THE IMl’ORTANCE OF PUECISIOX 
 
 ASSESSMENTS 
 
 BY 
 
 K. R. A. SRLIGMAN 
 
 PHOKKSSOU OK KOI.ITICAL ECONOMY, COLUMBIA 
 UNIVKUSITY, NKW YORK 
 
 REiMilXTKD KROM THK AODRKftSKS ANO PrOCKKOINGS OK THE 
 
 International Conkekence on State and Local 
 Taxation held at Toronto, Ontario 
 Oct. (i-9, VMS 
 
 INTERNATIOXAL TAX ASSOCIATION 
 
 COLUMBUS, OHIO 
 
THE IMPORTANCE OF PRECISION IN 
 ASSESSMENTS 
 
 By E. R. a. Seligman 
 
 Professor of Political Economy, Columbia University, New York, N. Y. 
 
 I 
 
 Ever since the days of Adam Smith, the demand for certainty 
 has been one of the cardinal rules in taxation. Adam Smith 
 borrowed his rule from one of tlie French writers. The arbi¬ 
 trariness of the French .system of taxation in the eighteenth 
 century had assumed such ])roportions as already to pa.ss beyond 
 belief, and it is no wonder that the would-be fiscal reformers 
 raised a loud note of protest against the utter lack of certainty 
 and precision in the French system. 
 
 It was not until the French Revolution that the worst evils 
 of the system were swept away; but so fresh has been the 
 recollection of tlie.se particular evils that from that day down 
 to the very present, the whole .system of French taxation has 
 been so framed as to secure, even at the cost of certain other 
 advantages, the ends of certainty and precision in asse.ssment. 
 
 The danger of arbitrariness in assessment can be well illus¬ 
 trated in almost any ab.solutc government. History is replete 
 with examples that may be taken from any Oriental monarchy, 
 and from imperial Rome. Many instances of the most shocking 
 character might easily be taken from the existing ab.solute gov¬ 
 ernments of the present. But absolutism is, unfortunately, 
 not the only home of arbitrariness in taxation. Strange to say, 
 democracy no less than absolutism is almost equally oxjiosod 
 to this danger. The danger, indeed, assumes a slightly different 
 form. In absolutism there is a lack of law and of constitutional 
 re.strictions; in democracy, like that of the United States, for 
 example, which is the classic home of constitutional limitations, 
 the danger lurks not in the law, but in the administration of 
 the law; or rather, the law, which on its face seems to provide 
 
 211 
 
212 
 
 STATE AND LOCAL TAXATION 
 
 all the constitutional guarantees of fairness and equality, breaks 
 down more or less completely when exposed to the test of 
 practical application under conditions for which it was not 
 originally framed. 
 
 It is well known that in a democracy the difficulties of gov¬ 
 ernment are prii7iarily administrative i-ather than constitu¬ 
 tional. Our constitutional problems have been, in very large 
 part, satisfactorily solved; our administrative })robloms have 
 scarcely been attacked. The weakness of democratic adminis¬ 
 tration is proverbial, — and this is esi)ccially true in the case 
 of fiscal administration. 
 
 Our tax officials are almost uniformly elective officials, and it 
 is a notorious fact that elective officers are but slightly immune 
 to the gusts and passions of popular approval or prejudice. 
 Nothing comes closer to the modern citizen than the amount 
 of sacrifice which he is called upon to make in the way of con¬ 
 tributions to the public support, and nowhere is there to be 
 found a greater pressure, whether of individuals or of classes 
 upon the government official than in the case of assessments for 
 taxation. The abuses which in absolutisms arc due to the 
 unchecked will of the absolute ruler are found duplicated in 
 democracies, owing to the dependence of the official upon the 
 electorate. 
 
 This shortcoming of democratic administration is intensified 
 by the inherent difficulties of modern economic life. In the 
 complex industrial society of the present, with its delicate 
 machinery and its subtle interrelations of all kinds, there is 
 needed a far finer insti’ument of assessment than in former 
 times. What is perfectly adequate for a primitive community, 
 or a simple agricultural State, becomes glaringly insufficient in 
 the modern industrial environment. Not oidy arc the things 
 themselves to be taxed increasingly difficult of location and 
 appraisement, but the j^ersons upon whom the assessment is 
 levied become, under modern economic conditions, more and 
 move elusive. And yet, just at a time when a more delicate 
 and perfect machinery of assessment is required, modern 
 democracy contents itself with a clumsy and outlived mechan¬ 
 ism, which is bound to give dissatisfaction. 
 
