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The Sources of Taxes and the Objects of Taxation

THE SOURCES OF TAXES AND THE OBJECTS OF TAXATION.

236. The material substratum of the whole discussion of Chapter I., dealing with equity in taxation, is the economic sub stance which constitutes the objects of taxation. The purpose of the present chapter is to examine the nature of this substance. What is the source from which taxes flow? What is the eco nomic force which is continually restored after having yielded the taxes, like the fountain which fills the broad river bed con stantly without being exhausted? It follows as a matter of course that every rational discussion of taxation has had to deal with this question from finding itself face to face with a crude empiricism that took the taxes "where it could find them," and that by so doing had conjured up consequences that had to be met by seriously taking thought. In fact, it is this question which forms the foundation and the corner-stone of the first scientific system of political economy and financial theory. The Physiocratic theory of the net pro duct (produit net, revenu net of industry is an attempt to answer this question.

Cameral Science, even at the stage which Justi had reached, contains no discussion of precisely this question. This writer is of opinion' that the contributions of the subjects to the great expenditures of the state should be taken from what property they have immediately at hand [" aus ihrem bereitesten Ver megen"]; except in cases of great need or misfortune, the state should demand no more than a portion of the income or produce of the property ; a fourth or a third of the income or of the earn ings is about as much as the subjects can afford in times of peace ; for if higher taxes were to be levied, a part of the people would suffer for the want of the necessary means of subsistence, and another part would have to cut into the substance of their prop erty ; and such management could not possibly go on forever, but would shortly result in the downfall of the state. For meet ing extraordinary emergencies, however, Justi pronounces for the unlimited tax-liability of subjects ; he even lays stress on it. To meet a growing fiscal need in ordinary times he advises the development of the industry and income of the subjects ; he, as is well known, regards Colbert as the greatest of finance ministers, in that, like the true Cameralist that he was, he sought to develop the country and to enrich it with commerce and manufactures in order to enable it to bear an increased burden of taxation.

The most prominent precursor of the Physiocrats in France, Bois guillebert, who had nothing to do with strenuous abstract thinking, speaks to much the same effect. He regards revenu and consom mation as equivalent This is much truer to life than later systematic writers and logicians from Quesnay to Ricardo and John Stuart Mill. But however unsatisfactory the abstract notion of the net product and net income may seem to us today, it was indispensable at an intermediate stage of scientific thought, whose earliest stage becomes intelligible to us on reading these pioneers.

discussion on the distinction between tax-object and tax-source. The former is the object with reference to which the tax liability of each taxpayer is rated. On the other hand, the property from which taxes are drawn (in the sense that it suffers a diminution through payment of the taxes) is called the Source of Taxes.

The problem of scientific discussion has evidently been to penetrate from the Objects to the Sources of taxes ; much as the problem of economic speculation has been to penetrate from the material objects constituting wealth to the sources of wealth. Taxes were laid on land and houses, on articles of food and drink, on superfluous and on indispensable articles of daily con sumption ; there were also taxes on persons, income, property, inheritances, etc. These were all objects of taxation. Naturally it became necessary to find out what it was that lay concealed behind these objects as the source of supply of taxes, in order to meet the requirements of equity in taxation, in order that every person liable for taxes might be assessed with proper regard to his ability to pay, both in itself considered and rela tively to the ability of other taxpayers.

Our scheme, which places the various demands of the public economy in immediate relation to the aggregate demands of the nation's industry and of individual establishments, which regards the public demands as but a portion of the aggregate demand of the people in another form, and to be met by dif ferent organs—to be fitted into its proper place in the scale of needs, like every other human need ;—our scheme places the problem on the common ground of all economic science. The source of taxes is to be found nowhere else than where the means of satisfying all wants are drawn from.

But all wants which recur from year to year and from day to day presuppose as a condition to their satisfaction sources which likewise constantly renew themselves. This supply can only be the result of production, which is placed at the disposal of these demands in the form of income. It is income, therefore, which constitutes the normal source of taxes.

In the life of the individual there are conceivable extraordi nary cases where the demands of the occasion exceed the means at hand, and which must be met by drawing on means which are not of the nature of income. In such cases expenditure must exceed income, because there are human interests whose impor tance outweighs any pecuniary consideration. In like manner there are extraordinary occasions in the life of the state when these limits are exceeded and the tax demand falls on what does not by nature bear the stamp of renewal ; that is to say, on property.

Property is by nature the trunk which annually bears the fruits that may be disposed of to meet expenses. Income repre sents these fruits. If the tree were destroyed by repeated depredations the fruits would also cease. Accordingly, realized property cannot be drawn on for regular expenses, but only for extraordinary occasions. But this latter may be done with less risk to the national well-being as well as to the permanent tax paying capacity of the nation, the more productive the industry of the time is, and the sooner, consequently, the new products of industry will avail to make good the inroads on the national wealth.

