REVENUE FROM TAXATION-GENERAL PRINCIPLES.
1. Taxation is the principal source of revenue.
2. The term defined.
3. A tax is compulsory.
4. A tax is a contribution.
5. What the term wealth includes.
6. A tax is imposed on a person.
7. A tax is levied for the benefit of the public powers.
8. The purpose of taxation.
9. Peculiar services rendered by the state. Care of the In dians.
10. Postal services.
11. Questionable services.
12. Local services.
53. Classification of taxes.
14. Direct and indirect taxes.
15. Opinion of the United States Supreme Court.
16. Economic distinction between a direct and indirect tax.
17. Difficulty in distinguishing between them.
18. What form of taxation will promote the greatest economy in expenditure.
19. Empirical classification.
20. Personal taxes.
21. Taxes on occupations.
22. Taxes on income.
23. Taxes on land.
24. Taxes on goods and money.
25. Taxes on inheritances.
26. All ought to pay a tax.
27. Including all the members of a family.
28. Why all should pay more than they now do.
29. What taxes all ought to pay.
30. Taxes for the preservation of personal liberty and security.
31. For civil justice.
32. For civil justice in an ideal state.
34. For food inspection, etc.
35. Why the owners of private property should pay more.
36. Payment by those who are able for those who are not.
37. This supplementary tax should be collected on just prin ciples.
38. It is not because those having the most wealth favor a wasteful government.
39. Should the state regard the incidence of a tax? 4o. Incidence of an octroi tax.
41. The incidence of indirect taxes is often unequal.
42. Should taxation be based on this idea? 43. To what extent can an indirect tax be thrown off? 44. It cannot be by persons not in business.
45. Nor by persons in active competition.
46. Nor with any uniformity.
47. Modes of attempting to throw off the tax.
48. Indirect taxation should be levied on non-necessities as far as possible.
1. Having described the National and State expendi tures, the way is prepared for considering the revenue collected to pay them ; the principal source is taxation' 2. In defining a tax we shall use Bastable's definitions "A compulsory contribution of the wealth of a person for the services of the public powers." 3. Each term of the definition may be briefly consid ered. First, a tax is compulsory ; the payer is legally re quired to pay. The amount, the mode, and the time of levying all are determined by the taxing power. A per son may contribute money voluntarily to a State, as is done in some of the cantons of Switzerland, but such sup port is not taxation. Gifts to a State cannot in any sense be regarded as taxes.
4. Again, a tax is a contribution, by which is meant a sacrifice, paid by the contributor. Some persons may profit by the operation of a tax ; yet every tax paid is a deduction from the contributor's wealth. He may indeed indirectly receive a larger return from the payment of the tax than the amount contributed, yet the tax is a contribu tion.
5. Again, the term wealth must be understood as in cluding services as well as money or other commodities. Sometimes a road tax is levied payable in money or in labor. Often a military tax is of the same character, but is none the less a tax, whether discharged by performing labor or paying money.
6. Taxation is imposed on persons. This necessarily follows from the circumstance that the payment of taxes is a duty, for persons only can be liable to duties.
7. Again, taxation is levied for the service or benefit of the public authority. Bastable remarks that the pub lic economy requires the supplying of its wants, and tax ation is the mode of meeting whatever proportion of its wants remains unsatisfied by other parts of the public revenue. The amount received may be misapplied ; the service rendered may be grossly inadequate for the con tribution made to the State, but whatever it does, whether good or bad, much or little, is a service. "The produce of taxation," he says, "has unfortunately been far too often misapplied and resulted in injury rather than gain, but the tax-imposing body must be regarded as the final arbiter as to the justice of its wants. That some require ments are evil makes them none the less requirements, in the case either of individuals or states." 8. Much has been said concerning the purpose of tax ation. Is it to secure protection by the State as many be lieve? Clearly, it is for the services rendered by the State. These have been disclosed in our analysis of ex penditures. What are they? One of the most important is protection to persons and property. Another is for the administration of justice.
9. Some of the services rendered by the National Government are peculiar, especially those to the Indians, founded on treaty relations, and resting solely on con tract. The Government, therefore, in serving the In dians, is simply fulfilling its contracts, either expressly made or implied during its long intercourse with them.
