Home >> The-science-of-finance >> Administration Of The Tax to Voluntary Aids >> Conspectus of the Various

Conspectus of the Various Kinds of Taxes

CONSPECTUS OF THE VARIOUS KINDS OF TAXES.

§ 324. A conspectus of the various kinds of taxes might be most simply and easily effected by means of an historical survey in which it is attempted to arrange the main facts of tax ation in an orderly manner by groups, provided only that the historical material were of a nature to lend itself to this treat ment by showing an orderly gradation of development from one kind of taxation to another. It would then be possible to trace some sort of necessary connection between certain stages of political development and certain forms of taxation, and to show that in accordance with well-known conceptions of the evolution of political, juridical and economic institutions, a gradual progress in forms of taxation has gone hand in hand with the gradual development of the state.

It is not only true that in the earlier treatment of tax sys tems a lively sense of the desirability of such a generalization has been present ; the promptings of this sense have been heeded, with the result that the existence of such a parallelism of prog ress has been asserted, and a simple and perspicuous scheme of historical development has been constructed. The favorite attempt in this direction was the predication of a progress from the stage of indirect taxation to that of direct taxation, which was claimed to go hand in hand with a development from an abso lute to a liberal constitution.

This position is right, not only with regard to the general claim that there is a progress of development in the form of taxation and that this development is connected with the general development of political and social life ; it is also right in assum ing that a transition from indirect taxes to direct taxes follows as a result of certain general features of the political and social development. But it falls short through the superficiality which per mits itself to overlook the complex of relations and circumstances that condition any such progressive development ; it also falls short .in that it sets up this generalization as a convenient and adequate programme to be immediately applied in tax legisla tion. For the purposes of such a conspectus of the leading facts of taxation it is of little use to point out such a general tendency, so long as the realization of this tendency lies in the distant future, and so long as there is a great number of taxes that are for the present indispensable, but for whose orderly classification the fact of this general tendency is of slight or no significance.

On this head, as on so many others, the science in its maturer and more thoughtful days has arrived at conditional and qualified conclusions in cases where the youthful science thought itself to have discovered simple and sweeping laws.

§ 325. As the result of the historical exposition contained in the last chapter we have reached a generalization of the history of taxation for a thousand years past which may be summed up in two propositions : (1) there has taken place a process of clar ification whereby the taxes, being recognized as a necessary compensation of the public administration, have come to be segregated out from other state activities directed to other ends than that of raising taxes ; (2) we have an aggregation of experi ences with the various kinds of taxation, which is calculated to bring us to a modest appreciation of the fact that our modern practical sagacity in matters of taxation is very old.

The process of clarification is visible in this, that the taxes have developed out of the position of a temporary and extraor dinary effort on part of the members of the state to the position of an unquestionable public necessity ; it appears also in this, that tolls, stamp dues and monopolies, in consequence of a full consciousness of this necessity, have ceased to be privileges of a quasi-private character and have taken on the character of con tributions rendered by the body of citizens under the forms of public law. But what 'this process of clarification affords us in the way of positive data accumulated by this long historical experience is a great number of means and appliances for the realization of the purpose of taxation, and these numerous ways and means are yet waiting to be intelligently classified according to their relative importance. This orderly classification is not to be drawn immediately and directly from the history of the past, but must be reached by means of a critical review of the historical material. For just as in our everyday life it is the part of an intelligent being to make use of the experiences of past days only as a guide to the realization of a rational plan of life, aiming at the accomplishment of what ought to be, and so contin ually improving upon the past, in like manner it is the office of the science within the field of human social life to make use of the experiences of the past as a guide for the efforts of the future. To avoid this duty, the science would have to show that historical events succeed each other without the intervention of reflection, and would have to persuade us that they ought to succeed each other in this way.

§ 326. The Physiocratic doctrine has given evidence of its incisive scientific character also in this, that it subjected the com plex variety of taxes handed down from the past to a systematic criticism, a criticism which brought order into the matter at a sin gle stroke in such a way that the classification of the taxes at the same time embodied a decision as to their expediency and justice.

In point of form this was a solution of the problem. The deficiencies of the solution lay in the substance of the theory of taxation, in the bold conception of productivity and of the tax source resulting from it ; its deficiencies lay in a rationalistic disregard of the results of historical growth, and in the habit of mind which, according to the fashion of that time, saw nothing but confusion in the tax systems of the past, instead of finding in them material for a thoughtful analysis and discussion.

