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Principles of Tax Exemption


The chief source of revenue for modern states is found in taxation, and this will continue to be the chief source of revenue as long as the institution of private property in productive agencies receives the approval of mankind. It is on this account that a study of the principles of taxation, and of the rules of the apportionment, the levy, and the collection of taxes, consti tutes the most important part of the Science of Finance. It would be a mistake, however, to so emphasize the importance of taxation that its relation to the other parts of the fiscal system is lost to view. Not only would this lead to an imperfect conception of the financial organization of modern states, but it would render a study of taxation itself unneces sarily difficult, since that study would then be deprived of the broad basis upon which certain of the most important prin ciples of taxation rest. Taxation is undoubtedly the most comprehensive problem in the Science of Finance, but it does not fill the domain of that science.

48. Concerning the Method of Treatment. One ac quainted with the general literature of the subject is familiar with the different methods adopted by English and Continental writers in their treatment of the problem of taxation. Most English writers include what they have to say on this subject in their treatises upon Political Economy. John Stuart Mill, for example, after bringing his system of private economy to a logical close, adds a fifth book which he entitles On the Influence of Government. Taxation is in cluded in this book as one among several ways in which the action of government may interfere or possibly modify the working of economic law. There are, it is true, a few separate treatises on financial questions, such as McCulloch's Taxation and the Funding System; Peto's Taxation: Its Levy and Expenditure, Past and Future; Levi's On Taxation: How it is Raised and How it is Expended; but these works are separate in form only and do not recognise the existence of a Science of Finance as an independent study. Mention should be made also in this connection of Bastable's Public Finance. This work, which appeared in 1892, is the first com prehensive treatise in the English language which follows the Continental form of treatment, but it fails to impress upon the student that sense of solidarity which alone may be urged as an apology for an independent treatment of financial ques tions.

Inasmuch as our own treatise adjusts itself in the main to the social organization developed under the influence of English common law, and is in harmony with what the author believes to be the conception of liberty in process of realization by the English-speakingpeoples, it may be well to explain why, in so significant a matter as the classification of the sciences which deal with social relations, approval is granted to the Continental rather than to the English method of treatment. Not only will this explanation lead to an interesting analysis considered by itself, but by means of it the point of view from which our discussion is undertaken, and which is be lieved to be the point of view to which all modern nations are arriving in their social and political development, will be yet more clearly apprehended.

What is technically known as English political economy, being the system of thought which regards taxation as an interference by government with the normal working of economic forces, reached its highest possible development in the treatise of John Stuart Mill. The assumption of laissez faire as the general principle for the guidance of public policy served as an obstruction to further development, since it did " First, the means adopted by governments to raise the revenue which is the condition of their existence.

" Secondly, the nature of the laws which they prescribe on the two great subjects of Property and Contracts.

" Thirdly, the excellences or defects of the system of means by which they enforce generally the execution of their laws, namely, their judicature and police." (Mill, Principles of Political Economy, Book V, Chapter I, § 3.) not allow candid inquiry into the rational form of commercial and industrial organization. Under the influence of this doc trine it was difficult to perceive that a normally adjusted society could make demands on government beyond a demand for the protection of person and of property. The placing of the State within the domain of industry for the purpose of ren dering a direct service, or, what is more to the point, of main taining those conditions in which voluntary association can work to the advantage of the community, was not regarded as worth the serious consideration of the classical school of economists.

It is not strange that this should have been the case when one notices the conditions under which the classical econo mists produced their works. Adam Smith, the first great master, wrote prior to 1776. The work of Malthus and of Ricardo was done under the influence of the narrow con ception of the first quarter of the nineteenth century. Senior, who gave form to the tenets of the school, did his thinking before 183o and was strongly impressed by the individualistic claims of the possessing class. Even Mill, who reduced the economic thought of the previous hundred years to systematic form, and whose book appeared in 1846, wrote before ma chinery had achieved its final victory, and before corporations had exposed their true significance. It thus appears that the social and industrial conditions which presented themselves to the minds of the classical writers of English political economy were in many respects different from those which emerged subsequent to 185o. The problems to be solved were different, and the evils against which it was thought necessary to guard society were different. These writers did not, and indeed could not, adequately appreciate the centraliz ing tendencies of machinery; nor could they perceive that great industries, unless subjected to proper control, might come to exercise a tyranny as baneful as political tyranny. It was reasonable, therefore, for these writers to support the theory of restricted governmental functions.

To advocate the doctrine of laissez-faire at the present time in the same way as it was advocated by English econo mists would, to express it mildly, be an anachronism, and the reason why modern writers have undertaken to reconstruct economics is that reconstruction is necessary in order to ad just the science to the requirements of modern conditions. The process of reconstructing a system of thought is neces sarily a difficult one, and it would be entirely out of place to suggest the many lines along which this process is taking place. Suffice it to say that the separation of Finance from Economy, and the development of the former as an inde pendent though coordinate science, is a part of that recon struction. The thought seems to be gaining ground that a State has certain permanent industrial functions, and that, as society develops through the differentiation of social activities, the appearance of common needs which the State alone can satisfy is a normal occurrence.

It would be manifestly improper, therefore, to regard any of the established functions of government as an encroach ment upon private rights; they are rather conditions essential for the enjoyment, of those rights. Nor can the best results be expected when the study of any of the lines of govern mental activity proceeds exclusively from the point of view of the individual; it is equally important that the common interests of all should be regarded as a unified and compact collective interest. This is what is meant by the phrase " organic conception of society." The collective interest is not merely the aggregate of those interests which the indi vidual members of the community may have in common; it is, as an intellectual concept, a different thing and possesses a character distinctively its own. This is the thought to which modern ideas of political economy are gradually ad justing themselves, and it is easy to see that a reorganization of the science under such guidance would not consent to the negative treatment of so important a problem as that of an appropriate provision by the State for its own existence. The recognition of the Science of Finance, therefore, as an independent study is one step in the reorganization of economic science, and results from a change in the point of view from which all social sciences are coming to be regarded.

47. Concerning the Nature of a Tax. In endeavouring to formulate a clear statement respecting the nature of a tax it will be of assistance to note that the conception suggested by the word is older than the word itself, or, to put this thought in another way, that many words have been used by different peoples at different times to serve the general pur pose now served by the term taxation. This being the case, the essential characteristic of a tax may be discovered by observing what is common to all the words which have been pressed into service by successive fiscal administrations. Professor Seligman has made an admirable collection and classification of these terms. His presentation of the subject is as follows : " This historical process is well illustrated by etymology. If we look at the various terms applied to what we to-day call a tax we shall find every shade of the development re flected not only in the words used in former centuries, but in those still employed to-day. There are no less than seven different stages in this etymological growth.

" The original idea was that of gift. The individual made a present to the government. We see this in the mediaeval Latin term donum and in the English benevolence, which was used far into the middle ages. The second stage was reached when the government humbly implored or prayed the people for support. This is the meaning of the Latin precarium, used for many centuries on the Continent, as well as of the German Bede (from betels, to pray). The Landbede was the term ap plied to the land tax in the German states until quite re cently. With the third stage we come to the idea of assistance to the State. The individual felt that, if not making a gift, he was at least doing the government a favour. This idea is expressed in the Latin adjutorium, the English aid, and the French aide, which was at one time used for all kinds of taxes. The same idea is discernible in the English subsidy and contribution. It has survived in the Getman term for a tax, Steur (steuern, to help), and in the Scandinavian hjelp. In France contribution is even to-day commonly used as synony mous with tax.

