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The Principles of Equitable Taxation


195. The general principle being admitted that each indi vidual private economy is in duty bound to contribute to the taxes, there remains for discussion the more difficult question as to the method by which this great multitude of dissimilar private establishments are to be laid under contribution to meet the expenses of the general public economy in such a way as to dis tribute the burden equitably among them all.

We have here to do with a postulate which the presence of moral considerations in every fundamental question of economics obliges us to take account of. I shall allow myself here to refer back to the more detailed treatment given to these ques tions in the introductory portion pf this work (vol. i. secs. 366 a seg.).

It is unnecessary to recur to the fact that in any investigation of the ground for a determination of prices, whether in the mar ket or in the affairs of the public economy, we have to do with historical problems yet awaiting solution, inasmuch as they are problems involving a moral factor. It may be sufficient to call to mind the point already established, that it is a meretricious sub terfuge to erect what is, into a norm of what should be. Whoever puts the question as to the ground for a determination of prices, or taxes, or any other form of payment employed in human society, thereby puts the deeper lying question : What has the judgment of men in the past declared to be just and right in their adjustment of business matters? and how far is their judg .

ment to be accepted as good? To the observation and appraise ment of the ethical desiderandum which expresses itself empiri cally in the judgments already passed, there is to be added an exposition of the further desiderandum wherein the decisions of the past are to be cleared up and further developed.

Far from its being possible to accept any fixed datum from which to proceed as from a basis of "natural" right, and beyond which nothing would be necessary but a dry, deductive logic (mathematically exact and subtle), we have on the contrary to do with the evolution of moral impulses, judgments, activities ; matters which appear definitive and statical only to the most superficial view, but which, in point of fact, constitute an unceas ing movement, while they present as statical data nothing more than a certain body of average, customary decisions, which on closer inspection resolves itself (like any other average) into an aggregation of diverse individual cases.

§ 196. The development of judgments concerning what is equitable is a progressive development, just as all historical development is progressive.

Starting from very crude beginnings, the sense of equity gradually gains strength in the struggle against the selfish motives and the force of the .strongest. But even after a lively sense of equity has been attained and has been incorporated into the social structure and habits of thought, there still remains a wide scope for development in the way of extending and deep ening it ; while there also remains open a path of indefinite prog ress in respect of quality.

The principles of prices and taxes afford a wealth of special materials illustrative of this general law.

A great advance in the progress of society has been achieved when the distribution and the recompense of work in an indus trial society have been freed from every element of coercion, and are determined solely on grounds of a recognition of equitable reward. But even though the element of force has been elimi nated, there still remains a broad field for the exercise of judg ment with respect to the nature and the reach of the principles on which is based an equitable determination of prices, wages, con tributions, taxes,—a field which the present age is far from having exhausted.

The facts of past progress in this respect, and the problems offered by the present and future in the way of further develop ment, are the matters with which our discussion will next have to deal.

§ 197. Free Contract and Authoritative Enactment are but different forms of the same process of judgment in the determi nation of values—in price, wages, contributions, taxes.

Whether prices are determined by the " higgling of the mar ket" or by legislative enactment and regulation ; whether the question concerns the exchange of the products of private industry between individuals, or services rendered its mem bers by the commonwealth ; whether governmental authority simply regulates prices in private intercourse, or fixes the price of what itself contributes toward the general well being—the basis of this multiplicity of determinations of price, etc., is always a multiplicity of judgments as to values, which may be carried out in practice with or without the intervention of the public authority.

It only makes the case clearer, it simply serves as a more palpable confutation of the illusory belief in determination of price by natural forces, to have the state enact what is to be done in squaring accounts for services rendered. And this authorita tive manner of determining price moreover affords a more potent means of progress in the growth of equity in price determination.

But in point of substantial fact, the process is just the same whether controlled by the organized action of the state or not ; it is always the existing sense of equity that has to decide with respect to the equitable adjustment of prices (taxes, etc.). The state has nothing at its disposal beyond the human material of which it is made up, being nothing but an organized society.

The state's enactments, therefore—price schedules, taxes, salaries, dike regulations, etc.—are but the expression of views that lie within the compass of the insight and intelligence already achieved and current. In virtue of its office it becomes the state's duty as a matter of course to give expression to the best and ripest sense of equity attained, and in so doing it will be able to rise above the level of free contract. The state is hereby enabled to bridge the interval between the backward sense of equity of today and the higher plane of a riper equity yet to be attained. But even in so doing it affords a proof of its depend ence on present attainments in moral and spiritual development § 198. All determinations of value rest, as we know, on the two elements of Utility and Scarcity. Scarcity resolves itself, so far as concerns all reproducible goods, into the cost of production. Utility, with respect to goods of all kinds, resolves itself into a complex of elements, some of which are only now struggling into recognition. ( Cf. vol. i. secs. 370, 378-380, Current views as to what is an equitable compensation are very largely agreed in looking for the ground of decision to the principle of cost of production. It is a simple and easily compre hensible postulate of the practical reason that every man, so far as he has the ability, should make good the cost at which another has wrought in his interest. When the pains, the labor, the consumption of materials undergone by another have served to afford me an advantage which I should otherwise have been obliged to compass by My own effort, etc., there is a manifestly equitable relation present between the sacrifice and the benefit conferred.