§ 238. To a superficial glance it would appear that the taxa tion of wealth (instead of income alone) in practice extends beyond the extraordinary emergencies spoken of. But there are a number of things to be taken into consideration in this connec tion. It is, first of all, the long and well-known " property tax " which gives this impression. But in point of fact, the property taxed is only the object on which the tax is imposed, not the source.from which it is drawn. The tax is proportioned to the property, but it is intended to reach as its source of supply the income derived from the property. It is at the most in excep tional cases only that the property tax aims to reach the property itself as a source of supply.

This suggests the distinction introduced by Adolph Wagner between the " nominal " property tax (in which the property is only the taxable object), and the " real " property tax (in which the property is also the source froni which the tax is drawn).

But in the second place, in cases where the property is the source of the tax, where we consequently have to do with a real property tax, it is necessary to bear in mind the distinction between what is property to the individual and what is property from the standpoint of the nation. Evidently, as viewed from the national standpoint the aggregate wealth is not diminished by the state's confiscating all that is coming to its creditors living within the country, whereas the property of the individuals whom this confiscation touches will suffer very appreciably. It is simply a case of the shifting of ownership, a change in the dis tribution of the national wealth. The case is quite similar when the state appropriates certain items of wealth by means of a real property tax in order to invest them for national industrial pur poses. Supposing the investment to be worth what it cost, we have here again to do with a redistribution of property, a change of ownership.

Now, there are a great many purposes for which the state may make such investments of capital. All productive investments (productive in the true sense and not only in the sense of yield ing a revenue) which the state or the commune may make, belong in this category: railways, harbor improvements, mines forests, agricultural land, gas and water works, etc. A heavy tax imposed on property as the source of the tax may, more over, have the indirect and less obvious result that greater saving will be effected in the less well-to-do households because of the reduced tax burden required of them ; so that as much property would be laid up by these as the state appropriates from the upper strata by means of the tax.

§ 239. Real property taxes, even in the sense last referred to, are not frequently met with in existing taxation. One of the chief examples of this kind of taxes, and also a very widely prevalent one, is the inheritance tax. These taxes, especially in the case of the remoter degrees of kinship,' as a rule take so large a sum from the total of the inherited property as to leave no doubt but that they are real property taxes. The strongly progressive rate of the inheritance taxes, increasing with the degree of remoteness of kinship (beginning with a minimum, or with zero, and rising to 8 or I0 per cent. and even more), goes to prove that the occasion of the tax lies in the peculiar circum stances connected with this transfer of property. The increase of the rate in proportion as a greater element of chance has con spired to transmit to the particular heir in question suggests the logical consequence of. the eminent right of the state to ownerless goods. It is also evident that the present stage of development of this class of taxes is not the final one, probably it is rather the beginning of a very large development of public inroads on egoism. And this is true as well in respect of the rate of the tax as in respect of the possible multiplication of taxes of an analogous kind.

Such a tax, even as we find it today, is of course hard to rec oncile with any theory which condemns the taxation of property as a source of the tax payment, either altogether or at any rate under ordinary circumstances. The justification offered for the inheritance tax, as being a supplementary tax added to the annual income tax at a favorable moment, is not consistent with the fact that this supplementary tax is made to depend on the degree of kinship of the heir. It is, in fact, a real property tax.

§ 240. Nominal property taxes have been in use for a very long time. The term has frequently been used to designate taxes which are not even assessed in proportion to property. The well known English " Property and Income Tax" which the younger Pitt introduced in December, 1798, was from the outset, and still remains, as he expresses it, an indiscriminate "general tax on all the chief branches of income." Pitt expressly declined to make any distinction between in come from property and personal income—for reasons, it is true, that do not appear to be sound. He claimed that the property whose continued existence was urged as a reason for taxing it at i higher rate, is already taxed more heavily in that it continues to pay the tax as long as it may be required, whereas the income from labor ceases when life .ceases and is therefore taxed but once ; the safest way is, moreover, to accept the inequalities which are the lot of man and which financial legislation neither ought to nor can improve It is otherwise with the property taxes so widely employed today in the Swiss cantons, especially for the communal finances. We have here to do with a class of cases in which not only is the property the object of the tax, but in which the purpose of making this the basis of apportionment and object of taxation (as contrasted with the income tax in the narrower sense) makes itself very sensibly Mt. In the canton Zurich, for example, the entire communal revenue, apart from a slight capitation and house lax, is raised by a property tax ; while for the purposes of the cantonal revenue a discrimination is made between the " income-cadaster" and the " property-cadaster," in such a way as to afford a much greater degree of exemption to the smaller and medium personal incomes than to the corresponding class of incomes from property.