1o. Other expenditures are for postal services and the like, which we have considered as justifiable, but which cannot be regarded as protective, like those incurred for defense against foreign foes and insurrection.
11. Other expenditures are for services of a question able character, some of which can hardly be justified on any ground. They are not for the protection of life, health or property; nor do they strengthen the general security or promote the general welfare.
12. Other expenditures are for mere local services ; they are not protective in any sense, but are necessary to the general comfort and well-being of the citizens, as roads and bridges.
13. Thus much concerning the purposes for which taxes are laid. Another question, and one far more diffi cult to answer, relates to their classification. They have been classified in various ways, but no classification has ever received general assent.
14. The classification into direct and indirect, whether economically correct or not, must be made, because it ex ists in the Federal Constitution:a What is the constitu tional and economic meaning of these terms? 15. In a recent judicial exposition the meaning of a direct tax has been defined by the Supreme Court of the United States. In 1894 a law was passed levying a tax on all persons in the United States having an annual in come exceeding $4,000. The tax was attacked as a di rect one, and if it was, could not be levied except in the manner prescribed by the Constitution. The question, therefore, was squarely presented, "What is a direct tax within the meaning of the Constitution ?" 16. The court, speaking through Mr. Chief Justice Fuller, answered That the distinction between direct and indirect taxation was well understood by the framers of the Constitution and those who adopted it. 2. That under the State systems of taxation all taxes on real es tate or personal property or the rents or income thereof were regarded as direct taxes. 3. That the rules of ap portionment and of uniformity were adopted in view of that distinction and those systems. The tax, therefore, was unconstitutional.
17. What is the economic distinction between a direct and an indirect tax? A direct tax is borne by the people who pay it ; an indirect tax the payer expects to throw off or collect from some other persons. For example, a tax imposed on imports is generally regarded as indirect, because it is assumed that the taxpayer will sufficiently increase the price of his goods to cover the tax, and thus throw it off on the buyers. Such a tax is said to be paid by the consumer, or is a tax on consumption. While some taxes fall readily enough within this division, other taxes are near the dividing line and cannot be easily classified as direct or indirect. A tax may be laid sup posing that it would be thrown off by the taxpayer on an other, but who may be prevented from doing so by cir cumstances unknown to the taxing authority. It is there by converted into a direct tax, contrary to the legislative intention. Suppose a landlord's real estate tax is in creased during a period of depression in business, when he can collect only with difficulty his full rent from his tenant? If his tax is raised under such conditions he will be quite unable to throw it off on his tenant, and it must be paid by himself. Suppose, on the other hand, that the tax is increased during a time of prosperity, when the tenant is making money rapidly? The landlord now in sists on increasing his rent because his tax is higher. As the tenant can pay the increase, he will probably do so and the landlord will escape partly or entirely the addi tional burden. The tax would then prove to be indirect. The question, therefore, cannot be always answered by looking at the form of the tax, but rather at the circum stances and surroundings of the taxpayer.
thoughtful persons favored direct taxation, believing that the people, feeling the burden, would watch expenditures more closely. Experience has exactly reversed this be lief, especially in the large cities. In them taxes have been drawn directly from the people, yet in them expendi tures have been incurred under their very eyes, in de fiance of economy and often of honesty. The people have rarely taken an efficient step to lessen abuses. On the other hand, the National Government, which has been maintained for most part by indirect taxation, has been more honestly and efficiently served. To this deduction are many qualifications. It is undoubtedly true that many municipalities have been served in an honest and effi cient manner. Governing in some of the States, towns, counties, cities, has been as economical and as intelligent as any one could desire. The result is mixed and contra dictory. In general, it may be said that the fathers of the republic were doubtless correct in their belief that when people felt the taxes keenly they would watch ex penditure more carefully ; and the reason why people have been so careless and unmindful of the wasteful and cor rupt ways of the expenditure of public money is that they have not yet felt the taxes keenly enough to demand a reduction, which would necessarily lead to a reduction in expenditures.
