Principles of Justice in Taxation 9780231888608

Table of contents :
Preface
Table of Contents
I. Introduction
II. The Origin and Nature of the State
III. Taxation, Economics and Ethics
IV. The Political Basis and Principles of Taxation
V. The Economic Basis and Principles of Taxation
VI. The Ethical Basis of Taxation
VII. Ethical Principles of Taxation
VIII. Practical Justice in Taxation
Bibliography

Citation preview

2 PRINCIPLES OF JUSTICE IN TAXATION

STUDIES IN HISTORY, ECONOMICS AND PUBLIC LAW EDITED

BY

THE

FACULTY COLUMBIA

OF P O L I T I C A L

SCIENCE

OF

UNIVERSITY

Volume XVII]

Number 2

PRINCIPLES OF JUSTICE I N TAXATION BT

STEPHEN F. W E S T O N

AMS P R E S S NEW

YORK

COLUMBIA UNIVERSITY STUDIES IN THE SOCIAL SCIENCES 45

The Series was formerly known as Studies in History, Economics and Public Law.

Reprinted with the permission of Columbia University Press From the edition of 1903, New York First A M S K D I T I O N published 1968 Manufactured in the United States of America

Library of Congress Catalogue Card Number:

AMS PRESS, INC. New York, N.Y. 10003

68-56695

PREFACE. THE subject of this monograph was chosen in 1891 while I was taking post-graduate work at Columbia University. T h e first draft was nearly finished in the spring of 1894 when I was compelled to give up work for a time on account of ill health. Engaging in academic work in the fall of 1894 I was again obliged to set the monograph aside until the winter of 1900. Since then it has been completely rewritten and chapter V I I I added. F o r his constant interest and encouragement I feel greatly indebted to Professor Seligman, for otherwise the monograph would not have been completed. I wish, also, to take this occasion to express my appreciation for the courtesy shown to me by the Faculty of Political Science of Columbia University in giving so much extension of time for the completion of my monograph. T o Dr. Alvin S. Johnson, of Columbia University, I am indebted for verbal changes of text and for reading of proof. AMTIOCH COLLEGE, YELLOW SPRINGS, OHIO,

May, 11)03.

S. F . W .

TABLE OF CONTENTS rin CHAPTER

1

INTRODUCTION

IL CHAPTER

II

T H E ORIGIN AND NATURE OP T H E STATE I . T H E I N D I V I D U A L AND SOCIETY

19

I I . ORIGIN OF T H E S T A T E

24

I I I . T H E N A T U R E OP THE STATE

26

I V . CHARACTERISTICS OP THE S T A T E 1.

28

THE VOLUNTARY AND INVOLUNTARY CHARACTER OF POLITICAL

ORGANISA-

TION

>8

2.

THE ORGANIC THEORY OF THE STATE

3.

THE NATURE OF SOVEREIGNTY CHAPTER

32 36 III

TAXATION, ECONOMICS AND ETHICS I . TAXATION 1.

43

THE NATURE OF A TAX

43

2 . CHARACTERISTICS OF A TAX

46

3.

50

THE LIMITS OF TAXATION

I I . TAXATION AND ECONOMICS

54

1.

TAXATION AND PRODUCTION

55

2.

TAXATION AND DISTRIBUTION

60

3.

TAXATION AND CONSUMPTION

65

I I I . TAXATION AND ETHICS

68 CHAPTER

IV

T H E POLITICAL BASIS AND PRINCIPLES OF TAXATION I . T H E SOCIAL CONTRACT AND TAXATION 1.

THE POLITICAL PHILOSOPHERS

2.

THE PROTECTION THEORY OF TAXATION

343]

76 77 85 7

8

CONTENTS

[344 PACK

I L T H E EVOLUTION T H E O R Y OF T H E S T A T E A N D T A X A T I O N

90

I I I . T H E U T I L I T A R I A N T H E O R Y OF T H E S T A T E A N D T A X A T I O N 1.

THE THEORY OJ MILL

2.

THT UTILITARIAN

98 99

THEORY OF SAX AND THE AUSTRIAN

SCHOOL

I V . SOCIAL THEORIES AND TAXATION

102 106

1. ANARCHISM

106

2. COMMUNISM

107

3. SOCIALISM

108

V . CONCLUSIONS AS T O T H E POLITICAL BASIS A N D PRINCIPLES CHAPTER

M

V

T H E ECONOMIC BASIS A N D PRINCIPLES OF TAXATION L

T H E PHYSIOCRATS A N D THE SINGLE T A X E R S I.

