tax objects, and the correspond- unallowable ing taxes objective taxes, meaning that distinction. they are taxes on things in distinction from taxes on persons. On the other hand, the per- sons are called the tax subjects, and personal taxes called subjective. This usage, although it has the sanction of a great authority, in Professor Bastable, has fortunately not been favourably received. Pro- fessor Seligman, in a review of Bastable's book, pointed out that by the object of a tax we usually mean the purpose of the tax, and the tax subjects may be things as well as persons subjected to the tax.^ Sec. 5. Following the lead of Adam Smith, various attempts have been made to classify taxes Classification of taxes, ac- according as they fall upon one or the cording as other of the different shares in distribu- they fall upon rent, interest, tiou, — rent, interest, profits, and wages. profits or But, as Bastable has well shown, the sources from which the different taxes are paid are generally a combination of several of these. The wealth or income of very, few persons consists of simply one of these shares. The attempts to carry out such classifications consistently have failed. Bastable's attempted compromise by calling such taxes as can be traced directly to one or the > Political Science (Quarterly, VII., p. 717. CHAP. II CLASSIFICA TION OF TAXES AND FEES 93 other shares in distribution primary, and all others secondary, brings us to practically the same results that were gained by Wagner in the discussion of direct and indirect taxes. His primary taxes are those called direct taxes above, his secondary are the indirect. One other important set of distinctions must re- ceive our attention, because it has the sanction of two prominent authorities. Wagner suggested and Cohn accepted the classification into, taxes paid ,„ ^ ^ Taxes on ac- out of wealth at the time of its acquisi- quisUion, tion CUnverb}, or while in possession *«**=« ""P"'- ^ -^ ^ session, and (^Besitz), or upon its consumption ( Ver- on consump- h?-auch'). This distinction, according to '"'"■■ the stage in which the tax finds the wealth from which it is paid, is often useful in showing the ef- fects of certain taxes. Another very valuable distinction is that made by the term "taxes on revenue." Taxes Taxes onreve- on revenue are those that fall or are as- '™^- sessed on the revenue, or income yielded by different kinds of property. These are a species of taxes on acquisition. The three sets of terms which we have used in this work are : (1) direct and indirect taxes, (2) personal, property, and income taxes, (3) taxes paid on wealth at acquisition, in possession, and at the time of consumption. Another distinction based upon the method of fix- ing the rate is important because of the use made of it 94 INTRODUCTION TO PUBLIC FINANCE part II in the American Constitution. That is the distinc- tion between apportioned and proportioned taxes. ,. , Taxes are apportioned when the whole Proportioned ^-"^ andappor- aniount to be raised is fixed and then tioned taxes, ^i^j^g^j among the different tax-payers. They are proportioned when the rate is fixed and then assessed on the base, which may be either the property or the income of the tax-payers.^ Sec. 6. We now come to the important task of classifying fees. The essential consideration to be Classification held in mind about these payments is of fees follows that they cover a part of the total cost that of govern- ,...,., ment activi- 01 certain governmental activities, which **^*- are performed for the benefit of all, but yet confer a real or assumed special benefit on the individual. When the payment covers the whole or a little more than the whole cost, it is a price. Since fees are levied upon the receivers of certain benefits from the government, it follows that the only classi- fication for fees is that which shows what activities of the government convey the benefit. We can thus classify according to the different departments of the government, for the services of which fees are collected. 1. The most numerous are the judicial and legal Judicial and fees, the character of which has already legaifees. been made clear from the discussion of the nature of these expenditures.^ Examples of 1 See further definitions in sec. 8. 2 See Part I., Chap. III., sec. 4, CHAP. 11 CLASSiFICA TiON OF TAXES AND FEES 95 these are the regular court costs and fees, probate fees, the charges for recording deeds, mortgages, contracts, marriages, etc. 2. Next come the administrative fees for the spe- cial services of that department. They are : police fees, charged for the special benefits ac- Administra^ cruing or supposed to accrue to the indi- '**'« /«««• viduals from the exercise of the police power of the State ; the fees for education, when charged ; a large number of industrial and commercial fees for services rendered individuals in their industrial and commercial undertakings. The industrial fees in- clude license charges for permission to carry on cer- tain businesses (care must be taken not to confuse these with police fees, nor with business taxes as- sessed on the same plan). Commercial fees include road and canal tolls, harbour dues, and a number of similar charges. A very important class of administrative fees are those known as special assessments or in England as " betterment " taxes, levied for local improvements affecting property, as streets, sewers, etc. special assess- Professor Seligman has defined these as '«««■<«• follows : " A Special Assessment is a compulsory contribution paid once and for all to defray the cost of a specific improvement to property undertaken in the public interest, and levied by the government in proportion to the special benefits accruing to the property owner." He regards them as of so much importance as to make them a class of revenues 96 INTRODUCTION TO PUBLIC FINANCE part ii co-ordinate -with taxes and fees. Strictly speaking, they are fees. Sec. 7. The revenues derived from prices or from the production and sale of commodities or services Thu analysis are of exactly the same character as the of prices e- gj^pjjjjjgg gf ^j^g people. This is true cai Economy, whether the products sold are derived from the public domain or from public industry. The principle underlying this kind of revenue, the analysis thereof, and to a certain extent the disposi- tion thereof, are the general subjects of Political Economy. To introduce a discussion of it here would be to invade the main fields of economic sci- ence. Surely, unless we commit the- fallacy commonly attributed to the mercantilists of regarding money alone as wealth, and treat all the money flowing into the treasury as revenue, no matter whether it merely takes the place of other kinds of wealth or not, we must exclude a full discussion of prices from the subject of public revenues. But since a great deal has been made by writers of note, of the money prices received in this way as a part of public revenues, a few words in defence of this position are necessary. ^ Let us take the common example of the water supply. We may suppose that a certain city is supplied with water by two private companies, both of which have the ^ Most German authorities discuss either the net or the gross income from domains. Cf. Bastahle and Seligman on "Classifi- cation." CHAP. II CLASSIFICATION OF TAXES AND FEES 97 right to lay pipes wherever they wish. They will then supply water, supposing that they actually compete, at prices determined mainly by the costs, „ , which are those of management, interest the water sup- on the " plant," the supplies and running ^ ^' expenses. The average prices will be considerably higher than need be by virtue of the duplication of the plant, etc. Suppose, however, before any ma- terial duplication is reached they unite, forming one company which has the monopoly. The charges will now be regulated by " what the traffic will bear," and provided the supply is ample will tend to conform to those rates which will yield the largest net returns. The principles by which monopoly prices are regulated are well known to students of economics. The charges in this case cannot be greater than the cost to the citizens of operating their own wells, nor even so high as to induce the citizens to economise materially in their use of water. But suppose that the townspeople are not content with the rates, or with the service. They attempt regulation and fail. They may determine to buy out the plant. Once the city owns the plant it may run it in one of four ways. (1) The four It may run it as the company did, to "~5„. make the highest possible profits, charg- agement. ing all or nearly all the traffic will bear. The surplus over costs goes into the treasury and helps to defray the other expenditures. But the rules determining what the traffic will bear are rules of pure econom- 98 INTRODUCTION TO PUBLIC FINAMCE part li ics. There is absolutely no difference between this public business and a private business. The method of " charging what the traffic will bear " is the method in economic life of determining the value of commodities so sold. It takes the place in the sale of monopoly goods of the " free dickerings of the market " by which the price of other goods is determined.^ The private company had to pay ex- penses, so does the city ; the private company en- joyed a surplus or made an " unearned increment," so does the city ; the private company spent this surplus to the satisfaction of the wants of its stock- holders; the city spends the surplus to the benefit or satisfaction of the general wants of the citizens, who may be regarded as its stockholders. Even if it fore- goes taking quite all the surplus, the principle is the same. A private company often does that in defer- ence to public opinion. (2) The city may decide not to make money, but to charge only what the service costs and make the service as good as possi- ble. It then foregoes taking the full price of the wealth that it has produced and allows each con- sumer to enjoy the surplus. Then the payment by the citizen is a fee. (3) It may charge a fee much smaller than the cost, or a fee for all water con- sumed over a certain amount, but provide a certain 1 See Sidgwick, Bk. II., Ch. X.; Andrews, Institutes of Eco- nomics, p. 112; Marshall, Ec. of Ind., pp. 180 fi.; Senior, pp. 103-114; Sumner, Essays, p. 46; Hadley, R. B. Trans., p. 100; Sellgman, Bailway Tariffs, etc., pp. 8fE. CHAP, n CLASSIFICATION OF TAXES AND FEES 99 amount of water for each citizen at the common cost. (4) It may distribute the water freely and pay for it out of the common fund derived from taxation. Now the sums received in the last three cases are all regarded as payments for the public Q^iy three of service. They are an essential part of *'***" "^"t^o^^ governed by the public revenues, taxes, and fees, jucaiprind- Their amount is not determined b}^ P^^^- any process known to political economy for de- termining prices. But so long as the principles determining the amount of the money taken and the management of the business are, as in the first case, purely economic, there is no need of including this money, as distinct from the wealth produced in the revenues of the public treasury, and burdening financial science with a discussion of matters fully within the scope of the larger science. All that we need to say is that the State produced so and so much wealth in the form of such and such com- modities which it sold for so and so much money. These economic industrial or commercial revenues are supplemented by others which are of a fiscal character.^ As Professor Cohn has so Avell pointed out, it is a very different problem that we have to deal with when the management of some industry Taxation by is made merely the form or means for "^Znafmo-' collecting a tax from certain classes of nopoiy, persons. The French tobacco monopoly, for exam- 1 Cf. Cohn, sec. 98. 100 INTRODUCTtON To PUBLIC FiNAMCB part It pie, is not in any sense to be looked upon as an in- dustry undertaken in the common interest, or even in the interest of a particular class. It is the aim of the French government to tax the users of to- bacco. This aim is attained by other governments through different processes. The form of a monop- oly has been found to be remarkably easy, expedient, and successful as a method of indirect taxation. Sec. 8. The base of a tax is the thing or phenom- enon upon which the tax is assessed. The base is not always the source. Thus a tax The ** base." based on property is generally paid out of income or revenue, which comes sometimes from the property, sometimes from some other source. The direct taxes are almost always called by the name of the "base." The tax-rate is the amount of the tax falling on each unit of the base. The base is generally ex- The"rate" Pressed in units of values; as for ex- and the "unit ample $100 worth of property. It may, of e ase. however, be some other unit, as one per- son, one ox, one acre, one yard, one ton, etc. Some- times the unit of the base is very complex. For example, in Vermont the rate is so much, say 11.50 on each fl.OO in the " Grand List." But only 1 per cent of certain kinds of property is entered in the grand list. This arose, originally, from the custom of fixing a definite uniform value for each piece of property, as so much per acre of land, so much per head of cattle, so much per horse, irrespective of CHAP. II CLASSIFICATION OF TAXES AND FEES 101 the actual value, and then fixing the rate upon this artificially constructed base. The rate may be proportioned, apportioned, pro- gressive, degressive, or regressive. When the rate is proportioned, it is the same per cent of all property. When it is appor- "Propor- tioned, the total amount to be raised is ^jo"^'^ " ™<« • ascertained and then distributed, share Honed" rate. for share, on each unit of the base. A tax is progressive when the rate increases more rapidly than the base ; that is, when a higher per cent is assessed upon the higher values "Progres- than upon the lower. This progression **'"' " ™^«- may be regular and start from the very smallest base, or one unit. For example, the rate may increase in some geometrical ratio, while the base increases in an arithmetical ratio. Of course any set of ratios may be chosen. The progression may be irregular in several different ways. Thus the progression may go by stages ; i.e. between certain limits, in arbitrarily fixed groups, the rate may be proportional, but increase gradually with each higher group. Or the progression may affect only certain parts of the base. That is, a certain minimum may be taxed pro- portionally, then a certain part taxed progressively, and the proportional rate may set in again after a certain high point has been reached. Again, a cer- tain minimum may be altogether exempt, and the rate after that progressive. The rate is degressive when the progression grows 102 INTRODUCTION TO PUBLIC FINANCE PART il smaller as the base increases. There are various ways of accomplishing this. The most common is to "Degressive " exempt a certain moderate amount of the ''"*^- base and deduct that amount from all larger sums, while a nominally proportional rate is levied on the remainder. In this way a proportion- ally increasing burden is laid on the larger amounts of the base ; but the ratio of increase grows grad- ually less, until, when the base reaches a very large amount, the increase in rate is practically nil, and the rate becomes practically proportional. For ex- ample, we may have an income tax in which the rate is 3 per cent on all income in excess of iSOO. The man who has $1000 pays 1.5 per cent on his whole income, while the man who has $10,000 paj^s 2.85 per cent, and the rate approaches but never reaches 3 per cent by ever decreasing amounts. So that the man with an income of $100,000 pays only 0.0015 less than three per cent. Another method is to make a deduction for the incomes below a certain amount only, the rate above that being proportional. A de- gressive rate is properly an irregular form of pro- gression. Both progressive and degressive taxes are sometimes called graduated. A regressive rate is just the reverse of a progres- sive or of a degressive rate. In this case the rate " Regressive" decreases as the property increases, and rate. ^ heavier burden is laid on the smaller amounts. The regressive rate may be irregular in as many ways as the progressive. That is, it may CHAP, n CLASSIFI.CATION OF TAXES AND FEES 103 vary in the reverse of any of the ways in wlaioh the progressive rate may vary. Assessment is the name applied to the whole proc- ess of ascertaining the amount of tax due from each person or property. It consists of two "Assess- steps, (1) the valuation of the property men*." or income, or the listing of the things taxed ; (2) the levying of the rate or tax, that is fixing the amount each unit is to pay. The tax list or roll contains the record of the amounts assessed and levied. In some European countries these lists are, for certain "Tax list." taxes, elaborate, permanent, or partly permanent records which serve various legal pur- poses as well as the fiscal, as for example the record of titles, and are called cadastres. Impost is a general term for any tax, but there is a tendency to make it synonymous .,.-,. J J "Impost." with indirect taxes. Customs duties are indirect taxes levied on the goods imported into or exported from "Customs certain territories. duties." Excises (English) or internal revenue taxes C American) are indirect taxes levied on „„ . „ "^ -^ Excises or goods produced or consumed within "internal rev- certain territorial limits. enue taxes." Toll was originally a general term for many taxes, but it has come to have a special ■ -, ■,■ -, 11 "Toll." meaning, and applies only to the charges for passage over roads, bridges, canals, etc. 104 INTRODUCTION TO PUBLIC FINANCE part ii A tax is said to be shifted when the tax-payer "Shiftin " reimburses himself from some one else. anci"inoi- The final incidence of the tax is the falling of the burden upon some per- son who does not shift it. THE TAX SYSTEM 105 CHAPTER III THE TAX SYSTEM Section 1. No nation has ever found it feasible to adopt any single tax as the sole source of its income. No nation at all advanced in civilisation has attempted to conduct its government entirely from the earnings of its domains or industries. Every civilised nation of to-day combines the three sorts of revenues, those produced by its own activi- ties and those obtained from taxation and from fees. And furthermore, no nation attempts to exist with only one of each of these kinds of revenues. These different forms are combined into a ^ "system" or general scheme, which con- 0/ various forms more or less closely to the general ZlldZtoZ ideal of justice which may have been national sys- adopted by the nation. To judge of the '^"'' justice or expediency of any tax it should be studied in its place in the "system." We have already seen the two main theories as to the proper measure of taxation, the one, that taxation should be measured by benefit, the other, that it should be measured by faculty. A perfect system would so combine the different forms that the total burden imposed would be in accord with the ideal adopted. 106 INTRODUCTION TO PUBLIC FINANCE part II There is a constant tendency toward the simplifi- cation of tax systems, although most modern systems The dream of ^^^ Still extremely complicated. It is a single tax. ^j^g dream of financial theorists, and has been ever since the science began, and it is the aim of many would-be reformers, to find a single tax that will furnish all the necessary funds for the support of the government. The Physiocratic impdt unique on the produit net is well known, as is also the jus- tification therefor. It is also well known wherein this fails. Modern proposals generally involve some- thing more than mere tax reform. The socialistic Single pro- demand for a single, exclusive income gressive in- ^^x with a progressive rate, is advanced come tax, and . , , » »» . t i the Georgian With a hope 01 effecting a redistribution land tax. of the Wealth of the world. Henry George's well-known scheme for a single tax on land has a similar ulterior purpose. His object is to free industry from trammels which he supposes are due to the existence of private property in land. In form his proposition is not unlike that of the Physiocrats. He is an extreme individualist, but he aims, like the socialists, at a new distribution of property. Of these two modern schemes for a single tax the first is perfectly feasible from the fiscal point of view. Such a tax could probably be administered and could be made to yield ample revenue. It fails, however, to answer the sim- plest requirements of justice. For example, it would not, unless our whole scheme of economic life CHAP. HI THE TAX SYSTEM 107 were first altered, seem just that the man whose property was benefited by the grading and metalling of a street should be entirely free from The socialistic a special charge for the special benefit. ^f'^'"^^/T, The scheme is inexpedient for three rea- unjust. sons : (1) it presupposes for its successful adminis- tration a method of distribution of wealth very different from that which the world now has ; (2) it demands a perfection in the technique of adminis- tration as yet absolutely unattainable ; (3) it would need, in order to be fairly administered, more hon- esty than men have yet shown in their dealings with the government. None of these reasons mili- tate in the least against the incorporation of an income tax in the tax system, beside other taxes. They apply only to its use as the sole source of income. But the second scheme, that of Henry George, is not only unjust and inexpedient, it is also not feasible, since it would not yield the necessary revenues. ^ It is unjust because its fundamental concept, that land values are solely due to the presence xhe Georgian of a large number of inhabitants, is ^^'^ff^e tax 1 T 1 1 would not untrue. The value of land, like that yield sufficient of other wealth, depends on the use revenue. to which it may be put. Moreover, as improve- ments are not to be taxed, it would mean a heavier burden on farming lands than on city 1 See Spahr, "The Single Tax," Political Science Quarterly, 1891 ; Seligman, Essays, pp. 64-94. 108 INTRODUCTION TO PUBLIC FINANCE part ii property. But in no case would the scheme yield sufficient revenue. It has been estimated that if the entire annual rental of the land of England were appropriated by the government, it would fall 1200,000,000, or ,£40,000,000, short of what is now needed to support the government. In the United States the matter is a little more difficult to esti- mate because it is not feasible to get a statement of the value of the land apart from the improve- ments thereon. Taxable real estate including im- provements is estimated by the Eleventh Census at 135,711,209,108. This was assessed at 118,956,- 556,675. The value of the improvements is hard to estimate. Probably it is on the average at least two-thirds of the total value. But in order not to err on the side which favours our argument we will estimate the improvements at merelj'' one-third of the total, which is certainly a moderate estimate. That would leave 123,807,472,739 as the highest value of the land. Suppose we take 3 per cent as the annual rental; we have $714,224,182 as the sum available for the single tax. Now the national government, the commonwealth governments, and the municipalities spend together over $915,954,055 annually. That is, at the most favourable estimate the single tax would fall $200,000,000 short of what is necessary to maintain the governments. Mr. Spahr estimates that in Connecticut the assessed value of land increased $36,000,000 during a period in which 3,000,000 were paid in commonwealth and local CHAP. Ill THE TAX SYSTEM 109 taxes. All of these figures, which err on the side of moderation, show conclusively that even in the United States no tax on land, alone, sufficiently- large to pay the entire expenses of the government could .be laid without appropriating enough to ruin the user of the land, and practically prohibit its cultivation. It may be urged that as the existing land taxes are regular charges, their capitalised value has already been deducted from the value of the land. But this would only be true if all the taxes now ^n tuxeK not fell upon the land. Most of the exist- capitalised ' and deducted ing taxes, however, fall upon other i„, the present sources of revenue and improvements. *'"^"'' °-f '""''• The abolition of all other taxes on different forms of property would also be unjust. This can be shown without abandoning the ground of the Georgian doctrine. Every kind of economic wealth may, under certain circumstances, and frequently does increase in value in such a way as to yield its owner an " unearned " increment. Why should that escape, and the " unearned " increment of land values alone be taxed ? Every tax tends to repress the development of the particular phenomenon on which it rests. ^ ^^ ^^^ A single tax of any kind will tend to would defeat -, n , • , J 1 • „ 4-i,„ its own ends defeat its own ends by repressing the j,^ „p,,,,,.„^ existent of the phenomenon which the thing upon forms the signal for its assessment. For example, in Mexico land is not taxed, but if the 110 INTRODUCTION TO PUBLIC FINANCE part ii farmer kills a cow, or sells a crop, he is taxed. Naturally this discourages any extension of the uses of land that involve this disagreeable consequence. The experience of nations which has led them to diversify the forms of their taxation is, therefore, supported by theoretical considerations. The tax system of the United States is still, and the tax systems of all European nations have been, until Tax system of recently, and are yet in great measure, mocernna- mere accidental iumbles of different his- iions not logi- J cai. torical taxes, which are retained simply for the revenue that they yield and not because of any belief in their justice. It is not often that nations are rich enough to enjoy what Professor Cohn has well called the " luxury of reform for re- form's sake." Their reforms have been most often undertaken for the sake of increased revenues. To be sure, the rough edges have been some- what worn away by the friction of economic forces, and the process of tax shifting has in some in- stances removed some of the worst injustices. But examined from the standpoint of some ideal sys- tem, the tax systems of many modern nations fail woefully. It matters little which ideal be the one held up by which to test them; whether it be that of the benefit theory, or that of the faculty theory, the failure is the same. Sec. 2. What in the opinion of nations consti- tutes the ideal of correct or just taxation ? The answer to this question is to be sought in the CHAP. Ill THE TAX SYSTEM 111 theories of taxation that have found favour, and are generally contained in the writings of econ- omists and financiers. The Physiocratic answer was, we have seen, inadequate. The benefit theory would say that each citizen should pay according to the benefit he receives. What is the benefit and how is it measured? The common benefits are, clearly, the peaceful enjoyment of life. The benefit liberty, and property. The protection theory cannot the State affords to life and liberty is existing ex- theoretically equal for all, that to prop- emptions. erties varies directly as the property varies. ^ A uni- form tax on each poll for the first two benefits, and a proportional tax on property, would seem to answer the requirements of this theory with sufficient accu- racy. But the relatively small returns from the poll taxes and the great expense and friction of collecting them soon led to their partial abandoiiment. Prop- erty then remained the basis. The value of property seemed clearly to depend on its revenue-yielding power. It is a matter of comparative indifference which is taken. Hence the idea embodied in the famous dictum of Adam Smith: "The subjects of every State ought to contribute toward the support of the government, as nearly as possible, ... in proportion to the revenues which they respectively 1 The benefit theory has heen illogically developed into a de- fence of progressive taxation. See Seligman, Prog. Tax., pp. 110 ff. I have not included this illogical side in the discus- sion. 112 INTRODUCTION TO PUBLIC FINANCE part ii enjoy under the protection of the State." ^ But here again as the industrial population separated from the soil and a large body of citizens arose, who had no land and little personal property, and who could ill afford to part with any of their earnings, humanity and expediency urged the exemption of the mini- Ttieexemption mum of Subsistence. It cost too much le mini- ^^^ caused too much bitterness to collect mum oj suo~ sistenoe. taxes upon those having only the bare necessities. Then came Ricardo's suggestion, "the power of paying taxes is in proportion to the net, and not in proportion to the gross revenue." The items that were to be deducted were the costs of production, among which were then counted the bread and meat for the labourers, which were re- garded very much as so much fuel shovelled into the furnace of a human machine. Hence it was argued that it would be too burdensome to production to tax what was necessary to maintain the productive power of the workers. A certain amount of income, therefore, should be exempt ; for if taxed, the tax would certainly be shifted. Fortunately, according to the prevalent theory of wages, the amount to be exempted would remain fixed, or nearly so, advanc- ing, if at all, very slowly. So that all incomes over a fixed amount were to be taxed proportionally; since the benefit to such individuals as possessed incomes . above the chosen minimum was supposed to be in 1 Bk. v., Chap. II., Part II. On the various interpretations of this passage see Seligmau, Prog. Tax., p. 94. Chap. Hi THE TAX SYSTEM 113 exact proportion to the amount in excess of the minimum. Stated broadly, this theory was as fol- lows. All taxes must be proportioned to benefit. Certain classes only are benefited, namely, those having income over a certain amount; that is, over the minimum of subsistence. They should be taxed on the amount above that minimum of subsistence. It would seem, then, that the money spent in pro- tection of the workers who lived on the minimum of subsistence was to be treated as if of benefit to the other classes. This puts the worker in the same category with the pauper for whom the State, from reasons of humanity, decides that it is worth while to care. With a clearer perception of the character of production and a realisation of the fact that the w^orker was a man the satisfaction of whose wants, even if they did not exceed the minimum of sub- sistence, was yet as important as the satisfaction of the higher wants of other classes, came a realisation of the inadequacy of this theory. It is now quite generally abandoned, except as the legal theory in America. Perhaps the best statement of the United States legal theory of what constitutes the just measure of taxation is given by Judge Cooley.i y^.fe^^^j^,. "If it were practicable to do so, the ory in the . i'iij.1 i -uj. United States. taxes levied by the government ought to be apportioned among the people according to the benefit which each receives from the protection 1 Taxation, p. 24. 