If we should ever succeed in constructing an orderly scheme of taxation based on an enlightened appreciation of the nature of the tax and of the tax source, and at the same time in organic connection with the past development of taxation, the goal would have been reached.

For the present there is but slight prospect of such a con summation. All attempts that have been made since the time of these earliest systematic writers have departed from their simple scheme of tax classification in the same measure as they have acquired a more adequate knowledge of facts. Very instructive in this connection is the fortune experienced by the Physiocratic terminology of " direct " and " indirect " taxes.

In contrast with every other of the manifold significations which these terms have assumed since their time, to the Physio crats the antithesis of the direct tax to the indirect taxes was at the same time, and above all, a decision as to the proper struc ture of the tax system. The direct tax was the only admissible kind of tax, because it falls immediately upon the tax source ; all other kinds of taxes are called indirect because they are levied on a tax object which is not identical with the tax source, and are, therefore, objectionable forms of taxation.

§ 327. The radical precision and simplicity of the Physio cratic theory of taxation is like the other efforts of this earliest scientific school in its boldness of conception ; it was a concep tion that has been fruitful in the later development of the science, but fruitful after the manner of the seed corn, whose substance dissolves to reappear in structures of a different character. It is true of Adam Smith's theory of taxation, which influenced science and practice for several generations, that, as is the case with so much else in Adam Smith's work, it bears the traces of this writer's great indebtedness to the French school. If we compare Smith with James Steuart x it immediately becomes apparent that the former's theory of taxation has passed through the Physio cratic school, that of the latter not. But as so frequently happens in Smith, as a consequence of the relative independence with which he constructs his own theory, the rigorous logic and adherence to the requirements of the system, characteristic of the French school, ' have disappeared. The net product upon which the Physiocrats focused their tax system by means of the single direct tax, resolves itself in Smith's hands' into three kinds of income, Rent, Profits, and Wages. He prefaces his discussion with four briefly stated rules of taxation, somewhat illogically arranged, but of practical value, and repeated with great frequency ; and by these rules he tests the tax contrivances of the past, and by so doing shows his superiority over the abstract radicalism of his French contemporaries.

There is no longer any talk of a "system" of taxation. The distinction between direct and indirect taxes disappears in Smith's discussion. It is of course true that the locution introduced by the Physiocrats recurs both in the science and in practical life, and that it had a great vogue, but the emotional content of the concept disappeared. A distant follower of the Physiocrats, Theodor Schmalz, utters a note of warning in the beginning of the nineteenth century against the " customary division of taxes into direct and indirect "; these expressions could have a defi nite meaning only if by direct are meant those taxes which are levied immediately upon the productions of nature, and by indirect all others, because they also finally fall upon natural products, but only indirectly and by a very circuitous path.' But this theory has long ceased to be anything more than the mistake of an obsolete school of thought.

The classification of taxes as direct and indirect is no longer a question as to the remoteness of the tax object from the tax source, but simply a question regarding different kinds of tax objects ; it is a question of the technique of taxation.' § 328. Of the many attempts at defining the terms in this latter sense it will be possible here to cite only a few of the more noted ones, which have gained a wider acceptance than others.

The view already spoken of above (sec. 246), which is prob ably the most widely accepted in the usage of practical life, is the one which is represented in the science by K. H. Rau and later by Adolph Wagner. If the demand, says Rau, is made immediately on the persons whom it is desired to tax, then the tax in question is levied without mediation and is a direct tax ; the person who pays the tax is, in this case, also the person who bears the burden of the tax. If, on the other hand, the taxes are demanded of persons whom the government does not intend should bear the tax themselves, but who are expected to recoup themselves from the persons whom it is desired to tax, then the tax is mediate, advanced or indirect. But as this " distinction between direct and indirect collection is an external distinction," Rau prefers the distinction between Assessments and Expendi ture Taxes. " Assessments " have to do with the person on whom is imposed year by year an obligation to pay a certain tax ; whereas the "expenditure tax" is based on the outlay of the taxpayer, as indicating the amount of his property. Assessments are for the most part, though not always, levied directly, expenditure taxes for the most part indirectly.

