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The Taxation of Earnings


334. Reasons of equity as well as of expediency have led to the construction of a system of taxation out of many and diverse constituent elements; these constituent elements are classed under three general heads. The same reasons have brought it about that each of these groups also is a similar systematic structure. In the first place, each particular kind of tax taken by itself is so far inadequate as to leave gaps that have to be filled by other taxes, and in the second place, particular forms of gain, possession or consumption stand in such a peculiar relation of indebtedness to certain public institutions as to require special payments.

For reasons of this kind the general group of taxes on earn ings is subdivided into Subjective Taxes, Objective Taxes, and Taxes on Business.

The two former classes have this in common, that they are levied on a regularly recurring gain, on yearly proceeds, yearly receipts, whereas the third class, the taxes on business, are levied on individual transactions of exchange. Subjective and objective taxes arc distinguished from one another by the fact that the former strike the gain only after it makes its appearance as an item of income at the disposition of the taxable person ; whereas the latter, the objective taxes, fall upon the gain-yielding material goods from which the income of the person is derived.

The subjective taxes are undeniably the most perfect form of taxation, so far as concerns the purpose of enforcing the public obligations of the person.' It is to be added that this relative per fection is accompanied by practical difficulties in the way of bringing them to a full development. From these practical diffi culties it results that these taxes are developed in a graduated series (capitation taxes, household taxes, class taxes, classified income taxes, income taxes proper, low income taxes, high income taxes) in which the idea of the subjective tax develops gradually from a minute germ into full bloom. There are difficulties con nected with this gradual development such as to lead to the employment, by preference, of less perfect, but for that reason more available forms of taxation. Such, for example, are the other taxes on gains, which afford a more convenient means of taxation in being levied on easily accessible tax objects (divi dends, transactions); such are also taxes on consumption, which are levied on obvious manifestations of tax-paying capacity in the form of the taxpayer's consumption of goods. But in addition to the difficulties in the way of an adequate development of the subjective taxes there is also the intrinsic difficulty that they leave uncovered gaps which require other kinds of taxes to cover them. One important failure of this kind on part of subjective taxes lies in the fact that they are too inflexible, too one-sided to serve as an exclusive measure of tax-paying capacity ; only the active employment of the earnings in serving the demands of the household can lend this measure of tax-paying capacity the requi site flexibility. Another inherent shortcoming lies in the neces sary inability of the subjective tax to meet the requirements of the objective liability ; to meet which the objective taxes have been adopted.

The strength of objective taxes lies in this, that they are well , adapted to fill up the gaps left by any subjective taxation, and that they can attach to tangible and easily accessible objects without prying into the more intimate relation existing between these tax objects and the aggregate income of the person taxed. But apart from these reasons in its favor objective taxes have also their undesirable features. If they are to be taken as a sufficient measure of tax-paying capacity, then instead of the praise be stowed by the Physiocratic school (that this class of taxes attach to obvious facts and are not arbitrary, as every personal tax is),' they are met by the impatient declaration of the science that "die todte Sadie kann nicht steuern, sondem nur der lebende As soon as the attempt is made to reach profit-yielding objects which are not pre-eminently conspicuous, such as a trade, securities and the like, the practical advantage attaching to objective taxes immediately disappears ; the difficulties of administration become as great as the corresponding difficulties in the case of the subjective taxes.

As regards taxes on business, they have with good reason been wont to disguise themselves during their early development under the semblance of payment for a service rendered. They possess this advantage, that they reach a great variety of visible events ; the disadvantage attaching to them lies in the fact that these events or transactions afford a much less reliable indica tion of tax-paying capacity than do the income-yielding objects— apart from a single class of events (not included under taxes on business by Wagner, for example) viz., inheritances, donations and the like. Unless they are used with moderation, therefore, they will result in great inequalities, such as only long habitua tion can render bearable.

§ 335 The early stages in the development of subjective taxation are characterized by a lack of clearness in its relation to objective taxes ; there is even a pronounced tendency towards a transformation of subjective taxes into objective taxes (taxes on realty), which is to be taken partly as an expression of the absence of a developed idea of the different character of the two classes of taxes, partly as expressing the urgent need of definiteness and tangibility of the tax requirements under an undeveloped system of taxation, as a protection against arbitrary and defective assessment.

The difficulties in the way of subjective taxation are also somewhat lessened by the gradual character of the historical development ; at the outset the structures are quite embryonic, and are then succeeded by slightly higher developed stages, presently to be followed by a still higher development,—the evolution going hand in hand with the progress of development in state and society. It is a very significant fact that after the subjective taxes of earlier centuries had long since assumed the character of objective taxes, the Prussian tax system of the nine teenth century began this course of evolution over again, starting with the capitation tax [Kopfsteuer], which was at that time literally what financial science in modern times understands by the term, whereas in the tax system of the times of the Great Elector, even, the tax levied under this name had assumed the character of a progressive income tax, by no means levied on a capitation basis alone.

But every capitation tax (in the strict sense) tends, in any progressive society, to a broader development. It is only under primitive conditions, under a regime of relatively stable economic conditions and a primitive uniformity and equality in respect of acquisition and possession of wealth that a capitation tax answers to the requirements of justice. As the social differentiation progresses this kind of taxation must decline in importance, relative or absolute. It declines in relative importance in case other taxes, better adapted to that end, are introduced for the purpose of graduating the tax in proportion to the diverse degrees of tax-paying capacity possessed by individual households. It declines in importance absolutely in case other forms of taxation are found to be better adapted than the capitation tax for the collection of its due contingent from each household liable to the tax obligation. It declines, nominally and apparently, in all cases, because even where it is retained in point of fact it is brought in under the more comprehensive head of a class or income tax.