114 Introduction to pubuc finance part h the government affords him ; but this is manifestly impossible. The value of life, liberty, and of the social and family rights and privileges, cannot be measured by any pecuniary standard; and by the general consent of civilised nations, income or the sources of income are almost universally made the basis upon "which the ordinary taxes are esti- mated. This is upon the assumption, never wholly true in point of fact, but sufficiently near the truth for the practical operations of government, that the benefit received from the government bears some proportion to the property held, or the reve- nue enjoyed under its protection; and though this can never be arrived at with accuracy, through the operation of any general rule, and would not be wholly just if it could be, experience has given us no better standard, and it is applied in a great variety of forms, and with more or less approxi- mation to justice and equality. But, as before stated, other considerations are always admissible ; what is aimed at is, not taxes strictly just, but such taxes as will best subserve the general welfare of political society." Benefit as a measure of taxation is therefore according to the admission of one of its strongest advocates inadequate. Only in special instances can benefit be directly measured. There, of course, it has been and will remain the basis of taxation, at least until the State shall decide that the special benefit has been merged in the common benefit. CHAP. lit THE TAX SYSTEM 115 Sec. 3. But the faculty theory, while offering some difficulties, is on the whole more satisfactory. The faculty theory is well illustrated by The faculty the history of the English poor law, to "'^''n/ '«««- 1 J V 1 trated by the which reference has already been made. English poor At first the attempt was made to supply '"'*• the wants of the poor by voluntary contributions. But it soon became apparent that all were not con- tributing "as God had prospered them." The idea that the support of the poor was a benefit to the other classes, except, perhaps, so far as almsgiving was supposed to ensure a man's salvation, did not appeal to the legislators. They anxiously avoided making the contribution compulsory because it would be hard to justify such a policy by point- ing to any benefit. But they felt that fairness demanded that each should contribute according to his ability. Indeed, this was their understand- ing of the Divine command upon which they were consciously acting. The Justices of Peace were, without any very definite instructions as to the mode of procedure, authorised to see that each person contributed fairly according to his ability.^ What then constitutes ability? The original idea seems to have been that the possession of prop- erty constitiited ability. But the value original idea of property depends upon its power to of faculty. yield the owner a revenue. If we consider landed property only, we find historically the greatest un- i Ashley, Economic History, II., p. 360. il6 INTRODUCTION TO PUBLIC FINANCE part il certainty as to whether men should be assessed according to some estimate of the salable value or according to its annual yield. This uncertainty Thu salable arose from the nature oi things. The vaueortie g^lable value of landed property was, annual ^^^oa- sr sr j ' nee. of course, determined by the annual produce or revenue-yielding power. In the middle ages land was not salable property; hence, it was the custom to value it for purposes of taxation according to the annual produce, or the annual rental value, which was determined by the produce. The history of taxation in the American colonies is very instructive as to the method of determining what constitutes faculty or ability to pay. Here for the first time in history, or at least since the fall of Rome, was a country that enjoyed almost absolute free trade in land. When the Connecticut proprie- tors bought in fee simple lands in Vermont, which they had never seen, to be sold again on the same terms to settlers, whom they had never seen, often for prices which the same lands would not bring „ , , . to-day, they were doing what was not Free trade m j i j o land in New possible in any European country at the ng an . time and what is only partly possible in most of them to-day, i.e. selling land as one sells wheat or any other commodity. The New England colonists, therefore, had the choice of two methods of assessing property in land : they could follow the older method to which they were accus- tomed at home, which assessed the rental valu« of CHAP. Ill THE TAX SYSTEM 117 the property, or they could take some method sug- gested by the fact that lands were really sold, in fee simple, for a price. In general they chose the latter, although there are numerous traces of the old method both in the tax laws and in other regu- lations that are of a similar character. It is un- fortunate that none of the investigations into the history of this period have been specially directed toward this point. Vermont furnishes one of the best examples of the principles underlying the colo- nial ideas of taxation. i There the conditions Avere very simple. Taxation was intended to cover all male inhabitants. Every male between „ ,. •' Taxation of 16 and 60 years of age, with a few defi- faculty in nite exceptions, was "rated" at £6 on «'™»"*- his person. That is, everybody was considered to be able to contribute something, whether he had property or not. Then the different items of prop- erty were " set in the list " over against the name of the owner at fixed rates. For example, each acre of improved land, 10s. ; an ox or steer four years old £4; three years old, ^3; two 3'ears old, £2; one year old, £1; a horse three years old or over, £2>; all "horse kind" two years old, £2. Money on hand, or due, was listed at £6 in the £100. Then all persons were listed "for their faculty," according to occupation and earnings : attorneys at from £50 upwards, as the value of their prac- 1 Wood, History of TaoMtion in Vermont. Columbia College Studies, IV. 3. 118 INTRODUCTION TO PUBLIC PINANC£ part It tice increased ; all tradesmen, traders, and arti- ficers "proportionally to their gains and returns." Other items of property were entered in the list in a similar way at fixed rates. The sum total of all the different items over against the name of each person was supposed to represent his total ability or faculty. The notable thing about all this is that only revenue-yielding property was listed. It was not a property tax purely, nor an income tax. But the thing which it sought to ascertain was how much ability or faculty each person had. All property that was regarded as indicative of faculty was listed, and many other things that were also indicative of faculty were included. Later, however, Vermont adopted a form more nearly in accord with the idea that property alone indicates faculty. There are then two ways of ascertaining faculty. In the one the base is primarily the property irre- Facultij meas- spective of the revenue the property wee ypiop- yjg]^(jg_ jj^ ^YiQ other it is income from ert;/ or oy *^ income. property or from other sources. There are, also, two ways of completing the measurement: We may assume that faculty is proportional to property or income ; that is, that it increases in exactly the same ratio as property and income increase. Or we may- assume that it increases more rapidly than either property or income. The choice of base and the choice of rate have given rise to long and weary discussions and hair-splitting dis- CHAP, in THE TAX SYSTEM 119 tinctions. In regard to the first, it is sufficient to say that at present the most widely accepted view is tliat, from the standpoint of abstract justice, income forms a better starting-point for the deter- mination of faculty than property. But we cannot avoid entering the discussion as to whether faculty is in proportion to income or increases FacnUy in- more rapidly. The widespread advance creases more vdvidlif tJiciTi, of democracy, and of sympathy for those property or in the lower walks of life, led to the income. desire to justify if possible the exemption of smaller incomes, especially the minimum of subsistence, and this desire found means of fulfilment in the newer theories of value, the conception of final utility, and the discussion as to the relative urgency of different wants. If we classify certain wants as absolute necessities, then the conclusion is near that the possessor of the minimum of subsistence has no ability to pay taxes. The possessor of a great deal more than the minimum of subsistence can in pro- portion bear more taxes than one who has only enough to obtain a few comforts in addition to the necessities. That is, the test of justice is found in equality of sacrifice, and we impose a greater sacri- fice if we take away from the labouring man with $1500 a year 10 per cent of his income, than we im- pose on the capitalist with $15,000 annual income by taxing him in the same proportion. Moreover, if we look upon faculty as identical with general economic power, then it is clear that, as the control of wealth 120 INTRODUCTION TO PUBLIC FINANCE part ii increases, the ease of further increase is greater. Thus it is easier relatively for the milliona;ire to double his fortune than it is for the daily wage- earner to rise to independence. Sec. 4. There are two other theories, which, inde- pendent of the idea of sacrifice or of increased The compen- economic power, attempt to justify a satorijcmd j^- j^^^. ^^^^ ^f taxation for higher in- sociahsUc the- ° ° ories. comes than for lower. These two the- ories adopt the hypothesis that the common benefit is equal, and demand that the inequalities in wealth should be removed in order to make it easily possi- ble to tax according to this equal benefit. There are, first, those who argue that the inequalities in wealth are due in large measure to the action of the State, and hence the State is justified in abandoning the idea of equality of taxation and in taxing those who have much wealth more heavily than others, for they have gained from the State's own action. This has been called the compensatory theory. Others, again, starting from the same hypothesis, urge that taxation cannot be equal, because evil economic forces have changed the abilities of the tax-payers and that it is the duty of the State to offset these forces by readjusting wealth through taxation. This has been called the socialistic the- ory. Neither of these theories can justly be called scientific ; they both cut loose entirely from existing conditions. "We CEmnot within the limits of this work attempt CHAP. Ill THE TAX SYSTEM 121 an exhaustive criticism of all the different theories as to justice in taxation. Indeed, we have already exceeded the limits of pure scientific inquiry. But the conclusions reached by Professor „ ,. Seligman after an exhaustive study of conclusions as all the different theories are too impor- «<'J'™.9'-<^^*'<'"- tant to be omitted. i He finds the benefit theory, like the socialistic and compensatory theories, wholly inadequate. But the faculty theory is satisfactory and seems to him to justify a moderate progression. Greater faculty is represented by the higher income: (1) because, after the initial disadvantages have been overcome, it is easier to acquire more ; (2) because the sacrifice of the same proportion of the larger income is less than in the smaller income. Neither of these reasons suggests a definite rate of progres- sion. He says : " If therefore we sum up the Avhole discussion, we see that while progressive taxation is to a certain extent defensible as an ideal, and as the expression of the theoretical 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." It would seem, then, that, in general, faculty is the ideal base of taxation ; that faculty can be meas- ured either by property or by income, but best by the latter ; that faculty increases somewhat pro- gressively and is affected by the consideration of 1 Frog. Tax. in Theory and Practice, pp. 190 ff. 122 INTRODUCTION TO PUBLIC FINANCE part ii relative conditions, as the kind of property, the source of the income, or the burdens already resting Modifying, ^P°^ ^^^ individual or property. All relative con- these Considerations have to be applied in determining whether the tax system of any country complies with the rules of justice. They do not apply with the same strictness to the separate taxes.-' 1 The recognition of tlie principle of progression in the recent reforms of taxation is very marked. See Seligman, Essays, 305 fl. DEVELOPMENT OF TAXATION 123 CHAPTER IV THE DEVELOPMENT OF TAXATION BEFORE THE INDUSTKIAL EEVOLXJTION Section 1. Feudalism placed a large number of economic receipts directly in the hands of the rulers. These receipts were generally sufficient for the discharge of the customary pub- found under lie activities. It is a mistake, therefore, " " "'"" to search for taxes proper in the period of the supremacy of feudalism ; that is, from the capitulary of Charles the Bald, 877, to the end of the thirteenth century. Taxes begin to emerge with the transfor- mation of feudal rights and dues, the commutation of obligatory military services,. and the like into pay- ments in kind or in money. Greek and Roman forms of taxation had even less influence on modern systems of taxation than Greek and Roman forms of expenditure on modern spending. For the study of Roman law and the traditions of the glory of the Roman Empire determined many State activities that involved the spending of public wealth. But new methods of obtaining the funds were devised. Infor- mation concerning the taxes of the period from the fall of Rome to the capitulary of Charles the Bald is rather meagre and too vague to be of much value. 124 INTRODUCTION TO PUBLIC FINANCE part ii The first taxes to emerge from the darkness of this period are a number of fee-like contributions of „ , , the nature of commuted feudal services, Early taxes ' loere commut- or directly connected with feudal rights, certain market dues and customs duties, tolls for protection to travellers, for the use of roads, bridges and ferries, and two forms of property taxes, land taxes and family taxes. The land taxes of this period are just emerging from the character of rent payments and acquire only by degrees the features of pure taxes. Even in the case of land left to the original possessors after conquest, the payments de- manded are more of the character of rents than of taxes. But the combination of these charges with hearth or family taxes leads to the formation of a sort of mixed property and personal taxes. The fact that land is practically the only kind of revenue yielding property and that no considerable earnings are made without the use of land makes this tax suf- ficiently universal for the demands of justice. Direct taxes are in this period, as in classical times, never paid by the freeman. They are regarded as The freeman derogatory and as the badge of a servile exempt. position. The freeman could give his services to the State, he could risk his life for it, but he would regard it as a deadly insult if he were asked to pay taxes. Indirectly, of course, he was taxed, as, for example, when he bought merchandise, for permission to sell which tlie trader was taxed. As soon, however, as industry began to develop. CHAP. IV DEVELOPMENT OF TAXATION 125 as soon as the crafts sprang up in the cities which clustered around the market-places, and classes which had lived in part from industrial pursuits found it possible to obtain so wide a market that they could live entirely from their industry, then, there arose such a differentiation of the sources of wealth that the old forms of taxation were insufficient. Tax- ation had, therefore, to be extended to Taxation ez- meet the new forms of wealth. The first *'"''f '" "'"f 7iew forms of methods of taxing these were dictated wealth. solely by expediency and the desire of obtaining as large revenues as possible, rather than by any defi- nite ideas of justice, and were mainly indirect in character and partly an extension of the older market dues, excises, customs, and tolls, together with new taxes of the same kind. Of old Roman taxes none can, be strictly said to have survived the conquest. Some lasted through- out the Merovingian period in a greatly changed form. Finally they were merged into various feudal payments, and took on the nature of rents. A few relatively insignificant market dues and fees con- stitute the only taxes which regularly formed a part of the revenues of the >State or of the State's officers, the feudal lords. The regular feudal burdens, while economic in character and not fiscal, Feudal dues really fill the place of the later direct al'^elvyl.s^^ taxes. In proportion to the prosperity taxes. of the people they were certainly as heavy as any modern systems of taxes. The rapid disintegration 126 INTRODUCTION TO PUBLIC FINANCE part ii of the German Empire into smaller territorial lord- ships after the sixteenth and seventeenth centuries, rendered the question of imperial taxation at once less pressing and more complicated. On some eleven different occasions, according to Wagner, between 1427 and 1550 the Empire as such stood in need of extra revenues, for purposes so clearly of common benefit as to justify a demand for common contri- The. " com- butious. Such an instance is that of mon penny." ^^e Hussitc and Turkish wars. The tax used was the " common penny." This direct imperial tax was a mixture of poll and personal taxes with income and property taxes. We find very similar taxes in France and England. It fell upon all imperial subjects, whether holding from the crown or not, provided they held property. The rate was an irregular regressive one, being smaller for all above a certain amount of property. It was very badly administered and not universally col- lected.^ In the German principalities that were formed out of the German Empire the first direct taxes were the bedes. These were extra payments. The " bedes." * a ./ ' similar in form to the existing feudal contributions. They were made by those already paying such dues and were measured in somewhat similar ways. The basis was generally landed prop- erty. The first hedes were more or less voluntary, private contributions for the support of the Vogt, 1 Ct Wagner, Sohonberg's Handfiuch, 3d ed., III., 184, CHAP, iv Development op taj^atwat 12? count, or lord for some recognised public purpose, ^y contracts entered into between the contributors and the lords, they became compulsory and formed part of the regular income of the lords, who then in extraordinary cases of need would again come for- ward with the demand for extra or "necessity" bedes. This was frequently done in times of war. Hence, these hedes were often called " army bedes." Some of these in turn became customary or fixed. With the rise of the idea of public life and public needs, the bedes easily became compulsory public con- tributions, and were regarded as distinct from the feudal dues, which by virtue of longer standing and the absence of a recognised public purpose were treated as the private revenues of the prince. A peculiarity of the earlier assessments of the bedes was the method of apportionment to, or assumption by, the different orders or cities of a certain lump sum, which was then distributed by their own rulers among the different members, according to some measure agreed upon. Prelates, clergj-, xoonative and knights were exempt from the ordi- rnonies." nary bedes. They sometimes rendered similar con- tributions, hedging themselves in with all sorts of reserves and precautions, to prevent the payments becoming regular. These were called "donative monies." It was in the cities that retained a large degree of political independence that the liighest develop- ment of the fiscal system was to be found in the 128 INTRODUCTION TO PUBLIC FINANCE part ii middle ages. This is owing to the fact that they were in advance of the rest of the country in their „. , ^ , economic development. Long before the uigh develop- -"^ ° mey\.t of citij principalities were able to abandon pay- finances. ments in kind and services, the cities were collecting taxes in money, making some use of public credit and developing regular fiscal offices. " The art of taxation," says Wagner, ^ " the use of public credit, and the practical organisation of the financial administration in the cities had been an important part of public institutions for centuries before the territorial State had even recognised the need of such." This field has, however, not yet received the attention of historical investigators sufficiently to alloAV us to draw conclusions as to the generally prevailing forms. ^ Sec. 2. In France the early growth of a strong central power led to an intensification and sharp differentiation of the royal feudal dues from the other feudal charges, which gives them something Royal feudal the character of taxes. But inasmuch dues in ^g ^[iq French State was peculiarly a France not properly proprietary State, and the territory was taxes. rather a part of the private property of the king than public property in the modern sense, these early charges are not taxes proper, but rents, or, to use the more general term, feudal dues. But the rapid growth of the central power, and the high 1 SchOnberg's Handbuch, 3d ed. , III., 185. 2 See Sohbnberg's " Investigations into the City of Basel." CHAP. IV DEVELOPMENT OF TAXATION 129 development of public needs in the kingdom, neces- sitated more revenues. These needs were at first met by the collection of indirect consumption and trade taxes. The tendency toward the development of indirect taxes grew apace after the seventeenth century. The mercantile theory, which was su- preme for most of the time after Colbert, developed customs duties very highly, and these ran par- allel with internal consumj^tion taxes. In the eighteenth century there were three, or possibly four, important taxes which had grown up in vari- ous ways out of the feudal dues. These were the "^aiZZe"^ (tallage), the '' vingtiemes" (twentieths), the ^'capitation" (poll), and possibly the ''dimes" (tithes). 2 The faille is of feudal origin. Originally it was arbitrarily assessed with extreme rigour upon the serfs by the lords, and occasionally upon the great vassals by the king with the assent of the peers. It became a permanent charge when royal power was ^ 1 The term "tnille," in English, tallage, also spelled taUiage, tail- age, and taillage, is from a root meaning to cut. It is explained as derived from the general method of keeping accounts by means of notched sticks. A taille was any sum of which account was kept, then the amount scored up (tallied) against any person. Slender sticks with notches called "tally sticks" were used by the English excheqiier for accounts, until abolished by the statute of 23 Geo. •III., c. 82. Similarly, the German "Kerbe," tally sticks. Other roots meanmg to cut are common in the names of various taxes : viz., incisio, incisura, cise, later accise, adcisio, Eng. excise ; in these Latin roots the thought is, that a part of the taxed article is cut out for the government. 2 See Vignes. Ed., Traite des Impots en France, 1872, p. 10. l30 iNTRObUCTION TO PUBLIC FINANCE part li firmly established on the ruins of feudalism. Charles VIII. made it permanent at the same time with the establishment of the royal army. The The taille. , i i t i /^ taille was both real and personal. On the one side it was based on the revenue from landed property ; on the other, it was based on the faculty of the tax-payer, measured by the revenues from his landed property, and active rents, as well as the prod- ucts of his own industry. This tax, suppressed in 1790, yielded 44,737,800 livres the year before. Necker obtained 91,000,000 livres from it. Nobles and clergy were exempt. The vingtiemes consisted of one or more twentieth parts of the revenues from either landed or movable property. This tax had a varied history. At first it was used with the taille, but when that tax was The vingii- made permanent under Charles VIII. emes. i]^q vingtienu disappeared. It was re- vived in 1710 by Louis XIV. as a war tax. It remained as the occasional resource of the treasury up to the Revolution. Only the clergy were ex- empt. It produced 46,000,000 livres (Necker 55,- 000,000). The capitation, or system of poll taxes, was the variable tax of the ancient monarchy. It dates The capita- from 1695. It was at first regarded as a ''<"'• temporary expedient, but was continued to the Revolution. It was assessed according to a tariff of twenty-two classes. But the base was fre- quently changed. The clergy were exempt, the CHAP. IV DEVELOPMENT OF TAXATION 131 nobles were taxed on the basis of their presump- tive ability, and those who paid the taille were taxed according to the amount of that tax they paid. In 1786 it yielded 41,500,000 livres. The dime^ or tithe, was an assessment paid in kind from the fruits of the soil for the benefit of the clergy. The tax was not always the TAe dime. tenth, but varied from one-seventh to one thirty-second. The ecclesiastical purpose of this payment has led some to refuse to call it a tax in the strict sense. Since the church exercised a power that differed little from that of the State and the burden was a regular one maintained for a public purpose, it should probably be called a tax. The corvees were more strictly taxes than the dimes. These were personal services applied to the construction of the roads and other pub- lie works. They were regarded as feu- dal dues. They were of two kinds : the first were levied on property and rendered by the proprietor for his lands, and the second were levied on persons and rendered by all irrespective of land-holding. The nobles and the aliens were not subject to the per- sonal corvees. The clergy could commute them into money payments or have them rendered at their own cost. The land corvees were due from all hereditary proprietors irrespective of rank, but they were not bound to furnish them in person. Louis XVI. sup- pressed the corvSes in 1776, but they were re-estab- lished. They disappeared in 1793. 132 INTRODUCTION TO PUBLIC FINANCE PART il The most important indirect consumption taxes were leased for 166,000,000 livres, and those collected r ,. , by the government were 51,500,000 livres. Indirect con- J a ' ' sumption These together nearly equalled the taxes. revenue from direct taxes. The indi- rect taxes of the ancient monarchy were : first, the aides, which consisted of taxes on drinks, on articles of gold and silver, on iron, oil, skins, starch, bills, paper, etc., and the octrois, levied at the city gates on all sorts of goods when brought into the towns ; second, the gahelle, or salt tax, which was so ar- ranged as to amount practically to a direct tax. For the people were obliged to buy each year from the management of the monopoly an amount of salt determined in each case by the size of the family. There was a similar " salt conscription " in Germany. Thirdly, there was the tax on tobacco. Sec. 3. In England ^ we find in Anglo-Saxon times three principal taxes : (1) The ship-geld, a tax Early English imposed on each shire, in proportion to taxes. ^l-^g number of hundreds it contained, for naval purposes. (2) The tribute-like "Danegeld" was levied after 991 at so much a hide (piece of land) and, after the cessation of the original cause, was collected by the kings as private revenue. (3) The "famage," or tax of smoke' farthings, a hearth tax. This seems to have been a traditional form of tax with the Saxons. In Norman times, the feudal character of the gov- 1 See Dowell, History of Taxation and Taxes in England. CHAP. IV DEVELOPMENT OF TAXATION 133 ernment was such that it obtained revenues from the demesne, from feudal dues, and from the royal prerogatives so great that no real taxes exist. The Danegeld was levied by the Conqueror as an annual tax, but disappeared after 1163. With the reign of Henry II. came a more ordered and regular system of taxation. This began with the well-known commutation of the mili- „ Commutation tary obligations of tenants. It was due of military to the continental position of the Ange- *«''"'<=^*- vin kings. The distance at which war was waged and the length of service demanded rendered the military obligations particularly burdensome, and tenants were anxious to commute them. An army of mercenaries, too, suited the king better, as easier to control than the feudal army. Hence arose the commutation of the duty to foreign service into a money payment of two marks, £\ 6s. 8c^., on each fee of X20, known as the "scutage." Henry II. col- lected three such scutages, and this tax did not fall into disuse until after 1322. It was practically a land tax, levied each time for a special purpose. The tallage in England was the tax that was col- lected from the tenants on the royal demesne on occasions of unusual expense. Those The tallage. who paid the hidage or Danegeld were generally exempt. Cities and towns not exempt in this way paid the auxilium or aid. The tenants were liable for these taxes up to one-tenth of their goods. In the city of London the tallage was 134 INTRODUCTION TO PUBLIC FINANCE part n treated as a "benevolence." It was superseded after Edward III. by the general taxes on mova- bles. The taxes on movables began with the " Saladin tithe" in 1188. It was one-tenth of rent and mov- „, . . . ables paid by all except crusaders. Out of taxes on of this insignificant beginning grew a mova es. system of taxes on movables which finally included all the taxes so far mentioned. Richard I. levied a tax on all ploughed land in 1194, known as the " carucage," from the area upon which it was levied, namely, the amount of land that could be covered by one plough (caruca) in a season. After 1224, this was merged in the tax on movables. The tax on rents and movables, which began, as we saw, with the Saladin tithe, was continued from 1189 ™ , , . to 1334. This was a grant of one-thir- teenths and teenth in 1207, one-fifteenth in 1225, one- flfteenths." ^^^.