THE RATE FOR DIRECT AND INDIRECT TAXES. In case the tax under consideration is a direct tax, the quantity of the thing taxed, as well as the amount to be raised, having been determined, the adjustment of the rate is a very simple matter. The rate at which the tax settles will be the rate necessary to secure the money needed. The property tax as practised in this country serves well as an illustration. The assessor lists the property, the legislature votes the expenditure, and the rate is deter mined by computing what per cent the expenditure is of the value of the property listed. It is common for this aggregate rate to be made up of several special rates. The township, the county, the school, and the State tax is each deter mined by itself, and each assigned in turn to the property assessed. The rate of an income tax also is made in very much the same manner in those countries where the revenue from this tax is used to even up the discrepancy between ordinary revenue and ordinary expenditures, or to provide a fund for some unusual service. It thus appears that, in the case of direct taxes on known amounts, the determina tion of a rate presents no difficulties.
indirect taxes, such as import duties, excise duties, or the taxation of a business that permits no differential profit, are under consideration, the question cannot be so easily disposed of. Such taxes enter as an element of cost into commodities or services, and on this account tend to disturb what would otherwise be the normal relation between supply and demand. Thus the probable effect of taxes at the several rates proposed must be carefully considered and that rate chosen which will be the least deleterious or the most advantageous, all things taken into the account. Moreover, the sociologic significance of the commodity or business accepted as the basis of the tax must be permitted to influence the relative rates imposed. These suggestions will become definite if we, first, consider the rule for rate-making laid down by the financial interest; second, the modification of this rule in the interest of normal social development; and third, a further modification in the interest of effective administration.
(a) The Financial Interest. By the financial interest as the phrase is used in this connection is meant the desire to obtain adequate revenue in the easiest and surest manner. To this end the industries selected as the basis of taxation will be those which minister to the universal necessaries of life, and the rate imposed will be considerably under what is technically known as the maximum revenue rate. Under such conditions there will be no considerable tendency for the tax to curtail consumption. Large amounts may be raised by virtue of the universality of the payment; and, what is also of importance, the rate chosen being below the maxi mum revenue rate, the amount of revenue will increase or decrease as the rate itself is raised or lowered. Thus elasticity of revenue, as well as certainty and ease of collection, will result when commodities taxed are the necessaries of life, and when the rate imposed is less than the maximum revenue rate. Productivity is secured by the broad basis upon which taxes rest rather than upon the high rate at which they are operated.
It is common to say that the demand for those commodi ties which minister to the comforts and luxuries of life is more sensitive to price than the demand for the necessaries of life. In so far as this is true the maximum revenue rate for the latter must be a lower per cent of the price which the consumer pays than of the former, from which it follows that necessaries may be taxed at a higher rate without diminishing the productivity of the impost than in the case of comforts and luxuries. Upon the basis of this assumption, and regarding the matter purely from the fiscal point of view, the rate of a tax which incorporates itself in the price of goods follows a descending scale as the goods in question ascend in the order of developed wants. The rate upon the necessaries of life would be high, upon the comforts of life moderate, and upon the luxuries of life low.
This rule, however, overlooks one important fact of human nature. Even from a fiscal point of view its rigour must be somewhat modified. The classification of commodities into necessaries, comforts, and luxuries has no very concise mean ing for a society that is stratified along the lines of income and expenditure. Demand is a matter of habit, both heredi tary and acquired. Each class in society, so far as classes depend on the money one can spend in living, feels its own needs to be imperative whatever they may be, and it is not universally true that a rise in price will act more quickly on demand in the case of goods adaptable to the higher rather than to the lower wants in the order of social development. Especially pertinent is this observation to the conditions as they present themselves in the United States, where the com mon experience of the large majority of the people is to live in the presence of assured necessities and under the influence of a constantly growing sense of social and esthetic wants. Not uncommonly will it be the case that threatened depriva tion of a commodity, the possession of which is the badge of social standing, will be felt more keenly, and lead to more strenuous effort, than the placing in jeopardy of some of the commonly accepted necessaries of life. From this it becomes evident that the maximum revenue rate for intermediate com modities may approach that of the necessaries of life.