In Prussia it was only during the short experimental epoch of the tax-reform period that any attempt was made to adopt a capitation tax in the strict sense (181 1-1820). The next higher stage, of the class tax, was reached very shortly. The latter embodies the compromise effected by the earlier liberalism, and contains the contradiction between an abstract enthusiasm for direct taxes and the empirical difficulties of an exact assessment of incomes. During this period of liberalistic enthusiasm there was, in the first place, an aspiration to do honor to the personal tax as the most perfect form of taxation, as being in a special degree an expression of the awakened consciousness of the identity of the people and the state ; but in the second place,. experience and the doctrines of Adam Smith effectively combine to discountenance the carrying out of this view to its logical consequences. A tax which does not resort to that class of demands that make the income tax seem insufferable to an imma ture sense of citizenship, which contents itself with conspicuous external indications of wealth instead of resorting to an annoy ing intrusion into the private concerns of the individual, is an obvious measure of compromise. As the evidence afforded by palpable facts was accepted as a substitute for an appraisement of a person's pecuniary condition in the administration of the French system of objective taxes of that era, similarly with us the readily ascertainable fact of social position was made use of for the same purpose.

But this expedient, too, is nothing more than a beginning which tends constantly to further development as the evolution of life goes on, and tends therefore to break up and disappear.

Even the social stratification which the class-tax system takes as its point of departure, everywhere contains intermediate layers between the strata and layers pitched on for the purpose of the tax, and these intermediate layers have also to be taken account of ; hence arises the necessity for what is sought to be avoided by the class tax, viz., the valuation of individual tax-paying capacities within the same stratum. And what is of still greater consequence, the economic development of the nineteenth cen tury has, in a very brief space of tithe, utterly confounded the typical social strata which have come down by tradition from previous centuries. In all this later process of fermentation there is a single indication of pecuniary ability coming ever more strongly into the foreground and displacing all traditional dis tinctions and indications ; this is the amount of money which each household acquires. But this indication is not a very con spicuous one ; it has to be ascertained, and that by the adoption of measures before which the era that breeds the class tax recoils. A survey of a very short period suffices to establish the necessity of the consequences indicated.

The income tax makes its debut in a very instructive relation to the renewed aggression of liberalism in the constitutional development of Prussia about the middle of the nineteenth century.

§ 336. But even at that time all that was achieved was a transitional measure (1851-1873).

The class tax was retained in substance for the great majority of the population, being modified only in certain details. It is based on the old stratification of society, quite after the fashion of a generation earlier. A decided alteration is made only as concerns those classes of society which possess an income of one thousand thalers and upwards. As affects these. classes, the requirements of equity and the awakened public sentiment with regard to the obligations of the well-to-do towards the common wealth, carried the day to the extent of introducing a real income tax. This new step in advance was sought to be mitigated by a variety of provisos. The statute explains that all annoying intru sion into private matters is to be avoided in the assessment of the tax. The organizations in charge of the assessment are genial social bodies, organized on a basis of self-government, and with more regard for social amenities than for a strict performance of their duty to the state ; the assessment is also somewhat lightened by the manner in which the new classes of incomes are constructed.

Still a gradual progress takes place, though by loosely defined methods impregnated with grave abuses, and after the lapse of a couple of decades a new reform is brought under way,— this time, too, being associated with far-reaching changes in the constitution of the commonwealth.

The class tax was still retained for incomes under one thou sand thalers ; but it was now (1873) for the first time given a form answering to the requirements of the new era, being mod eled after the classified income tax and based on a classification according to the money value of incomes. The income tax became a classified income tax, but it narrowed the intervals between classes and extended its action uninterruptedly into the highest grades of income ; whereas the older form of the tax, as adopted in 1851, stopped short on reaching its highest class. At one essential point no change was yet made : the method of assessment remained as it had been.

But the aggressive vitality of this young tree would suffer no standstill. From this time the reforms follow one another with accelerated frequency. The obsolete method of the class tax was displaced in 1873, but in point of substantial fact the doc trinarianism of the years still remained master of the situation. But the great events of the new era clear the way for realism at this point also. The class tax itself must gradually yield ; as a first step in this direction the very lowest grades crumble away under the action of irresistible social facts. But even that is not sufficient ; the view gains ground ever more decid edly, especially with the national government, that the class tax should be abolished or reduced, and even that the reduction should apply to the lower grades of the income tax as well as to the class tax.

In this we arc following the example set by the practical English people, whose income tax has, for a hundred years past, given up taxing the poorer classes. This is in part a practical acknowledgment of the difficulties of levying a personal tax on the lower classes, in part it is an expression of a sense of equity which finds that the lower classes:are sufficiently drawn on by means of other taxes for their proportional share in the burden of taxation.

The further development of the progression, the distinction between funded and unfunded incomes, in brief, a progressive realization of an equitable apportionment of the burden to the various grades of tax-paying capacity, but also as an indispensable means to this end, a thoroughgoing reform of the method of assessment, —these are reforms that follow necessarily as the next succeeding steps of the reform movement.

The difficulties of levying an adequately productive tax on large incomes by means of the other forms of taxation already spoken of will always necessitate a recourse to the subjective tax and the development of that tax in the direction above indicated. This is the office of the subjective tax as it is to stand in the new era, after it has cleared itself of the old-time accretions of capita tion and class taxes, and so shall have reached an all the more vigorous development in its own proper direction.

§ 337. Apart from this social-political purpose, the further development of the income tax has yet another office to perform. This is the attainment of that flexibility which will enable the tax system to adjust itself year by year to the varying fiscal dcmands.