While Rau, very significantly, is not Satisfied with the classi fication of taxes as direct and indirect, and so sets it aside as " extrinsic " in favor of the other classification, into assessments and expenditure taxes, J. G. Hoffmann' is concerned to bring the usage of practical life into consonance with the requirements of scientific thought. The separation of the totality of taxes into direct and indirect, says Hoffmann, is familiar to everyone, and most people understand the terms in approximately the same sense, although there is usually a great lack of clearness and pre cision ; the etymological derivation of the word would indicate that those taxes are to be called direct which are borne by the person who pays them ; whereas those are indirect which in the intention of the tax officials are advanced by some one else on behalf of the persons by whom they are ultimately to be borne ; but in most cases it is quite impossible to say who really bears a given tax, and it is to be added that, if the word be taken in the sense specified, the same tax will be indirect or direct according as a merchant or the actual consumer imports the goods on which the tax is levied. It is therefore necessary to find a profounder definition of the concept, and such a definition Hoffmann finds in the distinction that direct taxes are taxes levied on possession, while indirect taxes are taxes levied on transactions—a distinction which is at the same time of practical value, inasmuch as this distinguishing characteristic points to the necessity of a very different treatment of the two kinds of taxes ; it requires a different apparatus to collect taxes on possessions from what is adapted to collect taxes on transactions ; possession being more or less permanent, while a transaction is by nature transient.

§ 329. It is a matter of repeated experience in the political sciences that the efforts to establish harmony between colloquial usage and the notions of the science attain their end but very slowly. To begin with, agreement between the individual men of the science is reached. with difficulty. And then, colloquial usage is very apt to be guided by the momentum of established habits. The case in hand, however, is a somewhat unusual one ; the usage in question originated with a theory which has had no practical application and was thereupon presently supplanted in colloquial usage by a quite different signification (according to Hoffmann's view of the etymology), and now this latter col loquial usage is also incapable of reaching a stable and satisfac tory definition because it will not stand the test of a closer analysis. Improved definitions, as this of Hoffmann's, also labor under the difficulty that they are, in the first place, in conflict with the usage of practical life (of legislation, of the administration, etc.), and in the second place, they are themselves open to criticism. So we find that, on the one hand, logicians, such as J. S. Mill and Adolph Wagner,' have gone back to that meaning which the word has in colloquial usage, while on the other hand, Leroy (as contrasted with and other French writers on finance), dissatisfied with the current explanations, returns, consciously or unconsciously, to the sense which the Physiocrats attached to the term, but without returning to their ideals. The

definition (closely related to that of Hoffmann) which has gained acceptance in the official language' of France he dubs "empir ical "; it lumps things together which should be kept distinct. For example, it includes taxes on inheritances and donations under indirect taxes, for the reason that these taxes are levied on occasion of a particular isolated act. If a more scientific definition were desired, he would suggest the following : By the direct tax it is the legislator's aim to reach the actual payer of the tax, and to tax him in proportion to his property and his ability to pay ; he therefore suppresses every intermediate link between the taxpayer and the treasury and seeks to make the tax strictly proportional to the property and the tax-paying capacity. By the indirect tax, on the other hand, the legislator seeks to reach the actual taxpayer only by a sort of repercussion (par ricochet) instead of going directly to the end to be attained ; he relinquishes the idea of a strict proportionality, and contents himself with an approximation.

§330. There has been, latterly, a considerable writing of mono graphs with a view to bring order into the inconsistency of these conceptions, the results of which, it is true, have scarcely been proportional to the efforts put forth. It can therefore not be in place to take up the question here anew. But it may be in place to call attention to whatever fundamental element is common to all these diverse definitions, and to what is of vital importance to the economy of the tax system.

Common to all the definitions, and at the same time of practical value, is the contrast between the flexibility, impercep tibility and relative voluntariness of the indirect taxes, and the inflexibility, publicity and harsh imperativeness of the direct taxes. This contrast, quite independently of all varying definitions, is forever present in the historical development of taxation ; it results in or is the result of the more general contrast of a realistic or idealistic character in the different historical phases of taxation. Abstract idealism, in its earliest scientific form and at the height of its ascendancy, rejects indirect taxes unconditionally. Theo retical writers who hold closer to the facts of everyday life are as a rule apt to appreciate the realistic value of indirect taxes.