This contrast is visible even in the early taxation of the mediaeval cities. We find the guild masters of Duderstadt in the year 1438 demanding that, in the assessment of the scot, Erbe and Gut were to be taxed at a higher rate than receipts from the And the justice of this discrimination seems at the present day to be constantly gaining a wider recognition.

.For objections of the kind urged by Pitt are scarcely to be taken seriously, and weightier objections would be hard to find.

After it has been agreed that ability to pay the taxes is to constitute a chief principle, or the chief principle governing the rate of taxation, it will also have to be admitted that an income which is drawn from property should be taxed at a higher rate than a personal income, if it can only be shown that the income from property is more certain and enduring, and therefore possesses a greater ability to pay taxes, than does the personal income.

§ 241. It is to be remarked that the effect of a heavier taxation of an income from property (funded income) could be produced without the form of a property tax. The Prussian government, for example, has in fact made repeated attempts to impose a heavier tax on funded income under the form of an income tax.' It was attempted in the first project, which was laid before the United Diet in the year 1847 ; and again in the year 1883, in the attempted reform which was to have included among other things a tax on income from capital, in addition to the already existing tax on income.

It is to be added that the older methods of tax management from which the old property taxes have been handed down, are in great part adapted to so low a stage of development that the precedent is by no means to be accepted as authoritative under modern circumstances. In point of fact, property taxes have to a good extent been the pons asinorum to the undeveloped under standing of the nature of income. Undoubtedly it is "income" (as the term is understood by German Political Economy since F. B. W. Hermann's time that the owner of a house gets from his dwelling, that the owner of a park gets in the enjoyment of his park, that another man gets from his game preserve or from his picture gallery. It is income consumed in kind. It is only a little less palpable than the fruit which a landowner harvests from his garden ; it surely answers less precisely to our ideas of the income usually obtained in modern industrial society, with its division of labor and its system of money payments ; but it is income none the less.

The fact that our tax system is constructed with a regard to the use of money, and that therefore all items of income which are not primarily expressed in terms of money have to be trans lated into such terms, that is to say, have to be assessed,—this fact does not change the essential nature of the case. Whether the picture gallery as such is rated, or whether the rating takes place at a step farther on under the form of an estimated yearly dividend, amounts to the same thing. If it is not to be decided by an appraisement it will have to be decided beforehand by the law,' that is, under the form of a " nominal " property tax by which some rate of interest is adopted as expressing the relation between the property cadaster and the personal income cadaster.

242. Our taxation has today, for the most part, not attained to such a logical consistency, the reason being that we are in practice, not in theory, still bound by the prejudices which scientific discussion has long since put away, as well as that a widely prevalent reluctance honorably to perform our duty in the matter of tax payment hinders our seeing things in their true relations. From this cause there are several questions that require our attention.

It is objected that no tax, and certainly no special tax, should be levied on such property as either cannot, or at any rate actually does not, yield a money income ; that such a tax maN' easily tend to become, and may even set out with being, a " real " property tax.

This is an error. Whether the tax brings the fact into con sciousness or not, the fact at any rate remains that a park, a game preserve, a picture gallery, a library and the like represent, so far as concerns annual income and annual expenditure, a sum corresponding to the annual interest on their capitalized value. If the taxation of objects of this kind causes a disturb ance in the pecuniary circumstances of the taxpayer in question, that is simply an indication of an abnormal development of con sumption on his part. If the possessor of a collection, etc., which costs millions does not know, until the tax amounting to some thousand marks makes him aware of it, that he is indulging him self in a gratification that exceeds his pecuniary strength, that he does not possess the means necessary to retain so expensive an object in his possession and use, then this method of affording him practical instruction is but one of the possible ways in which a remedy may be applied to the abnormal growth of his consump tion. It may just as easily happen, without the tax, that the dilapidation of his house or the wretched state of some other portion of his necessaries, will bring him to appreciate the fact and to reduce the extent of his collection. Lord Shaftesbury, when he succeeded to his father's estate in the year 1851, sold a portion of the paintings inherited in order to provide better dwellings for the people on the estate.

But why this solicitude with regard to the demands of the state and the commune ? We are here again brought face to face with the well-known attitude which people assume towards these demands. If we only had thoroughly assimilated the fact that the state belongs among the prime elements of the neces saries of daily life for every civilized human being, then we should be less given to sentimental talk about the possible chance of this fundamental necessity trenching in some slight degree on some people's superfluities or luxuries. If it happens that the tax requirement compels a taxpayer to give up a dozen pictures or a portion of his game preserve, it is only that the less serious need gives way to the more serious.