Also on this head the English income tax affords us an instructive example. It is to be said that this positive advantage possessed by this tax is due to what may be called the negative characteristics of the tax,— to the circumstance that it came into the world as an extraordinary tax, to be adjusted to the fiscal demands year by year, and to be dispensed with as soon as possible. But this negative feature has practically been set aside by the development of the last half century, and the positive advantages of the tax for meeting an annually increasing expend iture have been established for a long time past.

The reasons for this use of the income tax lie in certain peculiar characteristics belonging to it, as contrasted with other taxes. Objective taxes arc too rigid to admit of any mobility of this sort ; they are characterized by a definiteness and relative fixity of the rate of taxation—in some respects an excellent quality on general principles, but at all events an excellent quality- in the eyes of the taxpayers. A rate varying greatly from year to year in accordance with the variations in the demand would under the objective tax (only remotely related to the individual's tax-paying capacity) frequently result in griev ances which it is in the nature of the subjective tax to lessen. Still less adapted to this purpose are the taxes on business and on consumption. Both these classes of taxts are, for the most part, levied on acts which are, in a way, "voluntary." An increase of the rate in case of these taxes may easily result in the opposite of what was intended by their introduction ; the business or consumption in question may decline under the pres sure of the higher rate. Moreover, an annual adjustment of the rate is even more annoying in these cases than in that of the objective taxes, and this is to be avoided. The course of busi ness and of the markets, the proper shifting of .taxes from the first payers to the consumers, will be greatly disturbed by any thing of the kind.

It is the office of the income tax—in an adequately developed form—to infuse flexibility and extensibility into the tax system, and so to put an end to open or covert deficit financiering, as well as to the ever-recurring necessity of a new loan to meet even the most moderate " extraordinary " demand on the treas ury.' § 338. Objective taxes [firtragssteuern] are, in point of histor ical origin, an outcome of the difficulties which beset the develop ment of the tax system as well as of the growth of a sense of civic obligation to pay taxes ; they therefore represent a low development of the methods of appraising tax-paying capacity, being employed under circumstances where the mature public sentiment on which to base a more perfect appraisement is lack ing, where the " arbitrary " character of the income tax is dreaded and the obviousness of the assessment on proceeds is made much of. Further, in point of present expediency, the objective taxes are an equitable form of taxation so far as concerns the relation between the household and the state (empire, commune), where no regard is had to the subject's relative ability to pay.

While by its nature the subjective tax, in more or less devel oped form, taxes the aggregate income of the individual, it lies in the nature of the objective tax to follow up the particular tax able items [Ertrii gen] with or without a view to their equal taxa tion. The classic example of this kind of tax is the English income tax, which is based on the five specified classes of incomes, but which, as is well known, really is, as it purports to be, a subjective tax (sec. 311).

Whenever the objective tax is in reality an objective tax, the question arises whether the peculiar relations of certain income yielding objects to the community, in contradistinction to other income-yielding objects and their 'relations to the community, are to be followed up with a special objective tax. On grounds of historical development, as well as for enduring reasons of equity, this question is answered in the affirmative (in Prussia, France, etc.) so far as regards receipts from real property in town and country ;—on historical grounds, because of its dominant impor tance among the different kinds of property, and because of its conspicuousness ; for permanent ethical reasons, because of the intimate connection of landed property with the various organs of the commonwealth.

The question as to whether an objective tax is to be levied at all or to the same extent on proceeds arising from other forms of property, is suggested by the above question with respect to landed property. It goes without saying that other forms of property will also be taxed in a community where there has been considerable development of other kinds of property than real estate. If they are taxed at a lower rate than real estate, it is to be taken that the eminent importance of real estate for the commonwealth affords a substantial practical justification for so doing. On the other hand, the little else than technological advantage of a greater tangibility of real estate as contrasted with the professions, commerce, investments of capital, can afford no definitive solution of the matter; it is rather to be looked upon as an incentive to improvements in the methods of taxa tion, with a view to adequately reaching the income from these sources.

Whether the tax on realty, in the form of a tax on proceeds, is regarded as a means of laying the tax-paying capacity under contribution, or is taken to fulfill its office of payment for special advantages enjoyed ; in either case something similar will hold with respect to a tax on professions, trade or profits of capital. In the Prussian tax system there is a gap at this point, which can in any case be only partially filled by the tax on realty. The requirements of equity remain unsatisfied so far as concerns the demand that our great industrial establishments, and the like, should bear their proportionate share of the burdens of the commune, etc.

The relative importance of objective taxes was greatly increased by the later development of business life, at about the same time that the science came to an appreciation of the inade quacy of this class of taxes for the purpose of equitably taxing the subject (taxpayer).

The increased mobility of modern life has given rise to an ever-increasing number of such relations between the individual establishment and the public treasury as separate the subject (taxpayer), spatially, from the tax object, so that the tax sub ject and the tax object frequently fall within the jurisdiction of different tax-levying authorities. Every such case of separation gives rise to a question of equity, requiring for its solution a dis tinction between the tax liability of the subject and that of the tax object (secs. 223-228).

The development of the means of communication must of necessity develop tendencies to a dispersion in space, a feature for which even the old regime (sec. 297) had been led by expe rience. to make provision by means of its objective taxes.' It must of necessity happen more and more frequently that a tax payer's estate, or his place of business, or his business activity, lies in a different commune from his domicile. As an example of the development here spoken of I may refer to the typical and very characteristic phenomenon of a gradual depopulation (as regards residents domiciled in the place) of the City of London at the same time that the business life of the City is taking rapid.strides in advance.

This class of cases increases constantly, intensively and extensively, in volume and diversity. Both as regards the com mune and as regards the larger communal organizations (circles, provinces), as regards states and empires, there makes itself constantly felt the need of a balancing of accounts between the individual and the public economy, such as objective taxes are well adapted to effect.