 Here in the new world we suffer from an accumulation of 
 
THE LMPOllTA-NX'E OF PRECISIOX IX ASSESS.MEXTS 213 
 
 evils. Not only is this the home of the jtreatest oxjx'viinent 
 in democracy that has ever been attcnii)te(l, but it is also fast 
 becoming the home of the greatest industrial differentiation 
 and complexity of social and economic organization. Mither 
 cause alone would suffice to create difficulties in tax as.ses.sments; 
 combined, they form an almost insuj)crable barrier to success. 
 .Mankind has yet to learn the lesson of combining, in fiscal 
 matters at least, the great princii)les of liberty and efffcienc}'. 
 It is given to but a few counti'ies to attain the administrative 
 efficiency which is found, for instance, in the Prussian govern¬ 
 ment. But that administrative efficiency is ])urchasod at a 
 cost of interference with individual liberty, which would, in this 
 country at least, be considered entirely intolerable. Bureau¬ 
 cracy is not democracy. If, therefore, we eliminate the bureau¬ 
 cratic administration as inai)plicable to .\merican conditions, 
 we are still confronted by this question: Which is better, the 
 attcmj)t to posit an ideal in taxation which shall seek to realize 
 the principle of e(pial justice, even though we know that the 
 endeavor to realize this ideal in practice will inevitably be 
 marred l.)y arbitrariness in administration; or, on the other 
 hand, the readiness to frame a less ideal scheme with the 
 knowledge that in j^ractice it would be attended with greater 
 pi’ecision and certainty of operation? 
 
 Put in this way, the answer can scarcely be doubtful. What 
 ’ statesmanship is trying to accomplish is not to pose abstract 
 principles, but to accomplish advantageous results. .And 
 while the province of the scientist is indeed in part to elucidate 
 fundamental princii)les, the publicist who is not to remain a 
 mere closet philosopher must always watch closely the working 
 out of Ids ab.stract principles amid the liard facts of daily life. 
 Especially true is this of the science of finance, where the 
 border line between finance and administration is found scarcely 
 distinguishable. .\n ideal principle which is administratively 
 unworkable is not for an instant to be compared with a less 
 elevated ideal which can be actually carried out in practice. 
 The chief trouble with our .American democracy in matters of 
 taxation has been that the people have blindly clung to an ideal 
 which has become admiidstratively impracticable; and that 
 they continue to hope against hope in expecting the impossible 
 
214 
 
 STATE AND LOCAL TAXATION 
 
 to happen. Our administrative methods are indeed slowly 
 improving, but it will be a long time before that point of 
 administrative excellence has been reached which will render 
 possible the realization of the fiscal ideal. In the meantime, 
 the disparity l^etween the ideal and the practice is such as to 
 create in our modern democracy some of the very worst evils 
 of tax assessment which are common in countries without any 
 tax ideals at all. 
 
 I do not he.sitate to assert that at the present time, in the 
 United States, the chief evils in public finance are to be found 
 primarily in that lack of certainty and precision which were 
 so vehemently emphasized by Adam Smith a century and a 
 half ago. In fact, if we take a broad view of the modern de¬ 
 velopment of taxation, we shall find that one, at least, of tlie 
 reasons for the great extension of indirect taxation throughout 
 tlie world is to be found in the fact that here, at least, under the 
 improved modern systems, we are able to attain a certainty 
 and a definiteness which is lacking in the other domains of 
 public revenue. The problem is on a large scale what the 
 choice between ad valorem and specific duties is on a small scale. 
 From the point of view of abstract justice there is no doubt that 
 ad valorem duties are in the main more equitable, and yet sad 
 experience has taught many a modern nation that there is in 
 ad valorem duties such an inherent danger of arbitrarinc.ss of 
 administration that they have, perforce, taken refuge, to a very 
 large extent, in a system of specific duties, which is adminis¬ 
 tratively workable, and which contains increased guarantees 
 of certainty and precision. 
 
 II 
 
 The chief examples of the evils of arbitrary assessments 
 in the United States at present are found in three classes of 
 taxation: the tax on real estate, the tax on personal j^roperty 
 and the tax on corporations. Let us say a word as to each. 
 
 In the case of real estate, the evils are comparatively insig¬ 
 nificant, owing to the fact that real estate is visible and tangible, 
 and that the impediments upon the transfer of real estate have 
 been so far removed in this country as to make real estate 
 almost as easily salable as personal property, and naturally 
 
THE LMPORTAXCE OF FRECTSIOX IX ASSESSMEXTS 215 
 
 where sales frequently occur, the selling value becomes a matter 
 either of record or of common knowledge. 
 
