THE COLLECTION OF TAXES.
§ 385. In the method of collecting taxes, at least so far as concerns indirect taxes—internal taxes on consumption and import duties—we are confronted with an historical growth of the same character as what we have met with in other depart ments of national life,—a development from the performance of public functions by private enterprise to their performance by a state organization in the full sense.
In the states of classical antiquity, as well as in the tax administration of the ancien regime, and, under analogous circum stances, in the countries of Eastern Europe at the present time, and even in certain special instances in the modern kingdom of Italy, we have the institution of Tax Farming. This method of collecting taxes turns over to private business men a function which is assumed as a matter of course by the financial adminis tration of any fully developed modern state. Even Frederick the Great, in his effort to increase the revenues of the Prussian state after the Seven-Years' War, made an attempt to reorganize and strengthen the tax system by calling French farmers of the taxes to his aid.
It is not to be denied that expedients of this sort may find some justification if we consider the relative efficiency of private enterprise as compared with an undeveloped official class for the performance of services of this kind, together with the teaching of past experience in the administration of the taxes. In this, as in other cases, the self-seeking of private individuals may be made use of to accomplish those purposes of the community for whose adequate performance the state officials of the time are not possessed of a sufficiently mature intelligence and sense of duty.
But there is also a second, and perhaps often a stronger argument for the farming of the taxes, viz., the state's need of advances for which it will, in such a case, pawn the taxes for a number of years. Even in the case of Italy's granting a lease of her tobacco monopoly to a joint-stock company this was the decisive reason ; and in France this was the decisive inducement to a farming of the taxes down to the reorganization of the finances after the Revolution. From time immemorial, says Taine,' it had been the custom to eat the corn in the ear and to antici pate the income of the succeeding year. Even Colbert' tried to break with the practice of alienating the national revenues and to annul the contracts already made ; but without any permanent result.
It is therefore readily intelligible that theoretical writers should have condemned the farming of taxes at an early date.
says that the royalty (i. e., collection of taxes by state officials) is the management of a prudent householder who takes up his revenues in an orderly and economic manner ; he saves the state the enormous gains of the tax farmers, who con sume the substance of the country in a thousand ways ; he saves the people a multitude of evil laws which the greed of the tax farmers imposes on them. Montesquieu's historic sense, how ever, leads him to admit the possible utility of a tax lease in introducing a new tax where the resourceful self-seeking of pri vate interest would detect and prevent tax frauds that would escape the state officials.
Justi,' who in so many things has a modern air, sets up the general rule that royalties cannot be farmed out without some detriment, and applies the statement particularly to customs duties and tolls. It is impossible that a farmer of the taxes should pay more for the lease than the revenue which would be obtained through officials, unless he enriches himself by illegal exactions from the public. But Justi falls short of Montesquieu in breadth of view, in that he does not recognize the importance of a self-seeking private enterprise, which may be made use of to prepare the way for administration by state authority in this field in much the same way as it is useful in modern improved industry and business.
The experiences which were present to the writers of the eighteenth century, especially in France, must have been quite unfavorable to the farming of taxes, since this method is so per emptorily condemned even by Adam Smith, from whose general standpoint it might be expected that he would show a certain predilection for it. The best and most economical way of col lecting the taxes, says can never be by the use of the tax lease. The large capital required for the purpose excludes any active competition, so that the state granting the lease has to deal with a combination instead of with competitors outbidding each other, and the profits of the tax farmers are consequently enormous ; they are the richest people in the country, stir up the hatred of the public by their extravagance and their heartless oppression of the taxpayers, for whom it is impossible that they should feel the sympathy which the officials feel towards subjects, Even a very bad prince has more sympathy with his people than can ever be expected of the farmers of taxes ; hence the tax laws are harshest in countries where the farming of taxes is practiced ; the sovereign has an interest in dealing gently with his people, the farmer of the taxes, never.
§ 386. The qualification of the state officials for the collec tion of taxes, just as the adaptation of the state officials gen erally- for any function, is the product of a development which gradually brings out the requisite intellectual characteristics of the people. The official class, and more particularly the tax officials of the half-civilized states of today, afford us a living example of this in the contrast they offer to what we find in civi lized states. In these half-civilized states there are no accom plished results ready to hand—the goal has to be reached by a process of gradual approach. The question as to whether the Russian state is better served by the kind of administration which it can get through an official class of the grade of development actually to be found in that country, or through an administra tion carried on by joint-stock companies and private enterprise, is a question to which an answer can be found only by experience.