^^^^^-^ j^ 1232, one-thirtieth in 1237, one-fifteenth in 1275. Up to 1283, the method of obtaining the grant was by separate negotiations with each section of the country. But after that date, general grants were made by Parliament and other taxes were discontinued. Besides these direct taxes, the crown had the privilege of taking "customary" tolls upon merchan- Customs dise imported or exported. Hence our duties. modern term, "customs duties." These tolls were of the character of licenses and protec- tion money. Their early history is obscure. Be- CHAP. IV DEVELOPMENT OF TAXATION 135 fore the Magna Charta they had become so fixed and regular as to call forth the well-known clause of that historical document : " Let all merchants have safety and security to go out of England, to come into England, and to remain in and go about through England, as well by land as by water, for the purpose of buying and selling, without the pay- ment of any evil or unjust tolls, on the payment of the ancient and just customs " (sme omnibus malis toltis, per antiquas et rectas eonsuetudines) . In 1275 these "ancient customs," slightly raised, were granted Edward I. by Parliament. The chief duties were on wine imported and wool exported and a poundage on all other goods imported or exported. From 1334 to 1453 there are a number of changes to note. The fifteenths and tenths were appor- tioned among the communities, cities, and boroughs, the townships and the demesne tenants, ™ ,,^, in 1334, and the assessment then made teenthsand remained the basis of taxation. The tax thus became a fixed charge. It varied in rate from one-half a fifteenth and tenth, to two fif- teenths and tenths, as the need for revenues might change. Sometimes no such grant was made. In 1377 Parliament granted to the king a tax of " four pence, to be taken from the goods of each person in the kingdom, men and women, over the The " tallage age of fourteen years, except only real °f groats." beggars." This was known as the "tallage of groats." Subsequently a classified poll tax was 136 INTRODUCTION TO PUBLIC FINANCE part II employed, in which an attempt was made, by the arrangement of the payers into classes and a grada- tion of the rates, to get a larger return by taking advantage of the greater wealth of certain classes. In 1379 this yielded £25,000, which was only slightly more than the previous tallage of groats. The clergy were included in both these taxes. After the peasant revolt return was made to the fifteenths and tenths. From 1382 the landowners take the whole burden of the old "fifteenth and tenth." In 1435 this was supplemented by a graduated tax on in- come from lands, rents, and annuities, and offices of freehold. In the reign of Edward III. the customs yielded large returns. They consisted as before of tunnage on wine, customs on wool and leather, and poundage on all other merchandise. The popu- larity of Edward IV. enabled him to add to his other sources of revenue the "benevolences," demands "Benevo- on the rich for special contributions. lences." Throughout the history of taxation in England the grant of monopolies of new industries was made a source of income to the government. The multiplication of these under Elizabeth did not yield much revenue, although it gave rise to much discontent. There is little in the varied application of these taxes that is important as showing the line of de- velopment until the seventeenth century. At that time they proved unequal to the task of meeting the growing needs of the treasury. The chief auxiliary CHAP. IV DEVELOPMENT OF TAXATION 137 lay in the extension of the indirect consumption taxes. The year 1692 (revision, 1697) saw the establishment of a 'permanent land tax. Theperma- This grew out of the apportionment of nent land tax. the "fifteenths and tenths." It became a fixed charge on land, a real burden, not having, as time went on, any definite relation to the income from land. In 1798 Pitt made this redeemable, a privi- lege which has been taken advantage of to the ex- tent of removing half the charge from the lands. In its operation it is rather a rent than a tax. The wars of the period of the French Revolution and the consequent need of revenue introduced the general income tax (1798, 1802, 1803, The income 1806). This tax was no departure in *«*• principle from the older taxes, although a departure in method. It has been well characterised as a com- bination of several taxes into a system which has for its aim the proportional taxation of all incomes, with the exemption of a certain fixed sum (digressive). The form which it took in 1803 is the best to study. Two separate acts were passed, the one taxing all incomes from holdings of real estate, rents, and pub- lic salaries at the source ; that is, so far as possible the tax was deducted before the revenues passed into the hands of the recipient. The second taxed industrial earnings and interest on capital on the basis of a declaration by the tax-payer. The tax began with an income of £60 (later £50), and this amount could be deducted from all incomes below 138 INTRODUCTION TO PUBLIC FINANCE PART II £150 ; after that the full rate was paid. Each per- son was required to declare his whole income and could claim reimbursement for any tax stopped at the source if he could show that his total income was below the minimum. This tax, set aside in 1816, was restored in 1842, as a substitute for the indirect taxes, removed in consequence of the de- mand for commercial freedom. The rate is changed from time to time as the needs of the government change. Sec. 4. Local taxation in England has been partly independent of royal taxation. England has not followed the continental plan of collecting revenues for local purposes in the form of additions The poor rate to the national taxes. While the weight t e prototype ^j national taxation fell upon customs of local taxes ^ in England, duties, excises, and certain direct taxes, measured roughly by income, local taxation was based exclusively upon revenues from real estate. The prototype of all local taxation was the poor rate. Previous to the reign of Elizabeth local ac- tivities were of such a character that they could be discharged from feudal dues. .In the manorial villages and the boroughs with semi-feudal guild, and close corporation governments, which owned landed property, feudal incomes paid the few public expenses. But the removal of the monasteries, hos- pitals, and other charitable foundations, threw upon public charity a number of well-developed paupers ; and the rapidly changing character of industry and CHAP. IV DEVELOPMENT OF TAXATION 139 of economic life constantly gave rise to the problem of what to do with the unemployed, who at times became very numerous. The result was the famous poor law of 1601. The principle of the tax for the support of the poor had been of slow growth. In the reign of Henry VIII. the giving of alms was prohibited, and collections for the impotent poor of the parish were required to be made in each chursh. In 1547 the Bishops were authorised to prosecute all persons who refused to contribute for this pur- pose, or should dissuade others from contributing. In the fifth year of Elizabeth the Justices of Peace were made judges of what constituted a reasonable contribution for this purpose. After 1572 regular compulsory contributions were levied. Out of a purely voluntary contribution then, there emerged in two-thirds of a century a compulsory tax. The basis of this tax was the annual rental value of real property. The tax was collected not from the owner but from the occupier. Most of the other taxes for local purposes which have developed in England since then are of the same general char- acter. They are too numerous to mention here. Besides the direct taxes, there were a few indirect ones, market dues, road tolls, coal and wine duties. Sec. 5. In the American colonies we Peculiar con- meet with entirely new conditions. Pub- '^JZhcTu col- lie needs were simple and few, and were onies. mostly local in character. Customs duties were for the most part controlled by the mother country in 140 INTRODUCTION TO PUBLIC FINANCE part ii the interests of her general colonial policy. So the colonists were driven to other forms of taxation. Practically free trade in land existed. Land at a known selling value early formed a large part of the property of each citizen, and differed in no essential particular from his other property. There were in some colonies, to be sure, charges of a feudal nature known as quit rents, which were a recogni- tion of the king's interest in the land. These never became of fiscal importance, and never developed into taxes. Nor do they seem to have ever seriously modified the essentially free character of land-owning, since they were so irregu- larly and meagrely collected. They were " acknow- ledgments His Majesty receives of the People's Tenure and Subjection."^ At times they devel- oped into an apparent tax on certain lands. They seldom formed a part of the revenues of the colonial treasuries, being generally payable to the king.^ Just as there were three different forms of gov- ernment among the colonies, so there were in the The New beginning tliree different tendencies in England tax taxation.^ New England began with a 071 property ° *=* andfacuHy. tax on property and faculty. The Gen- eral Court of ]\Iassachusetts laid down in 1634 the following principle : "In all rates and public charges 1 Spottiswood Letters, quoted by Ripley, Financial History of Virginia. '^ See Wood, History of Taxation in Vermont, p. 13. Also Schwab, History of the New York Property Tax. 8 Cf. Seligman, Essays, pp. 19 ff. CHAP. IV DEVELOPMENT OF TAXATION 141 the towns shall have respect to levy every man ac- cording to his estate, and with consideration all other his abilities whatsoever, and not according to the number of his persons." ^ Later, however, poll taxes were used, and the general property tax was extended to cover property in the process of acqui- sition, or the earnings of labour. In all the New England colonies the resulting system was practi- cally as follows : Each person was to contribute as he was able. Ability was measured, first, by prop- erty, real and personal ; secondly, by the ^^^ ^^^ person himself ; thirdly, in the case of EngianA sys- wage-earners, merchants, and others, by *^'"' earnings. With a few notable exceptions, as in the case of lawyers, the third measure of ability grad- ually fell into disuse. It has been repeatedly pointed out ^ that the New England people had the habit of saving. All earnings were soon turned into property. So that the demands of justice were fully met by the general property tax and the poll tax. In addition to these direct taxes, there were a number of indirect taxes, " imposts," some collected in the form of licenses, and many as excises. In the Southern colonies, of which Virginia will serve as a model, the first taxes were the poll taxes. " Personal responsibility," says Mr. Ripley, " was 1 Massachusetts Records, quoted by Douglas, Financial History of Massachusetts, "p. 18. 2 Walker, " The Bases of Taxation," Fol. Sci. Quar., Vol. III. 142 INTRODUCTION TO PUBLIC FINANCE part ii thus the basis of taxation at first, but as the burden of taxation became heavier this liability was partly „. . . „ transferred to real estate."^ This trans- Yirgiraa poll taxes and cms- f er of the burden to real estate began toms. with the practice of making the per- sonal tax a lien upon the property of absentees, or of persons dying before the payment of the tax. The general property tax in a form like that in use in New England did not exist in Virginia be- fore the Revolution. The grossness of the poll tax was modified by some reference to the different kinds of property owned. In consequence of the failure to develop a good system of direct taxes Virginia re- sorted to indirect taxes, export duties on tobacco and hides, import duties on liquors and slaves, and some general tunnage duties forming the main features. The third or central system is fairly represented by New York. There, under the West India Com- New York ex- P^iiJ) 1621-1664, taxation first took the cises. form of moderate indirect taxes on goods imported and exported and imposts on the consump- tion of beer, wine, and spirits. It was after the passage of the colony into the hands of the English that attempts were made to develop the property tax. The actual existence of this tax begins with the formation of the Assembly after 1683. ^ 1 Financial History of Virginia, p. 21. 2 See Schwab, Die Entwickelung der Vermogensteuer im Staate New York, Jena, 1890. Also Schwab, History of the New York Property Tax, Pub. of the Amer. Econ. Assn., V., 6. CHAP. IV DEVELOPMENT OF TAXATION 143 In all parts of the United States after the Revolu- tionary War the main reliance for local revenue was the general property tax. The commonwealths, as such, had little need for revenues until after 1840. In the formation of the Union indirect taxes were made the prerogative of the federal government, so that the commonwealths had to resort to other means. The character of direct taxation in the United States since the formation of the Union will be treated in the next chapter. The differences in the forms of taxation in the different parts are due both to political and economic differences. 144 INTRODUCTION TO PUBLIC FINANCE part ii CHAPTER V THE DEVELOPMENT OP TAX SYSTEMS SINCE THE INDtrSTEIAL REVOLUTION Section 1. The trend of the development of taxation was abruptly changed by the industrial Chancie.sin revolution at the close of the last cen- taxation due tury. On the one hand, the development to the indits- . . , . . . ,. , trial revoiu- ot constitutionalism, vesting, as it did, tion. -tiie control of the purse in the people, and especially in the tax -payers, had the inevitable effect of changing the ideas underlying the tax systems. New ideas as to the justification of taxa- tion developed, and with them a tendency to seek new measures of taxation. On the other hand, the rapid increase in wealth, the growth of new forms of wealth, such as invested capital, the birth of new kinds of property, as the many kinds of credits, and the rapid change in the distribution of wealth among the different classes in the community, — all of these and other similar causes led to the constant extension of taxation to the new forms. Old taxes which were well suited to certain simpler conditions of society become under new conditions unjust, and give rise to dissatisfaction, to many attempted and some accomplished reforms. These CHAP. V DEVELOPMENT OF TAX SYSTEMS 145 reforms in turn prove no more satisfactory in the long run, for the conditions they were intended to meet change again. Just as the attention of economists was chiefly directed to the study of productive agencies during the first three-quarters of the century, so the general tendency of the same the agents of period in finance may be broadly charac- P™''«'''«o«- terised as an attempt to compel the different agen- cies of production to contribute to the support of the government. It is claimed that economists have, during the last two decades, turned their attention more to the consideration of questions of distribution, and it is certainly true that the most recent tax reforms have been in the direction of securing a better division of the burden among the sharers of the new wealth rather thaia ^ Taxation of among the producers thereof. Subor- the shares in dinate to this tendency are various pro- *«'"'»"'™- posals and attempts to alter the distribution of wealth by the use of the taxing power. The demands upon the revenues increased vastly during and immediately after the period of war which followed the French Revolution. Large debts had been accumulated; great armies and navies claimed support even in times of peace. Effect of tran- New functions were being thrust upon ff*" '" " o r "money econ- the governments. Moreover, the new omy." economic era demanded the payment of all charges upon the State in money and necessitated the col- 146 INTRODUCTION TO PUBLIC FINANCE part n lection of revenues in money. The old feudal receipts and services became more and more inade- quate; new industrial receipts were, in general, not calculated to be much larger than the sums neces- sary to support the service or institution which furnished them. Consequently, taxation on an ever increasing scale becomes the basis of all State finances. Taxation is no longer regarded as a temporary expedient to meet passing and extraor- dinary needs. It is admittedly a necessary and permanent policy. The doctrine of political equality when generally accepted leads to a demand for universality and Effectsofpolit- equality of taxation. The diiSculties icai equality.^ that arise are no longer as to the justi- fication of taxation in general, but as to the justice of certain forms and measures of taxation. The main question is, what is equality, and what the best method of attaining it. The methods and direction of reform were necessarily prescribed by the constitutions of the various countries and differ much from land to land. Different economic and social conditions have also an inevitable effect. Among the constitutional features that determine the direction of taxation the following may be mentioned. First, federal governments have gen- Federai gov- erally been excluded from the field of ernmentsre- ^j^.^^^ taxation. The central govern- sort to mdirect => taxes. ments of the German Empire, Switzer- land, and the United States depend for revenues CHAP. V DEVELOPMENl^ OF TAX SYSTEMS 147 from taxation on customs duties and internal ex- cises. The sense of loyalty to the central govern- ment is inferior to that to the commonwealth governments so far as willingness to contribute directly to its support is concerned. The partial concealment or at least lack of prominence of the indirect contribution permits of its collection with- out calling the attention of the contributors forcibly to the fact that they are taxed by a new authority. Just that advantage of partial concealment in this tax which appealed so strongly to the monarchies, before the birth of political consciousness on the part of the people, appeals to the federal govern- ments. At the same time the practical necessity of uniform rates over the whole country, which arises from the fact that these taxes disturb the economic balance of industry and commerce, and the greater ease of administration with a larger territory and a single boundary, make it advisable to jDut all of them in the hands of the central organ. It was the latter considerations in regard to custom duties that led to the establishment of the Zollverein and eventually of the German Empire. ^ On the other hand, the different States of which the federal governments are composed have shown themselves inclined to restrict their taxation to the 1 See Bowring's Report on the Prussian Commercial Union, Parliamentary Documents, 1840, Vol. XXI., pp. 1-17. Reprinted in Hand, Economic History, p. 170. Also Legoyt's La France et V Stranger, Vol. I., pp. 250-255; iUd. 148 INTRODUCTION TO PUBLIC FINANCE part II direct taxes, leaving all but a few of the indirect ones to the central governments. But this separation of the assessment of direct and indirect taxes between different authorities has Difflcvities been productive of great difficulties. which arise por it is impossible to assess any tax sionofthetax- justly and equally without reference to ing power. ^j^q other burdens already imposed on the contributors. It would seem that the demands of justice which dictate that the whole system of taxation should work toward a definite and single purpose, will necessitate either the co-ordination of these forms or the placing of both of them in the hands of the same authorities. The proper co- ordination of all taxes is hard to accomplish when the taxing power is in different hands. This is one of the hardest problems of American taxation. The development of direct taxation will now be traced in detail by reference to some of the more important countries. Indirect taxes cannot prop- erly be said to have undergone any process of development. Many changes have, indeed, been made, dictated by different economic theories and purposes. But it has been simply a flux backward and forward. Sometimes ulterior aims, as protec- tion, have been abandoned and strict fiscal principles a.llowed sway. *In those cases we find a simplifica- tion and a decrease in the number of articles taxed. But no general principles have been developed. Sec. 2. Probably the most thorough attempts to CHAP. V DEVELOPMENT OF TAX SYSTEMS 149 reform taxation in accord with clearly recognised principles of theoretical justice have been in Prussia. That country has taken advantage from time to time of the advice of men of science. It has been doubly happy (1) in having a goodly p,„,^,, „„,^ number of unpartisan finaucial scientists use of men of to draw upon; (2) in being able to draw *'^'*'"=^- upon them for advice, either by counting their pupils among its fiscal officers or placing the scientists themselves on its tax boards and commis- sions. It has been able to make changes with a broad conservatism that looked toward the gradual realisation of accepted ideals. With characteristic visionary eagerness, France has several times started ■ out to obtain at a single bound some utae advance new ideal, but has each time fallen back «™ France. upon forms and methods but little better than those in vogue before. In England, special difficulties and objections have been met with little reference to any general plan. The result has „ been a steady approach to a better state moves special of aff'airs, with only an occasional in- -^"^ *' tensification of existing evils, due to the attempt to cure symptoms rather than to seek the underlying causes of the trouble. In the United States there have been spasmodic and ill-directed at- ^^ ^ tempts at the removal of a few clearly reforms in the recognised abuses ; and without any con- '" " " ^*' sistent attempt to change the system, the result has been a decided modification. The general failure of 150 INTRODUCTION TO PUBLIC FINANCE part ti the property tax to reach personal property gave rise at first to vigorous efforts to extend and. sharpen the methods of assessment. These attempts fail- ing, other methods of reaching the mass of personal property were devised, which have resulted in a partial change of system wherever they have been successful. Sec. 3. The most instructive country to study is Prussia. The line between the old and the new may be drawn at the reforms of Stein and Harden- burg in the forms of land tenure. These reforms Establishment may be regarded as having been accom- offreetrade jigjig^ ^^ jgij^ Briefly stated, their re- m land m ^ j i Prussia. suit was to abolish personal serfdom, dissolve the feudal partnership between tenants and proprietors, and establish free trade in land.^ Al- though these reforms had to do mainly with land, and although the accompanying edict of 1810 prom- ised speedy reform of the land tax on the basis of a new survey, or cadastre, nothing material was accomplished in the reorganisation of this tax until 1861. In that year the land tax was re- The land tax. i i. i • i arranged tor the entire kingdom on the basis of a new and rapidly executed surve}^ Some twenty different provincial land taxes, with up- wards of one hundred minor variations, which had 1 Seeley's Life and Times of Stein, Vol. I., pp. 187-297. Morier, "The Agrarian Legislation oi: Prussia during the Present Century," inProbyn [Editor], Systems of Land Tenure in Various Countries, pp. 306-316. See Selections in Rand. CHAP. V DEVELOPMENT OF TAX SYSTEMS 151 existed before that time, were merged into an ap- portioned tax upon the net product of each piece of land as given in the cadastre. This tax recently yielded about 40,000,000 M. annually. The reforms which preceded this were those of the indirect consumption taxes, out of which finally emerged the personal class tax. The Consumption edict of 1810, which was referred to '"^-^^ ''•«"»- formed into above as promising a reform of the land personal taxes. tax, seriously attempted to remove inequalities by destroying many feudal exemptions and privileges, and removing local differences. A general scheme of consumption taxes on necessaries, of which the excise on meal is a type, was planned for city and country alike. It was, however, immediately found that the meal tax was hard to collect in rural parts. As early as 1811, therefore, a poll tax of one-half thaler from every person over twelve years of age was substituted for the meal tax in all places except the larger towns. In 1820 this tax, still appljdng to the same places, developed into a classified poll tax ; i.e. all persons were grouped according to rank, profession, and general prosperity, into a few classes, which were then taxed ^er capita at different rates for each class. Somewhat modi- TJiiQ class tcfjc fied the next year, so as to make twelve classes, in groups of three each, and with rates which ranged from one-half thaler to 111 thalers, and covering all persons over fourteen years old, this tax endured thirty years. As before, tliis tax 152 INTRODUCTION TO PUBLIC FINANCE part ii did not extend to the large cities, where the excise on meal and meat was regarded as placing the same burden on the people. Such a remarkably clear perception of the fact that indirect taxes are practi- cally the equivalent of direct taxes in the individual burden they impose is not often met with in fiscal history. In 1851, this tax was changed in order to make room for the introduction of an income tax on all The income persons having an income of over 1000 '"'"• thalers. Those persons whose incomes were below this amount were taxed in the large cities by the meal and meat tax ; in the country and in small towns, by a class tax, like the old one, with rates ranging from one-half thaler to 24 thalers, according to the supposed income. Persons living in large cities who paid the income tax were allowed to deduct 20 thalers from their income as com- pensation for the meal and meat tax they were supposed to have paid. Later reforms removed these gate excises except for local purposes. As the income tax forms a special topic in a later chapter, we will not at present follow the details of its development and reform. It is sufficient to say that it was a progressive tax on the income of every person. ^ When the land tax was reformed in 1861, the building tax was separated from it, having been until that time a part of it; and all old taxes of I See Chapter IX, CHAP. V DEVELOPMENT OF TAX SYSTEMS 153 a similar sort were merged in the new one. This tax is assessed in the cities according to the rental of the buildings, and in the country ac- ' . r. 1 1 n Building tax. cording to the size oi the lands con- nected with the houses, and other characteristics. One of the reforms that was made after the peace of Tilsit to strengthen the weakened economic re- sources of the country was the establishment of general industrial freedom. Naturally, such a change would have been regarded as a failure from the standpoint of the statesmen of the times, if it could not be made to yield a revenue to . . Industry tax. the treasury; so the new industries were . burdened with a new tax. This tax, which was very weak, and which, wisely, perhaps, failed to meet all the new forms of industry which came into existence, was subjected to a thoroughgoing reform in 1891. But it was at that time transferred to the local governments. Capital invested and some of the permanent features of each business form the basis of this tax. The Prussian system, as it existed before the great reforms of 1893, may now be seen as a whole. It consisted of two parts : (1) There was a group of three complementary taxes upon the summary of produce of property and capital, — the ^''-^ Prussian ^ i J. ./ 11- system before land tax, the building tax, and the m- the recent re- dustry tax ; (2) there was a system of /<»'™s- personal taxes culminating in an income tax. The former group' true to the economic tenets of 154 INTRODUCTION TO PUBLIC FINANCE part ii the first three-quarters of the century, taxed the productive agencies. The latter, altliougli it orig- inated as a consumption tax, aimed at taxing the shares in distribution. Thus the older consumption taxes, which were originally assessed without any very clear idea of what the justification was, but were used because productive of large revenues, yielded to new taxes supposed to be more fairly in accord with the modern system of distribiition. We-are now in position to see the significance of the great reforms of 1893 (all of which went into r/se great re- effect in 1895), made under the leader- forms of 1893. ^ gl^i^ of Finanzminister Dr. Miquel. These reforms place Prussia far in advance of all other countries in the theoretical perfection of her tax system. 1 The income tax, which lias long been correctly regarded as the foundation of the Prussian tax system, was subjected to a thorough reform in 1891.^ It was strongly urged at that time that income from property represented a far higher fac- ulty, per unit, than income from labour and personal exertion, and, therefore, that a perfect system should contain two kinds of progression: one that taxed larger incomes more heavily than smaller ones ; another that taxed incomes from property more heavily in proportion than incomes from labour. It was felt that the existing produce taxes (^Er- 1 See Seligman, Essays, pp. 330-339. References to larger and more detailed statements are given there. 2 See Chap. IX. CHAP. V DEVELOPMENT OF TAX SYSTEMS 155 traijsfeuern), the land, building, and industry taxes, failed to accomplish this end. Hence one of the reforms of 1893 was the surrender The general of these taxes as royal taxes, and the property/ tax. initiation of a general property tax as supplement- ary to the income tax. This tax, which can only be properly understood when its supplementary character is held in mind, is arranged as follows : The tax is one-half per mill on the lower limit of the class within which the property falls. The classes go by stages of 2000 M. from 6000 M. to 40,000 M., of 4000 M. up to 60,000 M., of 10,- 000 M. up to 200,000 M., and above that of 20,000 M. each. Thus : From Pkopertt. Tax. Up to 6,000 M. . exempt. 6,000 " 8,000 " . . 3M. 8,000 " 10,000 " . . 4 " 10,000 " 12,000 " . . 5 " 20,000 " 22,000 " . . 10 « 40,000 " 44,000 " . 20 " 60,000 " 70,000 " . . 30 " etc. Above 200,000 M. the stages are 20,000 M. each, and the tax increases 10 M. in each stage. This tax being supplementary to the income tax accomplishes the result of imposing a differential rate on funded income as against unfunded in- come. The abandonment by the State of the three old taxes on land, buildings, and industry rendered the 156 INTRODUCTION TO PUBLIC FINANCE part ii reform of local taxation possible. As has already been said, the proper co-ordination of all tax burdens The reform of is One of the chief problems of modern local taxation, tax reform. With the exception of the beer taxes, and the meat and meal taxes still used by some of the cities, local taxation in Prussia is mainly direct. Most of it, until 1895, took the form of additional percentages to the rates of the royal taxes. In some cities there were important special local taxes, like the house rent tax in Berlin. Prussia, also, grants subsidies from the royal treas- ury to the local bodies for special purposes. But the symmetry of the national system was somewhat destroyed by these additional rates. Such additions to the income tax were especially intolerable. Real estate is, moreover, a particularly good basis for local assessment. It cannot evade the tax, and it is the recipient of particular benefits from good local government. The same is true of businesses of a local character, although it is not safe to let the rate vary from place to place. Hence these three taxes were handed over to the local bodies. At the same time the attempt was made to regulate all other sources of local revenues. Tlie Prussian system as it now stands comes nearest to the realisation of the taxation of faculty of any in the world. The chief difficulties that have arisen are those of assessment. The progressive rate gives rise to a special incentive to the concealment of larger incomes, and not even the general excel- CHAP. V DEVELOPMENT OF TAX SYSTEMS 157 lence of Prussia's administration lias been preventive of under-assessment.i Sec. 4. In France indirect taxation has probably found a higher development than anywhere else. Some of the main taxes are on the consumption of wine, spirits, beer, sugar, salt, tobacco, etc. ; there are also the octrois or gate duties collected by some of the cities as a means of contributing High develop- their share of some of the direct taxes "''f//""'^- rect taxes in to the general treasury. There are also France. the taxes on acts and transfers, which will be treated under fees, since they assume a public service, and the customs duties. Not peculiar to France, but receiving a high development there, is the mode of collecting a tax on consumption by a monopoly of the manufacture of tobacco in the hands of the government. The imperative necessity under which France has laboured all through this century of continually increasing her revenues, and the danger of making the burden unbearable if thrown upon the existing direct taxes, as well as the desire on the part of the legislators of concealing so far as possible the actual burden, lest an impatient constituency rebel, accounts well for the relatively high develop- ment of indirect taxation. The preference for in- direct taxes as the main reliance of the public reve- nues argues, however, a low stage of political ethics. 