" The fourth stage of development brings out the idea of sacrifice by the individual in the interest of the State. He now surrenders something for the public good. This is seen in the old French gabelle, in the modern German Abgabe, and in the familiar Italian dazio. In each case the citizen gives or sacrifices something. With the fifth stage the feeling of obligation develops in the taxpayer. The English duty was not originally restricted to its present narrow meaning in the United States. Here it is usually applied to import taxes and sometimes to the internal revenue taxes. But even to day in England the term includes some of the most important so-called direct taxes, like the inheritance tax and the income tax. It is not until the sixth stage is reached that we meet the idea of compulsion on the part of the State. We see this in our impost or imposition, as well as in the French imp& and the Italian imposta. Although we limit the term to a certain kind of tax, the French use it as the generic epithet par excellence. The same idea is seen in the German Auflage (something ' laid on ') and Aufschlag (something ' clapped on '), fre quently used at present for certain indirect charges on com modities.

" With the seventh and final stage we reach the idea of a rate or assessment, fixed or estimated by the government without any reference to the volition of the taxpayer. We see this in the mediaeval English scot (to be ' at scot and lot '), which is nothing but the German Schoss or the Scandi navian skatt. It is seen in the German Schatsing (or esti mate), which was used in the early part of the century. Above all, it is recognised in our tax (taxare, to fix, to esti mate), the French taxe, the Italian tassa, and the English rate. It is worthy of note that in the middle ages ' tax ' always meant a direct tax, for which a regular assessment list or schedule was made." The only conception which all the terms named above hold in common is that revenue from taxation forms a deriva tive and not a direct revenue to the State. The significance of this phrase has already been considered in connection with the classification of public revenues. It means that the fund to which the State appeals through taxes is the income of persons or of associations of persons, and is by this means to be distinguished from the income of the State conceived as a proprietor or as a corporation engaged in some indus trial pursuit. A system of taxation, therefore, implies the institution of private property; it presumes prosecution of private industry; and the tax, this being the word nOw most commonly employed, comprises that portion of private in- I come given over to the State for expenditure. The manner of securing the payment, the rules according to which the payment is assessed to persons or to associations of persons.

the argument relied upon C,Ir justifying the payment, or, in deed, any of the considerations or attendant circumstances peculiar to time, place, or stage of development, are not es sential to the conception of a 'tax. It is true one cannot proceed very far in an analysis of any question of taxation, or in a discussion of administrative or financial adjustments, without being forced to recognise many qualifying ideas; but this does not modify in the least the conclusion that the essential characteristic of a tax, the only one, indeed, of uni versal application, is that it forms a derivative revenue to the State.

Modem definitions of a tax almost universally insert the statement that the payment from a subject to a sovereign is a coercive and not a free-will payment, and, according to modern theories of political science, such a qualification is eminently proper. By the phrase coercion, however, should be understood legal coercion, and not the coercion which results from the recognition by an individual of definite wants, or from the pressure of public opinion, or from the sense of duty, which in a loose use of language might be included under that term. Much confusion has been introduced into the subject by the loose use of this word coercion. Professor Seligman would hardly care to be understood, when he says that the " idea of compulsion on the part of the State " was not introduced until what he terms " the sixth stage " was reached in the development of the idea of a tax, as implying that before this time governments exercised no pressure upon citizens in securing from them payments. Such a statement would be manifestly untrue. His meaning undoubtedly is that it was necessary for private rights in productive property to have been fairly well developed before a sovereign govern ment could be safely intrusted with the public right of making compulsory demands upon its subjects. The legal concep tion, therefore, which is an essential quality of modern taxa tion, implies the demelopmentidscrtainsegmining-principles.

in the exercise the State of the taxing power---_ Tull significance of taxation as a compulsory payment will not be apparent so long as the only relation held in mind is that which exists between the subject and the sovereign. The justification of the compulsory payment is not so much to enable the State to secure adequate revenue as that the State in securing its revenue may deal equitably between its subjects. The service of the State is a common service and contributions for its support must in justice be made by all. Were the sense of social obligations sufficiently developed to , insure a universal contribution, and one which the sense of justice would acknowledge to be relatively equitable between citizens, it would not be necessary for the State to employ' coercion. It is because this is not the case that a tax comes to be a coercive payment; and it adds much to our concep tion of a tax, and suggests the spirit in which all questions relative to taxation should be discussed, to recognise that the exercise of coercive power by the State in the matter of public revenue is in response to the ethical sense of the com munity, which demands equitable payment from all citizens. The coercion to which reference is made in defining a tax ise the legalized coercion of constitutional peoples, and in this sense is of relatively modern development.

48. Definition of a Tax from the Lawyer's Point of View. Pressing now our inquiry beyond the conception of a tax approved by all writers on finance, it will be found that the diversity of opinion respecting the nature of a tax arises from the fact that the definitions which present them selves are either adjusted to some peculiar legal code, or they are coloured by some peculiar rule of apportionment or special theory of social organization. It may be well to con sider separately these two classes of variations in the con ception of a tax, for each bears with it certain qualifying ideas or social and political tendencies necessary to a full under standing of the nature of a tax as that word is used by modern peoples. The legal definition of a tax is the first which claims attention.

Confining our analysis to the accepted principles of Ameri can law, it is observed that a coerced payment from the to the sovereign must meet three conditions in order to be recognised as a tax. These are as follows : (I) This payment must, in the first place, be for some li ur ose. This r-equirement rests upon the very nature of tie modern State, which, if it be not government by the people, is universally government for the people. This has been clearly shown in connection with the discussion of budgets and budgetary legislation. The assessment and col lection of moneys for private ends is a tyrannical act not contemplated by the constitutional organization of the State. The law goes even further in the application of this principle. Not only would a demand for money for private purposes be an abuse of the taxing power, and so, technically, no tax, demand for money for public purposes in excess of a just demand would be accounted a robbery under the form of law.

It is one thing, however, to lay down a legal principle, and quite another to provide for the enforcement of that principle; and the nature of this right of the citizen against the State will not be seen until one inquires what remedy 1 is open to the citizen in case a government make improper and excessive demands. This question leads to an important distinction. Although fundamental law may recognise a compulsory demand for revenue to be an encroachment upon the rights conferred upon citizens by the institution of pri vate property, it does not provide, except in extreme cases, for legal redress in case of a wrong; that is to say, the courts, speaking generally, are powerless in the premises. The de cision as to what constitutes a public purpose is intrusted to the legislature, and the courts universally assume that any law which the legislature may pass is passed in the interest of the public. The remedy provided for the redress of a wrong of this sort committed by the legislature is the political and not the legal remedy. It is at the polls and before the tribunal of the people, and not in the courts and before a jury, that such cases are tried. This distinction between the political and the legal remedy must be held constantly in mind.

