INEQUALITIES BETWEEN REAL AND PERSONAL PRO PERTY. It is evident that the task of assessing property for the purpose of taxation may be more fully and equitably ac complished for real estate than for personal property, a fact which shows that the general property tax, if used to the exclusion of all other forms of taxation, will be guilty of demanding relatively greater payments from those engaged in agriculture than from those engaged in other callings and pursuits. It is believed that this fact, when appreciated, will cause the abandonment of radical revision of the general property tax scheme. " Personal property nowhere bears its just proportion of the burdens; and it is precisely in those localities where its extent and importance are the greatest that its assessment is the least. The taxation of personal pro perty is in inverse ratio to its quantity; the more it increases the less it pays." So remarkable a generalization calls for statistical support, and there are here inserted a few facts col lected by Professor Seligman, from whom the generalization is quoted: " The tenth census of the United States asserts that from 186o to 188o the assessed valuation of real estate increased from 6973 millions of dollars to 13,036 millions, while that of personal property decreased from 5111 to 3866 millions. In 1890 the assessed valuation of real estate had grown to 18,956, while that of personal property was 6516 millions,—less than the figures of thirty years before. In California personal property was assessed in 1872 at 220 millions of dollars, in i88o at 174 millions, and in 1887 at 164 millions,—a net de crease in fifteen years of 56 millions. Real estate increased during the same period from 417 to 791 millions. Personal property paid 17.31 per cent, real estate 82.69 per cent of the taxes. By 1893, although the assessed value of real estate was moo millions, that of personalty was only 173 millions. In Illinois in 1882 personal property paid 22.01 per cent of the taxes, in 1894 only 17.26 per cent. In Cook County (in cluding Chicago), personal property paid only 14 per cent; in Kankakee County only 11 per cent. In Iowa, while the real estate valuation in 1893 increased over that of the pre ceding year by 32 million dollars, the assessed valuation of " The proportion paid by personal property has decreased steadily almost every year, until according to the last figures it pays but 9.99 per cent of the State taxation, as against 90.01 per cent falling on real estate. In twenty-five years the valuation of real estate has increased $2,000,000,000; that of personalty has diminished about $4o,00o,00o. In the Dis trict of Columbia the valuation was in 1878: realty 83 millions. personalty 17 millions; in i894 realty had increased to 160 millions, personalty had decreased to 11 millions. In New Jersey, in 1887, in one township the real estate was assessed at $272,232, the personal property at $591; in another the figures were $2,274,9oo and $47,150 respectively. In New York the personalty was returned in one town at $5000, in the adjoining but no more prosperous town at $7oo,00o. Per haps the most remarkable figures are found in the large cities. In Cincinnati the valuation in i866 was : realty, personalty, $67,218,101. In 1892 the realty had increased to $144,208,810; the personalty had decreased to $44,735,670. In Monroe County, New York, in which the city of Rochester is situated, the realty was assessed in 1892 at $132,202,478; the personalty at $8408,803. Finally, in the city of Brooklyn in 1893 real estate was assesssed at $4.86497,186, while personalty was valued at $19,123,170. Personal property, in other words, paid a little more than three per cent of the whole tax on property. In 1895 propor tion fell still lower,—to one and twenty-three hundredths per cent." These statements are most remarkable and must carry with them the conviction that the general property tax fails in the first step of its administration, namely, in a just assessment of the property of citizens.
In the Eleventh Census of the United States is found a graphic statement of the assessed value of real and personal property for each of the States, and as it would be impossible to present the argument against the general property tax more persuasively, it is here inserted. The diagram explains itself.
We cannot leave this phase of the question without in quiring what seems to be the trend of legislative opinion in the presence of the fact that personal property evades assess /nent. The situation is partly relieved by the development of special taxes upon those businesses represented by stocks, bonds, shares, and other forms of personal property. It being impossible to secure payment from this property by tracing it to individual proprietors, the tax is levied upon the corpora tion, which from its nature must have a legal situs and main tain a current record of its property and earnings. The idea seems to be that the government should take its share of the earnings of the industries in question at their source. It is believed this tendency rests upon a sound administrative theory, and if carried out to its logical conclusion, which is that personal property representing corporate industry should be exempt from the assessor's roll and the corporation itself relied upon for the payment of all just dues to the govern ment, that the revenue system will gain in clearness, in equity, and in ease of administration. The corporation taxes should not be regarded as supplemental to the general property tax, but as a substitute for that portion of the tax which addresses itself to the class of personal property referred to.
Admitting for a moment that a properly drawn corpora tion tax satisfies the problem of assessment for stocks and bonds, there remains one form of personal property which can not be reached in this manner. Reference is here made to per sonal property in the form of notes, mortgages, and other credit instruments. No subject presents greater difficulties to the ad ministrator than that phase of double taxation and tax evasion which arises on account of mortgages. The theory adopted by most laws is that a mortgage should be taxed to its full amount, and the property upon which the mortgage rests assessed at a value equal to its true value less the amount of the mort gage. Could this be done no injustice would arise, but it cannot be done. It is impossible for the assessor to discover mortgages. It is certain that they who hold them will not as a rule voluntarily declare them. On the other hand, it is equally certain that the owner of a piece of property on which the mortgage rests will declare the debt if by so doing his assessment can be reduced, and that, as a result, the State will be left with little or nothing upon which to levy taxes.