The appreciation of this principle of equitable reward is, indeed, so general and thorough that the need is rather of an effort to limit and circumscribe it than to advocate its wider acceptance.

And this for two reasons. In the first place, even in cases where the principle of cost of production has found adequate recognition din practice, we find expressions of views at variance with this principle and favoring a comparison of the benefits conferred, where benefits of different magnitudes are conferred at equal cost.

In the second place, there are large groups of facts, especially within the domain of the public service, where, from the nature of the case, it is either impossible or impracticable to set off individual expenditure against individual gain. Here the sense of equity accordingly turns perforce to other grounds for an equitable adjustment of the compensation required.

§ 199. Under the first head it may be noted that the current views of equity demand that in cases where the municipal author ities construct a new street, not only should the owners of the adjacent real property be required to bear a considerable share of the cost of construction, but the owners whose property is benefited in an especial degree, on account of a specially advan tageous situation of their property relatively to the new street, should be made to bear a larger proportion of the cost than the owners of property less advantageously situated. They reap a greater advantage from the same proportional cost, and should therefore bear a proportionally larger share of the expenditure by which they have been benefited.

As to the second point, we are aware that in the current views of what constitutes an equitable equivalent for benefits enjoyed there occurs a second, less definite principle of award, which may be designated simply as the ability to pay. The indef inite character of this element lies rather in uncertainty as to its scope, and as to the various remoter questions into which it ultimately resolves itself, than in any doubts entertained with respect to its own legitimacy.

As regards the scope of this principle, it is to be said that its legitimacy is questioned as far as concerns the great mass of pri vate business intercourse. We are shocked to hear that the same merchant or landlord demands a higher price for the same goods from a wealthy customer than from a poorer one. Indeed, it is the traditional attitude of the government in case of services which are of great importance to the public and are of a monopolistic character (railways and other common carriers), to forbid "dis crimination" between customers, under penalty of law.

But one may easily see that ethical concepts are less fixed and definite with respect to this point than with respect to the other principles governing the equity of compensation. The point which arouses antagonism is the arbitrariness, the discrimi nation between persons, etc., rather than the connection between the prices charged and the buyer's ability to pay. It is at any rate certain that we find other portions of the industrial field, even in private business relations, where such a dependence of price on ability to pay is not only accepted as equitable, but is even required. In railway passenger traffic the classification of coaches as first, second, and so on, proceeds on the assumption ( fre quently not in accordance with fact ) that fares are graded according to the ability of the various classes of passengers to pay; so that the fares charged for third or fourth class may not only afford less profit, but may even fail to cover expenses, as compared with prices for first and second class.

On comparing this case with the examples previously cited it appears that in private business, for large classes of society, the gradation of prices according to ability to pay is approved of, while personal discrimination is disapproved.

But even this rule does not hold in the case, e. g., of the physician, who actually regulates his charges by an elaborate scale of prices, and rates his services according to the ability of his patients to pay for them. In this case the principle ( habitually accepted as equitable ) seems to be connected with the peculiar nature of the physician's services, which, as is the case in all the higher professional occupations, rises above the plane of a pecu niary equivalent, being in a numerous class of cases constrained by the pecuniary position of the patients to forego it and there fore, on the other hand, constrained to recoup from the patients who can pay, in order to cover pecuniary necessities.

§ 200. But the principle of Ability to Pay finds its widest scope and most unquestioned recognition in the field of state and communal affairs.

Not that this field does not afford ample play for the practice of an adjustment of price to cost; but nowhere else does it hold true to the same extent as here that wide-reaching and funda Ynental relations of social life demand the application of the principle of pecuniary ability as the equitable and unavoidable norm of adjustment, scarcely questioned by current conceptions of equity.

I may here refer back to the discussion contained in an earlier chapter ( book i. chapter iii., On the Various Kinds of Public Contributions ).