(2) A coerced payment from the State to the sovereign must, in the second place, belevied in a spirit of equity and as between the subjects in order to conform to the mo ern egal conception of a tax. This, it is true, is nothing peculiar to taxation; it is rather an application to taxation of a general governmental principle. The government should have regard to equity as between citizens in the matter of taxes for the same reason that all of its dealings should be conducted in the spirit of fairness and justice. This neces sity, as has already been pointed out, is the apology which the State offers for the exercise of coercive power in the matter of taxation, from which it follows that should the State levy or collect an unjust or an inequable tax it betrays the trust which has been reposed in it. Equity of payment as between citizens is a fundamental characteristic of taxation among constitutional peoples. It is on this account that so large a share of the study bestowed upon this subject in quires respecting principles of equity and justice.

This legal quality, however, like the one mentioned above, must rely for its realization upon the political rather than upon the legal remedy. Courts have sometimes ventured to express an opinion as to whether or not a tax is levied for a public purpose, but should a court undertake to say that a particular system of taxation is without the warrant of law because it fails to realize equity as between citizens, ex cept, indeed, this opinion rest upon some explicit expression in the fundamental law of the State, it would be guilty of an encroachment upon the reserved functions of the legisla ture. The remedy for the inequable tax lies in the political organization of the State, and for this reason is it especially important that public opinion should be intelligent and sensi tive to moral considerations in all matters pertaining to taxation.

(3) The demand of a State for money in order to be rightly accounted a tax must, in the third place, be made according to established legal rules. This legal characteris tic of a tax has nothing to do with general principles, but its recognition is nevertheless of great importance. Among the marks of a good revenue system to which attention has been called mention was made of the necessity of harmony in all its parts. The laws out of which a revenue system is constructed are enacted by many different legislative bodies, at many different times, and with the stress of argument placed upon some peculiar interest which at the time happens to present itself. Should the vote of the legislative body be alone adequate to insure the legality of such law confusion of statement and contradiction of principle would surely re suit. this reason the duty is imposed upon the courts in the United States of interpreting the phraseology of laws, and of denying the name of a tax to a levy which has not been made according to established legal requirements.

This third legal characteristic of a tax has a yet broader application. There is perhaps no other constantly recurring public act which lies so closely to the interests of the people as the levy and collection of taxes, and, notwithstanding the political remedy against the abuse of the taxing power pro vided in the organization of popular government, private industry would not feel that safety essential to a healthy and active life were no other safeguard against the arbitrary acts of government provided. No power or right can be properly understood without recognising that it is limited in its exer . cise by corresponding rights which in a sense stand opposed to it. This statement applies equally to public and to private rights, and is of especial pertinence to problems in taxation. It is undoubtedly true that a tax is a coercive abstraction of private property, but this statement itself implies the institu tion of private property, and the general right of the State in matters of taxation must be interpreted in the light of the fundamental privileges which the law of private property guarantees the citizen. When, therefore, it is said that a tax must be levied according to legal requirements there is im plied by the statement, not only a code of parliamentary procedure, but a system of well-defined private rights.

Still another application of this third characteristic of a tax presents itself, which, however, is of more direct applica tion to a federated union like the United States than to a centralized government. According to American law, each grade of government enjoys a definite though restricted jurisdiction, and in framing tax laws it is necessary that these several jurisdictions be strictly conformed to. Failure to observe this rule would give rise to no difficulty should all industries from which citizens derive an income be confined in their commercial relations to the political jurisdiction of the government to which they make payment. But this is not the case. The development of inland transportation has destroyed the local market for large numbers of industries, so that there is no identity between the political jurisdiction of States and what perhaps may by analogy be termed the commercial jurisdiction of industries. An insurance com pany, for example, having its headquarters in one State secures revenue from policies sold in other States. A manu facturing corporation also sells goods to the citizens of other commonwealths than the one which grants it a charter. These are but illustrations of the complexity which must necessarily arise when the several States undertake to secure revenue from the industries lying within their respective juris dictions. There must be of course some fundamental law respecting the relative rights of the several centres of taxing authority, and no better way has as yet been devised than laying down certain fundamental principles or rules to which all laws levying taxes must conform, and of granting to the courts the right of determining whether or not such rules are conformed to.

From the above it appears that there is ample room for controversy respecting the legal characteristics of a tax, as also for the development of the law of taxation. There will of course arise differences of opinion between the theorist and the publicist, but it is essential that one who undertakes a theoretical treatment of the problems of taxation should do so with the full appreciation of the limitations which the established body of law imposes upon any suggestions which he may have to make. From the standpoint of law a tax may be defined as an enforced payment levied by government for public purposes and levied according to established legal requirements.

49. Definition of a Tax from the Theorist's Point of View. The assistance to be derived from a study of the nature of a tax as reflected in definitions of theorists is of an entirely different sort. Such definitions of theorists do not exhibit the facts of social conditions during the period in which they claim the attention of publicists, but rather the ideals and purposes of the times in which they were made the subject of controversy. They have on this account an important historic significance and, like all material of his tory, assist the student by rendering possible a comparative analysis. From the point of view of strict logic all these definitions are open to the criticism that they include in their statements some assumption respecting the theory of apportionment, that is to say, respecting the principles ac 'cording to which the duty of payment should be assigned to citizens. The controversies which at different times in the past have been carried on by students of taxation have cen tred about the rules of apportionment and of assessment. In case the controversy resulted in the acceptance of the idea urged by the theorists, it came to be a part of the estab lished system of taxation, and for this reason it is possible to trace every qualifying attribute of the legal definition of a tax back to some controversy which has marked an epoch in the development of political liberty and property rights. Current controversies are not less significant. Two advan tages, therefore, may be expected from a study of the defi nitions which theorists have from time to time presented. Such a study will, in the first place, impress the fact that the idea of taxation has passed through a development corre sponding to the development of government itself, and it will, in the second place, lead to an appreciation of the fact that current controversies pertain to undeveloped or unsettled rights. The definitions which we are now about to consider will bear upon the fundamental principles entertained respect ing the nature of society, the character of government, and the rights of citizens.

It would carry us too far from our purpose to apply the foregoing suggestions for study to all the definitions of a tax which have from time to time been presented. Confining our analysis to comparatively modern times, there are three conceptions of a tax that may with advantage claim attention. These are : First. That a tax is a price paid for a service rendered. Second. That a tax is a payment in proportion to benefits received.

Third. That a tax is a contribution of citizens to a com mon end.

(I) The Purchase Theory of a Tax. The most general of the theoretic definitions of a tax is the one which conceives of a tax as a payment to the government for service ren dered, and a payment equal to the cost of the service. This conception is not open to serious criticism so long as the question of payment is regarded as lying between the State and the taxpayers as a body; it is not satisfactory, however, when one holds in mind a general payment and a specific service rendered to him who makes the payment. The idea of purchase and sale as between the citizen and the State cannot be entertained without leading to untenable conclu sions respecting the nature of the State, and, also, respecting the relations that exist between citizens and the State or between various classes of citizens. It implies, for example, that the State is something separate from the body of citizens, and does not fit itself easily to the conception that the State is the body of the people organized for governmental pur poses. It implies, in the second place, that the citizen is at liberty to refuse the services offered by the government, and by refusing is able to escape the necessity of making pay ments. It implies, in the third place, that the relative duty of citizens to make payment for the support of government is in proportion to the expense which they occasion. All of these implications, for reasons that were suggested when the functions of government were under consideration, or which will be made clear when the theory of apportionment of taxes shall claim attention, must be regarded as unsound, and on this account the purchase theory of a tax abandoned.