THE IHYSIOCRATS

».

THE SINFLE TAXERS

116 116 119

I I . T H E CLASSICAL SCHOOL OF ECONOMISTS

125

».

THE BENEFIT THEORY OF TAXATION

125

C.

THE EXCHANGE THEORY

129

3.

THE INSURANEE

THEORY

132

I I I . T H E PRODUCTIVE T H E O R Y OF T A X A T I O N

134

I V . T H E U T I L I T Y T H E O R Y OF SAX 1.

ITS ORIGINALITY

2.

SIMPLICITY AND

138 140

TRUTH

141

3. INDIVIDUAL AND COLLECTIVE PSYCHOLOGY

143

^I)

INDIVIDUAL PSYCHOLOGY

145

(2)

COLLECTIVE PSYCHOLOGY

146

4. COLLECTIVE NEEDS EMPIRICALLY CONSIDERED (1)

DIFFERENCES IN CHARACTER . . .

( 2 ) POLITICAL FACTORS

IJI

V . CONCLUSIONS AS TO T R U E ECONOMIC BASIS AND PRINCIPLES CHAPTER

149 149

155

VI

THK ETHICAL BASIS OF TAXATION L T H E 3 E N E F I T T H E O R Y OF TAXATION

160

1.

THE COST-OF-SERVICE THEORY

161

2.

THE VALUE-OF-SCRVICE THEORY

165

(1)

EXPENDITURE

167

( 2 ) PROPERTY

168

(3)

169

INCOME

(4) MARGINAL UTILITY

170

CONTENTS

345]

g PACK

II.

A B I L I T Y AS AN E T H I C A L

BASIS OF T A X A T I O N

175

2. Ability and Income

178

(1)

Meaning of Income

179

(2) Taxable Income III.

182

ABILITY AND SACRIFICE

1. Mill 2. Wagner

IV.

171

1. Ability and Property

187

187 189

and A'eumann

3. Meyer

190

4- Sax 5. The Dutch Economists 6. Edgeworth

193 197 201

CONCLUSION:

A B I L I T Y VERSUS S A C R I F I C E C H A P T E R

206

VII

ETHICAL PRINCIPLES OF TAXATION I . T H E P R I N C I P L E OK E Q U A L I T Y

212

1. Rate and Source of Income (1)

Funded and Unfunded

213 Incomes

(2)

Inheritance

(3)

Monopoly and Quasi-Rent

and Gifts

(4)

Income from Speculation

213 216

Income

217 220

2. Rate and Character of Income

221

3. Rate and Amount of Income

224

(1)

Proportional Taxation

(2)

Progressive Taxation

226 231

I I . T H E PRINCIPLE OF U N I V E R S A L I T Y

246

1. The Justification of Exemptions 2. The Limitation of Exemptions C H A P T E R

249 256 VIII

P R A C T I C A L J U S T I C E IN T A X A T I O N I.

ASSESSMENTS

266

1. Declaration vs. Doomage 2. Taxable Properly 3. Methods of Assessment II. T H E TRUE TAX

266 268 270

SYSTEM

276

I. Subjects and Methods of Taxation

277

(1)

Taxes on Consumption

278

(2) Taxation of Real Estate

280

(3) Taxation of Personal Property

281

IO

CONTENTS (4) (5) (6) 2. Slate (1) (2) (3)

Taxation of Mortgages Taxation of Corporations Taxation of Inheritances and Local Taxation National Taxes State Taxes Local Taxes

[346 u a 381 283 387 290 291 39* 293

CHAPTER I INTRODUCTION A T H E O R Y of t a x a t i o n is n e c e s s a r i l y b o u n d u p w i t h f u n d a mental By

q u e s t i o n s of p o l i t i c a l s c i e n c e , e c o n o m i c s a n d e t h i c s .

abstracting

any

o n e of t h e s e

elements

alone the determining factor, or b y g i v i n g

and m a k i n g

it an u n d u e

it im-

p o r t a n c e , a t h e o r e t i c a l s o l u t i o n of t h e p r o b l e m m a y b e m a d e a c o m p a r a t i v e l y easy task. s c h e m e s based sarily

upon

defective

d i f f i c u l t y arises

B u t such

one-sided

and

not

when

a solution, like

partial

infrequently

these

their full s i g n i f i c a n c e , o r

or

factors

truths, is

Utopian.

are

most neces-

The

comprehended

in t h e i r t r u e r e l a t i o n

real in

t o o n e an-

o t h e r ; b u t o n l y in this w a y can t h e p r o b l e m b e f u l l y u n d e r s t o o d in its v a r i o u s b e a r i n g s , o r a s o l u t i o n b e s a t i s f a c t o r y a l i k e t o r e a s o n and t o t h e tice.