1 See the revelations of the Boohum investigations, quoted by Wagner in Schanz Finanzarchiv, XVIII. year, Vol. II., pp. 107, 108, 158 INTRODUCTION TO PUBLIC FINANCE part ii The more highly developed the consciousness of citizenship and membership in the State, the easier it is to make direct taxation effective. Direct taxation in France dates in its present form from the Revolution. All the taxes of the ancient monarchy were abolished at that time and a fixed scheme of taxes on revenue-yielding prop- erty substituted. This system of dii-ect taxes has four chief members : (1) the tax on real The members ^ ^ of the system estate ; (2) the tax on persons and dwell- ofcKrecttaxes. ^^^^ . ^g-^ ^j^^ ^^^ ^^ ^^^^^ ^^^^ ^^^_ dows ; (4) the . tax on business. Supplementary to this system are a number of taxes classed officially as assimilated to the direct taxes. These, so far as they flow into the State treasury, are: (1) the tax on mines ; (2) the charges for the verification of weights and measures ; (3) the tax on goods in mortmain falling on the property of the communes, hospitals, churches, seminaries, charitable institu- tions, etc. ; (4) the charges for the cost of inspec- tion of pharmacists, grocers, druggists, and herbists. Of these numbers 2 and 4 are practically fees, num- bers 1 and 3 are merely definite kinds of real estate taxes.-' The real estate tax, the personal and dwelling tax, and the door and window tax are apportioned taxes. The real estate tax, which is a combined 1 The official classification of taxes in France is very complex, as the example above given shows. In order not to confuse the student it will not be followed further in this work, CHAP. V DEVELOPMENT OF TAX SYSTEMS l59 land and building tax, is apportioned upon the basis of a very elaborate survey and valuation completed in 1850, and carefully kept up. These y^g ap^or- taxes are apportioned in successive steps <""'°'' taxes. first to the departments, then to the arrondissements, and then to the commujies, by the several legislative bodies, and finally divided among the individual i in each commune by a '•'■conseil de repartition." The tax on persons and dwellings, also apportioned, is a poll tax, with an attempt at gradation according to the ability supposed to be indicated by the rent of the building occupied. It consists of two parts: (1) the amount of three days' wages of labour at from one- half to one and one-half francs per diem; ( 2) the tax on the rent of the building occupied as a private dwell- ing. The cities of Paris, Lyons, Marseilles, and a few others raise their shares of this tax by the means of duties on goods brought into the city, i.e. octroi. The door and window tax is an apportioned tax rated according to the number of windows and doors in the houses. It was intended to supplement the personal and dwelling tax, but it is really an addition to the real estate tax. It is paid by the owner and he is allowed to shift it if he can to the tenant. The industry tax, contribution des patentes, unlike the other members of the system, is not apportioned but proportioned. It is intended to reach the bulk of the personal property, and in a rough way covers income from certain kinds of labour. Originally it 160 INTRODUCTION TO PUBLIC PINANCE part il was assessed in proportion to the value of the loca- tion of the factory, store, or workshop occupied by The droit de -the industry. Now it is assessed upon patent. some elaborately constituted classes, in rates which vary with the size of the community in which the business is done, and the rental of the place of business. It includes all kinds of commer- cial and industrial enterprises and occupations, large and small, and also the liberal professions, when not exercised in behalf of some already taxed business enterprise. The agriculturalists are exempt. Direct taxation in France may be summarised as falling mainly on the agents of production and the sources of wealth. Sec. 5. The English system of taxation can be very briefly treated here, because the principal com- ponent parts will be discussed in detail in later chapters. What is necessary here is to give an outline of the system as a whole. The greatest change in the British scheme of taxation within The reforms of this Century was the elimination of the 1S40-1SS0. protective principle from the customs duties, — and indirectly from the excises also, — brought about in the period from 1840-1850, by the abolition of the corn laws and the agitation leading thereto. The consequent simplification of both the import duties and the excises rendered it possible to manage them simply as a source of revenue with a view to obtaining I'elatively larger sums. The customs duties, the entire tariff of CHAP. V DEVELOPMENT OF TAX SYSTEMS l6l which now contains only 40 rates, and the some- what more numerous excises and stamp duties, pay one-half the total annual revenue. The property and income tax, which was restored in 1842 and has since been the variable or elastic „, The property element in the system, will also receive and income special attention in another chapter. In- *""'■ asmuch as this famous property and income tax is a system, in itself, of five taxes which are calcu- lated to fall upon the chief sources of wealth, it complies, in a way, with the requirements of uni- versality. Its rate is digressive, so that it attempts to comply with the requirements of justice. It may be looked upon as the complete system of direct taxation. Outside of the system there are two remnants of older taxes which are anomalies and destroy, somewhat, the logic of the system. This lack of any logical reason for retaining them does not necessarily form any good reason for abolishing them. They give rise to no serious complaint, they are old and have been in the main capitalised, so that they form no real burden at present. They are the land tax of the eighteenth century, which is now a redeemable rent charge, and the house duty. This latter developed out of the hearth tax of 1662. In 1688 it had been replaced by a window tax. In 1778 a tax on the annual rental was added to the window tax, and finally after 1851 this tax on the rental value was left to stand alone. 162 INTRObtjCTlOl^ TO PtlBliC PlNANCE part 11 There is still another tax which supplements the property and income tax, and that is the inheritance The inheri- tax. The most recent changes in these tance tax. inheritance taxes, — " death duties," — which have existed in England since 1694, will receive attention under another heading. The im- portant thing to note in this connection is that these taxes have introduced the principle of progression very extensively into the tax system of England. The English system as it now stands, consists (1) of the customs and excise duties, (2) of the so-called property and income tax, a digressive tax upon five kinds of income, (3) two older taxes, the land tax and the house tax, (4) a graduated inheritance tax. The different authorities that have had the power to levy local rates in England are very numerous. The whole system is very complex. The diiferent rates, each going by the name of the authority that levies it, or the purpose for which it is collected, are mostly upon the same base, namely, the annual rental of the various tenements. They are generally levied upon occupiers. In the case of tenements of less than £10 annual value, the difficulty of collecting from the occupier is so great that the plan of making the landlord advance the tax has been adopted. He then shifts it to the occupier. The recent reforms of county and municipal government in England have resulted in a simplification of local rates. Sec. 6. Like the English, the American system can be but briefly treated here, since many of the CHAP. V DEVELOPMENT OF TAX SYSTEMS 163 taxes will receive our attention in subsequent chap- ters. The principal federal taxes have been customs duties and excises. The States, or commonwealths, have confined themselves rather closely to direct taxes, as have also the municipalities. Down to 1840, commonwealth taxation was very meagre. Many of the States attempted to get along without recourse to taxation at all, depending for revenues upon the sale of lands, fees, and other sources. The evolution of taxation in this country during this -century has resulted in little advance. Indeed, it has been to make confusion thrice con- ™ , , The absence of founded. Not only has difficulty been sound pHnci- found in adjusting the spheres of the ^ ^^' different taxing authorities, but no sound principle, indeed scarcely any principle at all, has been fol- lowed. Before the Revolutionary War the general property tax, whose origin we have already seen, answered the requirements of justice and equality fairly well. As has been frequently remarked, the American people were a saving race. As fast as they created wealth they turned it into property. The forms of property were, even when not im- movable, tangible and unconcealable. Real estate formed the mass of it. Movable property consisted of furniture, farm utensils, and cattle. There were few stocks or bonds, or other forms of credit in which to invest wealth. Among such a people a tax levied on property that was easily ascertainable answered all the requirements. 164 Il^TRODtrCTIOtf TO PUBLIC FWAMCE part il But as intangible personal property increased, as opportunities for investment multiplied, it became The property impossible to make the property tax tax not "gerv- "general." It became a tax on real estate except for the few conscientious persons who declared their personal property. The commonwealth legislatures made half-hearted at- tempts to sharpen the procedure of assessment. But little or nothing was gained in that direction. Prompted by a wave of popular excitement, or a feeling of bitterness toward certain classes of cap- italists, the legislatures have, from time to time, The corpora- attempted to reach personality by taxing introduce a ^^® Corporations in which the untaxed new principle, funds Were invested. The resulting cor- poration taxes worked some slight improvement. Under the existing conditions they cannot all be shifted. They supplement the general property tax very effectively. Sometimes, the legislatures Taxation of have attempted to tax mortgages, as if mortgages. they were a part of the property on which they rest. As mortgages have to be recorded in order to be legal, it is possible to get at the full value. In some commonwealths, then, the mort- gagee is taxed on his interest in the property and the owner is exempt to that extent. In California, where this plan has been most extensively tried, the result has not been at all what was desired. The only effect has been to raise the rate of interest on mortgages by the amount of the tax plus from one- CHAP. V DEVELOPMENT OF TAX SYSTEMS 165 fourth to one per cent. That is, the mortgagees have succeeded in shifting the burden of the tax to the real owners with a handsome addition for their trouble. Such a shifting is always possible when any one form of capital is taxed leaving other forms untaxed, either because they are exempt or because they escape the tax. So the American sys- tem remains what it has been since 1840, — a re- gressive tax on real estate, supplemented in part by corporation taxes in some commonwealths, and by a few inheritance taxes. It is a system con- demned by every scientific writer and impartial statesman, but retained as the only source of rev- enue. The diiificulties which have prevented persistent attempts at reform remain, and it is hard to see how they can be overcome. No one com- T^^.^i^.^m^ monwealth can afford to pursue personal in the way of property with so much vigour as to act- ually impose a tax on all of it. Only concerted action could accomplish this. Capital is sufficiently mobile to move easily from commonwealth to com- monwealth, and if compelled to bear its fair share of the burden in one and not in another, it will surely migrate. Legislators are extremely desirable of attracting capital and very wary of repelling it. The owners of capital cannot be taxed personally. They change their residence from city to suburlj and even to unfrequented rural parts on the slight- est increase of local taxation and move from com- 166 INTRODUCTION TO PUBLIC FINANCE part il monwealth to commonwealth with equal facility. Residence too is a matter of intention, and it is easy if personal taxes are proposed to plead residence in another commonwealth. Concerted action being practically impossible, the tax-dodger is safe. But while the present system is very bad, it has been tolerated in the past, and arouses less discon- Reasonforthe *^"* ^* present than might be expected, toleration of because it falls mainly on the receivers e sys em. ^£ economic rent. The value of land in many parts of the United States has increased very rapidly and is still increasing steadily. So that in those parts, while the taxed owner feels the burden severely, he consoles himself with the thought that he is largely or wholly reimbursed by the increased price which he hopes to get for his land. The gen- eral practice, too, of assessing real estate at a fraction of its value, even though so universal as to work no actual lessening of the burden in any individual case, tends to stifle murmurs of discontent. For the owner secretly congratulates himself on not having to pay on all of it, — an illogical basis for self congratulation, to be sure, but still not infre- quently effective. The same person, too, is not infrequently the owner of taxable personal property which he conceals, and he is less uneasy about the tax on real estate so long as he is able to save the other. Another reason for the absence of a concerted movement of real estate owners to lessen the burden CHAP. V DEVELOPMENT OF TAX SYSTEMS 167 arises from the fact that the real estate tax is a real burden on the property, and shifts itself by the process of capitalisation. For the The tax on new purchaser gets his property at a "" esta e e- ^ " ir JT J comes a rent lower price than he would have to pay if charge. the tax had not been imposed. The frequency and ease with which real estate changes hands gives con- stant occasion for this capitalisation of the tax. Every real tax, when not a part of a well-organised system which taxes every kind of property or all receivers of wealth, can be shifted in this way. It becomes a rent charge on the property to which it is thus attached. A dim perception of this, and a pos- sible realisation of the fact that a reform of the tax system might transform this tax into an actual burden again, may lie at the bottom of the indiffer- ence with which the average land owner views pro- posed reforms. All of this selfish indifference is, of course, mis- taken. It defeats its own ends. The burden of taxation is only light when properly adjusted to all the shoulders. The serious effects of an unjust, unequal, and ill-arranged system of taxes upon the economic forces of the country has been treated else- where. The property tax forms the subject of a special chapter. We have spoken merely by courtesy of an Ameri- can system. As a matter of fact there is none that is worthy of the name. Federal authorities tax with no reference to commonwealths and munici- 168 INTRODUCTION TO PUBLIC FINANCE part n palities ; commonwealtlis and municipalities, with- out reference to federal action. Municipal taxes Untireab- *^®' liowcTcr, generally adjusted to the senceofsys- existing commonwealth taxes, but only *^™' in such a way as not to make the result- ing burden appear too large. Their efforts in this direction have only served to intensify the existing inequalities. CHAP. VI EXCISES 169 CHAPTER VI EXCISES Section 1. Generally speaking, indirect taxes are older than direct taxes. They are suitable to a more primitive organisation of society. Hence it will not be amiss to treat them before we analyse the direct taxes. By far the larger part of the indirect taxes are on consumption (Auf- „ '^ V ./ Comparison wandsteuern). Most of the taxes on of excises and consumption fall under one or the other ™«*<""«- of two heads : they are excises or customs duties. In the United States the excises are called inter- nal revenue taxes. Excises may be defined as all those taxes levied within a country on commodities destined for consumption. Customs duties fall on commodities as they enter the country. In their effect on the economic condition of the country and on the tax-bearer they are practically the same. In both cases the persons who first advance the taxes are generally supposed to reimburse them- selves from the persons to whom the wares are sold. In both cases it may be true that only a part of the funds taken from the tax-bearer flows into the treasury. For both of them enable pro- ducers who escape, or whom it is not intended to 170 INTRODUCTION TO PUBLIC FINANCE part il tax (as the home producer in the case of a tax on imported commodities), to collect on each piece of goods sold a tax in the form of a price higher than he could otherwise obtain, the amount of which goes into his own pocket. Sometimes this subsi- dising of certain producers is intentional, sometimes only accidental. In any case the ultimate effects which will result from such an interference with the ordinary currents of trade cannot be fully traced. It is very seldom that excises have been intentionally used to change the movement of economic life. But customs duties have regularly Excises have been used for that purpose. Excises sometimes have, to be sure, been used to influence moral re- social life, to lessen the consumption of forms. certain commodities the use of which is regarded as injurious to the individual or dangerous to society. But the object, in that case, is social, not economic. There used to be a large number of the so-called direct consumption taxes. A few of these still Direct con^ survive. They are direct in the first sumption sensc of that term, but not in the second. These direct taxes on consumption are either remnants of the older taxes on movables, or arose from the attempt to frown on the use of luxuries. They differ from excises in that they are levied on the consumer and not on the person or persons who supply him with the commodities. They are to-day few in number and of little fiscal CHAP. VI EXCISES 171 importance. The chief instances in modern times and the most universal are the dog taxes. Tliere are in England similar taxes on guns, carriages, armorial bearings, and men servants. In the United States watches have been made contributory in this way. Plate, houses, clocks, hair powder, and a great many other articles have been taxed. It is regarded as just to make articles of luxury the subjects of taxation because their use is supposed to be evidence of ability to pay. The tendency now is to leave the administration of direct con- sumption taxes to the local bodies. They are some- times combined with police regulative laws and are assessed as a means of enforcing those ordinances. This is the case with the dog tax in America. Sec. 2. It is the excise tax in all its forms that has displaced the direct consumption taxes. The distinguishing feature of this tax is that some resident seller of an article, whether produced in the country or abroad, or the manufacturer of such an article, advances the tax either gome excises during the process of its production or '*«'"' ">« •''""« purpose as at some time before it reaches the con- sumptuary sumer. The main purpose of the excise '""'*• is to obtain revenue, but the ideas underlying the sumptuary laws, and the desire to use taxation as a means of social and moral reform have dictated some of these taxes or at least the selection of the commodities to be taxed. The fact that the con- sumption of certain articles like spirituous liquors. 172 INTRODUCTION TO PUBLIC FINANCE part tl tobacco, and playing cards is condemned in itself, and that such articles are regarded as unneces- sary luxuries has led governments to disregard, or, indeed, to favour, the repressive tendency of the tax upon the use of them. It is felt that in case the tax should lessen the consumption, the gain to the community in moral and social well-being would more than offset the loss to the treasury in revenue. Moreover the consumption of such articles is not, it has been found, liable to serious diminution on account of the tax, unless, as in the case of the French tax on tobacco, it is very high. In the seventeenth century there was a marked tendency to multiply excise taxes. So strong did this tendency become that not a few able writers advo- Aii (.tQiusive, cated a general excise as the most just system of ex- foj-m of tax.i Many of the recent sug- dse taxes . . , . „ . . would be urir gestions lor the reform of taxation m •'"'*• France are in the same direction. This tendency can be easily explained by rapid multi- plication of taxable commodities. It was urged that the ease with which such taxes were shifted ensured in the end perfect justice. It was also often urged that consumption is more or less volun- tary, and any one who finds the tax too heavy can avoid it or lessen it by curtailing his consumption of the taxed article. Thus if the taxed articles are not important necessities the contributor has a certain control over his share and can suit it to 1 Cf. Cohn, p. 336 ; Seligman, Shifting and Incidence, pp. 12 ft. CHAP. VI EXCISES 173 his means. If the tax is on a luxury, he has abso- lute control over his contribution. But modern investigations into the character of distribution and consumption would seem to indicate that these views are erroneous. There is no doubt that con- sumption is a very poor criterion of tax-paying ability. What a man spends is no indication of his tax faculty. There are also some important administrative difficulties. The yield of these taxes is beyond the control of the fiscal officers. An excimive If more revenues are needed, it is not «^«*«"'- »/ «»:- eises mexpedt- always possible to obtain them by rais- ent. ing the rates, since a rise in the rate may, in fact, lessen the revenues by lessening the demand for the articles. They are not variable at the pleasure of the treasury. It follows therefore, that a system of excises would be extremely inelastic. But as parts of a system, the elasticity of which is provided for by other elements, they have proved very valuable on account of the relative ease of administration, and the large returns „ , . ' ° Used in con- which they can be made to yield. In nectionwUh England, Russia, and France the returns "*'"''' *°''"'^- of the excises and customs duties are about one-half of the national revenues. In Germany the consti- tution confers upon the Imperial legislature the power to regulate the customs and excises upon domestic productions of salt, tobacco, spirituous liquors, beer, sugar, and syrup, i The common- 1 Burgess, Political Science, II., p. 174. 174 INTRODUCTION TO PUBLIC FINANCE part li wealths of the Empire do not levy excises on the articles above mentioned except Bavaria, Wiirtem- berg, and Baden. The Empire cannot tax any other articles. In the United States the federal govern- ment derives nearly half its revenues from excises and an almost equal amount from customs. The following principles have been developed as governing the returns obtainable from excises: Excises on (1) Articles which are regarded as neces- necessaries. saries and which naturally have or can have a wide consumption, are very suitable under this tax for obtaining large revenues. In this case the operation of the tax is like that of a poll tax. The French gahelle is an example. The effect of these taxes, if high, is possibly to curtail consump- tion and possibly to cause a substitution of other similar articles not taxed. Possibly, too, they may curtail the consumption of other articles by lessen- ing the money available, for their purchase. But even with a low rate, these taxes are extremely productive, on account of the large number of con- tributors. The objection to burdening necessaries and rendering the existence of the poor harder, leads, however, sooner or later, to their abolition. These, like the poll taxes, recognise no differences in _ . ability. They are, however, good sources Excises on ■' j ' ' o luxuries and of revenue in cases of extreme need. cotnforts. ^g) Luxuries and comforts may be taxed heavily. The general principle is to select those luxuries of the widest consumption as the objects CHAP. VI EXCISES 175 of the heaviest taxes. Thus alcoholic liquors and tobacco are universally taxed in this way. In the United States they form almost the sole objects. In times of special need it is customary to press the semi-luxuries or comforts into service. Here again, the choice is made of articles of widest consump- tion ; such as coffee, sugar, silks, chocolate, etc. In most modern excise systems, the heaviest burden falls upon luxuries. In England, where the receipts from excises are 30 per cent of the total revenues, the chief burden falls upon spirits (£15,189,000) and beer (£9,536,000). In France, aside from the octroi, the chief excises are on beer, wine, spirits, and to- bacco, then on sugar, salt, and playing cards. In Germany, apart from the city gate taxes, they fall upon alcoholic drinks, tobacco, and sugar. There are special difficulties which Germany encounters in the administration of these taxes, due to deep-seated historical prejudices on the part of the commonwealths of the Empire. Moreover, the yield is not as large as it might be because of the bounties on sugar ex- ported. Modern excises are, then, mainly taxes on al- coholic drinks and tobacco with the addition of a few other duties upon playing cards, etc., and in cases of great need, upon a few articles of large consumption. Sec. 3. By far the most interesting features of the excises are the methods of assess- Methods of ment. These are practically of three «ss«««'»en«. kinds, which may be variously combined : (1) A tax on the producer or seller such that the failure to 176 INTRODUCTION TO PUBLIC FINANCE part II pay it deprives the person of the right to sell, and renders him liable to penalty. That is, a license is sold. (2) An impost on each unit of the article. This demands the registration of the dealers therein ; and sometimes they are required to give bonds as surety for the payment of the tax. Wherever it is possible, this impost is collected by means of the sale of stamps purchased of the government to be affixed to each package, hogshead, etc., or by means of brands, or other marks affixed by officials who thus receipt for the payment. (3) By the reten- tion of the monopoly of manufacture and sale by the government. England and America use a combination of (1) and (2). Thus in England every barrel of beer is taxed 6s. 9c?. and every dealer and brewer pays a license besides. ^ I a. d. 1 Beer, per barrel of specific gravity of 1055 degrees 6 9 Beer dealers' and brewers' annual licenses : Beer dealers, wholesale, not brewers, United Kingdom. 3 6 1 Beer dealers to sell any quantity, additional (not to be consumed on the premises, England and Ireland) 1 5 Brewers brewing beer for sale, U. K 1 Other brewers, U. K., annual value of house from £8 to £10 4 Annual value from £10 to £16 9 Retailers of beer, cider, and perry : For consumption on the premises, TJ. K 3 10 Not to be consumed on the premises, England 1 6 Eetailers of table beer, U. K 5 Retailers of beer and wine, U. K. : For consumption on the premises 4 Not to be consumed on the premises 3 CHAP. VI EXCISES 177 In the United States, all internal revenue taxes are payable by stamps. These stamps are pasted upon the packages containing the taxed commodities in such a way as to be necessarily broken when the package is opened. Or else they are pasted up or exposed in the places of business. The table below shows the whole system. Schedule of articles and occupations subject to tax under the internal revenue laws of the United States in force August 28,1894 (with the exception of the income tax then in force but since found unconstitutional). From the compilation of 1894: Special Taxes. Rate of tax Rectifiers of less than 500 bbls. a year $100.00 Rectifiers of 500 bbls. a year, or more 200.00 Retail liquor dealers 25.00 Wholesale liquor dealers 100.00 Retail dealers in malt liquors 20.00 Wholesale dealers in malt liquors 50.00 Manufacturers of stills 50.00 And for stills or worms, manufactured, each 20.00 Brewers, annual manufacture less than 500 bbls 50.00 Brewers, annual manufacture 500 bbls., or more 100.00 Spirits are taxed in a similar way and so are the dealers therein. In the case of tobacco the import duty forms the tax on the com- modity, and the manufacturer pays a license graded according to the size of his business. Tobacco manufacturers : £ «. d. Under 20,000 lbs 5 5 20,000 to 40,000 " 10 10 40,000" 60,000 " 15 15 60,000" 80,000 " 21 80,000 " 100,000 " 26 5 100,000 31 10 -0 N 178 Introduction to public finance part h Rate of tax Manufacturers of oleomargarine $600.00 Retail dealers in oleomargarine 48.00 Wholesale dealers in oleomargarine 480.00 Distilled Spirits, etc. Distilled spirits per gallon $ 1. 10 Wines, liquors, or compounds known or denominated as wines, and made in imitation of sparkling wine or cham- pagne, but not made from grapes grown in the United States, and liquors, not made from grapes, currants, rhu- barb, or berries grown in the United States, but produced by being rectified or mixed with distilled spirits, or by the infusion of any matter in spirits to be sold as wine, or as a substitute for wine, in bottles containing not more than one pint, per bottle or package 10 Same, in bottles containing more than one pint, and not more than one quart, per bottle or package 20 And at the same rate for any larger qaantity of such mer- chandise, however put up, or whatever may be the package. Stamps for distilled spirits intended for export, for expense.. .10 Tobacco and Snuff. Tobacco, chewing and smoking, fine cut, cavendish, plug or twist, cut or granulated, of every description, per pound.. | .06 Snuff of all descriptions, per pound 06 Cigars and Cigarettes. Cigars and cheroots of all descriptions, domestic or imported, per thousand I 3.00 Cigarettes, domestic or imported, weighing not over 3 lbs. per thousand, per thousand 50 Cigarettes, domestic or imported, weighing over 3 lbs. per thousand, per thousand 3.00 Fermented Liquors. Fermented liquors, per bbl., containing not more than 31 gal I 1.00 Per hogshead, 63 gal 2.00 CHAP. Vt EXCISES 179 Oleomargarine. ^^^ „f ^^^ Domestic, per pound $ .02 Imported, per pound 15 Opium. Prepared smoking opium, per pound $10.00 Plating Cards. Playing cards, per pack, containing not more than 52 cards.. $ .02 Sec. 4. "We may now look at a few characteristic excises. The taxation of salt by means of an ex- cise, collected in the form of a tax on The salt tax. producers, a tax on sellers, the sale of a monopoly to a private company, or state manufact- ure, is one of the oldest. On account of the nature of the commodity, a necessity for which there is no substitute, and of which poor and rich consume about the same amount, this tax acts practically as a poll tax. With the modern tendency to abolish or at least to lower poll taxes, as unequal and unjust, the salt tax has been largely abolished, or its rates have been so lowered as to practically nullify the returns. France to-day gets only 1,250,000 francs from the salt ex- cises, to which should be added the customs duty, making a total of over 3,000,000 francs. The Eng- lish salt tax yielded at the time of its abolition only £380,000. The United States war excise upon salt yielded only $300,000. The best, but not by any means the sole, example of the tobacco monopoly is in France. This inter- esting tax scheme began in 1674 under Colbert. It 180 INTRODUCTION TO PUBLIC FINANCE part il continued with slight interruptions for over a cen- tury as one of the most productive parts of the rev- French tobac- euue system. It was leased to a ferme CO monopoly. gSnerale, who paid the government at the time of Necker 32,000,000 francs annually. At the time of the Revolution the monopoly was abol- ished, and an attempt was made to introduce a series of taxes on tobacco. But the monopoly was restored in 1810 by Napoleon I., and has continued ever since. Under the present law the culture of the plant is forbidden outside of certain localities. Each year the estimated amount required by the depart- ment is apportioned among the different applicants within the district where it is permitted to raise tobacco. Several thorough official inspections of the fields and crops are made, and even the number of plants and leaves is counted to ensure obedience with the regulation which demands the delivery of the whole crop to the government. Tobacco raised for export is similarly watched to see that none of it escapes into the channels of the French trade. The price for each quality is determined by a commission of officials and experts. A part, about one-half, of the supply is imported. The manufacture is carried on in public factories, which employ about 20,000 workmen. The sale is in the hands of some 40,000 petty officials, who receive a percentage of their sales and whose appointment is a part of the party spoils system. The revenues obtained in this way are enormous : .VI E) KCISES 1815 . . . 