Justi puts it forward as a fundamental principle, applicable to all contributions, taxes and imposts, that, as far as possible, ways and means should be found and adopted, such as will lead the subjects to make the payment willingly and readily and, as it were, on their own motion ; for just as undeniable as is the duty of the subject to pay taxes, just so undeniable is the annoyance and hardship which most men find in the payment of taxes. James Steuart' finds (as so many others have done since his time), in direct contradiction to his contemporaries, the Physio crats, that taxes on necessary articles of consumption should commend themselves to producers precisely for this reason, that such taxes are repaid to them in the price of the product. Adam Smith incorporates in his rules of taxation 3 (extolled as " classic " by J. S. Mill) the requirement that taxes should be levied in the manner most likely to be convenient to the contributor, and he counts as especially conforming to this requirement consumption taxes levied on superfluities in such a manner that the contrib utor pays them in small installments and, moreover, pays them voluntarily, seeing that the articles taxed are not necessities of life, it being therefore his own fault if such taxes become oppressive.

"The secret of finance is to take without causing discomfort," says J. G. Hoffmann in the Promemoria drawn up by him for the purposes of the Prussian tax legislation of February 20, 1820 and in his Lehre von den Hoffmann says that taxes on . transactions bear less heavily on the taxpayer than taxes on possessions, for the reason that the extent to which the taxpayer is subject to them always depends somewhat on his own choice.

From this valuation of indirect taxes in the old Cameralistic science and in the school of Adam Smith, the contrary estimate of the value of direct taxes follows as a matter of course.

§331. It is quite obvious that the distinction between direct and indirect taxes could no longer satisfy the student after it had yielded its most valuable and suggestive results and had been reduced to a simple technical distinction in financial termi nology, as it has been for a hundred years past. In order to accomplish, for the purposes of a more highly developed stage of economic thought and a maturer view of the history of finance, something analogous to what the Physiocrats once achieved at a single bold stroke, it would be necessary to follow their example in placing all existing kinds of taxes in intimate connection with the sources and the purposes of taxation. The purpose to be accomplished was at that time a systematic classification of his torical data, in order to prepare the way for a reform of the existing taxation.

The task before the later generation was a harder one. While taking their stand'on the historical development of taxa tion in the past, they were required to work out a system which should exhibit the reasonable nature of this past development and at the same time exert a salutary influence on the course of taxa tion in the future. Their task was a harder one than that of the Physiocrats, insomuch as the latter threw overboard everything handed down from the past, and looked for no rationality in existing institutions.

Our past discussions of the ideal of a single tax (secs. 251 254) have already so far converted us into advocates of the historic tax systems as to have shown us the decisive arguments in favor of a plurality of taxes, both on grounds of equity and of expediency.

The particulars as to what kinds of taxes are to be adopted, and why, remain yet to be discussed. History affords us the data for answering these questions, but not the complete answer. We are thoroughly aware that these data show a progress, but we are also aware that the progress has never been so rapid as since the beginnings of a conscious reflection on these questions, —a science of taxes and scientific systems of taxation.

What were the motive forces in the reforms effected in the Prussian tax system which we have reviewed, in the reforms at the beginning and during the course of the nineteenth century ? Among the very foremost (in this as in other fields of economic life) was the influence exerted by the French-English theory upon the brains of our leading statesmen. It is only as a second ary factor that we can here cite the influence of historical facts ; their share in the movement was more frequently that of a drag on the new concepts reached by the science, and resulted in a sort of compromise which presently yielded again to the influ ence of the theory.

Keeping in mind these experiences it must be said that the science would be ingloriously renouncing its historic office if it were to do honor to the power of the scientific schools of the past as exemplified in the established institutions handed down from the past, and at the same time decline to do its duty for the present and the future by saying what line of action is to be followed.

332. Our systematic classification of taxes starts from the premise that incomes, and in exceptional cases, property, consti tute the tax source from which any and every kind of taxes are drawn (secs. 236-244).

The distinction to be made in respect of all taxes, therefore, will depend on the relation in which the tax object stands to these tax sources.