19. Taxes have been variously classified by writers. We might say that no two have ever agreed on a classi fication. Some of them insist that it is quite impossible to work out an economic or consistent system, and that an empirical classification only is possible. In view of this diversity of opinion we shall not attempt to review any classifications, but simply endeavor to give an em pirical classification of direct taxes, which, it is hoped, may serve a useful purpose.
20. First, we would classify some as personal. By these are meant taxes paid on the head—a poll tax is the best illustration.
21. Second, taxes on occupations. These consist of licenses and fees. They may be direct or indirect in their operation ; that is, the licensee may pay his tax and think no more about it, or he may try to get his money back by demanding a higher price for his service or for the thing he is licensed to sell. It may be paid annually or for some other period. It may be imposed in the form of fees for different duties or acts performed by the licensee.
22. Third, a tax on income from wealth or from ser vice. An income may be derived from two sources. The workingman gains his by performing daily labor. The man of wealth derives his, partly, at least, from the labor of others in the form of rents and interest, or profits from his business. Such a tax has long been imposed. In England, income taxes were first paid in 1798. An in come tax was imposed on the people in the United States from 1861 to 1871. Its constitutionality was questioned during this period, but not determined by the highest tribunal. In 1894 another income tax law was passed and the Supreme Court of the United States decided by five to four that it was unconstitutional. The decision was so close that it can hardly be regarded as final or binding on the court should the question again arise.
23. Taxes on wealth itself. This is by far the most common form of taxation. Property taxes may be im posed on land, which in turn may be divided into (a) houses, (b) factories, (c) buildings for storage and ex change, and (c) land without any structure thereon. These four include all the forms of land.
24. Taxes are also laid on goods, which may be di vided into (a) furniture and other articles of the house hold kept for permanent use, (b) merchandise bought and held for sale, (c) money used in business or lent or kept on deposit.
25. Lastly may be mentioned taxes laid on inherit ances, or on property inherited by people beyond defined lines of relationship to the deceased.
26. As every person derives some benefit from the Government, whether National, State or municipal, he ought to contribute something toward its maintenance. Whether he is able to pay a tax or not is another question, but his duty to do so is unquestionable. He receives a real benefit ; a real service is performed for him in se curing his life, liberty and wealth. In a larger sense he gains from the existence of society, which is preserved by the State. For this purpose does society create the State. But for all this somebody must pay, and, as all are bene fited, all ought to contribute to the common good or end.
27. For these services a tax should be paid by or for all the members of a family. As all share in the benefits thus rendered by the State, a contribution should be re quired of all. We know of no reason why a tax should be confined simply to the man who wields the power of suffrage or possesses wealth. It is levied, or should be,
because the State must be furnished with the means for providing security to its members, whether men or women, old or young. Why, then, should not all pay alike, for the service is one of equal worth to all? It may be true that from a philosophical or moral point of view lives may be valued unequally, but to all life is a precious thing, even to the poorest and meanest, as the poet said long ago: For who to dull forgetfulness a prey This pleasing, anxious being ere resigned, Left the warm precincts of the cheerful day, Nor cast one longing, lingering look behind? 28. Not only should all pay, but a larger amount for personal protection than they pay now, and for the ob vious reason that personal security and enjoyment are of the highest worth. As all know, the tax now imposed is trifling, and with a tendency to shrink, since the exten sion of the suffrage. Indeed, as the power to govern ex tends, the safeguards against ignorant and corrupt gov erning are removed, and among others the repeal or dim inution of the head tax that operated to bar out the less thrifty and intelligent class, which is the least fitted to take part in electing the officers of government and in making laws.
29. Let us then inquire what taxes ought to be paid by all, and afterward by whom they are paid? and lastly, why they do pay them? When these three questions are rightly answered some of the darkness surrounding the subject will disappear.
3o. The taxes needful to pay the cost of preserving personal security and enjoyment should be borne equally. So should the cost of supporting criminal justice.
31. Civil justice, as we have shown, ought to be more nearly self-supporting. A wrong-doer ought to be re quired to make amends to the person he has injured, and also to the State for infringing the laws. The lightest penalty that ought to be imposed on him is the entire ex pense for conducting the proceedings against him.