(2) The Benefit Theory of a Tax. The second theoretical definition of a tax suggested above is that a tax is a payment by citizens to the State on account of and in proportion to the benefit received. This leads to what is commonly called the benefit theory of taxation. It is also termed the in surance theory or the quid pro quo theory of taxation; but however characterized the underlying thought is the same. The idea embodied in this theory of a tax is that, inasmuch as individuals receive benefits from the State, a payment should be made on account of and in proportion to those benefits. Like the purchase theory of taxation, it rests upon the individualistic conception of society. Thy two definitions are coloured by the same idea, the chief difference being that the one regards a tax from the point of view of cost to the State, the other from the point of view of advantage to the citizen. All of the considerations, therefore, which were urged against the conception that a tax is a payment to cover the cost of a service rendered applies with equal force to the idea that a tax is the equivalent of a benefit received.

It may be stated further that they who accept the benefit theory of taxation are thereby committed to the restrictive theory of government which prevailed in the early portion of the present century. Were the functions of government rightly restricted to the protection of life and property there would be some reason in saying that payment to the State should be equal to all citizens so far as expenditures for the protection of life are concerned, and in proportion to property so far as the activities of the State are devoted to the pro tection of property. The modern State, however, assumes duties far beyond the primitive functions of protection to life and property. Government is subject to a development pari passu with the development of society itself. If the analysis presented in connection with the Theory of Public Expendi tures be accepted as correct, expenditures incident to the protective functions of the State, as compared with those that arise in connection with the developmental functions, tend to become less as civilization advances. While, there fore, the quid pro quo theory of taxation may have served fairly well under conceptions of governmental activity held in the early part of this century, it must be regarded at present as somewhat antiquated.

That phase of the benefit theory which has exerted the greatest influence upon the literature of taxation is the one which regards a tax as an insurance premium. kbptessuieu, for example, says that " the public revenues are a portion which each subject gives of his property in order to secure and enjoy the remainder," and many writers there are who make this definition the basis of their analysis. Thiers states baldly that a tax is an insurance premium. This method of presentation suggests yet another criticism. Not only does it entertain an erroneous idea of the nature of government, and rest upon an inadequate conception of the functions of the State: it presents also a false idea of property and of proprietary rights. It is logical for Thiers, who believes all property to be the result of individual effort, and who asserts that the defence of private property is found in the fact of individual production, to conceive of a government as a great insurance company, accepting from citizens an annual pre mium as a guarantee against loss by theft or dishonest treat ment. According to this idea the annual payment would not necessarily be in proportion to the amount of property, which has been the commonly accepted idea of apportionment, but in proportion to the risk Which the nature of the property entails. It is not necessary, however, to discuss at length the insurance , theory of taxation, inasmuch as the defence of property upon which it rests has been for the most part abandoned. Few writers at the present time would care to assert that property is wholly an individual product, and still fewer there are who would care to deny that social utility is at once the basis and the defence of individual ownership. With such an idea the insurance theory of taxation is wholly at variance.

The above considerations respecting the purchase theory and the benefit theory of taxation are fundamental. They pertain to the nature of the State, to the relationship between citizens, to the character of government, and to the basis of property. They do not bring to notice the practical diffi culties which would arise were it attempted to determine the cost of specific services or to measure the relative benefits of government to citizens. The administrative criticisms upon these theories of taxation will claim attention when the theory of apportionment in harmony with them is submit ted for discussion. It is desired for the present to hold our analysis strictly to fundamental ideas.

(3) The Contributory Theory of a Tax. The third defini tion which presents itself in this connection conceives of a tax as a contribution from citizens for the support of the State. Several ideas are implied by the use of the word con tribution. In the first place a contribution implies solidarity of social interest, or, to put this thought in another way, it implies that all the functions undertaken by the State are such as minister to common wants, and in large measure to wants which cannot be segregated or specialized to indi viduals or to classes. A sense of organic unity and of inter dependence, and a consciousness of common rights and common duties, go along with the idea of contribution. The social concept with which this idea is in harmony does not permit of a separation between the State and the indi vidual, as is the case with the social theories which conclude that a tax covers the cost of specific service, or that it is a payment for benefits received. The contributory theory of a tax concedes rather that the individual is a part of the State and that he realizes his individuality, in some degree at least, because the State exists. All of these conclusions, as well as others familiar to hiloso log ly fol ow rom is genera point u in the as Ila GI I tax is citizen to the support of the State,, an not a price paid by him for specific service rendered or a compensation allowed by him for benefits received. This theory of a tax rests upon that phase of Greek philosophy which asserts that society is organic in structure.

It may further be added that this word contribution, when used to characterize the non-commercial payments from a citizen to the State, implies certain established relations be tween citizens who together make up the State. Since government is the agency of the whole people, and is estab lished for the purpose of rendering a common service, it follows that a payment from a citizen to its support must be in proportion to some accepted rule of equity and justice; and it consequently lies in the contributory theory of a tax to assert that this payment should be made in proportion to the respective abilities of citizens to pay.

Conclusions. The results of the foregoing analysis, not alone in this chapter, but in the previous chapters as well, may be summarized in the four following statements : First. From the point of view of the State a tax is a source of derivative revenue.

Second. From the point of view of the citizen a tax is a coerced payment.

Third. From the point of view of administration a tax is a demand for money by the State in conformity to established legal rules.

Fourth. From the point of view of theory a tax is a con tribution from individuals for common expenditure.

50. Analysis of the Taxing Power. It was the purpose of the foregoing analysis to discover the true nature of a tax, and to arrive at a definition of use to the practical financier, because it fits into the legal conditions and social structure of the modern State. It is the intent of the present para graph, which is devoted to a consideration of the residence and employment of the taxing power, to carry this general inquiry yet a step further.

o view, are bound a contribution from the (I) Character of the Power. By the phrase taxing power , is to be understood the legal right which a government en joys of determining the amount which each citizen shall pay ' for the support of the State, and of forcibly collecting that amount if necessary. It is a sovereign power, and is so recog nised, whether exercised by a monarch or by a government resting on popular suffrage. This must be the case since the payment in question is a coerced payment. Private property is taken for public ends, and none but a sovereign , could consistently exercise such an unusual power.

It is not enough, however, to know that the taxing power is sovereign in character and that its exercise is the exercise of sovereign authority; it is equally necessary to learn with which of the three great departments of government—the executive, the legislative, or the judicial—this power resides. If the above question be confined to those peoples whose political ideas are coloured by the development of popular government, the answer is a very simple one. A tax must always be promulgated in the of a law, and a law comes into existence only as the exercise of legislative autEOrit From our knowledge of the constitutional' oryofEng land we are acquainted with the struggle of the English people against the arbitrary exercise of the power of taxa tion, and from our study of rules and methods of budgets we have come to appreciate how firmly is this principle established. So important is it conceived that the taxing power shall reside in the legislative body that the legislative body itself is enjoined from' either to the court or a corporate body of any sort nor is it possible for a court to assume the exercise of this power; nor can the legislative body itself diminish by one iota its authority over the question of taxation, it being a fundamental principle of constitutional law that each legislature should hand down to the legislature which succeeds it all the rights, powers, and privileges which it received from the preceding legisla ture. Without further comment, therefore, it may be stated s that whenever one reasons about the power to levy and collect 'taxes he is dealing with a sovereign power and with a power which is legislative in character.