 Notwithstanding this fact, experience has shown—espe¬ 
 cially in our larger cities — that the a.ssessment of real estate is 
 very largely arbitrary in character. In some cases the land 
 is held on long lea.ses and sales are infre([uent. In other cases 
 a false purchase price is put in the deed, and in still other cases 
 there are sudden changes, either up or down, in the value of 
 the real e.state, due to more or less unpredictable changes in 
 busine.ss {)rosperity, in the opening up of new means of com¬ 
 munication or in the tides of fashion. As a consequence the 
 real value of real estate becomes a matter of very expert 
 knowledge, and as our tax departments are notoriously unal)le 
 to secure the services of high-j)aid experts, the assessment is 
 very largely left in the hands of more or less incompetent 
 underlings. The result has ])ecn a system of haphazard assess¬ 
 ment, which even with the i)est intentions, and with all absence 
 of corrupt motive, has meant a decided inequality as between 
 individuals. Where, as frequently occurs, sci)arate parcels 
 within the same city or ward are assessed at all the way from 
 60 per cent to 90 per cent of their real value, we cannot speak 
 of precision or equality in assessment. 
 
 A way out of this difficulty has been indicated b)" the adop¬ 
 tion, in part at least, of certain mathematical rules to guide the 
 assessor. Such schemes as those of l\Ir. Somers, formerly of 
 IMinneapolis, and that in vogue in the city of New York, are 
 familiar to you, and have been explained by the chairman of 
 the Board of Taxes and Assessments in New York City. With¬ 
 out going into the details here, it may be said that the system 
 consists in applying known, instead of unknown, factors to the 
 problem, and in seeking to remove, as far as possible, the arbi¬ 
 trary guess of the assessor. 
 
 Of course it must not be forgotten that the opportunity for 
 the introduction of mathematical rules in the assessment of 
 real estate is only a limited one, for at bottom the basic values 
 which are to be multiplied by this mathematical factor must 
 largely remain a matter of individual judgment. In the last 
 instance we cannot get away from the expert decision as to 
 fundamental valuations; but to the extent that known factors 
 
21G 
 
 STATE AND LOCAL TAXATION 
 
 are substituted for unknown factors, a decided improvement 
 is possible, even in the case of real estate. 
 
 It is, however, in the case of personal property that the evils 
 of discretionary opinion become far more flagrant. There 
 is no need to repeat before this audience the familiar stoiy 
 of the breakdown of the general j)roperty tax; of the failure 
 to ascertain the existence of many kinds of property, and of the 
 shocking inequality of a.ssessment, even where cei-tain kinds 
 of property are discovered. The adoption of mathematical 
 rules of assessment will, of course, not help a wliit in those 
 cases where it is impossible to discover anything to be assessed. 
 But in those instances wliere certain kinds of property are on 
 the assessor’s books there is room for considerable improvement 
 by the adoption of more precise and definite rules. 
 
 As a good example of what I mean by this statement, take 
 the case of the mortgage tax. The assessment of mortgages as 
 a part of the general property tax has everywhere become 
 notoriously ineffective. The recent adoption of the recording 
 mortgage tax, as in the State of New York, where all mortgages 
 are, so to say, automatically subjected to taxation at the 
 moment of their creation, has brought about, among many 
 other benefits, not only equality as between mortgages, but a 
 decidedly increased revenue to the treasmy. 
 
 Of a character similar to this is the substitution in some of 
 the Canadian cities of the so-called Ibisiness Tax or Bentals 
 Tax, or the recent adoption in one of the Australian States of 
 the so-called ''abilities” tax, in lieu of the personal property tax. 
 The imposition of a definite percentage upon the known rentals 
 affords a simple and precise method of reaching property which 
 otherwise would very largely escape notice altogether. 
 
 Those who are familiar with the French system of taxation 
 will remember that it is Imilt up entirely on the idea of sub¬ 
 stituting known for unknown factors, and that while the system 
 has certain disadvantages of its own, in so far as it does not 
 attain the ideal of precise approximation to the exact conditions 
 of the individual, it pos.sesses the inestimable advantage of 
 avoiding the haphazard guesses and arbitrary estimates which 
 are almost inseparable from any democratic administration of 
 personal or individual valuations. 
 