In the case of luxuries, also, a possible exception to the above rule of rating presents itself. It is a commonplace of practical business that a high price for certain kinds of goods is a factor favourable to intensity of demand, and, in so far as this is the case, a tax which increases the price will not defeat itself by acting as a deterrent to purchasers. This truth is of relatively slight importance, however, in adjusting the rates of a general revenue system, because citizens who enjoy an income sufficiently ample to warrant careless ex penditures are relatively few, and no government could hope for any considerable income by imposing a high tax upon class luxuries. The rule of rating, therefore, as laid down by the financial interest, while it may indicate in a general way the curve of rates for goods designed to satisfy wants of different social grades, must, even in the interest of revenue, be applied under the direction of accumulated experience.
(b) The Sociologic Interest. But there are other con siderations to be taken into the account. The sociologic results of taxation cannot be overlooked. In so far as price is a factor in determining the extent or the direction of purchase and consumption the tax, when of such a form as to be an element in price, becomes one of the conditions under which social development takes place. What grade, class, or quality of goods is it desirable that society should consume? What order in the development of consumption harmonizes with the rule of social progress? In what class is found the strength of the State, and how may the further extension of that class be fostered? These questions, and others like them, must be answered by the financier before he can adjust the rate of taxation to the requirements of a satisfactory revenue system. The reasoning upon this point has been adequately set forth, and it only remains to say that what is termed the sociologic interest presents a rule for adjusting rates wholly at variance with the rule laid down by the purely fiscal interest. The sociologic rule for ratings is as follows: the rate of taxation should increase as the goods taxed rise in the scale of social use. The necessities of life should be freed from taxation or taxed at a relatively low rate; the intermediate goods should be taxed at a higher though not an excessive rate; while the luxuries should be imposed with the full maximum revenue rate. If it be de sirable for sociologic reasons to discourage the consumption of goods regarded as pernicious, such goods should be im posed with a tax in excess of the maximum revenue rate. Such at least is the contribution of the sociologic interest to the question of rate-making.
(c) The Administrative Interest. It would be a mistake to settle any question of taxation without consulting the ad ministrative interest, and in no case is this remark more pertinent than when the question of rate-making is under consideration. The smuggler and the illicit manufacturer are ever present, and their influence in preventing the normal working of an import tax or of a system of excise duties cannot be overlooked. It would be useless to impose a high rate should the result be to stimulate unduly the activity of those who make their livelihood by evading the tax laws.
Two ways are known for the discouragement of smuggling and illicit manufacture. The one calls for a strong body of
police and an efficient revenue detective agency; the other aims to remove the motive for illegal traffic by reducing the tax so that the profit which may be gained by smuggling and illicit manufacture will not compensate for the danger incurred. This means, among other things, that the practical limit to the rate at which a commodity may be taxed depends, in large measure upon the ease or difficulty with which the com modity can be smuggled or illicitly manufactured. In general, the goods that invite the attention of smugglers are those which carry a high value in small bulk, that is to say, goods which minister to the wants of the more wealthy classes in the commu nity. It thus appears that while the financial and the sociologic interest would lay a high rate upon class luxuries, the ad ministrative interest precludes the feasibility of such a rate. Diamonds, for example, will be worn regardless of cost, and on this account might be imposed with a high duty; the sociologist, also, would permit them to be listed among highly taxed commodities. But it is evident that the tax might easily be placed so high as to defeat revenue. The practical limit of a rate is the ability of the administration to collect it.
From the above considerations it appears that the adjust ment of a rate is not a simple matter. It cannot be accom plished by arbitrary rule, and all that can be done in a scien tific treatise is to state clearly the interests involved and to leave the application of the principles discovered to the prac tical judgment of the body whose duty it is to frame tax laws. The matter is very largely one of social psychology, and more light will be thrown upon the subject by the lamp of experience than by the theories of writers. Financial statis tics are of the greatest importance to one who would deter mine the proper rate of taxation. Thus far in the history of most peoples fiscal exigencies have been so imperative as to place the adjustment of rates almost exclusively under the guidance of the fiscal and administrative interests. Not only have those duties been selected for taxation which minister to the necessities and comforts of the great body of the people, but the rates selected have commonly been those capable of producing the largest amount of net revenue. It may be expected, however, as the social conscience becomes more defined that the sociologic interest will exert a relatively greater influence upon the adjustment of rates.