The numerous economic phenomena to which all taxes hitherto levied attach, will, with respect to the above-mentioned relation, group themselves under three heads : (1 ) those which show us the income (or property) in its genesis ; (2) those which show it in its finished (or achieved) form ; (3) such as show it in its expenditure for private consumption. Hence we have the three chief classes of taxes : taxes on Earnings [Erwerb], taxes on Possession, and taxes on Consumption.' A more detailed examination of these three general classes is necessary in order to an appreciation of the peculiar office of each class, and of each particular kind of tax belonging under one or the other class. By this means we shall come to under stand the necessity of their mutually supplementing one another in the completed structure of the tax system.

The historic evolution will thus come to its rights, in that the materials afforded by past forms of taxation will be assimi lated into the system ; while at the same time room will be afforded for scientific criticism, in the opportunity offered for sifting the historical material, and so preparing the way for fur ther progress in taxation.

§ 333. Before proceeding to this detailed examination it may be proper to consider briefly the " classic " rules of taxation of Adam Smith.

These rules are a typical example of the " principles " which for a hundred years were so much in vogue in the school of Adam Smith, and before his time in the German Cameralistic science, and not least in the crossing of Justi and Smith, together with its hybrid progeny, down to Rau and Roscher.

A few maxims of prudence, so drawn, if possible, as to admit of being immediately adopted in practice, while they are them selves but a generalization from everyday practice, and arranged and numbered with the greatest care ; interspersed among these and in the same series with them, embryonic indications of the presence of important questions of principle, the passing, superficial reference to which contrasts most significantly and curiously with the gravity with which the maxims of everyday expediency are expounded.

The first of Adam Smith's rules of taxation is a rudimentary statement of principle, which does not belong with the three rules following it. It is concerned with the questions dealt with in the first chapter of the present book, " Equity in Taxation," which were in part also treated of in Book I. Chapter III., on "The Various Kinds of Public Contributions." It is quite char acteristic that in this first rule Smith follows up the proposition : "The subjects of every state ought to contribute to the support of the government in proportion to their respective abilities," with this second proposition : "The expense of government to the individuals of a great nation, is like the expense of management to the joint tenants of a great estate, who are all obliged to con tribute in proportion to their respective interests in the estate." The ground is shifted to quite a different category when to this first principle is added a second one which prescribes that "The tax which each individual is bound to pay ought to be certain, and not arbitrary," and that "The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain," since "Where it is otherwise, every person sub ject to the tax is more or less in the power of the tax-gatherer," etc. We have here to do with a point in the struggle between the constitutional state [Rechtsstaat] and the earlier police state, a question which is no longer a question in the modern state, and like so much else in the writings of Adam Smith and his contemporaries, is to be taken retrospectively.

The third rule, as also the fourth, recites certain consider ations of expediency which are no more exhaustive than they are well arranged. In the third rule stress is laid on the proper choice of the tax period and on the convenience to the taxpayer of the quasi-voluntary taxes on consumption, in enforcement of the maxim that " Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the con tributor to pay it." In the fourth rule the principle is inculcated that " Every tax ought to be so contrived as to both take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state." This principle is expounded somewhat in detail, divers causes being cited from which undesirable expenses would result, and among these are the cost of collection, the disturbance to industry, pen alties for fraud and annoying interference by the tax officials.

The truth contained in these two rules is vitiated by being mixed up with opinions which are altogether peculiar to the times of Adam Smith, so that not even within the narrow field of pru dential maxims do these rules merit the epithet " classic " which is applied by Mill, unless we use the term classic to designate whatever has been repeated an infinite number of times, often without an appreciation of its meaning. Such is the following reflection on smuggling : "The law, contrary to all the ordinary principles of justice, first creates the temptation, and then punishes those who yield to it ; and it commonly enhances the punishment too in proportion to the very circumstance which ought certainly to alleviate it, the temptation to commit the crime." Here, as in other propositions contained in these rules of taxation, we have an expression of the individualism of the eighteenth century, which rises against the state instead of appre ciating the great necessity of its presence.

What there is left of positive content in these rules is accord ingly reduced to a collection of simple considerations of common sense, such as would find their place as a matter of course in a discussion of the different classes of taxes; whereas, such matters as the historical estimate of direct and of indirect taxes demand other treatment than they receive in the modest position awarded them by Smith under his third rule.

tax, taxation, indirect, direct and past