It is a gravely significant fact that in countries where this line of argument has been embodied in legislation the execution of the law at this point is extremely lenient.

§ 243. There is a further point closely connected with the last mentioned. There are circumstances, seasons, crises in which the income from productive property ceases. This is a different case from that dealt with in the last section. There the question concerned useful possessions [Gebrauchsvermogen] whose income yielding character was not understood, owing to the undeveloped state of the concept of income. Here we have to do with pro ductive property, which for the time, and by exception, owing to disturbing circumstances, affords no product and consequently yields no income. The North German agriculture during the twenties of this century, modern industry with its varying gains and losses, with its alternation of inflation and crisis, every specu lative enterprise, afford examples of seasons during which the income-bearing capacity of capital fails.

In this class of cases also there seems to be a reasonable ground of argument against the taxation of the income, or at any rate, there seems to be a defect in the system whose aim is to make the income the regular and permanent basis of taxation.

But still, we have to do with a confusion of the same kind here as in the class of cases previously discussed. If we have once convinced ourselves that the demands of the com monwealth are made for purposes of fundamental importance to the well-being of all civilized men, we shall also understand that in years when the productivity of the property in question fails, it is no less admissible to draw on capital for the necessities of the state than for the other necessities of the taxpayer. It is not a case of an external power intruding with alien demands on what, by good right, belongs to the private wants of the individual.

It may be conceded that the case is an abnormal one; it may be accepted as a matter of course that the assessment of the tax should be different from what it would be in a productive year.

But the principle is not to be given up. If the principle were surrendered we should logically reach the conclusion that the least of the workmen in such a factory, or the like, must be con sidered capable of paying taxes seeing that he possesses an income, while the wealthy, possibly very rich, employer should be exempted. It would be preferable, if it were possible, to find a reliable average of the annual produce and then base the income tax on this average. But that is not practicable. Even the long est periods which intervene between one valuation of income and the next are much shorter than the periods in which the great fluctuations and cycles in industry, agriculture, etc., run their course.

The difficulty arising out of the non-use of useful possessions is not a serious one. In case a rich man (a man of small means is not exposed to the temptation) lets his parks, collections and the like—objects that may have a value of several thousands or millions—lie idle, the tax legislator who imposes a tax propor tioned to the average normal income has simply to tell him : "habeas tibi." We have here to do with an abnormality resulting in an unreasonable luxury, or one required by social rank, of which, for this very reason, legislation can take no cognizance whatever. One must either make some use of one's use-property [Gebrauchsvermogen] or resign the possession of it.

But least of all can there be any question as to the taxation of wealth which is for speculative purposes temporarily withheld from productive employment or prevented from affording its normal product. The best example of this class is building-lots in towns, and especially in large cities — property, frequently of considerable value, which simulates an arcadian existence under the innocent guise of a potato patch, the pretense being taken seriously by an undeveloped tax legislation (Prussia), or treated with considerate indulgence.. by the owner's honest friend and neighbor who assesses the property (Switzerland).

Equity and the logic of the case here demand an adequate appraisement of the market value of the property and a taxation on the basis of the average income from a capital of like value.

The tax in such cases of suppressed income both in regard to use-property and in regard to productive property has the secondary but important function of reminding the owner of the duties towards the community attaching to ownership. The pressure of the tax urges to a management more in accord with public utility. It may be that it disturbs the indolence which has permitted valuable property to lie unused, or it may serve to discourage the obstinate disregard of the public interest which withholds large areas from present use.

§ 244. In the foregoing I have been at pains to explain what is meant by the term "property tax" and to point out how far it is apparently or actually associated with the real taxation of property. Likewise there is something further to be said with regard to the term "income tax" and its connection with the tax ation of income as source of the tax. In the case of the latest project of the French government for the adoption of an income tax (which is now to be adopted again, after so many futile efforts') the bourgeoisie, still influential in spite of all the demo cratic institutions, offers its customary resistance and makes use of the argument, among others, that the taxes already in force are every one of them taxes on income.

This is an instance of a confusion with which we are already familiar, the confusion of the tax-source with the tax object.

The " income tax " is one of many forms of taxation of income. While all these various forms of taxes presuppose income as the source of the tax, the " income tax " is that par ticular form which not only presupposes the income as the tax source, but also makes it the tax-object, that 'is, makes it the basis of the distribution of the tax.

It is therefore no objection to the introduction or retention of an " income tax " that all other taxes also draw on income as their source. The " income tax," in proportioning the tax according to the income, is laid with special purposes in view, which cannot be accomplished by the other taxes. These pur poses may be distasteful to certain classes of society, but pre cisely this fact is a proof of their desirability. To go into the details of this matter, however, belongs to the discussion of the System of Taxation.

tax, income, property, source and rate