This

difficulty

is

two-fold.

o f f e r e d that is

r e q u i r e m e n t s of jus-

In

the

first

place

our

v i e w s w i l l n e c e s s a r i l y b e c o l o r e d a c c o r d i n g t o w h i c h of these factors

we consider

the foundation-idea

of

our theory and

w h i c h w e r e g a r d as i n c i d e n t a l o r s u p p l e m e n t a r y ; and in t h e second place v e r y much depends t h e f u n d a m e n t a l i d e a and o f the o t h e r factors.

u p o n o u r i n t e r p r e t a t i o n of

t h e c h a r a c t e r of

its r e l a t i o n

s i d e r e d as h a v i n g a n y i m p o r t a n c e , t h e q u e s t i o n gether

a simple

to

E v e n if b u t o n e of t h e s e f a c t o r s is c o n one, for

there

arising f r o m the interpretation

still

remains

we may give

f a c t o r as the o n l y o n e f o r c o n s i d e r a t i o n . these that a c c o u n t f o r t h e g e n e r a l

is not a l t o -

the

difficulty

to t h e

chosen

I t is such facts as

d i s h a r m o n y in t h e o r i e s of

taxation. A n illustration of the d i f f i c u l t i e s r e f e r r e d to is f o u n d w h e n 347]

"

12

JUSTICE

IN

TAXATION

[348

the political factor is made the only one or the fundamental one. For if, on the one hand, we regard the individual as the only important factor, and the state as merely an accidental but necessary evil, the tendency will be to an extreme of individualism; if, on the other hand, the individual be regarded as a mere part of an organic whole, a cell of a living organism, we are in danger of the opposite extreme of socialism. The one extreme tends to the contract theory of Hobbs, Locke and Rousseau with its individual independence and its protective theory of taxation ; the other to a personified social organism which directs the economic activities of its units and utilizes taxation to produce artificial equalities of wealth. Both of these extremes are false, although they involve the important truth that principles of taxation are intimately associated with a political philosophy. Not less are the difficulties, nor more satisfactory the results, if the question be approached from a purely economic point of view. Different theories will be maintained and different conclusions reached according as production, distribution, or consumption is made the basis of the economic theory. Moreover, different conclusions will result from different assumptions respecting economic principles, or from the importance attached to specific economic laws. If, for example, production under a laissez faire régime be regarded as the chief end of human activity, it will be concluded that taxation should interfere as little as possible with capital and its accumulation, while the relative productive powers of individuals should be the same after as before the payment of a tax. Or if there be implicit confidence in the doctrine of free competition there will be little concern about the tax system, the shifting and incidence of the tax through the action of competitive forces being relied upon to effect the ends of justice. Similarly we have only to exaggerate other economic elements to get other results.

349]

INTRODUCTORY

13

So, too, the ethical factor may lead to equally divergent results according as Hedonistic or utilitarian principles, or the realization of the idea of man, is made the dominant feature of our ethical system. The difficulty is here further exaggerated by the fact that there is frequently a difference between theoretical and practical ethics. Harmony between these, whatever our ethical principles, is by no means easy to accomplish. Yet a substantial harmony must be established, or, on the one hand, we shall have only utopianism founded upon abstractions, and, on the other hand, expediency founded upon concrete facts without reference to ideas of justice. But a more fundamental difficulty than that which arises within the separate factors themselves is the determination of their relative importance. E a c h one must receive due consideration ; the political, because the relation of the state to the individual is primarily involved; the economic, because matters of taxation are essentially of an economic character; the ethical, because the subject and the end of the whole proceeding is man, a spiritual and therefore an essentially ethical entity. But which is the ruling factor? T h e importance of this question, together with the full recognition of the separate factors, is so great that we shall treat this aspect of the subject somewhat at length before taking up the main question—that of justice in taxation. Indeed, this method of procedure is indispensable since the principles of justice can not be determined before the basis upon which they rest is established. It may be premised here, however, that the whole subject of taxation revolves about man as its center—man in his relation to society, to his family and to himself; to the ends, that is, of his own existence. It has not, indeed, to do with the whole of man's activities and relations, but only with a small portion of them ; in fact, with only a portion of those