§ 34o. But it is not the development of the means of com munication alone which affords occasion for a growth of this need; there are developments in other lines in modern industrial life whose tendency is in the same direction. There are forms of industrial enterprise whose nature involves the result that the place where the undertaking in question develops its activity is nowise related to the place of domicile or of the business activity of the persons whose means are invested in the enterprise. Joint stock companies are the chief example of this class of enter prises. They gather the large capitals which are required for carrying on certain industries from the most varied sources and from ever-increasing distances, and by means of an ever more extended sale of shares.

Hence it happens, with growing frequency, that the place where the invested capital puts forth its industrial activity is remote from the place of domicile of the shareholders in the company. The result is that we have a great number of cases in which subjective taxation and objective taxation do not keep company, a diversity of demands on part of various tax-levying bodies crossing one another. The business of a joint-stock rail way company with its extensive plant, necessarily comes into intimate relations with local political bodies within whose juris diction its stations, workshops, etc., lie. These local tax-levying bodies have an equitable claim to some payment from the com pany, independently of all question as to whether or how far the railway plant and its business affords any profits (subjectively considered) to the stockholders of the company. A factory, whether it declares a dividend of t per cent. or of .30 per cent., in any case makes use of the streets and highways, and in so doing it occasions an expense to the local civil body, at the same time that it frequently increases the burden of the com munal poor relief and public schools by attracting a laboring population to the place ; for such expenses the industrial enter prises within the commune (of the province, etc.) are properly chargeable, just as much as for any other expenditure made in the interest of the enterprises in question.

T-his is a place where the objective tax should be employed. The employment of the subjective tax is entirely out of the question, either because there are no profits obtained or because such subjective tax as may be levied falls to those communes, etc., in which the persons live to whom the dividends go.

This taxation of joint-stock companies, it therefore appears, is of a twofold nature, involving two distinct principles of taxa tion, and therefore two kinds of taxes. From this is to be dis tinguished the other taxation of joint-stock concerns, which is intended to act as a double taxation with only the appearance of single taxation, the purpose of the legislator in its employ ment being to reach, by the taxation of the joint-stock company, what he is unable to reach directly by taxing the members of the company subjectively. So it was the purpose of the tax reform proposition of the Prussian government in 1883 (follow ing the example of the Saxon law) to tax the profits of joint stock companies in order to cover the unavoidable gaps in the assessments on dividends (and other similar incomes), which were already nominally taxed by the law of May 1, 1851, but with very unsatisfactory results. It was therefore an attempt to accomplish, by what was in theory a double taxation, a result which in point of fact would amount to nothing more than a single subjective tax.' The case of associations [Genossenschaften] (in the strict sense) is to some extent analogous. But only to some extent. The complicated question as to whether a society is a business concern in the same sense as a joint-stock company, and should therefore be required to pay the taxes levied on business asso ciations, introduces a special point of some difficulty.' § 341. Closely related to the objective taxes, and in some part employed for a similar purpose, are the taxes on business or on transfers [ Verkehrssteuen]. These are levied on particular transactions, a great variety of which are occasioned by the exigencies of business intercourse, and which constantly increase in number and variety with the increase of business.

They differ from objective taxes in this respect, that they are levied not on regularly recurring profits, but on certain business' transactions recognized by the law (purchase, lease, loan, insur ance, inheritance, gift), from whose occurrence the tax legislation infers the presence of corresponding receipts and incomes.

The designation adopted for this class of taxes, as well as their theoretical basis and their classification, has hitherto been a shifting one. The step taken by Lorenz von in advance of the position occupied by K. H. Rau, on this head, is signifi cant of the entire attitude of Stein toward Rau's Financial Science; it is a needed disintegration of the earlier doctrine, which is, however, far from having reached a definitive conclu sion and a satisfactory systematic structure.

But the disintegration of the untenable concept of a stamp tax, or rather of a stamp fee, is definitively accomplished.' It has been made plain that the stamp is nothing but a particular means of collecting a tax or a fee, and that it may be employed in the collection of various kinds of taxes, taxes on business as well as on consumption. The difficulty of constructing an ade quate scientific definition, but not the tenability of the earlier notion of a stamp tax, is increased by the fact that many stamp taxes partake of the character of tax and fee both, and that other stamp taxes occupy an uncertain middle ground between the tax on business and the tax on consumption (taxes on bills of lading, on railway tickets—transportation taxes).

While this field affords an opportunity for the exercise of scientific acumen,' it also appears, on the other hand, that the further development of taxation will, for a long time to come, afford a place for the employment of taxes on business transactions. These taxes seem to me (and in this I substantially agree with Adolph Wagner) to be of service as supplementing the taxes on earnings [Erwerbssteuern], subjective as well as objective. This position is in consonance with a view of taxation—idealistic in its aspirations and realistic with respect to the means to be employed —which recognizes the shortcomings of each particular class of tax as well as the great difficulty of removing these shortcom ings, and is therefore thoroughly convinced of the necessity of supplementing any single class of taxes by taxes of another kind. We have not even the conviction, but only a hope that a pains taking elaboration of the tax system in detail will make the various kinds of taxes mutually supplement one another and fit the salient and re-entrant angles of taxation together.

Of course this point of view does not exclude, but rather demands a persistent criticism and improvement of existing taxes on business transactions, under the guidance of scientific theory. But at this point, as well as elsewhere, we must care fully avoid underrating the importance of existing results of his torical growth ; the French taxes on transactions have been cited (sec. 283) as an historical example of taxes on the transfer of realty, serving to illustrate the force of habit, at the same time that it is a result not to be reconciled with any scientific system of taxation.

§ 342. Whether (with Adolph Wagner) we construct a special class of "succession-taxes" [Anfallssteuern] beside the taxes on transfers, or, as seems not incongruous to me, we comprehend this class of taxes under the general class of taxes on transfers, in any case a branch of taxation resting on a solid basis and of great significance for the future.