Although the power to tax is a sovereign power, it is not necessarily superior to regulation and control. Especially is this true in the United States, where the courts are given the authority to pronounce upon the constitutionality of legis lative acts. This does not mean that the court is in any

sense a law-making body, its chief social function being rather to preserve harmony in the development of legal prin ciples and to maintain symmetry in the body of legislative enactments. There is nothing inconsistent in the statement that the taxing power is sovereign in character and to add, at the same time, that its exercise must conform to established rules.

These rules respecting the employment of the taxing power are suggested by the two following questions : To what specific nt of sov wer may the exercise of the taxing power e cr3ited? Second. What are the specific limitations to the exercise of the taxing power? (2) Grants bestowing the Power. The meaning of the first of the above questions is that, although the general grant to tax resides in sovereignty, and, indeed, is essential in order that the State may maintain its dignity and perform effectively the functions assigned to it, still every specific exercise of that power must be referred to some specific grant, or to some general principle established as the result of a past contro versy. Confining our analysis to the situation as it exists in the United States, the authority to levy and collect taxes, if it exist at all, must be found either in the Consti Lion of the Federal State, in the of a _tate, in the charter of a municipality, or in the general laws passed by Statelegistres conferring the exercise of the taxing_p_ower on the minor ctiridtvisions. Each of these grades of govern ment must ha7ninegislative body; and from the above it appears that fundamental law prescribes the character of the taxing power consigned to each grade of government, and the extent to which and the conditions under which it may be exercised. This fact has a very practical bearing, for it shows that if harmony in methods of taxation is ever to be realized in this country the basis of that harmony must be laid in ' fundamental law or in inter-governmental agreement.

Another service is rendered by a study of the specific grants for the exercise of the taxing power. The simple rule of law respecting the employment of this power is that it can never be employed except for the purpose of procuring revenue. The principle to which this rule gives expression is boundup in the very nature of a tax. When " the power which only exists for the purpose of procuring revenue for the needs of government," says Judge Cooley, " is used for some wholly different purpose, and no revenue is expected or desired from the employment, it is misused, and the misuse is usurpation." Proceeding from this principle of law many writers have urged the conclusion that the protective tatiff, for example, is without legal authority. This would doubt less be true if the taxing power were the only power granted to the State. A duty imposed on the impart a ton of goods which is prohibitory, and which on that account can give no revenue whatever, is not a legitimate exercise of the taxing power; this, however, is quite different from the conclusion that a system of protective duties is without legal warrant.

Two remarks may be made upon this point. In the first place, it should be noted that while the taxing power is granted for the purpose of raising revenue, the legislature is not prohibited from employineit in such a way as to procure incidental benefits; that is to say, given the necessity for revenue, the legislature is in duty bound to choose the method the least detrimental to the public, and is at liberty to employ a method which may bring with it incidental ad vantages. Thus, while the prohibitory duty based on the taxing power would be illegal, a duty on imports which has for its chief purpose the securing of revenue, and which is incidentally protective, would be judged no abuse of that power. This may, perhaps, be a dangerous doctrine, but it is the position assumed by the courts upon this question.

There is yet another way in which this matter may be presented. A distinction must be made between the employment of the taxing power and the employment of taxing machinery. Thus taxes may be levied, and constitutionally justified, without any reference whatever to the power granted to the State to raise revenue. A protective duty, or, indeed, a prohibitive duty, may be referred to some other grant of power than that of taxation. It may, for example, be referred to the Rawer of regulatine commerce, 1 and in reality this is the basis on which the whole protective system as practised in the United States rests. Or, again, a tax on hack-drivers, or bootblacks, or newsboys, a special license imposed on peddlers, auctioneers, etc., is not justified as a simple exercise of the taxing power. The purpose of these impositions is zoliaregialgjoi, and not revenue, such an employment of taxing machinery must find its justifi cation in the police power; it cannot rest upon the taxing power. The distinction here drawn may be seen yet more clearly should it be applied to the levy and collection of special licenses for the manufacture and sale of liquors.

The rule of constitutionality, then, is quite plain. The taxing power is a special power granted to raise revenue, but the taxing machinery, which is something quite different, may be set in motion on the authority of various powers for various purposes.

(3) Limitations upon the Power. The second of the ques tions presented above inquires what specific limitations upon the exercise of the taxing power are made by fundamental law. There are five points which present themselves in mak ing reply to this question : (a) Such limitations as exist pertain to the method of tax ing, ing, and do not in_ the nature of the to tax.

\ There is no limit to the exercise of the power when properly applied. This principle seems to lie in the nature of sovereignty, and to be essential for the preservation of the permanency of a government intrusted with jurisdiction over war and peace, or which, indeed, in the exercise of its func tions, is liable to be called upon as the final arbitrator respecting any public question.

This at least is the position assumed by the Supreme Court of the United States as declared in the familiar case of McCulloch v. Maryland. In rendering the decision in this case Mr. Justice Marshall said, " The power to tax is the power to destroy." And again, " If the right to tax exist, it is a right which in its nature acknowledges no limits. It may be carried to any extent within the jurisdiction of the State or corporation which imposes it which the will of such State or corporation prescribes." It is true that the point in this ca. pertained to the right of the State of Maryland to tax the notes of the Federal bank, and that the object of Maryland in imposing such a tax was to drive these notes out of the State so as to make room for the circulation of the notes of State banks. Thus the point at issue did not pertain to the use of the taxing power for raising revenue, but to the use of the taxing machinery for a purpose other than that of securing revenue. It has, ally accepieViliafTfie kiiiciple laid down above is of univer sal application, and it has been followed quite closely in the subsequent development of American law. - In applying the rule that the power to tax " acknowledges no limits " it is necessary to distinguish between its exercise by a government recognised as sovereign, even though it be within a restricted jurisdiction, and a government which is the representative of or the agent of a sovereign govern- r ment. A county, a township, or a school district, for example, is, strictly speaking, no government at all, but an administra tive unit acting for a government for certain specified ends; and there is no inconsistency in limiting these minor civil 1 divisions in their exercise of 'the power of taxation. This, however, according to the theory of American law, must find expression in the fundamental law of the State itself.

(b) The general rule respecting the employment of the tax ing power is that it should be used only to procure revenue for public purposes. As has been already pointed out, this follows logically from the fact that the power of taxation is a sovereign power, and the limitation imposed on govern ment is a limitation bound up in the nature of the tax itself. It will be remembered that in considering the legal definition of a tax this point was dwelt upon at some length, and it was shown that the remedy against the abuse of the taxing power was political and not legal in character. In the main such a statement is correct, but it should not be pressed so far as to lead to the conclusion that the courts, in this country at least, are not at liberty to express themselves respecting the pur pose for which a tax is levied. The first decision respecting is or is not a public service lies undoubtedly with the legislature, and it may be added that the existence of a law duly sanctioned by the legislative body is accepted as pre sumptive evidence that the purpose for which a tax is levierl is a public purpose. The evidence, how'er, is and not final, and in extreme cases the question may be pre sented to a court for adjudication. This whole question is a very difficult one and has given rise to a long line of cases. In general the courts refuse to lay down any definite rule, but insist on deciding every case which comes before them upon its own merits, having regard, of course, to previous decisions in analogous cases. The following quotation taken from a decision in one of these cases may serve to illus trate the general point of view : " A tax must be con sidered valid unless it is for a purpose for which the com munity has no interest; when it is apparent that the burden imposed is for the benefit of others and where it will be pro nounced so at first blush." A case presented itself in Maine where the council of a town imposed a tax the proceeds of which were to be again distributed among the people of the town, a case which was promptly decided as illegal.