For the state of the higher stages of development this'ques tion has been solved. Its official class has reached a maturity corresponding to the cultural stage occupied by the community, and possesses the qualities which the state's work requires of it. It is safe to assume this fact as the basis of tax adminis tration and tax collection and to simply make allowance for such infirmities of "human nature" as are unavoidable, or at least unavoidable at the present stage of development. This public function is adequately performed by the official staff simply as part of its public duties, without recourse to those motives of private interest which the immature political organism of the Middle Ages and the formative period of the absolute state found so useful.
Viewed from this standpoint it becomes a question of detail only how far the organs of local self-government are to assist the organs of the central administration in the collection of taxes. There are no reasons in favor of a participation of the organs of local self-government in the collection of taxes, of equal urgency with those which speak for participation in the assessment of taxes. And in point of fact the national government does not so frequently employ those organs for the former purpose. The case where it will most obviously and most frequently occur is that of a tax levied for the purposes of state and commune both, when the commune may be entrusted with its collection for both ; or in the analogous cases where, in a federal state, a mem ber of the confederacy, as being the public body in closest con tact with men and affairs, may be entrusted with the collection of a tax levied for the member and the confederation in common,—as, for example, is done in Switzerland, since 1879, with the military-compensation tax, one-half of which goes to the canton and the other half to the confederation.
§ 387. The period of recurrence in the collection of taxes is of considerable importance in connection with the various forms of taxation.
In the case of the direct taxes (taxes on income and prod uce) it is customary to concede so much to the circumstances and habits of the less well-to-do classes as to collect the tax in as small quotas, and therefore at as short intervals (monthly and the like) as possible. The aggregate sum to be paid is not reduced by this process ; but, the burden of taxation being to a large extent an emotional fact, it is to be remarked that the poor man who is not in the habit of keeping large sums on hand (except under circumstances of an unusual industrial maturity) finds it harder to pay the entire annual tax once for all than to pay it in twelve monthly installments.
It answers more nearly to the habits of the well-to-do classes to collect the tax in quarterly, semi-annual or even annual install ments. But even in the case of these well-to-do classes the degree of economic maturity and the consequent habits vary greatly from one country to another. It is by no means a matter of pure accident that in the canton of Zurich the state tax is paid in a single annual installment by all classes of taxpayers, and the communal tax in semi-annual installments by all classes alike, whereas in Prussia the class tax payable to state and com mune is collected monthly, and the income tax quarterly.
If no such considerations of leniency toward straitened cir cumstances and an undeveloped economic sense are taken into account, it is certainly most convenient, for the tax collector and for the taxpayers both, to make the tax payable in a single yearly sum. The circumstances controlling the collection of indirect taxes, and especially of taxes on consumption, are quite different.
The point of practical utility in this form of taxation lies, to a'great extent, in the fact that in the collection of the tax the producers (merchants, etc.) advance the tax in a lump sum, with the expectation of recouping themselves from the persons who ultimately bear the tax. This method of payment is a necessary feature of this form of taxation, the hardship of which cannot be avoided although it can be reduced. Measures may be taken which will, as far as possible, reduce the interval between the pay ment of the tax and the recovery. The more nearly we succeed in making these two points of time coincide, the less legitimate ground will there be for the complaint (not ungrounded though often exaggerated for purposes of free-trade advocacy) of a bur densome interference with production and trade by taxes of this kind.
Measures intended to serve this purpose are : (I) Extension of the time of payment, for a proper term and with proper secu rity; (2) the laying of the tax in such a manner as will (so far as other requirements permit) require the payment of the tax at a point in the process of production or of circulation that shall be as little removed from the time of sale to the consumers as may be ; (3) bonded warehouses (entrepits) where goods may be held in bond until the tax is paid and the goods removed for actual entrance into domestic consumption, or until they are removed for re-export ; of course with all due precautions against abuses and discrimination.
Under this third head are comprised especially dutiable arti cles of import which at the same time enter largely into a transit trade with other countries ; for this reason there is frequently (where the political circumstances permit) a protracted struggle against including these markets within the tariff boundaries. The remedy in such a case, after the modern state has once carried its irresistible tendency to unity and centralization so far as to include them within the tariff boundary, is that of great places of deposit (free ports under customs supervision). Such are to be found in the commercial cities of Great Britain, France, and latterly also in the politically independent seaports of the Ger man Empire.