14

JUSTICE

IN

TAXATION

[350

involved in his political e x i s t e n c e — t h e maintenance and support of the state, or what may be called the satisfaction of the collective needs of the individual. But because these needs and their satisfaction are common and involve human relations, an equitable distribution of the burden is demanded. In brief, the question of taxation is a part of the larger question of distributive justice. But it is not with ideal men or ideal conditions with which we have to do, but with actual men and conditions. Hence, the specific forms which the principles may take will depend upon the prevailing moral and intellectual, the political and economic development. But while the ultimate end is ethical, the means thereto are largely economic. Both a theoretical and a practical determination of what is justice in taxation presupposes a knowledge of economic laws and of their influence upon the effects of any system of taxes. 1 It could not be otherwise, since all the phenomena concerned are economic. T h e end alone is ethical. But the ethical is not so far conditioned b y the economic that it is only a consequence of economic laws. There are, however, certain fundamental principles in taxation (and it is these with which we shall have specially to d o ) that are not directly concerned with economic laws. T h e y presuppose, indeed, certain economic conditions and certain economic forces, but their real justification is to be found in a political philosophy and in the ethical end of man. It is more directly with the practical side of justice that economic forces have their importance; although it is true that the theoretical principles of justice depend upon economic facts for their interpretation. Notwithstanding this close relation of the economic and the ethical, they are entirely distinct, being related as means to an end, or as proximate and ultimate ends. 1

Cf. Bastable, Public Finance, p. 9.

This fact is

351J

INTRODUCTORY

15

universally recognized in every financial doctrine; for, consciously or unconsciously, the ultimate sanction of every theory is its conformity to what are assumed to be the ends of justice. Even those who, like S a x , deny that ethics has any place in finance, are forced to this standard, as we shall have occasion to see later. With all, the attainment of justice in the distribution of the t a x burden, is the ruling idea. Thus, in fact, as well as from the nature of the subject itself, the ethical element is made the predominating clement in determining the principles o f taxation. But unanimity of thought respecting the end does not guarantee unanimity of doctrine. Such agreement of doctrine depends upon the conceptions of ethical ideals, and in these the differences are as great as those already noted. Finally, the difficulties of the problem of taxation and of the attainment of a c o m m o n agreement of doctrine do not consist alone in differences of fundamental presuppositions or of ideals. Not the least of the difficulties is a logical consistency in the development of a theory from its presuppositions. T o o frequently prejudice, sentiment or expediency usurp the place of logical thinking, which not unfrequently results in conclusions in no way related to the premises assumed, even if they are not in direct opposition to them. Without a further enumeration it must be evident that the problem that we have assumed to discuss is full of perplexing difficulties. T h a t we shall be able wholly to avoid them c a n n o t be presumed, for many o f them are inseparable from the subject itself. W e must necessarily start with assumptions, and the merits of our treatment must be measured by the rationality of these assumptions and the logical consistency with which the idea contained in them is developed. A philosophical or scientific treatment must further be devoid of any personal bias. While it shall be my aim to attain this standard there will undoubtedly be some who

JUSTICE

16

IN

TAXATION

[352

will consider my point of view, if not my reasoning, vitiated by an undue ethical emphasis. But apart from the fact that the real subject of my study is an ethical one, I believe that in emphasizing the ethical element of the problem I am only recognizing what is implied, if not expressed, in other theories. While we start out with the idea of ascertaining the principles of justice in taxation we endeavor to start without any presuppositions as to what those principles are. Our presuppositions are in the assumption of fundamental principles, not in the conclusions; but without such assumption no rational treatment of the subject is possible. What, then, is the assumption with which we start out? It is the conception of man as a personality, and as such as an end in himself whose fullest realization is the purpose and end of his existence; and that this realization takes place very largely in and through institutions, one of the most important of these being the political institution—the state. The assumption, however, is not a mere assumption. It has rational justification; but the demonstration of this belongs to the field of metaphysics" and for our purpose will be presumed. Of special and more immediate importance to our thesis is the relation of the state to the individual in this process of realization. Hence, a conception of the nature of the state and its relation to the individual will constitute the foundation of our thesis and form the basis of our argument. What the nature of the state is belongs to political philosophy to determine; but since political philosophy affords so many different conceptions of the state, and since our own argument must depend upon our own conception, it will be necessary to lay our own foundations by first discussing the origin and nature of the state before discussing the principles upon which the state should be maintained—or the principles of taxation. This we shall 1

See T . H. Green's Proltgomtna to Ethics.