40,000,000 francs 1869 197,000,000 « 1872 218,700,000 " 1876 262,300,000 " 1880 284,000,000 " 1885 300,000,000 " 1890 315,000,000 " 181 The prices charged for tobacco are high compared with the prices prevalent in other countries, so high that the consumption is apparently checked thereby, it being per capita less than one-half that of Ger- many. Austria and Italy have very similar State tobacco monopolies. Sec. 5. On account of the large returns obtain- able from an excise on luxuries, and in view of the fact that any repressive effect of such „, ■' '^ The proper excises is not felt to be harmful, but is field for ex- often desired, it is probable that these """^' taxes will be long retained. They are applicable to any luxury the consumption of which is large and of which the production is sufficiently simple or con- centrated to allow of supervision. But in general, excises as taxes on expenditure or consumption are unfair. What a man spends is no indication of his ability to pay taxes, and what a man spends on a cer- tain limited list of commodities is less so. When these taxes are made a subordinate part of a system and due allowance is made in the other taxes for the existing burdens, there is less objection to them. 182 INTRODUCTION TO. PUBLIC FINANCM. pArt it CHAPTER VII CUSTOMS DUTIES Section 1. Customs duties are taxes levied upon commodities when they cross the national boundary Customs liiie^ or ^re admitted within a customs duties defined, territory, consisting of a combination of countries or of definitely limited parts of coun- tries. Urdess a city or town forms an independent sovereignty, taxes levied on goods entering a city are not called customs duties, but octroi or imposts, and partake of the nature of excises. Duties upon goods passing from province to province in the same country are likewise not customs duties. Neither are tolls or transit duties charged upon goods pass- ing through the country. Such charges are fees for the ostensible or real service of the government in keeping up roads and bridges, maintaining peace, and allowing transit. ^ Customs duties are indirect consumption taxes of practically the same character as excises. Their treatment in a separate chapter is not on account of any actual difference in nature but because of their historical and fiscal importance. 1 Cf . Bastable, p. 513, for contrary view. Bastable does not recognise fees as a separate class. Hence his identification of transit duties with customs duties. CHAP. VII CUSTOMS DUTIES 183 Sec. 2. The oldest forms of customs duties were on exports and imports alike. They arose by anal- ogy from the transit tolls which were Old customs customary in the middle ages. Once ,'' '^'' ""'""^^ ■' ° hoth imports in use their fiscal importance was recog- and exports. nised, and it was easy from the standpoint of feudal politics to justify their continuance. Feudalism re- garded every act of the vassal as the concern of the lord. If any vassal, or later any subject, found a new means of gain, feudalism imposed on him the duty of contributing a part thereof to the lord or the king. If a subject sold a commodity to a foreigner it seemed to the men of the middle ages that the king's interests were affected, and it seemed right that his permission should be paid for. The export duty is often a sort of compromise accepted for the removal of the prohibition of exportation. With the decay of the older, cruder, mercantile ideas and the advent of a period when national wealth came clearly to depend upon the size of national trade more than on its direction, export duties fell away. It is interesting to note in this connection that England retained until the middle of this cen- tury an export duty on coal, supposedly for the pro- tection of her deposits from depletion. The fall of ex- Turkey is now the only country where P'^''* duties. export duties form an important item of revenue. There the duty is 1 per cent of all exported com- modities. Switzerland, Austria, Russia, and Italy have a few export duties upon products peculiar to 184 INTRODUCTION TO PUBLIC FINANCE part ll their soil, the burden of which is supposed to fall upon the foreigner. France did away with them in 1881 ; Germany in 1873. Import duties are still very numerous. As a branch of the taxes on consumption, their yield is very large. The German customs duties yield about 27 per cent of the total imperial receipts. Until recently, about half of the United States federal in- come was from this source ; now it is slightly less. The English customs duties yield 25 per cent of the gross receipts, the French 16 per cent, and the Italian the same. Sec. 3. Although the fiscal interests are great, yet in every important country except England the receipts from this source are not regarded as of any greater importance than the effects upon the indus- tries of the country. There are then two sides from which these taxes must be studied : (1) From the side of revenue-yielding capacity; (2) from the side of the " protection " afforded the industries of the country which levies them. While it would be The purposes Undesirable to introduce a full discus- of the customs gion of the f ar-reaching economic effects duties both fis- . , . . , . cat and poiiti- 01 protective duties upon industries '^"'- and commerce in a treatise on finance, yet a brief statement of these effects and of the main reasons which have led great nations to adopt these taxes is essential to an understanding of their nature. It is as essential to know how and why pro- tective duties are intended to alter the existing CHAP. VII CUSTOMS DUTIES 185 economic conditions, as it is to know how and why the income tax, for example, is supposed to leave them unaltered.! Sec. 4. What is the distinction between a protec- tive tariff and a tariff for revenue? It may be briefly stated as follows: A protective Proucn^etar- tariff is a scale of duties so arranged as ^ff defined. to prevent importation, wholly or in part, and to raise the price of commodities from abroad, the pro- duction of which within the country it is intended to encourage. The scale of duties is therefore arranged with a view to the supposed needs of the industries which it is intended to develop. A tariff for revenue, on the other hand, aims to avoid any effect upon industries within the country, and the duties are laid according to prin- jtevenue tar- ciples similar to those of the excise, if defined. upon articles of large consumption and great tax- bearing capacity. The term "• a tariff for revenue onli/," so current in the United States, is the expres- sion of an unattainable hope. A moment's considera- tion of the law of international exchange,^ namely, that the interchange of commodities between dis- 1 To refuse, as Bastable does, to discuss protective duties be- cause we believe them "vicious" and "uneconomic" is not sci- entific. In spite of the condemnation lieaped upon them by economists of the old school, the people of many great nations have continued to use them. This fact alone necessarily forces them upon our attention. We must trace the effect and incidence of these taxes as of any others. 2 See Mill, Prin., Bk. III., Chap. XVH. 186 INTRODUCTION TO PUBLIC FINANCE part ii tant places is determined by differences in their possible cost of production in the same place, and The effect of not by their absolute cost of production °iuties*oT ^^ *^® separated interchanging places, trade. will reveal the fact that even a very small duty upon a single commodity affects the demand of the country from which that commodity comes for other things, and indirectly affects every commodity manufactured in the country laying the tax. The same is true of an excise. In fact, any consumption tax has far-reaching effects. Strictly speaking, there can be no such thing as a tariff for revenue only. What is meant by that phrase is that the tariff shall be so arranged as to yield the needed reveniie with the least possible effect on the trade and industry of the country. It must be noticed that every tariff, even though it contains many protective features, also necessarily _, ^ contains many duties which are mainly The two pur- •' •' poses always for revenue. Thus in the United States conjoined. ^^^^ ^^^ j^j^j^ protective duties, the main revenues were obtained from the taxes upon a few commodities. The receipts in 1888, for ex- ample, were : from duties on sugar and the like, 152,000,000 ; from wool and woollens, $37,000,000 ; from iron and steel, $21,000,000 ; these three to- gether being more than half the entire receipts from customs duties. Sec. 5. The protective principle is widely applied in every important existing tariff of customs outside CHAP. VII CUSTOMS DUTIES 187 of Englanrl, Holland, Norway, Belgium, Switzerland, and Denmark. This policy is clearly the outcome of national selfishness. The attempt to direct in- dustry into certain lines by artificial means cannot find support in any system of political ^ . .• '^'^ •' -f J^ Protection as economy that regards the largest possible o nationaipoi- world's product as the proper aim.^ "^^' The object is rather the greatest possible diversity of home products. In so far as this purpose is attained, it is by the process of shutting out com- petition and allowing the home producer to collect from home consumers a certain amount of support, greater or less, according to the supposed needs of the producer in question. In so far, then, the actual protection afforde4 is an item of public ex];)enditure. Revenues collected by means of higher prices author- ised by law are spent in developing the industry protected. It is in every respect the same as if a subsidy were paid to the manufacturer or other pro- ducer, except that the money goes directly to him without first passing through the treasury.^ Sec. 6. We turn now to a treatment of the tax character of protective duties: (1) In the first place, 1 See the article by Professor Folwell on "Protective Tariffs as a Question of National Economy," in The National Bevemies, a collection of papers by American economists, edited by Albert Shaw, Chicago, 1888. Contrary to the popular opinion as to the views of economists, none of the writers who have contributed to this symposium finds it possible to attack protection on a prion grounds. 2 See above on expenditure for protection of industry. 188 INTRODUCTION TO PUBLIC FINANCE part il it is clear that the more " protection " the duty- gives, the less will be the revenues afforded to the A high pro- government, and the greater the possi- vieidsiutle ^^® revenues to the subsidised producer. revenue. Absolute protection means the exclusion of the foreign commodity and no revenue to the government. The subsidy that the producer can obtain is determined by the conditions of produc- tion ; it varies from nothing to the whole amount of the tax according as the cost of production varies above what the cost of the imported commodity would be without the duty. (2) Above a certain point high duties tend to diminish the revenues to the government, and increase the subsidy to the producer, by diminishing the amount of the com- modity imported. The point beyond which the At what point total revenues diminish is ascertainable tiddediargf ^^ ^ Principle similar to that of charg- es*? ing what the traffic will bear. In prac- tice that point can be ascertained by gradually increasing the duty until it is found that the im- portation begins to diminish, and stopping the in- crease of the duty when it i ; found that the added duty checks more of the importation than the in- creased duty compensates for. A tariff of customs The cost of duties arranged throughout on this prin- protectionis --y^ ^^^^^ ^^ ^ revenue tariff, and if paid by the ^ consumer. universal would yield enormous sums. It would, also, contain many protective features. The burden of such a tax would be insufferable. CHAP. VII CUSTOMS DUTIES 189 No such general tariff has ever been enforced. (3) Protection is given only when the price is raised. The subsidy paid to the producer is paid by the consumers vi^ithin the country. This part of the tax is never shifted to foreigners and ^, , ° The tax actu- generally remains on the consumer. (4) ally collected But that part of the tax wlaich flows into ^^ *^''.5«'«f"- ■*- ment is not the treasury of the government is not aiwayspaidby always, although generally, paid by the "'" <^»"««'«^'-- consumer, whether protection is afforded thereby or not. There are a few rare instances in which the tax that forms a part of the government's revenue is shifted either to the foreigner, i.e. the producer or the speculator, i.e. the importer. These instructive instances may be summed up as follows : The con- sumer escapes that part of the tax which flows into the treasury on purchases of commodities actually imported : (a) When the amount of the commodity produced in the country laying the tax is sufficient in quantity to entirely supply the home market and to fix the price very close to the cost of production, while the foreigner has at the same time so large a supply that he must enter that market to dispose of it. In this case, if any revenue at all _, ^, ^ ' •' When the for- accrues to the government, it is clear eignerpays that it is paid by the foreigner, who is *''««''"''«««»'• burdened by the whole tax and may lose more, — more, that is, if his entrance into the market still further depresses the price. The home producer gets no subsidy. A commonly cited example of this is the 190 INTRODUCTION TO PUBLIC FINANCE part ii case of rye in Germany in good years when the out- side crop is also good. (&) When a new tax is laid „, , . on goods produced by the aid of a large The foreigner o r j o pays the tax fixed plant for a limited market which temporarily. ^^^^^ ^^ ^^^^ .^ ^^^ p^.^^ ^^^^ ^.^.^^^^ As long as the producer is unable to change the nature of the plant, he must pay the tax. An ex- ample is found in the iron products from the Rhine districts prepared for the trade as " Sheffield " cut- lery. England could in this case tax the foreigner until such time as he could change the character of his product, (c) In the case of commodities that are used only as the substitutes for something else be- cause cheaper, and which would, if the price rose „, , . higher than that of the commodity for The foreigner o •' pays a part or which they are used, not be consumed at of le ax. ^Y[_ jj-^ ^1-njjj gg^gg (;jjg foreigner pays a part or the whole of the tax when the alternative commodity is cheap. For example, rye in Germany The foreigner '^^^^^ wheat is cheap, especially if at the pays a part of same time the crop of rye is short, (c?) In the case of commodities a large part of whose total consumption is produced in the coun- try, but not enough to absolutely fix the price, which is still above the cost of production. The foreigner in that case may pay part of the tax, since his arrival The speculator depresses the price, (e) The speculator pays the tax. regularly pays the tax in those frequently recurring instances when the commodity is massed in warehouses on the border ready for importa- chAp. vii CUSTOMS DUTIES l91 tion on a rise in the price, and on being imported, at the order of various speculators, in large masses depresses prices again. It is a pretty well-estab- lished fact, from the investigations of Cohn and Kandtorowicz, that the speculators on the Exchange as a whole lose more than they gain. This loss is in part the consumer's gain through the relief from taxation. 1 Sec. 7. Customs duties regarded merely as a source of revenue depend upon the same principles exactly as those which underlie excises used for that purpose. The greater revenue is obtained with the least expense from a few simple duties upon important commodities. Technically, customs duties are of two kinds, ac- cording as they are levied upon goods in bulk irre- spective of their value, or the contrary, o -^ j This technical distinction is of great im- ad valorem portance in determining the incidence of these taxes. Duties levied according to the value of the imported commodities are known as ad valorem; those according to weight, bulk, or other unit of measurement, are known as specific. The latter fall most heavily upon the coarser or cheaper grades of commodities. Such a tariff is, therefore, regressive and contrary to the spirit of many consumption tax 1 See the masterly treatment of the whole of this intricate sub- ject by Lexis, "Handel," in Schonbei-g's JIandbuch, 2ded., Vol. 11., XXI., sec. 77; also Conrad, in his Jahrbuch, XXXVII.; Cohn, " Zeitgeschafte und Differenzgeschafte," in Hildebrand's Jahr- buch, VII,, p. 388 ; brought down to date in 1800 by Kandtorowicz. 192 iNTRODVCTtON TO PUBLIC FINANCE part il systems, which usually tax luxuries more heavily than other commodities. But the great saving in expense, and the great ease of collecting and administering specific duties, go a long way in recommending them. Ad valorem duties demand more machinery of administration, as, for example, the certification of the consul in the place where the goods come from to the correctness of the invoice, a corps of appraisers, and a careful examination or inspection of all incoming goods. Little of this is necessary in the case of specific duties. Specific duties are now retained mainly for simple commodities of uni- form value per unit, or for rough groups of articles, whose value is easily ascertained. The watching of the frontier and the prevention of smuggling is one of the primary difficulties that have to be overcome in the administra- tion of customs duties. Goods of high value and easily portable are not very well adapted to pay such duties, unless they can be obtained only from distant countries and are thus easy of identifi- cation. Whenever there is a heavy excise on any commodity there is generally a correspondingly heavy customs duty as well. Sometimes the im- ported commodity pays both the duty and the excise or a part of the excise. The political or protective element in customs duties has been gradually retreating in importance, and the fiscal has correspondingly advanced. Stein ^ iVol. II., Part II., p. 377. CHAP, vn CUSTOMS DUTIES 193 makes this the sole law in the history of customs duties. It would be best characterised as an ad- vance of the fiscal interest, leaving the The rise o/im- political or protective interests the same f/""!"""! "■''. ^ '^ the fiscal pnn- as before. The pressing wants of na- dpie. tions, and the fact that federal governments have been well-nigh confined to these taxes, has necessi- tated this advance. Sec. 8. We may now look at some examples of customs duties. Those of England are particu- larly instructive.! The term " con- „. , •' History ofcus- suetudines," or customs, applied to the toms duties in duties levied upon imported and ex- "^"" ' ported commodities even before the Magna Charta, bespeaks their antiquity. In the time of the Nor- man kings, however, trade was insignificant and the duties not very productive. The original duty on wine was one cask from every cargo of between ten and twenty casks, two from twenty or more. What the original duty on wool was is not known. Finally the system settled down to a 5 per cent tax on all imports and exports. Down to 1700, these duties were entirely for revenue purposes and had no intentional protective features. At one time their yield was nearly £1,500,000. The eighteenth cen- tury saw a changed policy. Special protective and prohibitive duties were established. This was the policy of the entire century, except during the 1 See Hall, History of the Customs Bevenue, and Dowell, History of Taxation. 194 INTRODUCTION TO PUBLIC FINANCE part it " long peace " of Walpole, 1722-1739. By 1759, tlie general charges were 25 per cent, while many commodities, like tea, coffee, sugar, wines, and spirits, paid even more. The expenses of the wars which marked the turn of the century led to a general increase of charges on revenue- yielding commodities. Yet with all the many in- creases in the tax charges there was not a corre- sponding increase in revenues. In some cases, the high duties of the war period exceeded the limit of what the goods would bear. For example, sugar paid duties ranging from 20«. to 39s. per hundred- weight during the first fifteen years of the nineteenth century. But the annual income was least when the duties were highest. Consumption fell off half a million hundredweight under the higher price. It must be noted that this result was obtained in the case of a commodity not produced in the country it- self. Salt, also, bore a heavy duty in this period to the lessening of the consumption. Tea, coffee, to- bacco, wine, and other foreign products were also subject to revenue duties so high as to be close to, if not beyond, the limit of greatest productivity. Interesting and instructive is the experience of England with protective duties. Export duties on „ , ,, raw material, or the prohibition of the England's ^ protective exportation thereof, as in the case of I. Mies. -wool, was originally one of the most prominent features of the English system. From the middle of the seventeenth century down to 1825 the CHAP, vii CUSTOMS DUTIES 195 exportation of home-grown wool was forbidden. Until 1802, however, the importation of wool was free. Then the import duty rose rapidly from 5s. 3c?. per hundredweight, in 1802, to 56s. per hundred- weight, in 1819. To encourage the production of raw silk, heavy duties were placed upon that com- modity in 1765, and not lessened until 1825. Linen manufacture was encouraged by bounties. The chief battles over the customs duties in England were waged around the " corn-law." ^ Two things among others of minor importance seem to have contributed mainly to the establish- ment of protective duties on bread-stuffs.^ The first was the existence of heavy public burdens upon land, and the desire to compensate land owners and land users therefor. The other was the desire to make England as independent as possible of all foreign nations for her food supply, and to keep even the poorer lands in cultivation. According to the advocates of this policy, protection was needed to enable the proprietors and tenants to buy manu- factured products. It was the political power of the proprietors that enabled the policy to be maintained. The various tariffs that prevailed may be conven- iently summarised as intended generally to maintain a chosen price, which it was assumed would enable 1 The American student must bear in mind tliat hi England "corn" means wheat, or, in genera], bread-stuffs. 2 See McCullooli, Taxation, p. 206 ; Wilson, National Budget, pp. 62 ff.; Levy, History of British Commerce, 2d ed., Part II., Chap. 7 ; Band, pp. 207 fE. 196 INTRODUCTION TO PUBLIC FINANCE part n the producer to live, and wOuld not place too heavy a burden on the consumer. Hence the frequent re- course to a sliding scale by which a higher duty was imposed as the price fell. The best example is the scale adopted by Sir Robert Peel (5 and 6 Vict. c. 14), by which the duty was to be 20s. per quarter when the price was 50s. and 51s., and decreased Is. per quarter for every rise of Is. in price; so that the duty should only be Is. per quarter when the price rose to 70s. and over. The idea was, clearly, to maintain, if possible, a price of at least 70s. A similar purpose underlay the earlier prohibition of importation, until the price rose above 80s. per quarter. Popular agitation, headed by the Anti-Corn Law League, was based upon the hope of cheaper food The. eiitnina- supplies. It was Supported by the rapidly ^rot tive growing manufacturing interests in the features. expectation that cheaper food would re- sult in a fall in wages. After years of effort, it brought about the repeal of the corn laws in 1846. The sympathy aroused by the Irish famine of the same year contributed to this end. Just before the repeal of the corn laws Peel had, in 1842, simplified the whole tariff by eliminating many of the protective features, especially by remov- ing duties on raw material and freeing a num- ber of small articles. As a substitute source of revenue the income tax was restored. Gladstone, in 1860, completed the removal of protective feat- CHAP. VII CUSTOMS DUTIES 197 ures. Since that time it has been true, in the words of Bastable, that "the English customs system is remarkable for its vigorous adherence to the prin- ciple of purely financial duties. All traces of a polit- ical aim in the imposition of customs duties have now disappeared." Customs yielded £20,164,114 in 1894 from the following articles : — Spirits: rum, £1,938,181; brandy, £1,364,058; gin, £154,088 ; others, £674,257 ; beer, etc., £14,- 582; tea, £3,493,094; tobacco, etc., £10,119,954; wine, £1,210,141; chicory, £57,130; cocoa, £102,- 665; coffee, £164,985; currants, £120,977; figs, plums, and prunes, £55,135 ; raisins, £189,160 ; all others, £4,886. There are now only 40 rates in the English cus- toms tariff. In 1875 there were 53, as against 397 in 1859, and 1046 in 1840. Sec. 9. The difficulty of administering customs duties in the small and scattered areas of the differ- ent States of Germany led to the for- ^ „ •' Ihe German mation of the German customs union customs iZollverein) in 1833. This union, which "'"""• at first embraced a population of 25,000,000 and a territory of 80,600 square miles, grew in size and in permanence with the renewal, from time to time, of the treaties which bound together the States composing it, and with the entrance of new States, so that in 1854 it embraced 98,000 square miles and 35,000,000 inhabitants. It was the core of the present German Empire. At the beginning 198 INTRODUCTION TO PUBLIC FINANCE part ll the moderate, mainly revenue, duties of Prussia were adopted. In the tariif of 1865 the rates were lowered and many removed. Duties on grain and on almost all raw materials were removed, and the duties on manufactured goods reduced. The free-trade tendency which accomplished this change lasted until long after the formation of the Empire, indeed, down to 1877. The constitution of the Empire confers upon the Imperial legislature the exclusive power to regulate customs. It may levy taxes to any amount upon Tha customs ^^1 articles exported or imported, for of the Empire, revenue purposes or for protection or for both. But the Imperial legislature cannot tax any- thing else. Further revenues, if needed, can be raised in the form of an apportioned requisition upon the commonwealths of the Empire. The growing need of the Empire for revenues was ac- companied by a wave of protectionist sentiment, so that the increased duties were more and more pro- tective in character. It is true, however, that the revenue features were increased at the same time. Particularly interesting is the duty on grain, intro- duced in 1879, and raised several times since then. The rate is now 5 M. per 100 kilograms for wheat and rye, 4 M. for oats, 2\ M. for barley. These duties are in some measure protective in ordinary seasons. It is frequently found that a part of the revenue which flows into the treasury from this source, especially in extraordinary years, is paid by CHAP, vn CUSTOMS DUTIES 199 others than the consumer. ^ Generally, however, the consumers pay the home producers a goodly sum in the shape of higher prices. The operation of these grain duties has been materially modified in recent years by the conclusion of commercial treaties with some of the grain-producing . countries. The main revenues from customs duties in the Empire come from coffee, tobacco, wine, and grain. Sec. 10. France has a highly developed system of customs duties. By the edict of 1664 Colbert attempted to reduce to a single uniform Histm-y of the scheme all the confused and multifarious -^'■««cA tariff. customs charges that had come down from feudal times and were in the hands of many different authorities. The tariff thus established was pro- tective in character and was dictated mainly by the mercantile doctrine. But many' provincial duties were left, and as time went on confusion increased. The Revolution swept all the old taxes away, and in 1791 the. system which is the basis of the present one was established. The development since then has been gradual. Prohibitions of imports and exports, so numerous in the tariffs of the ancient monarchy, have now all been removed. Since 1863 the only exceptions to this statement are books that infringe the copyright law and munitions of war. To ensure the proper registration, for statistical research, of all traffic, there used to be an import charge on all goods of 1 See examples cited above, also Cohn, pp. 565 fi. '100 INTRODUCTION TO PUBLIC FINANCE part ii 15 centimes per 100 francs' worth or 50 centimes per 100 kilograms, and an export charge of 25 centimes per 100 kilograms. These have been removed.^ During the period subsequent to the Revolution, and down to 1814, war measures left no opportunity to test the tariff of 1791. The Restoration estab- lished a highly protective system at the instigation of the Chambers. The Second Republic continued the same policy. Napoleon III., finding himself unable to persuade the deputies to change the tariff, removed many of the prohibitive duties by treaties. The first of these treaties, with England in 1860, fixed the maximum ad valorem duty on English goods at 30 per cent for the first four years and 25 per cent after that. Other treaties followed extending similar privileges to other countries. In the spirit of these treaties the tariff itself underwent many amend- ments, raw products were admitted free, duties on foods were removed or lowered, and the duties pro- tecting the stroiager manufactures were lowered. By 1873, that is, after the struggle with Germany was over, and after the revenue system had been rearranged to meet the tremendous burden which The two tar- ^^^ ^^e consequence of the war, France »/■'• had two distinct tariffs. First, the gen- eral tariff built upon the law of 1791 amended many times. Second, a conventional tariff based 1 On the -whole subject see Levasseur, "Recent Commercial Policy of France," Journal of Political Economy, Vol. I., No. 1, December, 1892. CHAP. VII CUSTOMS DUTIES 201 upon treaties. Since these treaties generally con- tained the clause granting each nation the same privileges as the most favoured, this tariff was more uniform than the method of construction would lead one to expect. In 1881 the general tariff was pretty thoroughly revised so as to approach the treaty tar- iff. Manufactures were slightly protected. With this as a starting-point new treaties were made. One of the most remarkable reforms that any tariff has ever undergone was accomplished in 1892. This was the passage of two tariffs in a The tariff re- single law. There was first a general /<>"«■ o/ 1892. tariff or maximum which was to be levied on goods from all countries not obtaining special privileges by treaties. Second, a minimum tariff marking the lower limit to which the concessions might go. The latter was to be applied to the native products of those countries which grant French products re- ciprocal privileges. Both of these tariffs were pro- tective. There are over 700 items in the maximum tariff, but the number on which concessions could be made was considerably less. Sec. 11. The tariff history of the United States has been written many times. ^ Its effects have been explained in many different ways. Not rj^^^^ff^^^i^ one of the many histories is clearer and of the United more impartial than the short statement by Professors Seligman and R. Mayo Smith, printed 1 Sumner, History of Protection in the United States; Taussig, Tariff History of the United States, 1789-1888. 