For while in the great variety of other occurrences that are reached by the taxes on transactions we have to do with trans actions of the nature of bargain and sale, which logically afford nothing more than a basis of inference, and even a qualified infer ence, as to the taxable gains resulting from the transaction, the nature of inheritances and donations, on the other hand, is that of gratuitous transfer, so that these occurrences of themselves indicate an accession of property ; and although the significance of such accession may vary with the varying relations subsisting between the parties concerned, still the fact remains that there is in every case a real gain.

It may be that other taxes on business [Verkehrssteuern] as well as taxes on proceeds [Ertragssteuern] will have to acquiesce in the imputation that they fall upon business transactions which afford no safe inference as to any gain derivable from them (even the taxes on proceeds, as regards some portion of them, are of the nature of advances made in productive industry, in that they are simply a payment for services rendered by certain public establishments without there being any question as to whether a gain will result to the taxpayer). But the case for the tax on inheritances and gifts is a much stronger one ; these events are not expressions of a simple one-sided relation alone, but what is much more important, there is a manifest connection between the transaction taxed and the paying capacity of the taxpayer.

343 The category constructed and introduced into ,the theory of taxation by Adolph Wagner, and commended by him as peculiarly important and desirable—Taxes on Speculative Gains [Konjunkturgewinne] —occupies a middle ground.

From one point of view these gains appear to be gratuitous gifts of chance, accruing to the individual under circumstances calculated to shed light upon a dubious spot in every industrial community organized on the basis of private love of gain. The taxation of these gains, when viewed from this standpoint, com mends itself not only as a.direct logical consequence of the accepted principles of taxation, in the same sense as does the tax on inheritances, but it is at the same time a social-political measure directed to an equitable neutralization of the harsh discords of modern business life. It is unnecessary here to recall Lassalle's highly colored account of the nature of the " conjuncture "z "als rohe Naturmacht auftretende gesellschaftliche Zusammenhdnge." This is one point of view ; but there is also another.

Speculation is not, as Lassalle asserts, simply "a guess at the results which unascertainable circumstances will bring forth." It is more than that. It is the struggle of intelligence, armed with a knowledge of the ascertainable conditions, against the blind workings of chance.

This struggle takes the form of commercial transactions between two parties holding opposite opinions as to the results to be expected from known conditions, and so testifying to the uncertainty of any anticipation of the future. It is these trans actions, based on the uncertainty of the future, on which the tax must be levied if it is to reach the speculative gains under the general form of a tax on business transactions. Precisely this recognition of the blind working of chance in human affairs casts doubt upon the legitimacy of such legislative interference, at the same time that it neutralizes the effort to reach the specu lative gain. It is only on such portion of the transactions in question as have actually resulted in a gain, and only on the ground that they have so resulted, that a special tax can be imposed, after the fashion of the inheritance tax ; provided always that practicable means of levying such a tax are at hand, and that such means are available only in the form of a subjective tax -- a taxation of income and property— and not in the form of a tax on business.

§ 344 The problem seems an easier one in cases where the nature of the speculative article excludes the possibility of two alternative speculative aims —a rising and a falling of the price both. In such a case' an exceptional preponderance of the ascertainable and the known conditions affecting the particular article in question confines the force of chance within a narrower range. In these cases the development of value in the process out of which speculative gains accrue to private individuals takes the form of an undeviating, continuous chain of increments of value, and in such cases there is a more available opportunity for the imposition of a practicable and equitable tax on the transactions in question.

The course of values in real estate has frequently, under favorable circumstances, given the impression that it affords a case of development of the kind above spoken of. During a period of strongly progressive development of industrial produc tivity and of population, and especially at every focus of economic growth, in the great cities and their immediate surroundings in the city-like industrial countries, the record of increase in real values shows a movement which appears to be quite the opposite of the rise and, fall above contemplated, both in point of absolute increase and in point of steady growth. Especially striking are the instances, to be found in any modern metropolis, of the value of building ground advancing in the course of years, decades, centuries, moving constantly in the same direction.

But even at this point the tax on business transactions will not find as ready application as might be expected or as might be desired.

In the first place, it appears on analyzing the movement in detail that the steady advance of values which is observ able in the movement taken as a whole is not to be found in each particular case. It may be fully established as a point of theory, and it may also be sufficiently borne out by experience, that under certain favorable conditions the course of values of realty is, in the long run, upwards ; but the ownership of a given piece of property by a given person is, under modern economic condi tions, not a matter of centuries, and frequently not a matter of decades ; it is the course of values during the lapse of a shorter time that is the decisive point for the owner, and it is this fluctuation of shorter periodicity thA is had in view in very many of the transactions in real estate. And within this briefer period it is to be remarked that (especially under existing agri cultural conditions in Great Britain, Germany, etc.) what we find is at best a stagnation, or even some decline of values. The rental value of landed property, therefore, falls into the same category as other goods whose rise and fall is to be taken into account.

In the second place, so far as it is well founded, the expecta tion of an advance in the value of real estate—such as is unmis takably to be seen in a modern city like Berlin—will give rise to an effort, as widespread as the tendency itself, to take advan tage of this " calculable appreciation." The prices which are paid for a building lot under such circumstances may of course be expected to comprise the equivalent of the currently expected future advance. The degree in which these expectations affect prices may be greater or smaller, according as times are good or bad, but it is always an active factor for the simple reason that the future rise of land values is a generally accepted article of belief. From this it follows that such an advance in the prices is not necessarily due to a present favorable turn in the move ment of population or of industry, but rather that the effect of any such favorable turn in the future has already been discounted in the present price. The greater the number of speculators concerned, the more highly developed the speculation, the more sensitive is the fluctuation of values and the more difficult, consequently, is it to infer any speculative gain from the fact of 4 transfer of property.