32. In an ideal State we believe that officers should be appointed to conduct all civil suits, instead of limiting their functions, as is now done, to conducting criminal prosecutions. Why should such a distinction be made? Is not a person who refuses to execute a contract a law breaker? If he is, why should he not be compelled to pay a penalty for his infraction, and why should not the State act as a prosecutor? 33. In many cases a State would be unable to obtain a money satisfaction on its judgments ; the person prose cuted would be unable to pay. What should be done in such a case ? This expense at first must be borne by the State, whether anything could be subsequently recovered would depend on the debtor.
34. All the expenditures for the preservation of health—diseases to men and animals, the inspection of food—come under the head of necessary expenditures, and all should be equally taxed to pay for them. As the benefit is personal, every person should be required to pay equally for the service thus rendered.
35. Having shown why all ought to pay taxes, it may be remarked that those who possess wealth ought to pay more than those who have none because the State ren ders a greater service to the wealthy. But how much one should pay for the security and enjoyment of his life, and how much for the security and enjoyment of his wealth, are questions not easily answered.
36. As many who ought to pay are unable to do so, it follows that those who have the means must pay in addition to their own taxes a portion of the taxes of those who do not pay theirs. This they must do to maintain the State ; there is no alternative. In the time of Richard II. the wealthier were required by positive law to con tribute at least one groat nor more than sixty in addition to the general contribution of three groats exacted of every person above fifteen years of age. On what princi ple is the exaction of additional contributions justified? The general opinion is that of ability. The service for secur ing private property rests, we think, on a different foun dation. Prof. Seligman says that "we must disabuse our selves of the idea that property as such owes any duty to pay taxes. The State has direct relations not with prop erty, but with persons. It is the individual who, from the very fact of his existence within the State, is under defin ite obligations toward the State, of which the very first is to protect and support it. The State, indeed, can exist without the particular individual, but the individual can not exist without the State." But the service rendered by the State to those who have property is greater than to those who have none; and if a just and practicable method can be adopted for dividing or apportioning the service, why should not this be done? 37. Keeping this distinction between the two forms or kinds of taxation clearly in sight—the one form that is just and proper, which ought to be paid by all alike, and the supplementary or secondary form, which is in the na ture of an unwilling gift, contributed in consequence of the inability of others to fulfill their duty to the State— this supplementary tax ought to be levied and collected on the most just principles. If the functions of a State were confined to necessary and justifiable expenditures, the amount exacted from all would be greatly lessened ; but as they are not, and questionable ones are incurred which ought not to be paid by any one, the evil is greatly increased. Such contributions cannot in a true sense be called taxes, because they are not paid for any real ser vice performed by the State.
38. In collecting taxes the State too often proceeds in a rough and inconsiderate manner. Those who are best able to pay, who have the largest income, and the most influence, often escape without paying anything like their proper share. Those who possess less wealth and influ ence suffer most. This is one of the great evils of our time. A large class, perhaps without employment and possessing a moderate income, small householders and the like, are taxed far more heavily in proportion to the value of their property than larger corporations. The remedy for the taxpayers who are unfairly assessed lies in united action. And the justice is all the stronger for this union to resist the payment of a tax representing the unpaid portion of those who have more ability but shirk payment.
39. In levying a tax the State proceeds on the princi ple that the person who is required to contribute ought to pay the amount demanded from him, or to act as an agent or instrument to draw the money for others. One of the best authorities of our times, Bastable, insists that every State in levying taxes has regard to their incidence or the probabilities that taxpayers will throw their taxes off. Some kinds of taxation are indeed levied wholly on this principle. Indirect taxes are levied with the expecta tion that taxpayers will add them to the prices of the arti cies taxed, and thus require others ultimately to pay them. In other words, an indirect tax is levied on things, on property, and the owners are regarded merely as agents of the State to collect it of purchasers and con sumers.* 4o. One of the best illustrations of an indirect tax, which perhaps is more successfully collected than any other, is the octroi tax, paid by the sellers of produce in many foreign cities when going into them with their mer chandise. Such a tax, it is supposed, will be added to the price and paid by consumers ; and as the merchandise in most cases is much wanted—consisting of the necessaries of life—doubtless the taxes are easily collected.