TIIK IMPORTANCE OF PRECISION IN ASSESSMENTS 217 
 
 It is, however, io the case of the corporation tax that the 
 problem has become most acute in this country. The well- 
 nigh universal system of taxing corporations is through the 
 medium of the assessment of the corporate property. In 
 some States, as even in the great State of New York, for ex¬ 
 ample, the local tax of corporations which, as almost every¬ 
 where, is the one of most importance, is based U])on the valuation 
 of the corporate property by local officials. Under this sy.stem 
 the most aUsolute arbitrary discriminations arc made, as be¬ 
 tween the various localities, and it is a notorious fact that those 
 corporations where it is physically possible to do .so will often 
 transfer their ostensible chief office from one place to another, 
 in order to secure a more complaisant assessor. In other States, 
 especially for certain classes of public service corporations, the 
 valuation has been put into the hands of a State boaial, which 
 obviates indeed these glaring discrej)ancies as between localities, 
 but which does not give any increased assurance of exactness or 
 precision. Even in such cases the alnises are frequent. And 
 what is worst of all, the secrecy observed by the State Board of 
 Assessors renders it utterly impossible for either the victim or 
 the scientific observer to point out the error in the procedure. 
 lOspecially true is this in all tho.se cases where it has become 
 customary to assess the value of the franchise of corporations, 
 a system which is obviously peculiar to our country, and fi’om 
 which all the European States which base the assessment on 
 income, rather than property value, are entirely exemi)t. 
 Valuations of our State boards of taxation are so notoriously 
 inadequate that in the case of one class of corporations, namely, 
 railroads, the cry has now gone forth for an official national 
 valuation. Without going into the arguments for and again.st 
 this scheme, it need only be pointed out that the successful 
 prosecution of this idea will not only co.st tens of millions of 
 dollars, but will take a very long time to effect; and that the 
 attempt to apply this same method of national official valuation 
 to all corporations that are subject to taxation would not only 
 be hopelessly expensive, but would, for obvious reasons, be 
 entirely impractical)le. In the great mass of cases, if we are 
 to have any valuation of property at all, we shall have to con¬ 
 tent ourselves with the perpetuation of the present most un- 
 
218 
 
 STATE AND LOCAL TAXATION 
 
 satisfactory methods. The experiences that we have had, even 
 with the so-called official valuations of railways in Michigan 
 and Wisconsin, are not such as to warrant the confident expec¬ 
 tation that they are satisfactory for tax purposes, and that 
 they avoid the evils of arbitrary a.ssessment. 
 
 How much better it is to take some external criterion, as is 
 now the practice in a few of our advanced States. In the case 
 of public .service corporations a definite percentage of receii)ts 
 is an obviously simple method. This is not the place to discuss 
 the pros and the contras of a tax on gross receipts versus a tax 
 on net receipts; but it may be pointed out that so far as rail¬ 
 roads, at all events, are concerned, under the new system of 
 accounting which has been enforced by federal law,-the chief 
 objection foi’inerly urged against the ta.x on net receipts lo.ses 
 almost all its potency. But whether we have a tax on net 
 receipts, or a tax on gross receipts, it is undeniable that the 
 tax is precise and definite; that there is no room for secrecy 
 or arbitrary action, and that equality as between classes of 
 corporations or between individuals in a class, may be .secured 
 by the adoption of precise mathematical rules which will cause 
 the rate to vary in accordance with the definite and easily 
 ascertainable factors. 
 
 It is true indeed that a few cases have recently been seen of 
 State legislatures abandoning the receipts tax for the system 
 of valuation, but I think that 1 am safe in saying that expert 
 opinion is almost unanimous in this country, that this was a 
 step backward and not a step forward; and that all the ends 
 which it was attempted to secure by the reintroduction of the 
 valuation .system might have been secured by a modification 
 of the rates and methods of the old system. Any method of 
 corporate taxation, in short, which is based upon the applica¬ 
 tion of precise and definite rules, is preferable to the happy-go- 
 lucky system of property valuation, whether it be a tax on 
 gross receipts or on net receipts; whether it be a tax on a 
 certain proportion of the market value of the stocks or of the 
 bonds, or of both together; whether it take some other exterior 
 criterion of the business; any of these methods is susceptible 
 of a more or less successful application because it avoids the 
 fundamental evil in our present system. No one man or set 
 
THE l.MPOllTA.N’CE OF FllEClSIOX L\ ASSESSMENTS 219 
 
 of men is able to value intelligently and precisely the selling 
 value of the multiplicity of corporations in our modern indus¬ 
 trial world, with the continual oscillation of business, and with 
 the increasing complexity of industrial interrelations. Tlie 
 task is one for suiterhuman strength and ability, and with 
 the weakness of our democratic administrative methods, the 
 attempt would be ludicrous, if it were not so lamentable. The 
 first step in the reform of methods of assessment is, as far as 
 l) 0 .ssible, to substitute the known for the unknown. 
 