353]

INTRODUCTORY

17

attempt to do in the following chapter so far as is necessary to make clear our own point of view. W e shall then discuss the nature of taxation and its relation to economics and ethics, after which we shall take up the subject of our thesis proper. Before beginning our discussion, however, it may be well to clear up an ambiguity suggested in the wording of our subject. " J u s t i c e in T a x a t i o n " m a y b e considered either from a practical or from a theoretical point of view. Under the former the subject would involve the setting forth of a detailed system of taxes that would realize justice to the individual taxpayer. A theoretical treatment, on the other hand, involves a discussion of principles rather than of kinds or systems of taxes. It is the latter view that forms the chief subject of our inquiry, although from neither point of view can a discussion of justice in taxation wholly ignore the effects of taxation; as, for example, the phenomena of shifting and incidence are closely related to the problem of rates and exemptions. Principles, however, must precede definite systems just as a fundamental assumption must precede the determination of principles, for without a norm of judgment no definite conclusions are possible. T h e necessity of this norm must be our answer to the "practical m a n " who distrusts all theorizing not based upon empirical facts alone, and who seeks to determine justice in taxation by purely objective standards. Such a procedure is, to our mind, comparable to the attempt to obtain a knowledge of an object from mere sensations without reference to a unifying and interpreting agency to give them meaning. Like sensations, mere facts are without significance. The so-called facts of the empiricist must be given a meaning by reference to fundamental concepts. The principles once established, it is for the practical statesman or financier to put them into operation. If the principles

lg

JUSTICE

IN TAXATION

[354

are not practicable they must be considered as Utopian, at least under existing conditions. The ideal, however, has its place and importance, but the necessity of its modification in practice according to circumstances must be recognized. T h e nearest approximation to justice is always the ideal under any given conditions.

CHAPTER

II

THE ORIGIN AND NATURE OF T H E STATE

A STUDY of the origin and nature of the state is a neces sary preliminary to a study of the nature of taxation and is indispensable as a foundation for the determination of the principles on which taxation should be based. I t furnishes, moreover, an explanation of the reason why these principles should be based upon ideas of justice. T h a t justice should b e the aim in all taxation, is now universally admitted, and appears, indeed, so self-evident that proof is deemed unnecessary; but the proof is always implied, and is to be found in the nature of the state, or rather in the nature of the individual and his relation to the state. I. T H E INDIVIDUAL AND SOCIETY

T h e nature of the state is determined b y the nature of society as the nature of society is determined b y the nature of the individual. B u t the individual and society are so intimately related that they mutually condition each other, and hence our study must begin with a study of the individual and society. Beginning, then, with man, the individual, it is possible to conceive of him in three different a s p e c t s : As related to himself, that is, as a distinct p e r s o n a l i t y ; as related to society, or as a c o m p l e x personality; and as related to the Infinite, or as a permanent personality. T h e s e three aspects arc expressive of the ethical, social and religious nature of man, and without their co-ordination we have only the imperfect and undeveloped man. Our conccrn, however, is 355]

'9

20

JUSTICE

IN

TAXATION

[356

with only the first two cf these aspects—man the individual and man in society. In respect to the former we assume, and without attempting a metaphysical proof, that man is a human spirit and, as such, a personality, and therefore exists as an end in himself; that it is the purpose of his life to realize that end—to develop his highest personality, to perfect himself. Otherwise man would exist without any rational purpose. It is not the nature of the human spirit to be content with mere existence, except, perhaps, in its lowest form, where the animal predominates over the human. It is rather its nature to develop, to unfold itself, to manifest its possibilities, and in doing so it reveals and perfects its own personality. But the development of individual personality can not take place by itself. It is possible only in and through a society of similar personalities, a society of persons. As a person in a society of persons the individual, in being conscious of his own end, as an end in itself, recognizes that every other individual is likewise an end in himself, and therefore an end to be realized. In this reciprocal recognition of similar natures, effort towards the realization of others becomes a part of the realization of self. Thus, though an end in himself, the individual does not exist solely for himself, but is at once his own end and a means to the ends of others. His development is conditioned by their development, as their development, in turn, is conditioned by his. The joint effort towards the realization of individual personality centers in the social nature of man and necessarily involves social relations. Only through the development of the social nature is the development of the individual nature made possible, as only by the co-ordination of the individual and social side of human nature can true personality exist. The development of the social, and therefore also of the individual, nature of man takes place in manifold ways, but