Still, it is conceivable that demonstrable gain from the sale of real estate might be made an object of taxation just as a gain by inheritance or from a lottery ticket is taxed. It is also not to be denied that the publicity of the transfer of real estate affords a readier indication of such a gain than is to had in the case of other business profits. But on this point the follow ing considerations are to be taken into account.

In the first place it would lead to the adoption of annoying regulations to be observed in every transfer of real estate with a view to determining, from the special circumstances of the indi vidual case, whether any gain has resulted or not. How far these regulations would be burdensome to the officials and to private parties, how far they would accomplish their purpose, • what kind and amount of evasions they would encounter ; this would be a problem to be settled by experience alone.

But in the second place, even a relatively successful taxation of the speculative gains on real estate might easily be regarded as an anomaly, or as a case of one-sided taxation (as is so often the case with respect to existing imposts on landed property), in view of the absence of any similar taxation of other business gains. But the attempt to supply this deficiency with respect to the taxation of other gains would probably encounter very great difficulties, inasmuch as it would require the application of similar methods of publicity to other business, and these arrangements would have to be created, and created for the purposes of the tax, whereas, in the case of the transfer of realty these require ments of publicity already exist, even apart from any purpose of taxation, and are in the nature of the case readily enforced in spite of the mobility of life as it actually exists. At the same time, the unreserved disclosure of the condition of othes business enterprises to the officials for purposes of taxation would involve an amount of intrusion into private affairs such as is entirely foreign to existing methods of tax administration and would therefore appear to be a harsh and unequal requirement. And in addition to this, the artifices for the evasion of any such requirement in themselves offer a problem of some difficulty.

§ 343. In itself considered, the idea of seeking out and ade quately taxing the speculative element in the gains of modern business is quite legitimate, but it is scarcely if at all feasible by the proposed method of a tax on business. Still, the difficul ties of this method serve to point out another and more practica ble way.

The fact has already (sec. 243) been spoken of that there is a point here at which tax legislation may fail, either in the enact ment of the law (Prussia) or in the administration of it (Switzer land). Land adjoining the city and increasing rapidly in value by reason of the city's growth is permitted to escape with a tax answering simply to its agricultural value, so long as it has not actually undergone the transformation into an urban building site. A piece of suburban property—according to the provisions of the Prussian tax legislation (sec. 3o6)—is not transferred from the land-tax cadaster to the building-tax cadaster until it is covered with a building ; there is no tax for a building lot, as such, so long as it is not occupied by a house, however great may be its actual value, and, however manifestly it is withheld from occupancy for the sake of a speculative gain.

The justice of this claim is not impugned by the fact that the good intention has, in a particular instance, taken a vicious form.' What is wanted is a more adequate application of the canons of equity than is to be expected in the caricature of legislation comprised within the jurisdiction of a state covering a few square miles, where the merchants make laws to suit their own interests ; as Aristotle says, a wagon one span long is no wagon.

But the question does not concern values of real estate alone ; the omission which claims our attention at this point is one which calls for reform in our income-tax legislation as well. There are, in fact, very grave problems calling for solution at this point.' These problems stand in close relation to what has already been said (secs. 317-322) on this head in speaking of the Prussian legislation, as well as with what remains to be said farther on. Their consideration would lead to a discussion of certain, peculiar supplementary tax contrivances calculated to impose special taxes on the great aggregations of profit from speculative business.

It is therefore to subjective taxation that we must turn for * the effective means of compassing the required equity.

§ Taxes on transactions, in the strict sense (exclusive of "succession-taxes" in the sense used by Adolph Wagner), show, in respect of the objects on which they are levied, the same course of development which we find in the case of other taxes.

Just as in the case of taxes on proceeds the tax on land stands first in importance and in point of time, because of the pre eminent importance of landed property in the economy of the community, because of the relative unimportance of other sources of income during the early stages of industrial development, because of the obtrusiveness of this as contrasted with other forms of property ; —so, likewise, in the case of taxes on trans actions it is the transfer of realty that is constantly required to bear a burden beyond what is imposed on other property trans ferred..

In a commonwealth in which the propensity for innovation turns by preference to alterations of the constitution, while the methods of administration all the more presistently retain their ancient form,—in France we find even to this day a tax on the transfer of real estate, which is a faithful image of this earlier method of taxation. And in this taxation it will even hold true that imposts of a private and of a public character are blended • together quite after the fashion of what occurs under the feudal state.

The contrast between the established institutions and what reason would require is in this case a very striking one. The evidence of the fact of transfer is desirable for purposes of tax ation, but the imposition of the burden has nothing to do with equity. The special tax imposed on the basis of the evi dence so obtained is justifiable only in case the (in itself con sidered, justifiable) purpose is not adequately attained by other forms of taxation. The hardship involved in a considerable tax on transfers (with a view to taxation of the speculative gain) might be dispensed' with in case a great and constant advance in the value of real estate could be assumed to take place ; but the difficulty at this point lies with the assumption here made, which may either be wholly unfounded or may not hold with sufficient permanence and generality.

We accordingly find that the tendency of the latest legislation is toward an abatement of the tax on realty which has been handed down from the past.

The need of some equalization on grounds of justice, the development of personal property and the resulting increased transfer of personalty [Mobiliarverkehr] and the complaints of excessive taxation on part of landowners, have in later times given our tax legislation an occasion to extend itself along the lines of the earlier stamp taxation. But it has always been with a well-founded horror of interfering with business transactions, such as must result from any but moderate rates of taxation.