202 INTRODUCTION TO PUBLIC FINANCE part ll (in English) in the publications of the Verein fur Socialpolitilc, 1892 (Vol. XLIX., Part 1). Nothing but the barest outlines can be attempted here. The colonial policy of England prohibited the ex- portation of the more important commodities, the " enumerated " articles, to any country but England. Importation was to take place only from British ships. As was seen in the chapter on protective expenditure, bounties were paid to encourage agri- cultural products. The only import duty in the colonies was that imposed in 1773 on rum, molasses, and sugar from other than British colonies. After the war of Independence there was a move- ment to protect the new industries which had sprung up. As Congress did not, until the adoption of the new constitution in 1789, have the power to collect duties, the commonwealths tried to afford the de- sired protection. There is naught but confusion in these efforts, all of which, however, came to an end when the commonwealths were forbidden to levy customs duties. The tariff was the sole source of tax revenue which the new federal government had. It was, conse- The beginning quently, largely utilised from the first. of the tariff. Down to the close of the war of 1812 the tariffs were, in effect, if not in intention, revenue and not protective tariffs. The rates were generally low, except on purely revenue articles like sugar, tea, coffee, and wine. The Orders in Council, the Berlin and Milan decrees, on the east side of the CHAP, vn CUSTOMS DUTIES 203 Atlantic, and the Embargo and Non-Intercourse acts, on the west side, followed by the war of 1812, gave absolute protection to American industries and seriously lessened the growth of the customs revenue of the government for a period of seven years. It is not surprising, therefore, to find the new industries which had been forced into existence during that time calling loudly for protection after the peace. A strong protectionist sentiment arose which in- itiated a policy that had scarcely more than a temporary setback from 1816 to 1895. ™ . . . ■'- *^ The beginning That policy was to combine high pro- of the protect- tective duties with important revenue '"^p""'?'- duties. The main arguments advanced for and against the policy of protection have been stated under Expenditure. The industries protected were the textiles, cotton and wool, and iron. Among the revenue duties may be named those on tea, coffee, and wine, and perhaps those on sugar and tobacco. The first period of the protective policy passed the highwater mark in 1828. The only important setback which the policy sustained before the recent tariff, was in the so- called free-trade period from 1846 to 1860. The act of 1846 was heralded as a tariff for revenue only, but it was still highly protective, y,^^ ^^_^^„^^ The duties on the classified commodities free-trade ranged from 5 per cent to 100 per cent ; ^^"^ the last on spirits. Some purely revenue duties ■yyere removed entirely, as, for example, the duty on 204 INTRODUCTION TO PUBLIC FINANCE part il tea and coffee. The protected textile industries re- tained their duties for the most part ; woollens 20 to 30 per cent, cottons the same, iron 30 per cent. All the duties were made ad valorem, a change which involved an increase in the cost of administration. A more substantial reduction was made in 1857. The crisis of 1857 resulted in a serious decline in the revenues, and just before the civil war broke The Morrill out, Congress passed the so-called Mor- tariff. rill tariff, March 2, 1861. This tariff in- creased the protective duties, especially on iron and woollens. From the technical side this act made two changes of note. First, specific duties were again restored, second, the system of so-called compen- sating duties was initiated. This second feature, which afterwards received a very broad application, can best be made clear by an illustration. The Morrill tariff increased the duty on raw wool. To compensate the manufacturers for this, a specific duty, supposed to represent the duty on raw ma- terials, was placed on manufactures of wool, to- gether with an ad valorem duty for protection. Immediately after the passage of the Morrill act the war broke out. Under the pressure of the need for revenues -Congress passed a long series of acts The war tar- increasing the duties on purely revenue '^'■s- articles, putting duties upon articles hitherto free, and raising as compensation the pro- tective duties. The idea of giving compensatory duties was extended to cover the burden of internal CHAP, vil CUSTOMS DUTIES 205 taxes also. Thus the manufacturers were, in 1864, given special compensatory duties to oflfset the heavy internal taxes. This remarkable protectionist meas- ure, embodied in the act of 1864, was rushed through Congress with only one day's discussion in each house. It represents the highest limit ever reached. Nearly 1500 articles were enumerated ; the average rate was close to 50 per cent. It shows the effect of three different forces : there was (1) the desire to increase the revenues ; (2) the feeling that the manufacturer had a good claim for compensation for the high taxes in general ; (3) the mad scramble to gain all that could be gained from this class of legislation. This act afterward received a number of amend- ments to meet the changes made in the other parts of the revenue system, but the character of the tariff was not materially changed until 1883. One of the most interesting changes, technically, was the fixing, in 1866, of the method of ascertaining the value upon which the duty was laid. It was provided that the value should be determined by adding to the value, at the place of shipment, the cost of trans- portation, packing, commission, warehousing, and other charges which fell upon the goods before their arrival. The protection policy thus extended gave strength to vested interests which thereafter sup- Modilications. ported that policy. The only changes of note down to 1894 are the attempted reforms 206 INTRODUCTION TO PUBLIC FINANCE pakt ii of 1870, 1873, and 1883, and the McKinley tariff of 1890, which reduced the income by removing the duties on purely revenue articles and on very strong, self-sustaining industries, but increased the protec- tive features. In 1894 came a change that is very important. The McKinley bill of 1890 had become practically Reduction of t^e platform of the Republican party, protective and the Democratic party went into power pledged to the reduction of protec- tion. They proceeded slowly to the fulfilment of these pledges. The famous Wilson bill was re- ported Dec. 19, 1893, and became a law Aug. 27, 1894, without the approval of the Democratic Presi- dent. It failed of his approval because of the ob- jectionable features introduced in the Senate. Two things prevented the change from being sweeping. The first was the power of the vested interests in the protected industries. Every sort of pressure, short of illegal, was brought to bear in favour of the existing system. The second was the patent danger of too sudden a decrease. Sweeping reform would ruin industries and create a depression. The changes may be roughly summarised as follows. Forty-five articles previously taxed were Anal sis of P^* °^ *^® ^^^® ^^®*" Among these the the recent most important was wool. The duties rejorms. ^^ wooUens Were " compensatingly " re- duced to an average of about 40 per cent as against tbe old average of nearly 100 per cent. Copper was CHAP, vil CUSTOMS DUTIES 207 made free, as was also lumber. Iron ore was, after a struggle, left dutiable. The chief feature of the McKinley bill had been the removal of the duty on sugar. This was restored to the tariff with a duty for the sake of the revenue. On all the rest of the list the duties were reduced by from 20 per cent to 40 per cent. It is well-nigh impossible to summarise the result further; the items are too numerous and there is a lack of guiding principles. The reduc- tions carry the tariff lower than it has been at any time since the war. The level of 1857 has been reached but in a very few instances, though in some cases a lower limit has been reached. The im- mediate result was a material falling off in the revenues. This is, however, due to the coincidence of the reduction with a serious industrial depres- sion and will probably not be permanent. 208 INTRODUCTION TO PUBLIC FINANCE part ii CHAPTER VIII PEOPBETY TAXES Part 1. The. G-eneral Property Tax. Section 1. In the general property tax the basis is the entire amount of property, real and The theory of Personal, owned by the tax-payer. It the general is usually paid out of the income of the proper y ax. tax-paycr derived from any source, but inasmuch as it forms a lien on the property it may be paid from that. The tax rests, theoretically, upon one of two ideas : (1) that property measures faculty ; (2) that property measures benefit. In the older forms of this tax, when there was little oppor- tunity to buy or sell land, or to invest capital, it was pretty generally true that property did meas- ure faculty. In modern times the theory that benefit can be measured by property has led to the retention of the tax. The fallacy of that theory has been shown. The general property tax is, as we have seen, very old. It is still the main reliance of Switzerland and the United States for supplying the revenues of the component parts of the federal systems. Prussia and Holland have recently reverted to it. This reversion to a form of taxation which has been the subject of CHAP. VIII PROPERTY TAXES 209 almost universal condemnation suggests the necessity of re-examining the grounds upon which those objec- tions were based. Among many there are two of great importance. (1) It is urged that the tax is unjust because property forms no criterion of tax- paying ability. It is maintained that objections to income is a far better basis. (2) It is *'»»s*«^- urged that the general property tax is inexpedient because so difficult to administer justly, especially in the matter of the discovery and assessment of per- sonal property and because of its effect on the move- ment of capital and forms of investment. Against these serious objections it is urged that when there is a tolerably just system of income taxation already in existence a property tax in addition thereto fulfils the requirements of justice because it imposes a heavier burden on " funded " income, which is regarded as indicative of more faculty since it is less precarious. It also supplements the income tax by making prop- erty in enjoyment, the use of which is an indication of tax faculty, a part of the base, as for example picture galleries. And, lastly, the comparative steadiness of the return from the property tax is a great recom- mendation from the fiscal standpoint. It would seem, then, that the objections to the general property tax as the main part of a system still stand, but that there may be room for such a when this tax tax as a subordinate part of a larger sys- ^s justifiable. tern, the demands of justice being met by the proper relation between the different parts of the system. 210 INTRODUCTION TO PUBLIC FINANCE part n In Switzerland and Prussia the general property tax is part of a more elaborate system. In the United States it stands almost alone for commonwealth pur- poses, supplemented in a few isolated instances by other taxes intended to reach certain forms of reve- nue-yielding property. The universal condemnation of the American commonwealth general property tax is therefore not due to the defects in the tax itself, but mainly to the fact that it is not properly supple- mented by other taxes. The first question that arises when the general property tax stands alone, and a question which although not so prominent also arises in other cases Qan the as- is : Can the method of assessment be , made suniciently ertective to reach all property -^ made? forms of property, especially personal property ? The answer to this question that has been given by the experience of all nations, is emphati- cally in the negative. This is especially true when the administration of the assessment is left to offi- cials popularly elected for a short term. It is also in the negative, but somewhat less unanimously so, when the assessment is under the control of an impartial bureaucracy appointed by a monarch or holding office practically for life. In the United States it is notorious that almost all personal prop- erty escapes. The report of the extensive investigations of the Eleventh Census (1890) into the matter of local and commonwealth taxation has just been published. CHAP. VIII PROPERTY TAXES 21l The census office undertook to ascertain the true value of property, i.e. its fair selling value. This serves as a basis of comparison for the . ^ Assessment m assessed values. The investigations of the United the census were conducted with the ut- " '^^•^"' *' most care, and although they inevitably contain many unavoidable sources of error they are yet very serviceable. The following table shows the re- sults of the investigations into the true value of property: Real estate, with improvements thereon . . $39, 544,544,333 Live-stock on farms, farm implements, and machinery . . . . 2,703,015,040 Gold and silver coin and bullion . . . 1,158,774,948 Mines and quarries, including product on hand 1,291,291,579 Machinery of mills, and product on hand . 3,058,593,441 Railroads and equipments, including street rail- roads ... . . 8,685,407,323 Telegraphs, telephones, shipping, canals, and equipment ... . 701,755,712 Miscellaneous 7,893,708,821 Total 165,037,091,197 The total assessed valuation was 125,473,173,418 or about 40 per cent (41 per cent if we allow for $8,833,335,225 exempt by law). Of real estate, — land and its improvements, — the true value was 139,544,544,333, of which all but $3,833,335,225 is legally subject to taxation; the assessed value of the #35,711,209,108 taxed was 118,956,556,675, a little over 50 per cent of its true value. The 125,492,546,864 of personal prop- 212 INTRODUCTION TO PUBLIC FINANCE part ll erty was assessed at 16,516,616,743, about 25 per cent. But if we make allowance for the $1,291,- 291,579 worth of mines and quarries which might be well classed as real estate, personal property is assessed at about 22^^^^ per cent of its true value. As the statement of the total amount of personal property errs admittedly on the side of moderation, there being some forms which were not ascertain- able, this showing is more favourable to the assess- ment than the truth would be. It is well within the truth to say that in the United States as a whole not more than 20 per cent of personal property is taxed. Probably considerably less than this is the true figure. In many important com- monwealths the assessment of personal property even according to the favourable showing of the census is far below the average for the whole country. In the country as a whole, personal property is about 71 per cent of real estate or 41^^^ per cent of all taxed property. In New York it is assessed at a trifle over 11 per cent of the real estate and about 10 per cent of all property. According to the census valuation there was in New York #5,817,- 704,667 worth of real estate and 12,758,997,324 worth of personal property. Real estate was as- sessed at $3,408,751,246, or about 58 per cent of its real value, while personal property was as- sessed at $382,159,067, or not quite 14 per cent of its real value. When it is remembered that the census report omits some unascertainable items CHAP. VIII PROPERTY TAXES 213 of personal property it is fair to say that 90 per cent of the personal property in New York is un- taxed, where at the same time only 42 per cent of real estate is untaxed. This means that the assessment of personal property is evaded and that real estate is assessed below its actual value. The latter fault is not so had as the former because gen- eral under-assessment means merely a higher rate than would otherwise prevail, but does not affect the distribution of the burden. Pennsylvania, j\las- sachusetts, and Ohio show somewhat better assess- ment of personal property. Thus in Pennsylvania the assessed value of personal property is 618 mill- ions against 2042 millions of real estate; IMassachu- setts, 654 millions against 1600 millions; Ohio, 546 millions against 1232 millions. But no one supposes that there is any more personal property owned in these commonwealths than in New York. In fact the contrary is the case. In some of the newer west- ern States the assessment of personal property is larger than the assessment of real estate. Thus in Montana personal property is 58 millions, real estate 55 millions ; in Wyoming the ratio is 20 : 13 ; New Mexico, 28 : 15 ; Arizona, 18 : 10 ; Nevada, 17 : 9 ; Idaho, 16 : 10. But this is easily explained. (1) In these States, land values have not yet developed. (2) The real property assessed is only such lands, with their improvements, as have fully passed into the hands of private owners. (3) Personal property is swelled by including in it the improvements upon 214 INTRODUCTION TO PUBLIC FINANCE PART 11 public lands the fee to which is still vested in the United States, and upon railroad lands the title to which is still vested in the railroad companies. (4) Tlie list of personal property is swelled by the nature of some of the industries that prevail, — cattle. A certain amount of it is due to the assessment of rail- road property as personal property. (5) The possibil- ity of concealing property is less in a country where population is sparse and the conditions for invest- ment well known to the assessors. (6) The need of revenues is very great and real estate has not enough value to bear the burden. Personal prop- erty must, therefore, be called in to raise the neces- sary amount without inordinately high rates. The chart on the opposite page taken from the Eleventh Census shows the relative assessment of personal and real property in all the States. The failure to assess personal property is due en- tirely to the laxity of administration ; the tax laws The failure to On the subject are universally strict reachpersonal enough to answer every requirement. property not due to faults What constitutes personal property is in the laws. explicitly Stated ; the assessors have ample power to ascertain its exact amount. In a large majority of commonwealths (all but four- teen) the tax-payer is required to make a declara- tion of his property. In all the States the assessors have the advantage of large powers of investiga- tion, and can ascertain the amount of the prop- erty if they will assert their power. But this ia J'ROPERTY TAXES 215 ASSESSED VALUATION OF PROPERTY TAXED. Real Esta-te. Persona! Property. _ J _ Tr g s r As ess Tie It 1 ■ Real Estate Personal Real Estate Personal N.V. PENN. MASS. OHIO CAL. MICH, MO. ILL. N.J. INO. TEXAS MINN. WIS. MO. KY. IOWA TENN. COLO. ALA. N.C. N.H. D.C. W.VA. MISS. NEB. VT. ARK. DREG. S.D. S.C. UTAH N.D. DEL> FLA. MONT. N.M. WYO. ARIZ. IDAHO NEV. 216 INTRODUCTION TO PUBLIC FINANCE part ii what locally elected assessors are very reluctant to do. The questions as to the expediency and justice of a progressive rate, as to the exemption of small properties, and the like, have already been treated. The assess- The advisability of extending the as- ment of legal sessment to legal persons so as to cover persons under . the general ^ certain amount 01 property that might property tax. escape in the guise of personal property, depends upon the strictness in the assessment. The stocks and bonds of railroad companies are easily concealable personal property of the individual stock- holder. But the road and buildings are easily ascer- tainable real property of the companies. For ease of assessment, therefore, it is best to tax legal per- sons as well as real persons. But in that case stocks and bonds in the hands of private persons should be exempt, unless it is intended to tax such property more heavily than other property ; i.e. to introduce a partial progression. Whether in addition to in- cluding legal persons in the general property tax a special corporation tax should be imposed is a ques- tion of policy affecting the whole tax system. When the general property tax stands alone, all The taxation tax faculty that exists in the form of offaeulty in receipts of the economic character of the form of t ■ j- t j- • i wages not ac- wages, — Salaries, tees for professional compiished. services in independent professions, profits and earnings of management, — are untaxed. In the earlier forms of the property tax in the CHAP, vm PROPERTY TAXES lYl United States this omission was seen, and a special tax levied upon such income. But at present that method of taxation has almost entirely disappeared. The technical arrangements for the assessment of this tax vary very much. In some cases the method of rather permanent cadastres is feasible J, , 1-1 T ■ Assessment. tor a large part of the property. It is necessary to make an annual investigation into the amount of personal property held by the different tax-payers, inasmuch as this changes very rapidly. But there is less necessity for such revision in the case of the real estate. A very simple cadastral sys- tem with revision every five, ten, or fifteen years, is in use in a good many commonwealths of the United States for commonwealth taxation, but annual as- sessments are in vogue for almost all local pur- poses. Thus, in Rliode Island, the jVssemljly fixes the assessment or apportionment of the common- wealth taxes whenever there seems need of revision ; in J\Iichigan it is done once in five years ; in ^^er- mont once in four years ; in Ohio once in ten years. No matter what changes may, meanwhile, occur in the value of property in the towns, the share of each remains the same for commonwealth purposes. Most of the commonwealths, however, require the regular addition of improvements and alterations. Sec. 2. The property tax as the sole Scientific or chief form of direct taxation has no ■f " ^""^"' °J the general supporter among scientific writers. So property tax. universal and unanimous has been the condemna- 218 INTRODUCTION TO PUBLIC FINANCE part ii tion heaped upon this tax that we must consider in detail some of the objections that have been raised. Professor Seligman sums up his interesting dis- cussion of this tax in words to the following gen- eral import : The general property tax is a failure as the main source of revenue from the triple standpoint of history, theory, and practice. 1. Historically, it was once well-nigh universal. In a community mainly agricultural it was not altogether unsuited to the conditions. But as soon as industry and commerce became important, it failed to extend so as to comply with the require- ments of justice. It became in fact, even where not so considered, a tax on real property. Every- where but in America it has been (a) divided into a number of subordinate property taxes, (5) allowed to become a subordinate member of another system, or (c) entirely abandoned. Sooner or later it will have to be abandoned in America. 2. Theoretically the general property tax is defi- cient in two respects. First, it assumes that there is an ascertainable general property. But since prop- erty is a composite of inseparable but widely differ- entiated elements this assumption is contrary to the fact. " The general mass of property has disap- peared and with it vanishes the foundation of the general property tax." Secondly, "property is no longer a criterion of faculty or of tax-paying abil- CHAP, vm PROPERTY TAXES 219 ity." Two equal masses of property may be unequally productive [because used by men of dif- fering talents, and thus differently joined with the personal element, or because the possession of them may give rise to fortuitous gains, or because the owner of one mass of property may be labouring under peculiar economic disadvantages]. It is the income M'hich property yields that is the best index of the tax -paying power which the prop- erty represents. 3. Practically, '■'■the general froperty tax as act- ually administered to-day is beyond all peradventure the worst tax known in the civilised world." As at present administered it fails entirely to reach intangible property. It debases public morals by putting a premium on dishonesty. It is regressive and presses hardest upon those relatively least able to pay.i This is strong language, — even stronger has been used. But no words are too strong to express the iniquities of this tax. Part II. Special property taxes. Sec. 3. The land tax is one of the oldest contri- butions. It has three forms : (1) it may be based upon each unit of area, sometimes with Forms of the an attempt to classify the different units '""'' '"*• in fertility; (2) it may be based upon the estimated value of the land or upon an estimated average 1 Seligman, Essays, pp. 23-61, 220 INTRODUCTION TO PUBLIC FINANCE part ii annual yield or surplus; (3) it may be based upon the actual yearly yield, and be as it were a share in the product. The tax was common in the latter part of the middle ages as a recognition of the monarch's right of proprietorship in the soil. A good example of this, among many others, is afforded by the so-called quit-rents in the American colonies. ■* In their first form these payments are not strictly taxes. They are acknowledgments of the people's tenure. But they frequently grow into taxes. In France, as we have seen, the taille devel- oped from feudal dues. The impdt fonder now yields 255,000,000 francs. In England the old land tax has been converted into a redeemable rent charge, but the revenue from land is still taxed in the general income tax and yields £1,500,000 annu- ally. Local taxation falls largely on land. In Prussia the land tax was in 1895 transferred en- tirely to the local bodies. Economic rent as the surplus of revenues from land, after all expenses have been deducted, has always been regarded as a legitimate object of taxation. It has been strongly argued that this tax cannot be shifted. But as the land tax is not always confined to rent-bearing land, being gener- ally imposed upon all land, even the poorest in cul- tivation, and as modern economic theory does not regard rent as an inevitable surplus, this old argu- ment needs thorough revision. (See Chapter X.) 1 See Ripley, and Wood, CHAP. VIII PROPERTY TAXES 221 It is in the assessment of this tax that the cadastre has been most widely used. The principles upon which the best cadastres have been built are the following: (1) A careful measurement of the land is made and recorded. In the older ones the land is entered in rough his- torical units: the "yoke," the "hide," the "seed." Sometimes the cadastre is intended to serve other purposes, as that of a record of titles. In any case the names of the owners or occupiers are entered Avith each piece. (2) A record is made of the yield of each unit of area and from that is estimated either the gross revenue or the net revenue, — more fre- quently the latter. As a rule the cadastral revenue is less than the actual net revenue. Another method is that of recording the market value. The cadastre when finished is subject to more or less frequent revision. A partial revision which involves the recording of changes of title, etc., is generally made currently. An entire revision is only undertaken after periods of considerable length. The making of a complete cadastre is a matter of considerable expense and takes no little time. In many cases more than the mere land is recorded, buildings and other improvements being frequently entered in the same cadastre. It is generally urged in justification Justification of the retention of the land tax even in v^^ intention by the side of countries where there are other taxes other taxes. that fall upon the revenue from land, that the in- 222 INTRODUCTION TO PUBLIC FINANCE part ii come accruing from land is constantly increasing in every growing community, and that the expenditure of the government accrues largely to the benefit of the land-holders, and appears in the form of an in- creased value or rental. The same reasons are urged in support of a higher rate for the land tax. On the basis of a cadastre the land tax is gen- erally apportioned ; less frequently it is propor- tioned. In general the tax lends itself better than most others to the apportionment method. With a fixed valuation as a basis which varies com- paratively little from year to year, it seems per- fectly natural and easiest to apportion the amount that it is desired to raise, among the different pieces or units. Sec 4. The older forms of the land tax often in- cluded the building tax, with which it was closely The building connected in character. At present, ax °''>ff^na y ^j^j^ contribution generally forms an in- part of the ° •> land tax. dependent tax on the revenue from the site and the building. It is, like the land tax, a tax on a fixed source of income. Its incidence will receive special attention elsewhere. The buildings taxed may be classified according to value, or according to the uses to which they are put, Forms of the 01" according to their location, whether building tax. urban or rural. There are two very dif- ferent forms of the building tax : one is intended to fall on the income derived by the owner from the building ; the other simply taxes the occupier ao- CHAP, viii PROPERTY TAXES 223 cording to the rent, taken as the index of a certain amount of tax faculty on his part. The second is very much like a consumption tax. The first re- gards the revenue derived as a source from which the tax may be paid. But even this first form, when paid by an owner who is also an occupier, is very much like a consumption tax. The building tax, wherever in use, is one of a number of other similar taxes ; it never stands alone. In ease of assessment it has many advantages. The valuation is simple and inexpensive. Alterations affecting the base can be easily and accurately ascertained. Unlike the land tax the building tax is regularly assessed each year. Hence this tax is more often proportioned than apportioned. The building tax may be ex- tended into a sort of industry tax, as when it is assessed with higher rates upon buildings used for industrial or commercial purposes. An example of this method of assessing the business tax is that of France cited above. Sec. 5. The taxes we have already considered cover most fixed capital. Circulating capital also, in all of its many forms, has been sub- Tmationof jected to separate taxes. This is as true ""p^^"^- of those countries which have the general property tax as of those which attempt to accomplish the desired results by the taxation of the various ele- ments of revenue. How to reach this kind of reve- nue and to make the faculty which it represents 224 INTRODUCTION TO PUBLIC FINANCE part 11 bear its share of the public burden, -is one of the most difficult practical problems of taxation. The chief difficulties arise from the elusive nature of circulating capital and the intimate way in which it is connected with many of the processes of indus- trial life. Justice and equality demand its taxation. But various pleas of expediency are against it. Capital is hard to reach, and if it is not fairly taxed the result may be injurious to trade. There are two forms in which this tax has been applied with some effectiveness. One is that of a tax on mortgages, the other that of a tax or taxes on corporations and banks. Some results have also been attained by the attempt to tax stocks and Taxation of bonds. Public stocks are especially easy public bonds, gf assessment. But there is an objec- tion to taxing them when the other forms of in- vestment escape, because of the bad effect on public credit. If it is distinctly declared beforehand that the bonds are to be taxed, their selling price is lowered. If it is not so declared, at the time of issue, and the tax is subsequently assessed, the process is regarded by the holders as equivalent to a partial repudiation of the debt, and sub- sequent loans are looked upon askance. When, however, all forms of revenue-yielding capital are, nominally at least, subject to taxation, this objec- tion to taxing public securities disappears. If the tax is not to have the effect of reducing the capital value of the stock, bond, or other secu- CHV-Viil PROPERTY TAXES 225 rity, it must fall upon every form of capital. But so great are the difficulties of making it thus universal that, as a general rule, such a tax affects the rate of interest on all new investments in the taxed form. This question will receive further attention under the head of incidence. Where there is a complete system of public rec- ords for deeds, mortgages, and contracts, necessary to their validity, it* is comparatively Taxation of easy to tax these recorded securities, ^nortgages. Thus it is that mortgages are generally easily tax- able. This, however, results in inequality if the tax is not extended beyond the recorded contracts. When the mortgage is upon property already taxed, as, for example, by the building tax or a general property tax, the question arises whether both the borrower and the lender should be taxed, or only one, and if so which one. An able writer says on this point, " Tax the mortgagee on the amount of the mortgage, and the mortgagor on the value of the property minus the mortgage. That is the only rational system." ^ Indeed, it would be, if every other form of capital were taxed; but when that is not the case, the result is in every respect the same as though the owner were taxed alone. Generally he pays more. Taxation at the source has been warmly recom- mended for reaching interest on capital; i.e. to have the debtor advance the tax and shift it if he can 1 Political Science Quarterly, V., 35. Q ^26 iNTRODUCtiON TO PUBLIC FINANCE pajt li to the lender or share it with him. In the case of corporations, this method is applied to the dividends. Stoppage at -^-S Bastable has well shown,^ such a the source. ^gtji is a Combined tax on interest and on profits, and is therefore partly outside our present Taxation of purpose. The taxation of corporations corporations, jg ^q^ always the taxation of circulat- ing capital merely. Corporations often own other taxable property, — land, buildings, etc. But in the United States, one of the main objects of the intro- duction of taxes on corporations was to reach forms of personal property that generally escaped. The other object was, of course, to extend the general property tax to cover all property. We find that the basis of the corporation tax is, in many instances, the capital stock at its par value, or at its market value ; and in a good many instances, the bonded indebtedness is also included. When the nature of the business is such that the capital stock and bonds do not represent all the capital concentrated in the hands of the corporation, as, for example, in the case of banks and insurance companies, then the business transacted, the gross earnings, the divi- dends, or the net earnings become the basis. But no clear line is drawn between the taxation of in- terest and profits, so that corporation taxes often approach, in character and operation, business taxes.