Taxes, also, the proceeds of which are paid as a bonus to some manufacturing company as an inducement to locate in one place rather than another would seem to lie outside an appropriate exercise of the taxing power; but in making statements of this sort respecting American law one should remember that he is dealing with a large number of independent sovereignties. He should also recognise that the legality of a tax, so far as it is affected by the purpose for which it is levied, depends upon the accepted ideas respecting the proper functions of government, and on this account may vary from time to time. The courts are obliged to take into considera tion the new ideals entertained by the people as well as the precedents from previous decisions. The limitation in ques tion, therefore, is upon analysis found to be nothing more than a guarantee that the taxing power shall not be employed for any purpose except one of common interest, and to which the body of the people has fully and finally committed itself; and the service rendered by courts in assuming to check the action of legislative bodies in extreme cases is, in reality, nothing more than the protection of the public against its own enthusiasms. It was never intended that the legal prin ciple which asserts that the taxing power should be employed only to procure revenue for public purposes should act as an obstacle to changes in the social and industrial structure of society. S (c) The taxing power is further limited by the claim that its exercise must pertain to the grade of government by which or for which it is put into operation. This principle has no very definite meaning except it be applied to some particular State. In the United States, as has been already remarked, the governmental functions are divided between the Federal State, the commonwealths, the municipalities, and the minor civil divisions. To each of these is assigned a definite set of functions, and the idea underlying the limitation of the exer cise of the taxing power above stated is that each grade of government has the right to exercise the taxing power in such form and to such extent as may be necessary for the satisfactory performance of public functions assigned. The reverse of this statement is also true, that each grade of government should be protected in the exercise of its taxing power against the encroachments of the other grades of gov ernment. The practical application of this principle has not, as yet, been very fully developed, but, as will be made clear when the existing system of local taxation in the United States is subjected to critical analysis, it is a principle upon which continually increasing reliance must be placed. Harmony and symmetry in the taxing policy considered as a whole are essential to a sound fiscal system, but there is no possibility of attaining such harmony and symmetry until the respective rights of the various grades of government in matters of taxation are more perfectly worked out.

(d) The taxing power cannot be exercised, in the fourth place, so as to encroach upon the established rights and privi leges of citizens. The chief effect of this principle is to re strain the commonwealths from imposing burdens or restric tions upon the citizens of neighbouring States which they do not impose upon their own citizens. The depository of this right is the Federal Constitution, and it is to the Federal courts that any State must look for protection against the improper use of the taxing power by another State. Its necessity and its sanction is the fact that it is essential to the existence of the national government. Thus the Federal Constitution guarantees the citizens of each State the privi leges and amenities of the citizens of every other State. No discrimination can be made in the framing of tax laws unless it can be clearly shown that, as a remit of a formal dis crimination, greater equity is secured as between those who are called upon to make payment than would otherwise be the case. A discriminating license tax, for example, upon the citizens of other States, or of other localities within the State, is not permitted, for these are assumed to have paid taxes where they live; special taxes upon peddlers, on the other hand, not living in the State are regarded as lawful, since otherwise these citizens might be free from the payment of any tax whatever. The purpose of the principle under con sideration is to maintain equality of opportunity without regard to residence or occupation, and any apparent discrimi nation necessary to the attainment of this end is not conceived as contravening the principle enunciated. The limitation upon the exercise of the taxing power here laid down is coming to be an increasingly important one in view of the development of interstate commerce. The truth is that com mercial relations no longer have regard to political jurisdic tion, and on this account the framing of a satisfactory system of local taxation is exceedingly difficult. This legal principle, like the one just referred to, will be held constantly in mind when the existing system is subjected to critical and, we trust, constructive examination.

(e) It is further stated as a limitation of the taxing power that it cannot be exercised so as to impair the obligation of contracts. This is simply a special application of the general law as found in the Constitution of the Federal Government and of the several States. An exhaustive discussion of this principle will be found in all the text-books upon the law of taxation. It is of too technical a character to receive con sideration in this treatise, and on that account we must rest satisfied with the mere statement of the principle itself.

• 51. Concerning the Duty to Pay Taxes. The duty to pay taxes is one that is owed by the citizen to his sovereign. This is the fiscal expression of a fundamental political relation, and the first conclusion to be drawn from it is that no sovereign is at liberty to look to a foreign people for any por tion of orderly revenue. The purpose of charging the cost of the home government upon the subjects of a foreign State is not only immoral in itself, but it is contrary to the spirit of international comity, which at the present is about all the " cosmopolitan Stati" has to rest upon. Moreover, it is bad international policy, for it overlooks the fact that good govern ment in a neighbouring State is one of the essential conditions for the enjoyment of good government at cheap cost in the home State, a fact which leads to the conclusion that the money which a foreigner can justly be called upon to pay for the support of government is most judiciously expended when paid for the support of an efficient administration in his own State. Yet a further consideration may be urged against the purpose of attempting to throw the burden of the home government upon the subjects of a foreign State. Such a purpose would undoubtedly lead to retaliatory laws. The evils and bitterness of feeling which would be sure to arise from such a state of affairs far outweigh any fiscal ad vantage to either party; and, in case the laws of each nation are equally effective, it is clear that neither party would be permanently benefited. We may, therefore, conclude, without discussing the conditions under which it is possible for a government to obtain revenue from the subjects. of a foreign State, that the duty to pay taxes exists solely between a citi zen and the State to which he owes allegiance, and that the endeavour to collect revenue from a foreign country not only rests upon an immoral purpose, but it is unsound from the point of view of international comity and incapable of success as a fiscal policy.

The fact that the financier must look to persons and pro perty within the jurisdiction of the government whose affairs he administers presents one of the most difficult of the formal questions that arise in connection with the general subject of taxation. Were it true that all subjects lived within the juris diction of the government which grants them citizenship, and that all of the commercial relations from which men draw an income were limited to the jurisdiction of a single sovereignty, there would be no reason, so far as residence or the situation of property is concerned, why the theory of taxation which levies payments upon persons and property couki not be easily realized. But such is not the fact. Citizens pass freely from one jurisdiction to another, and it cannot be as sumed that the income which they enjoy accrues from a business or from property lying wholly within the jurisdiction of a single sovereignty. The difficulties to which this situa tion has given;ise are, first, the evasion of a duty to pay taxes by virtue of a foreign residence, and, second, the dupli cation in the levy and assessment of taxes by virtue of the fact that a citizen may be called upon to make payment where he lives, while his property is assessed for payment where his property exists. It will add to our appreciation of the con ditions under which a successful revenue system must be administered if we consider for a moment these two classes of difficulties.