Still, it is instructive to note that those countries of Europe whose industry stands at the head of modern development have applied the tax on transactions to a greater extent than those whose industrial development has been later and slower. Great Britain, and also France, have, as contrasted with the German legislation, made earlier and more extended use of the tax on transactions. The British law taxes bills of exchange, bank notes, life and marine insurance policies (previous to 1869 also fire insurance policies), receipts. None of this occurs in the legisla tion of the German Empire. Receipts, taxed since 1855 at an invariable rate of only one penny (for sums of £2 and over), yield at the present time an annual revenue of 1,000,000, that is to say, four times what it amounted to thirty years earlier.

The legislation of the German Empire (Acts of July 1, 1881, and May 29, 1885) omits all these items. It applies, apart from drafts, only to securities, broker's notes and bills of transactions in securities, and the aggregate amount of the tax was for the fiscal year 1886-87' 12.88 million marks ; that is to say, not much more than one-half of what the tax on receipts alone yielded in Great Britain. The stamp tax on drafts, habitually in extended use in Germany as in other countries, was reduced to uniformity for the first time by a law of the North German Fed eration of July 10, 1869, and afterwards (1870-70 extended throughout the German Empire. This tax, in spite of the appreciable increase in its aggregate amount as compared with the results obtained during the first half of the century, still yields only 6.542 million marks in Germany, while, it yields 14 million marks in Great Britain. At the same time it is to be noticed that the stamp tax on drafts in the latter country has fallen off' very considerably on account of the great spread of business transactions on a large scale since 1874, much more so than in the German Empire, where the amount of the tax in 1873 was 7.85 million marks (in 1874, 7.04 million marks.

§ 348. It appears, therefore, from the foregoing considera tions that there are grave difficulties connected with the taxa tion of transactions ; it is only in cases where the business in question is very brisk that it is possible to collect a considerable revenue, because the rates are perforce extremely low ; 'while the classes of transactions which would seem at first sight to be especially fitted for this kind of taxation prove unproductive of revenue. In coming now to the taxation of inheritances and gifts, however, we have to do with a more amenable subject, which may more properly be made a subject of heavy taxation both on grounds of justice and of expediency.

All the elements which are absent in the case of the common run of business are here combined —a coincidence of an inde pendent act of the court with the act of proving and entering upon an accession of wealth, and therefore of an increased tax paying capacity. It is of course necessary to take cognizance of the kind and degree of relationship between the heir and the person leaving the inheritance, in order to satisfy the require ments of equity in taxation ; it may be that an adequate appre ciation of this relation will, under given circumstances, result in an exemption from the inheritance tax (as happens in point of fact under the inheritance laws of most countries with respect to the inheritance of property within the first degree of relationship); but after all due allowance has been made, there is still left a broad field for an inheritance tax of undoubted equity and expe diency, as is proven by the testimony of all existing systems of tax legislation (in other words, all convictions as to equity handed down from the past), as also by cogent arguments of policy both as regards taxation simply and as regards social expediency.' § 349. In order to an understanding of the inheritance tax in its relation to existing tax legislation it is necessary to reach some definite appreciation of the meaning of the right of inheritance.

The right of inheritance is, on the one hand, a civil recogni tion of the bond of kinship, which is an expression of an ever active sentiment of humanity as well as of a necessary condition of civilized life (vol. i. sec. 308); but at the same time it is also, on the other hand, the expression of the owner's arbitrary choice seeking to perpetuate itself beyond the grave.

According as the right of inheritance is one or the other of these two things it does or does not appear to society and to the state as unimpeachable, or at least a restriction of it will or will not seem to be a hardship, as the case may be. The senti ment which has found expression in the gradation of the inher itance tax is quite in consonance with this view. Inheritance by a son or a daughter is simply an accession to what the sentiment with regard to kinship as well as the consciousness of the great significance of thig relation for the commonwealth recog nizes as theirs by right. Accordingly the sense of equity does not see in an inheritance of this kind an increase of possessions in which the state can claim a share on the ground of its being a fortuitous gain. Even where the prevalent views as to the equity of an inheritance tax call for a taxation of such cases they are wont to content themselves with the imposition of the lowest rate employed.

In proportion as the transmission by inheritance passes these narrow limits of kinship, sentiments of a different character with regard to the equity of an inheritance tax come to prevail. The less close the bond of relationship is, whether because of greater remoteness or because of the prevailing conceptions as to the degree of importance of such a relationship, the more will the view prevail that inheritance is of the nature of an extraordinary accession and partakes of the character of fortuitous gain. The heir is conceived to enter upon the possession not of something that is properly his own and that by the nature of the case has long pertained to him, but of something alien, accidental and unexpected.

This contrast and this tendency in the evolution of the inheritance tax will always be present, so long as the now preva lent views of the family, property and inheritance on the one side, and of the state and the obligation to pay taxes on the other side persist. At the same time the practical realization of these tax gradations in the future will be subject to the like course of development as the varied tax provisions of different countries show to have prevailed in the past.

§ 35o. The contrast afforded by the amount obtained from the tax in different countries may serve to show to how great an extent the inheritance tax is a product of historical conditions.

In the German states the amount of the inheritance tax was on an average for the years 1880-1884 not more than 29 pfennigs per capita of the population, in Prussia only 19 pfennigs' (with a very gradual increase resulting from the increase of wealth), and for 1889 in Prussia about 24 pfennigs.' On the other hand the inheritance tax in France, in 1884, yielded a revenue of 2.85 marks per capita, in Belgium (1880) 3 marks, in Italy .83 mark, in Great Britain (1884) 4.37 marks, in Holland 3.02 marks.