^ 1 P. 422. 2 The best discussion of this interesting field of taxation is con- tained in Chapters VI., VII., and VIII. of Seligman's Essays on Taxation. CHAP, vin PROPERTY TAXES 227 Sec. 6. There remains but one other very im- portant property tax and that is the inheritance tax, or the successions tax, sometimes called ^ . . ^ , Origin of the death duties. ^ The feudal "relief" and inhentance " heriot " were payments made from the '"*' estate of a dead vassal, or by his heirs, in recog- nition of the lord's authority. Similar payments were made upon the transfer of property. But the direct connection between these feudal dues and the modern inheritance taxes is hard to trace. It is probable that the older dues suggested the feasibil- ity of the modern inheritance tax. But no closer connection than that has been established. The modern inheritance tax is a special exercise of the taxing power. It is resorted to on account of the comparative ease with which large returns can be obtained at relatively little expense and without great friction. It is generally justified in one of two ways : (V) It is claimed that the . ,.„ ,. •' ^ ' Justification deceased person has probably not paid of the inheri- his share of the general taxes during his '"""^ '"*' lifetime, and that the publicity necessarily connected with the transfer of his property to his heirs affords an excellent opportunitj^ for the fiscus to " get even " with him. If this were the sole justification, it would require that the exact history of every estate should be investigated, and only those subjected to 1 See Max West, "The Inheritance Tax," Columbia College Studies, IV., 2; also the excellent chapters in Bastable, 2d ed., and Seligman, Essays, pp. 307 ff. 228 INTRODUCTION TO PUBLIC FINANCE part ll the tax that could be shown to have escaped taxa- tion. But this would be a laborious and costly- process. Another justification is, therefore, sought. (2) It is claimed that in all cases of collateral in- heritance, the newly acquired wealth comes to the lieir as a fortuitous, more or less unexpected gain. He had been living without it, and this sudden increment of wealth represents, temporarily at least, a sudden increase in his ability to pay taxes. This justification points to the necessity of exempting the inheritance by immediate dependents of the de- ceased. They were already living upon that prop- erty; and the death and breaking up of the family and of the estate represent to them not an increased, but a decreased, tax faculty. An examination of the many forms of inheritance taxes reveals two main tendencies. The first is to „ , . , exempt small estates and to establish a Tendencies of ■'■ modem inker- progressive rate for larger ones. The I ance axes. ^QQQ^id is to exempt that portion of the estate passing to the immediate heirs. The grounds for this second exemption have already been exam- ined. The grounds for the first are wrapped up in the general principles of a proportional or progres- sive rate. A very good example of these, principles is afforded by the new English death duties of 1894, and the older " Legacy and Succession Duties " of 1881, which, however, are not progressive as to amount of property. Under the new law the estate of every person dying after the 1st of August, 1894, PROPERTY TAXES 229 must pay a duty which varies according to the fol- lowing schedule : £ £ £ s Estates from 100 to 500 pay 1 per hundred. 500 " 1,000 ' ' 2 (( 1,000 " 10,000 ' ' 3 u -10,000 " 25,000 ' ' 4 <( 25,000 " 50,000 ' ' 4 10 « 50,000 " 75,000 ' ' 5 u 75,000 " 100,000 ' ' 5 10 it 100,000 " 150,000 ' ' 6 u 150,000 " 250,000 ' ' 6 10 (f 250,000 " 500,000 ' ' 7 (t 500,000 " 1,000,000 ' ' 7 10 u 1,000,000 8 u The older legacy and succession duties are also pro- gressive, but in a different way, rising as the degree of relationship of the recipient of the legacy becomes more and more remote from the deceased, from £\ in a hundred to £10 in a hundred. Thus the total burden that may fall upon the share of any one person can amount to 18 per cent ; i.e. ,£10 in £100 of the duties of 1881, and £8 in £100 of those of 1894. In the United States, inheritance taxes are now in use in- thirteen commonwealths. In all but one of these. New York, direct inheritance ^^g„-(.„„ is untaxed, and there only personal prop- inheritance erty so inherited is taxed. The list of exempted relatives varies somewhat from common- wealth to commonwealth. The taxes are not pro- 230 INTRODUCTION TO PUBLIC FINANCE part ll gressive. In all but Tennessee a certain portion of the estate is exempt. Probate fees and taxes are very common, existing in most of the States. They are, however, not in proportion to property except in Pennsylvania, Vermont, and Virginia. PERSONAL TAXES 231 CHAPTER IX PERSONAL TAXES Section 1. The simplest form of personal taxa- tion is the collection of an equal contribution from each citizen. But such a tax cannot be large, else it would impose a burden be- yond the ability of the poor. A poll tax by itself cannot yield sufficient revenue to support the gov- ernment. The uniform fer capita tax is not just unless all wealth is equally distributed, and only in a very primitive community is such equality found. Hence it is that, outside of the United States, the poll tax now arouses nothing more than an historic interest. In the United States there are about thirty commonwealths that still have the poll tax. It is levied on all males between the ages of 20 or 21 years and 45 or 60. It is very laxly and poorly collected in almost all cases, being in general successfully evaded by all who have no other tax to pay. In four cases it takes the form of a fee for the registration of voters. In the early taxes of the commonwealths of the United States there was fre- quently an assessment of each person at so much per poll as a part of the general property tax. In some commonwealths the poll tax still exists in this form. 232 INTRODUCTION TO PUBLIC FINANCE part n In a few cases this contribution is used for local pur- poses ; thus, in some commonwealths there is a road tax of so much -per capita assessed upon those indi- viduals who are found by the authorities on the road. The road tax is generally payable either in labour or in money. The returns from the poll tax are generally insig- nificant. Despite the apparent ease of assessment the poll tax is expensive to collect. It frequently causes much opposition and friction. It militates against the demands of equality, and has been superseded by other forms of personal taxation, which recog- nise differences in faculty. Sec. 2. We have already seen how the poll tax in one instance developed into the income tax. That _,, ,, . tax will now be studied more closely. The theory of -^ the income While it is true that, since the abolition *"''■ of the federal tax, the income tax has little more than a theoretical interest for American readers, yet inasmuch as the hopes of reformers all centre in it, and inasmuch as it may any day, again, become a live question, it is well to give the theory of the tax some consideration here. While the general, or special, property taxes rest either on the benefit theory or on the faculty theory of taxation, income taxes are better defended from the standpoint of the faculty theory. It is easier to make it clear that income measures faculty, than it is to show how income can measure benefit. To be sure, it has been claimed with some plausibility CHAP. IX PERSONAL TAXES 233 that income is a sure indication of the benefit en- joyed under the government. But that proposition requires more argument and explanation .than does the simple statement that a citizen is able to pay more or less because he has a greater or a smaller income. Besides this advantage of easier justification, the income tax has in common with all personal taxes another recommendation. It levies directly on the tax-payer. The nation's income from taxation is derivative. As such it is abstracted from the an- nual increment of wealth of the citizens. Any taxa- tion which is actually paid out of capital or property is ruinous. Property taxes as we have seen are, theoretically, paid from the revenue earned by the property or out of other income of the owner, the property being at best but the indication of faculty or of benefit. But the income tax finds the indica- tion of faculty in the source of the tax. There is a certain directness about this identification of base and source which theoretically, at least, is a strong recommendation of this form of tax. From the standpoint of the faculty theory no general property tax, and no system of special prop- erty taxes which has not, incorporated in it, a tax on wages, salaries, profits, and the like, can be called equal. Many persons enjoying comparatively little property live in luxury and ease from their personal gains, while many others possessing comparatively large property may be from time to time in serious 234 INTRODUCTION TO PUBLIC FINANCE part 11 straits. For example, to be "land poor" is to be poor indeed. Large property does not always imply ability to pay taxes, and the absence of property does not always imply absence of ability. There has been a feeling in the United States, not always clearly expressed, yet strong enough to influ- ence legislation, that the earnings of personal exer- tion, professional fees, and the like are not good subjects for taxation. This is the result of an ex- treme laissez-faire view, which decries every sort of interference with individual freedom. Every tax is seen or felt to have a repressive tendency, which is sometimes supposed to be one of the main objects in assessing taxes.-' It is feared, then, that to tax the earnings of men would discourage exertion, would discourage industry. That this is a mistaken view of the nature of taxation, will, in the light' of our whole discussion, be evident from the mere state- ment. A general tax on all income would not discourage income getting, but might even act as a stimulus thereto, more income being required to meet the tax and the same expenses as before. It may be true that this form of income represents less faculty than income from property, because more precarious than the latter, which furthermore leaves the owner free to engage in the getting of other in- 1 A liquor license in a certain western town cost .SIOO. A tax of $100 was put upon banks. The banlters held up their hands in horror: "The people think the banks are as undesirable as the saloons 1 " CHAP. IX PERSONAL TAXES 235 come. But the entire exemption of personal earn- ings cannot be justified. Sec. 3. The form of the income tax will be deter- mined by the place given it in the system of taxa- tion. If it were possible to administer a single tax of any sort in accord with the tax in the the demands of justice, the income tax ^y^*^"^- would be, theoretically, the one to be chosen. But the objections to any single tax, already stated, bear upon this as well as upon any other. Theoretically, it is best to make the income tax the central one of the system, the gaps of which are filled in by other taxes. li this be the intention, then the income tax can be arranged in the form in which it is most easy to administer. Thus the very small incomes can be exempt from the income tax, being covered by direct and indirect consumption taxes. In this way one source of difficulty and friction is avoided. Then no distinction need be made in the assessment of income from different sources. For if it be decided to tax income from funded investments at a higher rate than other forms of income, this additional tax can be laid on in the form of a property tax. How far the exemption of smaller incomes should go, or to what extent funded incomes should be more heavily burdened, depends upon the concrete facts in each case. An abatement of the burden in cases where there are already more than the usual claims on the income, as of a large family, is, also, some- times given. 236 INTRODUCTION TO PUBLIC FINANCE part il Sec. 4. As an example of such a tax, not, per- haps, ideally perfect, but still laid down in accord Prussian in- with the general principles enunciated come tax. above, we will study somewhat in detail the Prussian income tax.i In order to have in mind the main features of the development already out- lined above. Chapter V., we quote from Mr. Hill the successive stages in the growth of personal taxa- tion in Prussia : " 1. A uniform poll tax, 1811. " 2. A class tax, collecting somewhat more from the prosperous, and not less from the poor, 1820- 1821. " 3. To supplement the class tax, an income tax with comparatively few classes, a uniform rate, and a maximum limit, 1851. " 4. Classification made finer, the maximum limit removed, and the class tax below made practically an income tax with a progressive rate, and the exemption of incomes up to 420 M., 1873. "5. Exemption of incomes up to 900 M., reduc- tion of the remaining rates of the class tax, and of the two lowest rates of the income tax, 1881-1883. " 6. Principle of progression extended to all incomes under 100,000 M., incomes under 10,000 M. taxed less than before, and higher incomes more ; a 1 For history see Hill, Quarterly Journal of Economics, VI., 207 ; Wagner, "Die Reform der directen Staatsbesteuerung in Preussen im Jahre 1891," Schanz' Finanz Archiv., VIII. Jahrgang, II, Band, A full statement of the law is there appended. PERSONAL TAXES 237 declaration of income by the tax-payer required, and a finer classification adopted, 1891." To make the new tax still more clear we quote the rates from the law itself : TARIFF OF KATES. Incomes, from to (inclusive) M. M. M. 900 1,050 6 1,050 1,200 9 1,200 1,350 12 1,350 1,500 16 1,500 1,650 21 1,650 1,800 26 1,800 2,100 31 2,100 2,400 36 2,400 2,700 44 2,700 3,000 52 3,000 3,300 60 3,300 3,600 70 3,600 3,900 80 3,900 4,200 92 4,200 4,500 104 4,500 5,000 118 5,000 5,500 132 5,500 6,000 146 6,000 6,500 160 6,500 7,000 176 7,000 7,500 192 7,500 8,000 212 8,000 8,500 232 8,500 9,000 252 9,000 9,500 276 9,500 10,500 300 ite increases from to in stages of by M. M. M. M. 10,500 30,500 1,000 30 30,500 32,000 1,500 60 32,000 78,000 2,000 80 78,000 100,000 2,000 100 238 INTRODUCTION TO PUBLIC FINANCE part ii In the case of incomes from 100,000 M. to 105,000 M. the tax is 4000 M. And from that point on the pro- portional rate of 4 per cent is assessed upon the lower limits of stages of 5000 M. each. This rate is progressive from about two thirds of one per cent at 900 M. to 3 per cent at 10,000 M. Then the rate is nearly proportional at 3 per cent up to 30,000 M. Then progressive again, until at 100,000 M. 4 per cent is reached, after which it is proportional again. Each tax-payer having an income of over 3000 M. is required to " declare " it. He has to fill out a blank calling for a statement of income from each of four sources : (1) from capital invested, interest and dividends ; (2) from landed property and houses, including all crops, _. , . whether consumed in the house or not. The form of ' the declara- but deducting the cost of cultivation ; '*""■ (3) from trade, industry, or mining, de- ducting the cost of maintenance ; (4) from any em- ployment, wages, salaries, fees, and including pen- sions and every source of income not covered by (1) (2) and (3). Deductions are allowed (1) for interest on debts, except that on business debts ; (2) for permanent legal burdens (example, maintenance of reserves), (3) contributions to sick funds ; (4) life- insurance premiums. This division of the income into different parts is for the sake of accuracy of declaration, not for the sake of assessing different rates on the different kinds of income. Persons with large dependent families or labour- CHAP. IX PERSONAL TAXES 239 ing under any special economic conditions seriously affecting their faculty are allowed an Abatements abatement of not more than three grades ""owed. provided their incomes are not over 9500 M. Persons having less than 3000 M. deduct 60 M. for each child imder fourteen years of age, and if there are three such children a reduction of one grade is made. Corporations and stock companies pay the income tax on all dividends over 3^ per cent. This makes double taxation of this income, which is regarded as particularly "capable." In other ways the attempt is made to tax funded income more heavily. The exemption of incomes below 900 M. ($225) and the lower rate for smaller incomes is justified on the ground that the consumption taxes already impose a burden on these persons. The assessment of the tax is not perfect. It is said to be considerably better, however, than the assessment of property in America. Large incomes escape in part. It has, however, an advantage in that the evasion of the tax does not in Prussia as it does in America intensify existing differences and inequalities. Other parts of the system tend to offset the failure in this case. Sec. 5. The British income tax, correctly called "the property and income tax," may Theproperty serve as another illustration, but it dif- ""'^ '"■=«'»« ' tax III Eng- fers very much from the Prussian. Log- land. ically, this tax might have been treated in the pre- vious chapter, but it is as well to discuss it here. 240 INTRODUCTION TO PUBLIC FINANCE part n In the first place, as has already been stated, it is rather a system of taxes on revenue than a tax on the aggregate income of each person. It is a sys- tem of modified property taxes, with a wage and salary tax appended. In Prussia the intention is to make the total income the base irrespective of the source, and reference to the sources is called for in the declaration merely as a means of getting at the total with greater accuracy. In England the different sources are kept strictly apart, and there is a difference made in the treatment of each kind of income : the tax being in some cases " stopped at the source." The total income is only called into use in estimating the exemptions and abatements. The tax-payer has the right by summing up his whole income to show that he has been taxed too much, or is entitled to exemption. In that case he is reimbursed. In 1895 such abatements amounted under schedule A (see below) to £800,000 ; on small incomes the amount returned was £840,000. So separate are the different parts of this tax that Mr. Wilson says of it : ^ " To the bulk of the people, it is known in its most obnoxious (?) form as a tax upon ordinary incomes, salaries, professional earn- ings, profits of trading, etc." Bastable (p. 449) says : " Inequalities are, however, removed by the comprehensiveness of the tax." The various revenues are taxed in five "schedules," known as schedules A to E. 1 P. 115, National Budget. CHAP. IX PERSONAL TAXES 241 Under schedule A, Great Britain taxes the rev- enues received from property by owners of rented lands or houses (tenements), proceeds from tithes (not commuted), royalties, etc. Mortgages are taxed in this schedule, owners being allowed to deduct what they advance in taxes from the inter- est they pay. By a change recently made in the income tax, in consideration of the burden of the inheritance tax, revenue assessed in schedule A may receive an abatement of one-eighth in the case of that from farms, and one-sixth in the case of that from buildings. Under schedule B is taxed the income gained by occupiers of land (tenements and hereditaments) ex- cept where the land is used as the means of carry- ing on some trade ; as, for example, nursery gardens. Owners in occupation pay under this head. Under Schedule C is taxed the income from annu- ities, dividends, etc., not paid from the public funds. The banks are required to deduct the amount of the tax from the interest paid. Under schedule D are taxed salaries, professional earnings, profits of trading, etc. (railways, canals, mines, gas-works, water-works, etc.), and all gains not included in the other schedules. Most wage- earners evade the tax, or are exempt on account of the smallness of their incomes. Schedule E includes public salaries and pensions of employees of the State, or of the corporate bodies. This tax is stopped at the source. 242 MTRODVCTION TO PUBLIC FINANCE part ii Incomes of less than £400 are assessed at £150 less than they really are. Between £400 and £500 at £100 less. These abatements exempt all persons with less than 1750 annual income and lessen the burden for all up to $2500. It is, therefore, a tax on large incomes. This tax is the variable element in the English system, the rate being changed from time to time itspiaceinthe according to the estimated requirements. system. The indirect taxes, the excise and the customs duties, being necessarily of fixed rate, yield a steady return, which grows slowly. And any varia- tion in the probable expenditure can be met by chang- ing the rate of the income tax. The annual yield is now about £15,000,000, or about one-sixth of the total revenue of the government. A rather large change in the rate of this tax, would, therefore, not result in a very great change in the total income. The assessment of wages, business profits, and the like, is said to be very lax. But this is tolerable because the indirect taxes, which, together, are more than one-half the public income, may be said to fall on that. Life-insurance premiums may be deducted from the taxable income. Sec. 6. The United States Federal government has made two attempts to establish an income tax. The first was a war measure, and was re- income taxes ' in the United pealed as soon as the pressing necessity States. ^g^g removed. The second was, like the English income tax in 1842, a means to make up the Chap, ix PERSONAL TAXES 24S estimated deficit resulting from the repeal of the pro- tective duties. It failed to go into effect, however, as the Supreme Court could not be convinced of its constitutionality. We shall consider the civil war tax first. ^ The constitution provides : " No Capitation, or other direct. Tax shall be laid, unless in Proportion to the Census or Enumeration hereinbefore directed to be taken." Article I., sec. 9. Also, " Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their re- spective Numbers, which shall be determined by adding to the whole Number of free Persons, includ- ing those bound to Service for a Term of Years, and excluding Indians not taxed, three-fifths of all other Persons." Article I., sec. 2. And, " . . .all Duties, Imposts, and Excises shall be uniform throughout the United States." Article I., sec. 8. Early in the search for revenues to support the war a proposition was made for the apportionment of a tax of 130,000,000 in accordance with these pro- visions. But it was felt that population y/^e eiKt7 war was no measure of the wealth of the dif- ^'^°ine tax. ferent States, and that such an apportionment in 1861 would not result, as one in 1789 might have done, in imposing fairly equal burdens upon all the citizens. In lieu thereof, an income tax of 3 per cent on all 1 See Quarterly Journal of Economics, VIII., 4; also July, 1889. 244 INTRODUCTION TO PUBLIC FINANCE. part il incomes with an exemption of $800 was voted. In the case of Springer v. the United States, 102 U. S. 686, the Supreme Court decided that such a tax could be levied since it was not a direct tax within the meaning of the constitution. The tax was to go into force a year later. But in 1862 it was amended, making the deduction 1600 and the rate progressive. Incomes from f600-f 10,000 (less f 600) paid 3 per cent, all over that 5 per cent. In that form it went into effect. The great war tax law of June 30, 1864, made the rates as follows: 5 per cent on the excess over $600 up to 15,000; 1\ per cent on the excess over $5,000 up to §10,000; and 10 per cent on the excess over 110,000. But again, before the law went into effect, the 1\ per cent rate was cut out and 10 per cent was collected from all incomes over $5,000. On all incomes derivable from the public funds ^ the tax was stopped at the source. In 1867 the tax was reduced and the rate made 5 per cent with an exemption of flOOO, and it remained thus until 1870. The income tax was, in a way, con- joined with one on corporations, banks, insurance companies, railroads, etc. The part of the indi- vidual's income taxed in this latter way was deducted before the income was assessed. No attempt, how- ever, was made to make the rate of this tax progres- sive. It was first 3 per cent and later 5 per cent, and there were no exemptions. The assessment was made on the basis of a written declaration by the tax -payer, 1 Except interest on bonds. CHAP. IX PERSONAL TAXES 245 subject to correction by such information as the assessor could gather. Generally the information upon which the tax was assessed was published in the newspapers. With the general removal of war taxes in 1870 the income tax fell away. The pro- tective policy, which demanded the retention of the customs duties, rendered it possible to do without the revenue from this source. The reduction of the customs duties in 1894, and the probability of a falling off in the revenues from this source led to the second income tax.^ y^^ income The law for this tax, faultily drawn and taxofi894. more or less incorrect in principle, was declared un- constitutional by the Supreme Court in 1895 before it went into effect. The grounds for this decision, which reversed that in the case of Springer v. the United States, by which the other tax law had been tested, were that the tax was a direct tax and also not uniform inasmuch as all incomes below $4000 were exempt. This astonishing decision bespeaks more acquaintance on the part of the Court with economic literature than with the use of language at the time of the adoption of the constitution. As the decision now stands no income tax can be levied by the federal government without a constitutional amendment. This income tax was to be for five years, commenc- ing 1895. It was degressive, at 2 per cent, on all incomes in excess of f4000. It was levied upon 1 Quarterly Journal of Economics, IX., 1. 246 INTRODUCTION TO PUBLIC FINANCE part il "the gains, profits, and income" of all citizens and residents, " derived from any kind of property, rents, interest, dividends, or salaries, or from any profes- sion, trade, employment, or vocation," " or from any other source whatever." Debts, and interest thereon, were exempt. The cost of stocking the farm and home consumption of products were not included. Accretions by gift or inheritance were to be counted as income. All persons having an income of over $3500 were required to declare their incomes. The individual stockholder in a corporation was allowed to deduct the income from his shares in making his return. Public corporations were exempt, but other corporations were not. State and local taxes except special assessments might be deducted. United States officials were taxed on their salaries. Returns were to be confidential. It will easily be seen that this was a combina- tion of an income tax with an inheritance and corporation tax. That it would necessarily have worked badly on that account is not clear. The rate was so low and the exemptions so liberal that pretty full returns might have been justly antici- pated. The law, hoyv^ever, was loosely drawn, faulty in wording, and even contained clauses taken from the laws of the civil war tax having no possible meaning or bearing in the connection in which they were used. No attempt was made to adjust the tax to the existing burden of State and local taxes. The taxation of income by the commonwealths of CHAP. IX PERSONAL TAXES 247 the United States is rare and entirely without lead- ing principles. In Virginia alone there is a general income tax. It is supposed to be a tax of 10 per cent on all incomes over flOOO. But the returns obtained in this commonwealth are insignificant be- cause of the lax assessment. Partial income taxes, in- tended to supplement the personal property taxes and to cover the annual saving, exist in Massachusetts, Pennsylvania, Tennessee, and North Carolina. ^ 1 See Seligman, "Finance Statistics," Ptiblications of The American Statistical Association, New Series, 8, December, 1889. 