It would be difficult to obtain a correct statement of property and mortgages were both mortgagor and mortgagee subjects of the same jurisdiction; it is impossible when they are citi zens of different jurisdictions. Nothing would be easier than by means of fictitious mortgages between citizens of different States to enable all property, real as well as personal. to evade assessment.
Many remedial acts have been addressed to this difficulty in the administration of the general property tax, but thus far they have all failed in their purpose. One of the most carefully devised of these laws was recently passed in the State of Michigan, by which it was required that the recorder of each county should furnish the recorder of every other county in the State a list of mortgages held upon lands by the residents of other counties. The immediate effect of this law was to disclose a large amount of personal property which had previously evaded taxation, but the ultimate effect was an exchange of mortgages by citizens of Michigan upon Michigan lands for mortgages held upon lands in other States.
Another experiment in the taxation of mortgages proved equally futile. It was provided that both the land and the mortgages should be formally taxed, but that, in case the owner of a mortgaged farm should pay the full amount of the tax imposed, he might use his tax receipt in payment of in terest upon the mortgage to the amount that the mortgage itself was held for taxation. The immediate effect of this law was, first, that the rate of interest upon loans increased by one per cent; second, that the mortgage contract was so revised as to deny the borrower the liberty of presenting tax receipts in part payment of interest dues; and third, that the mortgages on Michigan farms were sent as rapidly as possible out of the State.
It is not necessary to consider at length the extended bib liography of this subject, or to pass in review all of the special laws designed to adjust equitably the burden of taxation between the borrower and the lender. An exhaustive inves tigation would bear out the conclusion that so long as each State administers its revenue system independently of other States it is impossible to secure just and comprehensive as sessments of this class of personal property. Moreover, if the framer of a revenue system can convince himself that economic principles do act, and that the criticisms of a certain school of economists have not as yet caused the repeal of those fundamental laws of human conduct upon which the commercial world of voluntary association rests, it will not be necessary for him to consider seriously the question of taxing mortgages. A little more confidence in political economy, and a little less reliance upon minute legislation, would lead to better results. The distinction drawn in the foregoing chapter between the payment of a tax and the shifting of commercial conditions incident to a tax was designed, on its practical side, to prepare the way for the remission of a large number of indirect taxes; for, in so far as competition can determine the price, whether of goods, of service, or of loanable capital, the " burden " of indirect taxes does tend to equalize itself throughout the com munity. That is to say, the relative conditions of men will be the same, so far as social service rendered and social benefits received are concerned, after the commercial shifting which follows a new tax has taken place as before the tax was imposed. A tax on mortgages, being a special tax upon one form of investment, is an indirect tax, and the result of a release of mortgages from taxation will be a lowering in the rate of interest on loanable capi tal. The man who buys property on credit (let us assume for purpose of illustration the case of a farm purchased with borrowed money) has no reason to complain if the capital which he borrows is not taxed to the holder of the instruments that represent the loan. It is true his property will be as sessed to its full value regardless of the debt resting upon it, but the first effect of such an adjustment will be to reduce the price he must pay for his land; that is to say, the tax results in depressing the value of land by an amount equal to its capitali zation. The second effect is that he will be obliged to pay less for the money borrowed with which to purchase the land. It is doubtless true that up to a certain point these two tendencies will counteract each other, for the lower the rate of interest the higher will be the valuation of land. But the balance will most certainly be to the advantage of the man who desires to buy land with borrowed capital; for the rate which fixes the price of land is the commercial or industrial rate, while the rate that must be paid for the money borrowed is the current rate on loanable capital. Not only is this latter lower in itself than the market rate on industrial capital, but it will be yet further depressed by the exemption of such capital from taxation. It is lack of confidence in commercial laws by which values are determined and to which contracts are ad justed that incites to a constant effort on the part of legis lators to lay hold of loanable capital for the purpose of taxa tion. Experience shows this to be impossible and analysis shows it to be unnecessary. There is no reason in the nature of the case, due allowance being made for the peculiar indus trial qualities of government bonds, why the farmer should pay more for money than the government. The farmer's true interest lies in removing every element of uncertainty that surrounds a loan, and one of these is the threat of the law that mortgages should be taxed.
The conclusion from this somewhat extended discussion is that all personal property should be dropped from the as sessment rolls—corporate property because it can be taxed to the corporation in a much more effective manner than to the individual, and credits because their exemption will tend to reduce the rate on loanable capital. The situation seems to be that personal property cannot be reached by the present system. Even the most severe laws are futile to secure its listing. It is, therefore, necessary that some radical changes be introduced into the system itself if the industry of agriculture is to be relieved from the relatively excessive burdens which it now bears.