41. It must be admitted that in very many cases in direct taxes are grossly unequal, because collectors are unable to levy them, either wholly or in part, on the per sons to whom they sell their products.
42. As the incident of taxation is so unequal, the State should be very careful in establishing a system of taxation based on uniform or equal diffusion. A few years ago an eminent economist prepared a new system of taxation for the State of New York. Believing in the incidence or diffusion of taxes, he proposed that the prin cipal tax should be levied on land, which would be dif fused through the action of its owners by increasing the price of their products. But it was clearly shown that the farmers raising wheat in the far West at a lower cost and not thus taxed would be able to undersell their New York competitors. Such a system of taxation, therefore, if adopted, would have compelled the farmers to pay the tax themselves.
43. Is it true that every person tries to escape the incidence of a tax, or rather to escape the payment of the tax itself ? And if so, to what extent does he succeed ? 44. First of all, no one can succeed who is out of busi ness. As this is a large class, producing nothing, no member has any means of throwing off a tax.
45. Again, those who are engaged in competitive busi ness and selling at a lower price than others, if subjected to a tax, are unable to throw it off on others. To do this would enhance their prices and diminish still further their sales, consequently they must bear the burden them selves.
46. When such obvious cases are mentioned it be comes at once evident that the incidence of all taxes oper ates unequally. In times of depression especially, when prices are shrinking, it is more difficult to throw off taxes on others than when the opposite conditions of business exist. Perhaps in times of prosperity, when all are flourishing and prices are rising, persons may be able to transfer the burden of taxation to others, but this trans fer must be confined very largely to such conditions as are becoming less and less frequent.
47. If a tax is imposed on an individual, how does he attempt to throw it off on another? By raising the prices of the thing he has to sell, whatever it may be. When he advances prices, a customer can do one of two things, either he can purchase with the expectation of selling at still higher prices and thus transfer the tax to another, or decline to pay the advance and seek another seller. What he will do, of course depends on circumstances. If the thing is desired for consumption, for use in his own home, it is no affair of the State whether he pays a high price or a low one. If he growls over the tax that is levied, then the State in most instances can make a good answer by saying that if he did not wish to pay the tax he could escape by going without the thing purchased, and this he can do except for necessities. If the thing desired does not come within the doman of necessity, then he can certainly act with great independence ; and if he does not, but insists on purchasing and regards himself as a sufferer, it must be remembered that this suffering is self-imposed, and consequently he cannot very seriously complain of the conduct of the State. The case is quite otherwise when the tax is imposed on things that are necessary to life.
48. If these deductions are correct, so long as the State imposes indirect taxes instead of taxes on income, it ought, so far as possible, to draw its funds from things that are not necessities. For one fundamental principle of importance is involved in such taxation, namely, that in paying a tax on things that are not necessary to one's physical comfort and well being the taxpayer acts vol untarily, and therefore he cannot as justly complain against the conduct of the State, for he can escape the payment of such taxes by refraining from the use of the articles on which they are imposed. Such a course can not, of course, be followed when the State taxes neces saries, like the grains and fruits of the earth and the land on which they are grown, but it does apply with great force to tobacco and spirituous liquors. This is one rea son why in every civilized State these things have been singled out for the highest taxation, and why the Gov ernment should continue to impose them. The only limit that a State should observe is a tax that will not lead to smuggling and frauds. Until this limit is reached the State is quite justified in imposing as large a tax as may be needed that can be collected.
a Seligman's Essays in Taxation is regarded as the most thorough presentation of the subject, so far as the field is con cerned, by any writer. Chapter 14 in Prof. Hadley's Economic is one of the latest general contributions.
laDireet and Indirect Taxes in Economic Literature, by C. J. Bullock, 13 Pont. Science 2, 442.
'Pollock v. Farmers' Loan and Trust Co., 137 U. S. 558.
'No American writer, indeed no writer, has studied this subject so exhaustively as Prof. Seligman. See his "Shifting and Incidence of Taxation," which also contains a very full bibliography.