Other questions there are of a general character, such as the comparison of local and national taxes, the use to be made of specific and ad valorem duties, the means of avoid ing double taxation, and the like, that might be made the subject of independent analysis; but, partly on account of the limited space at the disposal of this treatise, and partly be cause the practical character of such questions permits one to judge with greater confidence respecting them when pre sented in connection with some definite proposal, their sepa rate consideration is not here attempted. Better results may be expected from an inquiry into the various forms in which tax laws may be drawn, and from an investigation into the possibilities and limitations of those methods of raising deri vative revenue which the analysis of the nature of taxes has left at the disposal of the financier. Following out this sug gestion we shall now turn our attention to a consideration of property taxes, corporation taxes, excise and customs duties, and income taxes, from the point of view of him who frames and administers tax laws. A theoretic analysis of these taxes has already been presented; we shall now under take their analysis as projects of law.
69. Administrative Questions Respecting the General Property Tax. It will be remembered that the general pro perty tax accepts value of all property, irrespective of its in dustrial character or of the use to which it is put, as the basis of the universal tax levy. The error involved in this theory, as was pointed out, is that value is not a homogeneous quality of things, and that any system of taxation which assumes it to be such must work unjustly as between the holders of different sorts of property. This is, however, scarcely adequate as a final argument against the property tax, for if no other difficulties present themselves it might be possible to attain substantial justice by classifying property according to its economic character, and by assigning an appropriate rate to each class of property. It is true this would destroy the formal simplicity of the scheme and introduce complications that would render the system more difficult of administration than it is at present; but it would satisfy the objection of the theorist. It seems necessary, therefore, before concluding that the general property tax should be abandoned or radi cally modified, that we inquire respecting the manner in which this tax works in order to discover if the difficulties by which its administration is surrounded are so serious as to render futile any readjustment in its form that might be undertaken.
The making of a tax bill is a very simple affair so far as method of procedure is concerned. In a State like Michigan, for example, whose local government is a compromise be tween the county and township system of organization, the assessment, levy, and collection of taxes are intrusted to town ship officers. It is the duty of the assessor to list the property in the township and to assign to it a valuation for the purpose of taxation. The name of each citizen who pays taxes is entered upon the assessor's books, and against his name is set down the amount of his property, classified according to the requirements of the law. The assessment roll made up in this manner is accepted as the basis for the levy of township taxes. The county obtains its list for county taxes by combining the assessment rolls of the several township officers, while the State levies its taxes upon the combined valuation of the counties. In the bill presented to the taxpayer it is common to state separately the rate imposed for each of the grades of government or special objects supported by the general property tax, and what is kno i as the rate of local taxation in the United States is the sum of these separate assessments less the amount col lected for State purposes. The collection of taxes follows in general the same theory. The local officer, commonly the treasurer of the township or of the county, according as the township or the county is the unit of local administration, receives the taxes and pays over in lump sum the amounts due the other grades of government in proportion to the per centages expressed in the tax bill. This, however, is a purely ministerial function, and being the occasion of no difficulty in the administration of the law, will not receive further con sideration.
The evils of the general property tax centre in the task of assessment. While the great mass of property was in the form of real estate, and while such personal property as existed was simple in its industrial character, the general property tax worked fairly well. Under such conditions it was pos sible for the assessor to list fully and assess fairly the property of citizens. But since the development of corporations has changed the character of industrial property, giving it a form that can easily be hidden from the eye of the assessor, and since credit relations have developed to such an extent that double taxation must inevitably follow the listing of the property of all citizens, the task of the assessor has become a very difficult one. Not only does he find it impossible to discover personal property of those who refuse to make reply or who are guilty of false returns, but the dishonest citizen, taking advantage of those provisions of the tax laws designed to avoid double taxation, is able so to locate his property as to evade assessment.
To speak definitely upon this point, three difficulties pre sent themselves in the administration of the general property tax : First. This tax works unequally and unjustly as between citizens of the same town.
Second. It works unequally and unjustly as between real estate and personal property.
Third. It works unequally and unjustly as between the townships, whose property is used as the basis of county taxation, and the counties, whose property is used as the basis of State taxation.