248 INTRODUCTION TO PUBLIC FINANCE part ii CHAPTER X THE INCIDENCE OP TAXATION" Section 1. We postponed a treatment of the question of incidence in connection with each tax, ... , because the incidence of any tax depends pends upon upon its place in the system. It seems, the system. therefore, better to treat the subject by itself in such a way that every tax can be considered in its connection with other taxes. The problems of this part of the subject are many and difficult. In an elementary treatise, all that can be done is to suggest methods of study and a very few of the more simple principles. By the term " shifting " is meant the transference of the burden of a tax from the payer to some The meaning other person or persons. By the " final of shifting incidence" is meant the falling of the and of mci- " dence. burden, without possibility of further shifting, upon some particular revenue, property, expenditure, or person. This may be illustrated by two very simple cases. An American bookseller in a college town imported some books from England for the use of the students. He paid the duty to the custom house, but collected it again from the stu- dei^ts in the shape of an addition to the price of the CHAP. X INCIDENCE OF TAXATION 249 books. The bookseller shifted the tax. The final incidence was on the students. In this case, the shift- ing was expected by the law-maker. It was to save the expense of hunting up and taxing each user of the books in question, that the seller was made to pay the tax, or to be the agent of the government in collecting it. Since the students thus taxed cannot shift the burden, we need not investigate this case further. Again : in California, the commonwealth and local taxes paid by the mortgagee amount on the average to about If per cent. The current rate of interest on the best untaxed loans, in and around San Francisco, is about 6 per cent, but on mortgages, in spite of the good security, it has been almost invariably 8 per cent, or more. In this case, the mortgagee shifts the tax, and its incidence is on the mortgagor. This may be its final incidence, or it may be possible for the mortgagor to shift the burden to the tenant of the mortgaged property in the shape of higher rents, or to the purchasers of the commodities raised on the property in higher prices. This last illustration shows how complicated the problem of incidence may be. Sec. 2. Each and every tax must be studied in its proper connection if it is desired to know to what extent the aims of taxation are Shifting may realised. Sometimes the shifting of the T "* "^ ""a^.^" tax defeats the general purpose, as in pose of the tax. the case of the tax on the mortgagee's interest in 250 INTRODUCTION TO PUBLIC FINANCE part il California, while in others the general purpose can only be accomplished when the tax is shifted. The process of shifting, like every other economic trans- fer of burdens, costs something. No person ad- vances the amount of the tax with the intention of transferring it to some other without desiring to be paid for his trouble and risk. Unless the conditions are against him he will succeed in getting paid for it. Thus, the importer of books tries to get a certain profit on the cost to him, which is composed of the price in England plus the cost of transporta- tion and the duty. If the rate of profit or commis- sion which he reckons is 10 per cent, he adds 10 per cent of the duty as well as of the other items. The money which he has advanced on the duty must bring him its share of the earnings. So in the case of the mortgages in California. One- quarter of one per cent interest, or more, is usually charged above the rate plus the tax. If the lender has to suffer the annoyance and run the risk of paying the tax, he will have to be reimbursed. Shifting is a Shifting is, therefore, an undesirable and costly process, costly process, and is to be avoided un- less there is some clear saving, as in the case of the customs duties. Sec. 3. The aims of taxation, the accomplishment of which shifting may aid or defeat, have been stated in the form of canons. The oldest and most famous are the four of Adam Smith. ^ The fourth of these 1 Wealth of Nations, Bk. V., Chapter II., Part II. CHAP. X INCIDENCE OF TAX A TION 251 famous canons bears directly upon the problem in band. Shifting adds to the burden without adding to the revenue coming into the treas- Sometimes a C! i- 1, 1, ■ shifted tax is ury. sometimes, however, by assessing -^ , •J ' 'J o more produc- the tax upon a part of a great economic tive. process and permitting of a certain shifting, the tax is made more productive to the treasury. Now it is clear that the first duty of the fiscal officer is to fill the treasilry as quickly and easily as possible. He has, therefore, no right to pass over a tax that is productive, in favour of one that is not, simply because the one is shifted and the other is not. If, however, it can be seen that the incidence is such as to entirely derange the system adopted and defeat the general aims, an attempt must be made to pre- vent it. If a tax can be found that is productive and at the same time is not shifted, it will be pre- ferred to one that is shifted. It follows directly from the fact that a tax should be as " productive " as possible, that those taxes chosen should have as little repressive effect as possible. 1 For, to destroy the phenomenon is to lose the return. Sec. 4. Let us suppose that the ideal by which all systems are to be tested is that the total taxation shall impose a slightly progressive burden upon all 1 See Bastable, pp. 388, 389, for the same idea ; also Ross, "A new Canon of Taxation," Pulitical Science Quarterly, VII. Tliis is no very new canon. Adam Smith said : " Taxation should re- tard as little as possible the growth of wealth." 252 INTRODUCTION TO PUBLIC FINANCE part ii incomes. Then it is necessary to examine all the taxes with their various shiftings and to see how the total shifting affects the final result. ^ It is a fundamental principle, too often overlooked in the discussion of incidence, and one that cannot be too frequently restated, that the possibility of shifting Shifting can- depends largely upon the relation of the ^henthetax *^^ ^'^ question to the other parts of the is universal, system. Let US use an old? illustration : the tax on mortgages is in California shifted to the mortgagor because there are other investments for capital that escape taxation. If every possible channel into which capital might go led to the pay- ment of a similar tax, it would not be so possible as it now is to shift this tax. It is not quite true that the tax would not be shifted at all, but it cer- tainly could not be so universally shifted. "We shall see later when it may be shifted. If we had a tax system so arranged as to fall, in the first in- stance, upon all parts of each individual's income, — an unattainable ideal, — there could be but little shifting. But when a part of the nation's wealth is exempt, taxes upon all wealth that might be trans- ferred into this exempt form are peculiarly liable to be shifted. 1 There have been many theories which have undertaken to explain the final incidence of all taxation on some other plan than that ol an examination of all the different taxes. Professor Selig- man discusses ten different classes of theories in regard to inci- dence of which only two require this method. See Shifting and Incidence of Taxation. CHAP. X INCIDENCE OF TAXATION 253 Sec. 5. We shall no-w look at the incidence of the more important taxes, taking them in the order of our previous discussion. Excise taxes and customs duties, so far as the latter yield a revenue Shifting of and fall upon citizens of the country ™'^^«<' *«»:«« '■ ■' and customs laying them,i are for our present purpose duties. the same. They are classed by Professor Seligman as "virtually one form of the profits tax," which, " in the great majority of cases," will be " shifted in whole or in greater part." What Professor Seligman says upon this point ^ is true enough and very clear, but we shall follow an entirely different analj^sis. In the case of these taxes it is the intention of the law-maker that the tax shall be shifted to the consumer. If any of it remains on the producer or importer, it may be said to have been shifted back. This takes place sometimes: (1) if the taxed com- modity is produced as a monopoly, and the price is already as high as the traffic will bear, i.e. the addi- tion of the tax to the price would lessen the sale, then a part or the whole of the tax comes out of the profits of the monopolist; (2) a new tax on some commodity produced by a large plant of fixed capi- tal, not easily transferable to other lines, may remain on the producer. In all other cases an excise or an import tax cannot be shifted from the consumer. Sec. 6. The general property tax consists of a 1 See Chapter VII. for shifting to foreigners. 2 See pp. 140 ff., and p. 177. 254 INTRODUCTION TO PUBLIC FINANCE part ii number of different parts which are best considered separately. Such a separation is legitimate since „, . . , the tax falls apart in the practice of The incidence '^ ^ of the general assessment. It falls naturally into at property tax. i . . j. j • • ■ j. i ■^ ' " least two great divisions, a tax on real estate and a tax on personal property. The tax on real estate may be regarded as of two parts, a tax on land and a tax on buildings. In the general property tax, the tax on land is assessed according to the selling value. When the land is used for agricultural purposes the incidence of the tax lies between the owner and the user of the commodities produced.* Can the owner shift the tax to the con- sumer ? If this happens, it means a rise in prices which again means an extension of the margin of cultivation, marginal lands being untaxed, as having no price, or less heavily taxed. But such a rise in price may affect consumption and lessen the demand at the same time that it tempts to the creation of a new supply, thus inducing a fall in prices. But as cultivators of land do not readily withdraw from their position, those on or near the margin of cultivation will suffer severely, but will generally hold on until their profits are gone, often until they are ruined. The conditions under which agricultural products are sold to-day are beyond the control of any one set of producers. The full burden of the taxes 1 For America, the tenant may be considered as a consumer of utilities, residence, etc. ; so few farms, or productive lands, are rented that they need not be considered. Chap. X INCIDENCE OP TAXATION 265 upon agricultural land, therefore, falls upon the farmers. In the United States, inasmuch as the farmers are seldom the owners of any in the United considerable amount of untaxed personal . " ^'^ ^ ^ farmers are property, they bear far more than their overtaxed. proportionate share of the commonwealth taxes and often also of the local taxes. When land is used for other purposes than agri- culture, it is generally best considered in connection with the buildings on it. The incidence j. ., . ° Incidence of a of the general property tax on houses tax on build- and the land they occupy will vary from *"^*' locality to locality with the demand for such houses and the supply. Houses cannot be readily torn down or fundamentally altered without great loss: conse- quently if the supply of rentable houses is larger than the demand, the tax on the buildings will fall wholly on the owner. It can be shifted to the tenant only when the supply of houses is very limited. In America these two cases are both frequently illus- trated. * The incidence of that part of the general prop- erty tax which is assessed upon personal property or upon invested capital is very difficult it,,^^^^,;,, to trace. If the tax were well and uni- on personal versally assessed upon all such capital, ^™^^'' ^• it could not, regularly, be shifted from the owner at all. There is no free field for this capital to invade. But when the tax is evaded by a con- siderable proportion of the capital, then the tax 256 INTRODUCTION TO PUBLIC FINANCE part n can be shifted to the borrower and will be so in the main.i It will be seen even from this brief statement of the facts of shifting concerning the general property tax that the incidence is different from the intended incidence wherever that tax fails of forming a com- plete system. Sec. 7. The incidence of a land tax like the Eng- lish differs somewhat from that of the land tax as The incidence P^^* ^^ *^*^ general property tax, inas- of a special much as it stands entirely apart from the system. Still there are some points in common. Both these taxes may be capitalised. That is the taxed property will sell for less than it would bring untaxed by the amount of the capital • sum which, if put at interest, would yield the amount of the tax. In the case of the general property tax, which really falls upon well nigh all land of any value whatever, the tax as we have seen falls most heavily upon the producer of agri- cultural commodities. But the English land tax has been capitalised and was paid for all suc- ceeding owners by the owner at the time of its assessment, since it did not affect all lands and has become a fixed charge upon the property. The same is generally true of all taxes upon land which are in addition to a regular system of taxes a part of 1 For the rest of this intricate subject the student is referred to the larger treatises. Chap. X INCIDENCE OF TAXATION 257 which covers the revenue from land. The same may be said of a special building tax.i Special taxes upon certain forms of fixed capital, especially when they stand beside a general system which is fairly universal, may be capital- ^ .^ •' T J i. Incidence of ised in the same way. The incidence of special taxes taxes on profits is determined by the con- ""■ «''^""'- trol which the recipient of profits has over the profits. If the control is so great that he can virtually raise them at will, then he can shift the burden. But, in- asmuch as it is generally true, that he is taking all that he can whether he be taxed or not, it is clear that he cannot as a rule shift them. Generally speaking, then, taxes upon profits are not shifted. A tax on successions, also, cannot in any conceivable way be shifted. Poll or capitation taxes cannot be shifted at all. The only conceivable case in which they might be shifted is when levied upon a wage- ^^-^^^^^ ^f earner at the point of starvation. The poll taxes and • , r J. J.1, 1 J. wages taxes. same is true of a tax on the lowest wages. " The burden would mean higher wages in order for the labourer to live and meet the tax. But when the wage-earner is of a higher class, it is to be presumed that he cannot shift his tax at all, for that presup- poses that he can control his wages sufficiently to raise them. If that were the case we may safely assume that he would raise them whether the tax 1 See Seligman, p. 117. 258 tNTkODucTioN TO Public finance parth were imposed or not. He cannot therefore shift them at all. A tax upon income cannot be shifted if the assessment is general and uniform. But as a matter of fact no such tax is general or uniform, and it will be shifted or not according as it splits up into other taxes upon rent, interest, wages, etc. In conclusion : the intention of the law-giver as to the incidence of taxation will be fully realised only, (1) when the system is theoretically perfect, and (2) when the execution of the law is perfect. The worst cases of shifting arise when serious gaps are left in the tax system, or when the administra- tion of the system is so lax in parts as to result in a crippling of the whole. Shifting always acts to intensify existing inequalities. The problems of incidence are among the most important of our subject. The law-maker may with the best of in- tentions work the greatest imaginable injury; and the necessity for a careful stiidy of the probable effects of each new tax cannot be over-estimated. CHAP. XI FEES AND INDUSTRIAL EARNINGS 269 CHAPTER XI FEES AND INDTJSTEIAL EARNINGS ^ Section 1. There is the closest sort of connection between fees and the industrial and commercial earnings of the State. In the case of The connec- the sale of goods or services by a State ''o" between the private persons pay the price of the ^ustnai eam- wealth which they obtain. The price ^"S'*- is fixed by economic conditions. It cannot exceed a certain sum, for if it does the citizen will not buy. But in most cases considerations of a public charac- ter induce the State to enter upon the industry or commercial enterprise, and these very considerations are inducements to a lowering of the charges. As the public element comes to be more clearly recog- nised, a part of the economic forces fail to act. The State sacrifices part or all of the gain, but makes no loss. As the public element presses still more to the front, the State pays, at the general cost, a part of the expense, and charges the particular persons specially benefited merely a fee for the service. Many modern public institutions have gone through a process of development from one stage to the other, and the different stages are found contemporaneously 1 For definitions and classifloation see Chapter II. 260 INTRODUCTION TO PUBLIC PlNANCM part il in different countries. But while this is the order of progression in new functions, it is not the histori- cal order of the rise of these two forms of payment for public services. Fees are the older of the two. Fees are not to be found in the ancient civilisa- tions, because of the intimate relation between the Fees and the individual and the State. Only when consciousness ,^ • j • j. • j. • £ of " ubv " t^^^^ IS a distinct consciousness- oi life. " public " functions can we have fees. Payments in the middle ages for the services of the courts, of the church, of the schools, etc., were mainly of the nature of private remuneration. As soon, however, as any function comes to be recognised as public in character, fees arise. At first contributions are more or less freely and willingly rendered for the use of markets, roads, bridges, protection, and the like. Frequently there is an arbitrary assumption made that a special benefit is conferred and a fee is charged. As the State emerges from feudalism, the growth of public consciousness is marked by a rapid multiplication of these fees, which form a system of public revenues without taxes. After that the line of development is in the direction of the curtailment of the fee system and the growth of the tax system. Fees mark the transition stage in the division of labour in the public service. There is a growth of the conception of common benefits as distinct from special private benefits, and a corresponding removal of functions from one to the other category. At the same time new functions arise which are supported CHAP. XI FEES AND INDUSTRIAL EARNINGS 261 by fees, until finally the recognition of public in- terest outweighs that of the individital interest. Some fees, however, become fixed in Fees emerge character and are not subject to these »™'<' '«*««• transforming tendencies ; but the public interest is recognised in this case by limiting the fees to a very small part of the total cost. Thus many court fees are retained, but the larger part of the rapidly growing expenditure for the support of justice is now met from taxes. Those functions, in con- nection with which there are fees, are regarded as conferring a divided benefit. The individual pays for what he receives, the State for what the public gains thereby. Sec. 2. The extension of the fee system by the courts to cover a very large part of the cost of the judicial system, even to such a degree as judicial and to make litigation impossible to all but legaifees. the rich, was a transition stage in the develop- ment from the middle ages to the present. No- where was the fee system for court costs more abused than in England. Later practice, while placing more of the burden on the general treasury, has re- tained an extensive tariff of such "costs." More- over in not a few instances, the assessment of the " costs " upon the party responsible for the litigation, as shown by the fact that he loses his suit, makes these fees approach in character punitive fines. This is the characteristic of American practice. In many cases the special benefit conferred is not 262 INTRODUCTION TO PUBLIC FINANCE, part n very clear, but is arbitrarily assumed to exist and the fee levied as though it were for such benefit. Since the middle of the seventeenth century, a large part of many of the legal fees have been col- The coiie Hon ^^^^^^ ^J i^eans of Stamps or stamped of fees by paper, the latter being necessary to le- stamps. galize the transaction ; the officer who furnished or cancelled the stamp being supposed to investigate and vouch for the propriety of the transaction. A notary's fee in most of the American commonwealths is of this character, the fee being receipted for by a stamp embossed upon the paper. Similar fees or taxes on acts and transfers are very common in France. Other such fees are collected in the form of the sale of a license to per- form certain acts which would not be legal without such a permit ; and then there is a charge for record- ing the act after it has been performed in accord with the permit. Of this character are the fees for marriage licenses and recording of marriages. The act itself is, also, often subject to the payment of a tax. The general character of the legal fee is seen from the following list : fees for passports and similar papers of identification, fees for recording and legally recognising births, deaths, marriages, and divorces, changes of residence or legal standing, for papers in evidence of honours, degrees, orders, titles, offices, etc., for patent rights and copyrights, for consular services in vouching for invoices, etc. Sec. 3. Many of the acts of tlie various adminis- CHAP. XI FEES AND INDUSTRIAL EARNINGS 263 trative departments are of such a character as some- time to confer a special benefit upon individuals for which a fee is charged. The police Administrw- may render extraordinary services as in *i''«/«es- the protection of property on special occasions, on the control of masses of people, preventing intrusion, etc. Examples of these special services are very frequent. The same is true of the special services of detectives for private persons. Fees for public education are gradually falling into disuse. They were originally charged for all grades of instruction from the lowest up E n. Payment of debts, 315 ; of interest, 313. Penalties, 82. Pennsylvania, 213. Pensions, 68. Percentage taxes. See Propor- tioned taxes. Perpetual bonds, Wl. Personal property in U. S., 211, 217; tax, incidence of, 255. Personal tax, 90, 231 ff.; and dwelling tax, French, 159 ; Prus- sian, 151. See Poll tax, Class tax. Income tax. Pet banks, 348. Petitiones, 71. 382 INDEX Physiocrats, 5, 87, 106. Pitt's sinking fund, 317. Police, 40. Political equality, 146. Political science, 2. Poll tax, 90, 231; French, 129; Prussian, 161; shifting, 257; Virginia, 141. See Capitation. Poor law, English, 139. Poor rate, English, 75, 76, 138. Poor relief, 23, 55. Popular subscription, 311, 371-373. Possession tax, 93. Postal fees, 269 ; surplus, 270. Poverty, 13, 54. Price, B., 317. Prices, 78, 96. Primary taxes, 93. Printing, public, 39, 40. Probate fees, 95. Productive " agents taxed, 145 ; loans, 307, 308. Progressive rate, 101. iSfee Income tax. Prohibition of exports and im- ports, 199. Property, landed, assessed accord- ing to annual yield, 116 ; and in- come tax, English, 161 ; taxes, 90, 91 ; general, 208 ff. ; not gen- eral in U. S., 164. Proportioned rate, 101 ; taxes, 94. Protection, 59, 60, 63, 184, 185, 187. See Customs duties, Free trade. Prussian general property tax, 210 ; income tax, 236-239 ; tax re- form, 149; tax system, 150-154. See Germany. Public credit, 14, 281, 288, 289. See Credit, Debts. Public debts, 14; forms, 293; ne- gotiation, 311; system of, 309. Public finance, defined, 1 ; a science, 1-3. Public industries, 31, 97, 98, 271, 276. Public land, 271-273; property, 26. Quarantine, 57. Q«ffls«-debt, 297. Quit-rents, 140. Rate, 100. See Poor rate. Rau, 35 n., 87, 282. Real estate in U. S., 211-217 ; tax, French, 158. Real taxes, 91. Redemption of debt, 315-323. Reform, 10, 165. Register, 335, 338. Regressive rate, 102. Relii-.f, 121. Religion, 15, 22. Rent charges, 124. See Single tax. Rejiresentative government, 72. Repressive effect of taxation, 109. Reserves, cash, 281. Revenue taxes, 93 : duties, 184, 185. See Internal revenue. Revenues, classification of, 69 ; col- lection of, 340 ff. ; cost of, 37 ; derivative, 79. Reversions, 82. Revolution, French, 130; indus- trial, 144. Rhode Island, 217. Ricardo, 112. Ripley, 140. Rivers and harbours, 47. Roads, 46. Roman army, 24 ; expenditure, 22- 24 ; lavf , 123 ; taxes, 125. Roscher, 4n., 21 n., 296 n. Rosewater, 265. Ross, 251 n., 319. Sacrifice theory, 84. ; Salable value of real estate, 116. Saladin tithe, 134. Salt tax, 179. See QcCbelle. School fees, 263. Schwab, 142 n. Scutage, 133. Secondary taxes, 93. Seligman, E". R. A., 11, 76, 76 n., 78, 84, 92, 95, 96 n., 121, 172 n., 201, 217-219, 247, 252, 253, 266. Services, 349. INDEX 383 Sevres, 275. Sewage, 15. Shaw, 49 n. Sherwood, 283 n. Shifting, 101, 248 ff. ; cost of, 250 ; of customs and excises, 253; poll tax, 257. See Incidence. Shlpgeld, 132. Single tax, 106'-109. See George, Henry, Income tax, socialistic. Sinking fund, 316-323 ; of common- wealths, 323; Galatin's, 320; of war debt, 322. See Redemption of debt. Smith, Adam, 5, 46; classification of taxes, 92 ; canons of taxation, 250, 251; funded and floating debts, 293, 294; on proportional taxation, 111. Smuggling, 192. Socialism, 18. [of progression, 120. Socialistic income tax, 107 ; theory Spahr, 107 n., 108. Spain, war with U. S., 360. Special assessments, 95, 265-269. Special benefit, 11-13, 28. Specific duties, 191. Springer?). U. S., 244, 245. Stamps for fees, 202. State, functions of, 17, 19; nature of, 17; an organism, 17; owner- ship of railroads, 3. See Govern- ment. Steadiness of revenues, 20. Stein, L. v., 81 n.; on customs du- ties, 193 ; on budget, 325. Steuer, 71. Stoppage at source, 228. Storage of funds, 347. Stourm, 325. Sub-treasuries, 347. Subjective taxes, 92. Succession tax, 227. See Inheri- - tance tax. Death duties. Sumner, 201 n. Superannuations, 59. Supply services, English, 350. Supreme court, 89 ; on income tax, 244, 215. Surplus, 21. Switzerland, general property tax, 210. System of taxation, 105. Tailli', etymology of, 129 n., 130. Tallage, 129, 129 n., 133 ; of groats, 135. Tariff, 182 ff. ; English, 193; French, 199, 201 ; German, 197 ; U. S.,201ff. See Customs duties. Taussig, 201 n. Taxation by divided authorities, 148; English writers on, 5; evo- lution of, 125; by faculty, 115- 120; ideal, 110, 111; justification of, 83 ; measure of, 75, 83. See particular captious. Taxes, acquisition, 93; appor- tioned, 94; be.sj<2, 93; classified, 85,86; consumption, 93; defined, 77 ; direct and indirect, Rau and Wagner, 87 ; early English, i;i2 ; ejicf'rt, 93; income, 90, 91 ; per- sons, 90 ; possession, 93 ; prop- erty, 90, 91; proportioned, 94; on revenue. 93; on t:crhrauch, 93. See particular captions. Tax farmer, 340; list, 103; system, 105, 110. Technical education, 49. Ten-forties, 303. Terminable annuities, 304. Thirteenths and fifteenths, 134. Tithes, French, 129. Tobacco monopoly, 3, 151, 179, 180. Tobacco tax, 175, 177 n., 178. Toll, 103. Training schools, 45. Transfer of funds, 346. Transit duties, 182. Treasury, notes, 307 ; department, 335, 338. Turkish wars, 126. Twentieths, 129. Unearned increment, 98, 109. Unit of base, 100. Universities, 50, 263. 384 INDEX Valuation of property in U. S., 211. Yerhrauch, 93. Vereinfiir Socialpolitik, 202. Vermont, 100, 117, 217. Vignes, 129 n. Vingtieme, 129, 130. Virginia, 141, 142, 247. Voluntary contributions, 71. "Wages taxes, 207. Wagner, A., 20 n., 87, 88 n., 126, 128, 157, 236 n., 2^,295. Wallter, F., 141. War, borrowings of U. S., 369; expenditure for, 22, 23, 45, 354 fe. ; finances of, 354-374; revenue bill, U. S., 366 ; tariff of U. S., 204, 361, 362; taxes,' U. S., 357, 358, 363-365. Water supply, 15, 97. Weather bureau, 48. West, Max, 227. Wilson, A. J., 46, 195 n., 240, 329. Wilson tariff, 206. Wilson, Woodrow, 2 n . Window tax, English, 161. Wood, F. A., 117 n., 140. Woolsey, 43. Wyoming, 213. ZoUverein, 197. New Books on Economics, Political Science, and Sociology DRAHMS. The Criminal, His Personnel and Environment. A Scientific Study. By the Reverend August Drahms. With an Introduction by Cesare Lombroso. Cloth. i2nio. Price ^2.00 BLACKMAN. The Making of Hawaii. A Study in Social Evolu- tion. By William F. Blackman. Price ^2.00 DAVENPORT. Outlines of Economic Theory. By Herbkrt Joseph Davenport. Cloth. 8vo. Price $2.00 Outlines of Elementary Economics. By the same author. Cloth. i2mo. Price 80 cents DEVINE. Economics. By Edward Thomas Devine. Cloth. i2mo. Price ;Ji.oo net EATON. The Government of Municipalities. By Dorman B. Eaton. Columbia University Press. Price 1(4.00 net GIDDINGS. The Principles of Sociology. By Franklin Henry GiDDINGS. Columbia University Press. Cloth. 8vo. Price J3.00 net The Theory of Socialization. By the same author. Paper. 8vo. Price 60 cents Democracy and Empire : with Studies of their Psychological, Economic, and Moral Foundations. By the same author. Cloth. 8vo. Price $2.50 GOODNOW. Municipal Home Rule. A Study in Administration. By Frank J. Goodnow. Cloth. i2mo. Price ^i. 50 Municipal Problems. By the same author. Cloth. i2mo. Price J1.50 MAYO-SMITH. Science of Statistics. By Richmond Mayo- Smith. Tvi'o Volumes. Cloth. Svo. Vol. I. Statistics and Sociology. Price $3.00 net Vol. 11. Statistics and Economics. Price $3.00 net PATTEN. The Development of English Thought. A Study in the Economic Interpretation of History. By Simon N. Patten. Cloth. Svo. Price $3.00 SELIGMAN. The Shifting and Incidence of Taxation. By Edward R. A. Seligman. Second edition, completely revised and enlarged. Cloth. Svo. Price l3-oo "ef VEBLEN. The Theory of the Leisure Class. By Thorstein Veblen. Crown. Svo. Price $2.00 WARD. Outlines of Sociology. By Lester F. Ward. Cloth. i2mo. Price J2.00 THE MACMILLAN COMPANY 66 FIFTH AVENUE, NEW YORK The Citizen^s Library of Economics, Politics, and Sociology Half Leather. $1.25 each MONOPOLIES AND TRUSTS By RICHARD T. ELY, Ph.D., LL.D. Since such prominence has been given the subject of Trusts in the public press, it may seem that the present interest in the topic has sug- gested this book; but, on the contrary, the author has been engaged on this and connected subjects for a number of years ; it is the result of long-continued research, a complete and searching discussion, interest- ing and authoritative. " It is admirable. It is the soundest contribution on the subject that has appeared." — Professor John R. Commons. " By all odds the best written of Professor Ely's works." — Professor Simon N. Patten, University of Pennsylvania. THE ECONOMICS OF DISTRIBUTION By JOHN A. HOBSON Author of '^ The Evolution of Modern Capitalism^' etc. An analysis of those processes of bargaining through which economic distribution is conducted, the results of industrial co-opera- tion being apportioned to the owners of the factors of production in its several stages. IN PREPARATION ESSAYS IN THE MONETARY HISTORY OF THE UluTED STATES By CHARLES J. BULLOCK, Ph.D. Assistant Professor of Political Economy, Williams College The first of these three essays furnishes the first systematic attempt to supply an interpretation of the leading facts in the entire monetary history of the country, maintaining the thesis that during three cen- turies the agitation for cheap money has been due to the same under- lying cause, namely the extension of settlements over unoccupied Western- lands, and that consequently by a process of natural evolution we are now approaching its end; the two others are briefer and contain the results of original investigations into special topics — the early paper currency of the States of North CaroUna and New Hampshire. OTHERS TO FOLLOW THE MACMILLAN COMPANY 66 FIFTH AVENUE, NEW YORK