(I) Difficulties of Administration due to Foreign Residence. The simpler of these questions pertains to the various rela tions existing between the subject and the sovereign on account of residence. These relations are three in number and are as follows : (a) A citizen may have his domicile within the State to which he owes allegiance and draw his income from a property or from a business within the same jurisdiction. This is the simplest of all relations and in theory at least presents no difficulties. Under such circumstances a citizen must pay whatever personal tax is levied; he must also pay all taxes imposed upon his property. There is here no possibility of evasion or duplication, except of course it be traceable to the bad intent of the citizen in declaring his property, or to the negligence or ignorance of officers in administering the laws. Any evasion or duplication under the conditions as sumed cannot be charged to the system.

(b) The subject of the State may, in the second place, live outside the jurisdiction of the State to which he owes allegiance. A citizen of the United States, for example, may live abroad, or an individual who has property in one State may be a citizen of a neighbouring State. In this case the duty to pay taxes according to the established rule depends upon the kind of property from which the citizen in question derives an income. The rule is that personal property follows the domicile of the owner, and no tax can be imposed by the home government so long as the citizen maintains a foreign residence. This, however, is the formal statement of a general practice. Quite a number of modifications have been intro duced in order to prevent the evasion of the duty of paying taxes by the judicious selection of residence. If the property from which a citizen secures an income is real rather than personal, it will be taxed at its situs regardless of the residence of its proprietor. If the income arises on account of a busi ness that has a legal situs, as, for example, a corporation, the State levies its tax directly upon the corporation. The form which the corporation tax assumes is of no importance. It may be upon the capital stock outstanding, it may be upon gross earnings, or it may be in the form of a franchise tax; in any case the theory is that he who has invested his money in a corporation is taxed in the tax to the corporation. It may be that the business from which a foreign resident se cures an income exists within the jurisdiction of the State in the person of a trustee or an agent, in which case the tax upon the business is left against the legal representative of the proprietor. Or, finally, it may be that the income en joyed by the foreign resident accrues to him as interest from investments in government bonds, in which case the tax, or an equivalent for the tax, was taken at the time the govern ment sold its bonds, since, on account of the clause which exempts such obligations from tax, the price paid was higher than the commercial capitalization of the income. It thus appears that, in theory at least, a citizen cannot evade the duty to pay a tax on account of the fact that he resides either temporarily or permanently in a foreign country.

(c) The third relation which the subject may hold to the sovereign in the matter of taxation presents itself when the subject of a foreign State, living outside the jurisdiction of the home government, may have availed himself of some of the public agencies of the home government. For example, a foreign subject living abroad may be a party to a suit in the courts of the home government. In this case he is charged the fees and expenses which are properly regarded as a form of public revenue. Or the subject of a foreign government living abroad may fall heir to property which makes part of the wealth of the home State. Under such circumstances it is not at all uncommon for the govern ment to impose a special inheritance tax upon property pass ing out of the jurisdiction of the State. The defence of such a tax is that, by the transfer of property to the subject of a foreign State living abroad, the taxable basis of property is reduced, and the orderly income of the State is thereby decreased. In order to make good this loss the government feels justified in imposing a tax upon the legacy equal to the capitalization at the current rate of interest of the annual tax proceeds of the property.

The relationships here portrayed might be increased in number by assuming the reverse conditions of the different cases. But it is not necessary to present in detail such cases. A fundamental principle is involved, namely, the principle of international comity. For all practical purposes it may be assumed that the ordinary governmental services rendered by one State to the citizens of another for which no direct payment is demanded will be balanced by analogous services rendered by a foreign State to the citizens of the home State. In so far as property is the object of taxation rather than persons it may be said that the citizen residing abroad who receives benefits from the foreign State for which he does not make explicit payment, has placed the property from which he derives an income at the disposal for taxing purposes of the home government in order that the foreign citizen may receive corresponding services from his own government. Moreover, the personal and property taxes do not exhaust the list of possible taxes. Besides these there exist those taxes which find their way into the price of consumable com modities, and these are paid by him who consumes them, regardless of his domicile or the situs of his property. It thus appears that the duty to pay taxes is universal, that it is a duty imposed upon him who receives the benefits of government, but that in order to secure this payment it is not always necessary to follow the individual from whom finally the payment comes. Certain modern governments do attempt to tax foreign subjects residing within their jurisdic tion, but such attempts can only be successful so long as they are followed by insignificant results. Indeed, the theory of securing payment immediately from individuals is one that, in the complex condition of modern society, and in view of the free migration among modern peoples, is impossible of realization.

(2) Difficulties of Administration due to Diffusion of Busi ness Interests. The other side of this difficulty presents itself when one considers the fact that commercial relations extend beyond the jurisdiction of the taxing body. This is one of the incidental results of the development of a world's market, of the rise of corporate interprises, and of the tendency to ward the establishment of great industries. An illustration will make this matter plain, which, for purpose of explicit statement, we confine to the political organization of the United States. A railway in this country may extend through several States, and even within the boundaries of a single State it may come under the fiscal jurisdiction of a con siderable number of minor civil divisions. Now it is clear that much confusion may arise on this account, and that evasion of payment as well as duplication of assessment may result from such lack of organization.

An insurance company also, to cite another illustration, may have its local residence within the jurisdiction of one State, and it will probably write policies in many neighbour ing States. In this case, as in the case of interstate com merce, the income is due to transactions which the cor poration has with citizens of a foreign jurisdiction. Should, now, the home jurisdiction impose a tax upon the franchise to its full value, and the neighbouring States impose a tax upon the earnings of the corporation arising from business relations with their 'citizens, it is clear that the corporation in question would be subject to double taxation. Without inquiring as to whether this is just or not it is a sufficient criticism that 'in this manner the revenue system as a whole is seriously embarrassed.

Yet another illustration of confusion and possible dupli cation in the application of taxing laws under the conditions described is found in the debit and credit relations existing between subjects of the several States. A citizen of one State may, for example, loan money to a citizen of another State, and secure the loan by taking a mortgage upon property. If, now, he is taxed upon the mortgage as personal property by the government to which he owes allegiance on account of residence, and the borrower of the money is taxed upon the value of the land mortgaged without deduction for the debt, it is clear that the property, that is to say, the land mortgaged, is taxed at a figure in excess of its true valuation.

It is not designed at this time to discuss the question of corporation 'taxes or of duplicate taxation arising on account of mortgages. Sufficient has been said to make clear the fact that modern industrial conditions have outgrown the old revenue system which rested upon the assumption that both persons and property are confined to the jurisdiction of the government to which they owe the duty of payment. Our general conclusion, however, will not be modified by the con sideration of these questions. The duty to pay taxes is one that the citizen owes to his own government, but it is not neces sary for the government, in securing the fulfilment of this duty, to follow the citizen in residence or the property in its situs. It is likely that the future revenue laws will consider the commercial activity of property rather than its situs as the basis of payment.