The demand of equity that individuals are to pay in propor tion to their varying pecuniary ability, is accepted so unresistingly within the field of the public economy for the reason, in the first place, that a computation of proportional cost and benefit is, in ' regard to many very essential services, impossible, and in the second place, and more especially, because the more fundamental , phases of the public activity in some degree condition the very existence of the individual in society, so that it appears right and just that these fundamental conditions of human social life should be intimately bound "up with the total personal and eco nomic strength of each individual. The appeal to the principle of the pecuniary ability of the individual in matters of national concern touches our sense of equity so directly and irresistibly because it.is a principle of wider scope than that of the economic field alone, and is but a special application 'of the broad principle of a moral solidarity.

But the degree to which this principle has won acceptance in the convictions of any generation of men is not the same with respect to all matters. And then, again, there are large classes of relations, even in public matters, for which the method of pay ment according to cost and benefit received is both possible and expedient, not only for the present, but for an indefinite distance into the future. So that the principles of equitable adjustment prevailing at any given point of time are a complex—a varying combination of the factors that bear on the question of equity, varying according to the relative importance ascribed to one or the other factor in different fields of public activity.

§ 201. It follows from what has already been said that the struggle between the two principles of taxation which the ethical conceptions of earlier historical writers have presented as antagonistic, viz., the so-called utility principle (or the prin ciple of taxation according to interest, or benefit received) and the so-called sacrifice principle (or the principle of taxation accord ing to ability to pay) is not to be set at rest simply by a decision in favor of one or the other alternative, to the exclusion of the other.

Rather, the question of equity in all taxation, inclusive of payments not usually classed as taxes (fees, contributions), reduces itself to the question of an equitable determination of values, such as has already been discussed in what has gone before. The question concerns the same elements, in varying combinations according to the degree in which one or another of these elements is in any particular case recognized as equitably decisive.

In the course of the exposition in which there has been attempted an analysis of the services rendered by the public economy and the formulation of the methods of payment properly to be adopted in requiting these services, the conclusion has been reached, not only that the " utility " principle alone, does not afford a tenable basis for taxation, but also that the principle of sacrifice, or ability to pay, cannot be accepted as the sole principle.

To state the matter briefly and in a general form, the two prin ciples simply serve to indicate the prevalence of certain concep tions of equity. And—historically considered—their signifi cance, in the sequence in which they have won acceptance, is that they indicate the course of development from the egoistic, indi vidualistic conception of equity to the conception of solidarity. There has been an evolution of the moral attitude of men and a progressive recognition of the equitableness of taxation.

§ 202. There is a class of speculative writers on history who seek to insure the unhampered claim of coming generations to a free choice of any peculiar norm of equity, by recognizing as valid, without reservation, whatever conceptions of equity have prevailed in times past. In freely accepting as sufficient the grounds on which each successive generation holds its peculiar tenets with respect to equity in taxation, they fancy that they are leaving so much the freer scope for conceptions of equity that may arise in the future.

To me it seems that this conception blurs the unquestionably legitimate idea of an historical development of equity by over stating it. On the basis of an unproven preMise there is con ceded to each succeeding epoch the capacity to give adequate expression in its institutions to the idea of equity answering to the circumstances of time ; so that we should have to look for progress in the conception of equity not from any advance in knowledge and moral sentiment, but simply as depending on the historical epoch from which it emanates. Still, in the facts of daily life, and in our scientific researches as well, we are con stantly confronted with the obvious fact that the of equity in the period of history to which we belong is in dispute at every point.

Adolph Wagner has not been entirely uninfluenced by his torical-philosophical views of this nature in drawing his distinc tion, in his Allgemeine Steuerlehre, between a " purely financial " (or fiscal) principle of taxation and a social-political principle. The former of these principles being assigned to the "civic (staatsburgerliche) period," as good and fair for that period, while the latter is insisted on as the true principle for the present and the coming period, as the basis of the " social phase" of taxa tion.

But if we are to construct our " civil period " out of the material furnished by the actual course of political and social development, and not replace reality by a utopia, it becomes absolutely impossible to accept the purely fiscal principle as a tenable sole principle at all ; that principle not only claims to afford a justification for thoroughgoing individualism and egoism, but also seeks to justify a complete disregard of the unavoidable fact of solidarity in all political and social life.' In the second place, the justification offered for the " social political " principle of taxation, to which this other principle is made to serve as a foil in the same manner as the "civic" period serves as afoil to the "social" period—this principle, with its contained purpose of abolishing existing inequalities in incomes and property—with its struggle against the inequities of the "competitive system," is but an exaggerated expression of the legitimate sentiments of equity which have grown out of the principle of pecuniary ability in the course of its develop ment, and which we shall have to discuss later on.

I apprehend that the placing of these two principles in antith esis is but the rending asunder of a single fundamental principle, the investigation of whose historical development is our real task.

principle, equity, ability, pay and public