 What the future has in store for us it is given to no man 
 to know. Popular customs and prejudices yield only slowly. 
 The thick mi.st of ignorance and inertia can be dispelled only 
 very gradually by the sunlight of knowledge and ol)servation. 
 Hut if the experience of mankind is to afford us any helj) in 
 fi.scal matters, and if the history of other countries under 
 somewhat similar conditions is to bo of any aid to us, it may be 
 stated with some reasonable degree of confidence that advance 
 in tax reform is to be sought rather in the progressive excellence 
 of administrative methods than in the elaboration of new and 
 high-sounding ideals. The ideals may be the same for all 
 countries; the administrative methods must differ according 
 to the ])eculiarities of each. In our .American adherence to an 
 abstract ideal we have failed to let our administrative methods 
 keep pace with the attempted realization of the ideal. In our 
 endeavor to secure the taxation of all property, we have not 
 only attem])ted the impo.ssible, but we have opened wide the 
 door to all the abuses of practical inecjuality, of unintentional 
 injustice and of widespread arbitrarine.ss. 
 
 Of all the methods that cry out most loudly for reform, 
 that of property valuation is the mo.st imj)ortant. The great 
 need of the day is to replace arbitrariness by certainty, and to 
 secure ])ractical equality in taxation by substituting, as far as 
 possible, definite and fixed rules of assessment for the hodge¬ 
 podge and capricious system, or lack of system, which is well- 
 nigh universal to-day. 
 
INTERNATIONAL TAX ASSOCIATION 
 
 Tlie objects of the Association are: 
 
 “ I o fornuilate and announce, through the deliberately ex)'>ress('d 
 opinion of an annual conference, the l)est>inforined economic tlioiight 
 and ripest administrative exjx:rience available for the correct guidance 
 of ])ublic o]>ini()n, legislative and administrative action on all (piestions 
 pertaining to state and local taxation, and to interstate and international 
 comity in taxation.” 
 
 Tiie Conference is composed of delegates ai^jiointed by governor-s of 
 states, premiers of provinces, universities and colleges. 
 
 OFFICERS 1908-1.909 
 
 President, Ai.i.en Puiu.ey Foote, Commissioner, Ohio State Roard of 
 Commerce, Columbus, Ohio. 
 
 Vice-President, United States, Lawson Peudy, Pre.sident, Department of 
 'Faxes and As.ses.sments, City of Xew York. 
 
 Vice-President, Dominion of Canada, Aktiiek ,J. Matmeson, Provincial 
 'J’reasurer, I’rovince of Ontario, 'roronto, (bitario. 
 
 Corresponding Secretary, United States, A. C. Ri.eydei.i,, Secretary Xew 
 York 'Fax Reform Association, oG Pine Street, Xew York. 
 Corresponding Secretary, Dominion of Canada, C. R. Ceaky, K.C. Trad¬ 
 ers Rank Ruilding, 'J’oronto, Ontario. 
 
 Treasurer. Foster Copeland, President City Xational Rank, Columbus, 
 Ohio. 
 
 Secretary, Mary C. Snyder, Roard of 'Frade Ruilding, Columbus, Ohio. 
 Executive Committee: The Okeicers oe the Association and 
 Proeessor Charles J. Rcllock, Harvard University, Cam¬ 
 bridge, ^Massachusetts. 
 
 Ernest C. Kontz, Attorney-at-law, Atlanta, Georgia. 
 
 F. M. Lee:, President of Railroad Commission, Jackson, Missis.sippi. 
 
 K. S. Gilson, Chairman, Wi.sconsin State Tax Commis.sion, 
 Madison, Wi.sconsin. 
 
 T. J. 'Fhomas, Secretary State Roard of Equalization, Salt Lake 
 City, Etah. 
 
 John R. IMcKilligan, Surveyor of Taxes and Imspector of Revenue, 
 Victoria, R.C. 
 
 The work of the Association is carried on by means of membei-ship 
 fee and contributions. 
 
 All persons interested in the study and improvement of tax systems 
 and assessment methods are invited to join the Aasociation. For terms 
 of membership, and li.st of publications, address the Secretary, Board of 
 Trade Building, Columbus, Ohio. 
 
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