Something analogotis may also occur with respect to consump tion taxes on domestic products in case the tax is levied on the finished product. Very much as is done with the goods imported from abroad, these domestic products may be held in bond under the charge of the tax offiCials until the goods are thrown on the domestic market or are exported.
The difficulty is much greater in case the tax is levied at a stage in the productive process at which no determination with respect to the destination of the goods has been taken. Under the Prussian-German law, the potatoes intended for distillation, the barley intended for beer, the beets which are to be converted into sugar represent the stage at which the tax is collected, whereas the decision as to their ultimate use, whether for home consumption or for export, will not be made until they have passed through the manufacturing process and assumed their finished form. For, it is to be remarked, this manufacture plays a very important part in the national industry and produces in excess of the home demand.
The consequence is that a tax is paid on the raw material which is reimbursed in case the product can be shown to have been exported (drawback). So that we have, instead of a place of deposit exempt from taxation (bonded warehouse), an actual payment and reimbursement of the tax. The objectionable fea tures of this method are (apart from the tax supervision), in the first place, a burdening of the industry by the tax, and in the second place, the difficulty of an accurate computation, for the purpose of the drawback, of the ratio of the raw material to the finished product. If the drawback is placed at too low a figure the result is a hardship to the producers ; if it is placed too high it involves a drain on the public revenues which goes to the pro ducers as a virtual export bounty, and may under given circum stances result in all the detriment involved not only in the enrich ment of a number of individuals at the public expense, but also in an abnormal growth of certain branches of production through artificially over-stimulating them, as has happened of late in the case of the beet-sugar industry.
388. To this national character of taxation and tax collection there corresponds a system of coercive measures, in the shape of tax inspection and penalties adopted to secure the payment of taxes.
The methods of tax inspection are so closely connected with the character of the various forms of taxation, that the adoption and the successful employment of a given tax, as we have seen, largely depends on the kind and the possibility of the measures of control to be adopted. The entire system of income taxation is dependent on the feasibility of certain methods of superin tendence, the characteristic features of which have already been touched upon ; the question as to whether taxes involving certain annoyances and difficulties are feasible at all, what results may be expected from them, and how much it is expedient to require of them, all these are questions the answer to which depends on the existence of practicable means of supervision and control. Whether and what taxes on consumption are to be employed, on what particular articles they are to be levied, whether on imported goods or on domestic products, and at what rates, depends (aside from the question of the need of revenue and of equitable distribution) on the practical conditions imposed by the measures of supervision and control necessary to be adopted.
Hence we have a variety of methods of supervision employed in the various classes of taxes, as well as a further variation in detail between the individual kinds of taxes made necessary by differences in the details of production and circulation. The practical exigencies of the processes of production and distribu tion, therefore, give rise. to special practices in tax collection ; we find instances of this in the taxation of distilled liquors and in the sugar tax ; and the progressive centralization of the busi ness of supplying a great city by rail has, for example, resulted in a centralized control of the octroi in Paris and other similar places.
The strictness with which measures of superintendence and control are applied answers in some degree to the height of the rate of taxation ; so that an increase in the demand for a tax revenue is followed by a fresh accentuation of the measures of control, which sometimes takes the form of the substitution of a new method of tax collection (a tobacco monopoly instead of a tobacco tax levied on private producers). The principle involved in the question is the discovery of the most effective weapon that can be brought to bear upon the taxpayers' undeveloped sense of public duty ; the greater the demands, the severer, cateris paribus, is this struggle between the public demand and the tax payers' reluctance, and the severer the struggle the greater the need of an effective weapon.
Penalties for failure to pay the taxes are the ultima ratio in this struggle, just as the legal penalty is always the ultinta ratio in the struggle between the public authority and the individual in the execution of the public will. And the tax penalties can do nothing beyond applying to the special purpose contemplated the penalties which arc at the disposal of the law generally, and by the usual methods. The distinction between different degrees of offense and the consequent difference in the penalties imposed, etc., have their place in the field of taxation as elsewhere. The distinction between this field and the field of criminal law gener ally lies in a difference not of principle but of practical applica tion. The difference lies in this, that the penalties with which the modern state visits tax frauds are relatively very light, the very name and implication of fraud being avoided in the word ing of the law, out of consideration for the very prevalent feeble ness of the sense of civic duty.
The law has got into the habit of taking active cognizance of only a very moderate proportion of the cases of such frauds as actually take place. Probably in no sphere is the proportion so very low as in the field of frauds on the taxes.