52. Principles of Tax Exemption. Closely connected with the question of the duty to pay taxes is the question of tax exemptions. There is one fact respecting this question which may be stated without fear of contradiction : it does not lie within the idea of constitutional government that any citizen should be exempt from the duty of contri buting to the support of the State on personal or class considerations. In this regard the conditions which existed in France previous to the French Revolution, when all taxes were imposed upon the third estate, the clergy and nobility being exempt, have entirely passed away. Such exemptions as exist at the present time must rest on grounds of general expediency, and be capable of expression in some rule of general application. No question respecting taxation has been the subject of fiercer controversy than this one of exemp tions, a fact which in itself shows how clearly public opinion recognises that the duty to support the State is universal, and that government is not at liberty to show favours in the levy of taxes. Tax exemption must apply to some condition or quality of property, and not to individuals or classes.

Looking at matters as they exist at the present time, it appears that tax exemptions rest upon one of three con siderations. A mere statement of these considerations will probably secure for them general approval. They are as follows : First. The State should not tax itself. It has no reason to tax itself, nor could such a procedure influence in any way its real financial standing. The apparent income might, it is true, be increased by this means, but the real income would in no manner be affected. All property belonging to the State, therefore, as well as all instruments or agencies em ployed exclusively by the State in the performance of its delegated functions, should be exempt from taxation.

The above rule does not require that salaries of public officers should be excluded from the rolls of an income tax. Thus the Federal income tax of 1861, as also the income tax of 1894, recognised no difference between the salaries of Federal officers and the earnings of the professional man or the profits of the business man as a basis for imposing the tax; and the laws referred to followed in this regard the general practice of European states. The reason for making a distinction between public property and the salaries of pub lic officials lies wholly upon the surface. The property is for the use of the public and discharges its duty to the public by being used for a public purpose; the salary of an official, on the other hand, is for his private expenditure as a citizen. The fact that a salary is compensation for a public service does not change its private character. Like the fee of a doctor or lawyer, or the profits of a merchant or manufacturer, it constitutes a fund for domestic expenditure.

A further consideration in support of this conclusion may be added besides the one which arises from an analysis of the nature of the income. Assuming the salaries of public offi cials and the incomes of citizens engaged in private pursuits to have been properly adjusted prior to the tax, the exemption of officials from the rolls of an income tax would tend to disturb established relation between the various classes of income. It would be equivalent to a rise in the salaries of public officials. It is of course true that were the tax in question permanent, so as to be rightly considered a fixed charge on income, an exemption of public officials might ultimately result in a relative decrease of public salaries; that is to say, the tax would be borne by this class of citizens, although their earnings would not be listed among taxable incomes. As the income tax is used by modern States, however, it cannot become a permanent charge at a fixed rate, and on this account it has come to be the general practice of nations to refuse to exempt the salaries of paid officials from taxation.

A curious case arises in the United States in connection with the taxation of salaries of public officials on account of the peculiar relation which exists between the Federal Govern ment and the State governments. It is very properly as sumed by the courts that neither grade of government should be jeopardized by any act of the other. Each is sovereign within its own jurisdiction, and the integrity of the State as constituted demands the continued exercise by each grade of government of all powers and privileges with which it has been intrusted. Reasoning from this premise, it has been held that the salaries of officials paid by one grade of govern ment cannot be taxed by the other, since, in view of the fact that " the power to tax is the power to destroy," this would give to either government the power to destroy the agencies by which the other is alone capable of performing its public duties or of continuing its active existence. With this ex ception, however, salaries of public officers are subject to taxation.

The query may arise, in case a government is engaged in an industry which competes with a private industry, if it would be just to a private industry to impose a tax upon it, while the public industry is exempt from taxation. Such an exemption would without doubt be unjust were the State to administer the industry in all respects as it would be ad ministered by the private corporation. But, as has already been pointed out, it is impossible for the State to ignore the fact that it is the depository of the sovereign power, and that it stands for the common interest of all the people, even when it undertakes the management and the control of the indus try. The competing industry under private management, therefore, need not fear the competition of the State, even though public capital be exempt from taxation, provided only that the principles laid down for the conduct of a public business be conformed to. There is no necessity, therefore, for the purpose of securing equity between the State and its competitors in a business that the former should tax its own instruments of production.

It is common for States to exempt from taxation the bonds which they issue, the exemption being made a part of the contract between themselves and the public creditors. This provision has been subject to much criticism. Its defence, however, lies in the fact that a bond which guarantees per petual exemption from taxation will bear a much higher price than a bond subject to the uncertainties of subsequent taxa tion. It is usually the case when bonds are issued that the government is in pressing need of funds, and on this account it is deemed wise to draw the contract in such a manner that the bonds will sell for the highest possible price.

Second. The second consideration asserts that property which is believed to assist the State in the fulfilment of its public functions should be exempt from taxation. There is here introduced for the first time a very im portant consideration. In matters of taxation the financier is obliged to recognise the actual condition of public opinion. This opinion may rest upon a satisfactory basis or it may not. The fact of its existence is for some purposes sufficient to control the judgment of the financier; for it must be remembered that he desires, next to the at tainment of a system of equitable taxes, a system that will work smoothly and efficiently, and on this account the deep seated prejudices for or against any particular suggestion will ever remain an important consideration in the drafting of tax laws.

Applying this principle to the case in hand, it follows that church property, property of educational institutions and in general of all corporations or associations which are engaged in religious, educational, or philanthropic enterprises, should be exempt from taxation. There is, however, this limitation, which is manifestly just, that the exemption attaches only to such property as is strictly used for the purposes named. In case of a church society, for example, its house of worship would be exempt from taxation; but if the society in its cor porate capacity own productive property from which it derives a revenue, such property would be subject to taxation.

Third. The State should not tax capital regarded as es sential for extending the source of future income. It will be remembered by referring to the Introductory Chapter of this treatise that one of the fiscal axioms laid down asserts that a sound revenue system will not impair the patrimony of the State. This third class of exemptions is but an appli cation of this general principle. The duty of the financier is not limited to the getting of revenue, but he is obliged to get revenue in such a manner that the source from which it is derived shall never be exhausted. He must hold in mind the needs of the future as well as of the present, and is therefore debarred from employing the taxing power in such a manner as to dry up the springs of present revenue or to hinder the development of an enlarged supply.

One of the most common facts in connection with modern systems of taxation is the exemption of incomes and property below a certain amount, and many financiers justify this exemption on social considerations. It is not right, they say, to call upon a citizen to contribute to the budget of the State until the necessary domestic budget has been provided for. Without admitting any man's right to live in the modern State without contributing to its support, a modified appli cation of this principle may be defended on purely fiscal grounds. The surest source of public wealth is a lively hope and a healthy expectation on the part of the great body of citizens, and in so far as exemption of low incomes and small salaries from taxation induces to the conditions from which this hope springs such exemptions will tend to the expansion of a nation's wealth. If this be true the exemption of small incomes from direct taxation, as also of the property of those who relatively are poorly able to pay for the support of the State, must ultimately result in the development of a source of wealth from which the State may expect to derive an increased revenue.

Another application of this same principle is found in the exemption from taxation of mechanics' tools. These are not only the means of his livelihood, but they are the means by which he secures funds to pay his share for the support of the State. Their possession is an essential part of the ability of the workman to gain a livelihood, and for that reason are exempt from all ordinary liens and attachments. These two illustrations indicate the reason for this third class of exemptions. It is not conceived that the needs of a govern ment can ever become so pressing as to warrant the levy of a tax that will depress the wealth of the nation or impair the ability of citizens to secure an income.

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