There is no doubt but that diversity in point of wealth, at least as regards certain ones of these countries, has something to do with this difference in results. Also some part of the differ ence is due to the different degrees of strictness with which the tax law is administered (somewhat as we have found is the case with the income tax in England as compared with Prussia). But the chief cause of difference is no doubt a difference in the pro visions of the law, in great part the taxing of the nearer degrees of kinship in some countries instead of exempting them as is done in other countries.

In France, with an aggregate revenue (1883) of 138 million francs derived from the inheritance tax, the taxation of inheritances in the direct line alone yields 35 million francs and the tax on inheritance between man and wife 15.50 millions ; while both these degrees of relationship are exempt in Prussia and in pretty nearly all the other German states (Baden, Schwartzburg-Sondershausen and the Duchy of Lauenburg impose a tax on inheritance between man and wife of t.66, 3, and I per cent. respectively). France taxes inheritance in the direct line at a rate of 1.25 per cent. and inheritance between man and wife at 3.75 per cent.

To this is to be added that the other, remoter degrees of relationship, as well as the cases where there is no relationship, are taxed more heavily. Inheritance between brother and sister is taxed in France at 8.125 per cent., in Prussia at only 2 per cent. The highest rate imposed on the remotest degrees of relationship and on non-related heirs is 8 per cent. in Prussia and 11.25 per cent. in France.

In this latter year it made up about one-ninth of Great Britain's aggregate revenue from taxation (75.66 million pounds).

In this case, too, there is a taxation of inheritance in the direct line (1 per cent.), a higher rate for the nearer degrees of kinship (3 per cent. for brothers or sisters) and a further increase of the rate for the remoter degrees of relationship and non related heirs (10 per cent.). There is also a second, subsidiary form of inheritance tax (probate duty) which is levied without regard to the degree of relationship and is graduated by classes according to the amount of the property, the rate being about 2 per cent.

§ 351. Tax legislation has so far reached a much lower degree of development in another direction—viz., in the development of a progressive rate, to increase with the increasing amount of the property inherited.

In this case, as elsewhere in taxation, a beginning in this direction has been made at the lower end of the scale, by the exemption of the very small and the smallest amounts. A measure of this nature, moreover, has the support of a principle involved in the taxation of inheritances. If, as happens France, Great Britain and many other countries, inheritance in the direct line is also taxed, there is at least this much to be said for the views which prevail today in the German states, that in case of very modest pecuniary circumstances (such as are so common in Germany) the decease of the head of the household and the succession of his immediate heirs to the property carries with it a pecuniary change for the worse rather than for the better.' It is in accord with this fact that the idea of the inheritance tax requires the exemption of this class of cases, or at the most that they should be taxed at a lower rate than others, and the case is analogous if legacies of small amount in favor of needy relatives who may have habitually received support from the testator during his lifetime are exempted, relatively or entirely, from the inheritance tax.

Following out the same thought higher up in the scale, into the development of the idea of a progressive taxation we come upon demands which lie rather in the region of what ought to be in the future than of what actually exists today. It is only in isolated instances that existing legislation has been affected by this line of thought, and, very significantly, it is (in connec tion with existing taxes on income and property) in three Swiss cantons, Zurich, Soleure and Thurgau, that anything of the kind occurs.

In Zurich it is provided by the law of December 22, 1869, that "these amounts of the tax are to be increased : by one tenth in case not less than 10,000 francs, by two-tenths in case not less than 20,000 francs, by three-tenths in case not less than 30,000 francs, by four-tenths in case not less than 40,00o francs, by five-tenths in case not less than 50,000 francs fall to a single recipient." In Soleure the law of December 13, 1848, provides : "If the amount inherited by a single heir (or legatee) amounts to less than 100 francs, only one-half the fee will be collected ; whereas the like fee will be increased by one-quarter for all such legacies amounting to not less than 5000 francs, by one-half for amounts of not less than 10,000 francs, by three-fourths for amounts of not less than 15,000 francs, and doubled for amounts of not less than 20,000 francs." In Thurgau the law of May 23, 1850, provides : "If the amount received by an heir falls short of 212 francs (= too gulden) only one-half the fee will be exacted ; whereas the like fee will be increased by one-fourth for legacies amounting to not less than 6350 francs, by one-half for amounts of not less than 12,700 francs, by three-fourths for amounts of not less than 19,000 francs, and doubled for amounts of not less than 25,000 francs." In other countries the development of tax legislation in this direction has so far taken place to so slight an extent that it even happens in many countries (in a manner quite analogous to what occurs in the case of the undeveloped income tax) that the rate of the tax decreases in the higher grades of the scale, so that the larger inheritances bear a relatively lighter burden than the smaller ones. Such is the case in Great Britain. Here the probate duty for amounts of £30,000 and over is about one and one-half per cent., whereas for amounts of £3000 to £30,000 it is about two per cent., and for still smaller amounts usually over two per cent. A reform has been attempted only very lately (1889). The Chancellor of the Exchequer, Mr. Goschen, proposed to introduce a new form of inheritance tax to be added to those already in force, by which it is proposed to levy a tax of one per cent. on every estate amounting to more than L'to,000, whether land or personalty. The purpose avowed by Mr. Goschen (a correct Manchesterist, by the way) is to reach the growing body of accumulation, because "people of consid erable means habitually pay very low taxes in proportion to their aggregate income." It is to be remarked that, as happens in the case of the income and property tax, so also in the case of the inheritance tax, we have to do with the solution of problems of financial equity and of social policy, towards which existing legislation serves as the rudimentary substructure on the basis of which a further development is to proceed. It is only by bearing this purpose in mind that we shall be able to maintain the existing system of property in substantial integrity, as against the far reaching demands put forward not only by the radical opponents of the rights of property, but also by scholarly critics, such as John Stuart who claims that "no one person should be permitted to acquire by inheritance more than the amount of a moderate independence."

tax, taxes, business, development and inheritance