ORIGIN AND NATURE

357] more

and

more, with the

OF THE STATE

progress

of

his

21

development,

t h r o u g h social relations that manifest themselves in social institutions, in whose c o m p l e x p h e n o m e n a we have what is called " s o c i e t y . "

To

borrow Hegelian

terminology,

the

h u m a n spirit in realizing itself objectifies itself in social institutions—in society.

S u c h a society b e i n g a manifestation

of, and so constituted b y , persons is something more than a mere aggregate of individuals, a mere numerical

quantum.

It is the result of social forces, and aggregation is not socialization.

T h e bond that transforms human aggregates into

living societies is psychical.

B u t at the same time that it is

a uniting, it is also a differentiating f o r c e ; thus, while giving unity to the social elements and to the social whole, it permits expression of the manifold human interests in social effort.

It is, furthermore,

purposive in character, uniting

c o m m o n interests to c o m m o n ends, and so re-enforcing the recognition b y self-conscious spirits of persons as means the ends of others, as ends

t o themselves.

T o the

to

extent

that this c o m m o n interest and recognition do not exist the self-seeking spirit of man tends to the disintegration of society;

or to the assumption b y a part of society that certain

classes of individuals are o n l y means to the ends of others, a practical denial o f their e x i s t e n c e as persons, as ends in themselves.

T h e e x i s t e n c e of such a negative force in so-

c i e t y has far-reaching c o n s e q u e n c e s , not only in matters of t a x a t i o n but in the whole e c o n o m i c and social life; for to the failure to recognize individual personality as an end in itself are very largely due the antagonisms of social classes. O n l y in the c o m p l e t e recognition of the ethical nature and end of the human person can society fulfill its highest purpose, as expressing the objective realization of the individual — o f personality;

and the m o r e this b e c o m e s a reality in

life the more will j u s t i c e between man and man be realized. A n d the more that society is recognized to be a society of persons the more will these ends be attained.

JUSTICE IN

22

TAXATION

But if it is t r u e t h a t s o c i e t y is c o n s t i t u t e d of p e r s o n s , and t h a t without persons t h e r e is no society, it is not less t r u e t h a t w i t h o u t society t h e r e are no p e r s o n s . ' P e r s o n s a n d socicty are, in fact, correlative to e a c h o t h e r . E a c h p r e s u p p o s e s t h e o t h e r . I n society p e r s o n a l i t y and individuality unfold t h e m s e l v e s ; in society t h e h u m a n spirit seeks its realization. W i t h o u t society t h e p e r s o n has only potential c a p a c i t y , while it is o n l y in society, " o n l y in t h e intercourse of m e n , e a c h r e c o g n i z e d b y e a c h as an e n d , n o t m e r e l y as a m e a n s , a n d t h u s as h a v i n g r e c i p r o c a l claims, t h a t t h e c a p a c i t y is actualized and t h a t we really live as p e r s o n s . " 3 If t h e evolution of social relations, indeed, is b u t the g r a d u a l t r a c i n g o u t of the evolution of t h e h u m a n spirit, these relations, as t h e y at a n y t i m e exist, arc t h e e m b o d i m e n t of all past, a n d condition all f u t u r e , social d e v e l o p m e n t . But a l t h o u g h society and t h e individual m u t u a l l y p r e s u p p o s e e a c h o t h e r t h e e n d of social evolution is n o t in society, as such, b u t in t h e realization of t h e individual, to which end society is a c o n dition a n d a m e a n s . A n d in t h e c h a r a c t e r of society as a society of persons, and as a condition of their d e v e l o p m e n t , we have indicated t h e ethical c h a r a c t e r of all social institutions, a n d t h e necessity of ethical c o n s i d e r a t i o n s in all social relations. R e l a t e d as s u b j e c t i v e to o b j e c t i v e t h e d e v e l o p m e n t of o n e implies the d e v e l o p m e n t of the o t h e r . A n d as t h e d e v e l o p m e n t of t h e ethical life t a k e s on t h e f o r m of a c h a n g e in e x t e n t r a t h e r t h a n in t h e f u n d a m e n t a l ideas, 5 e m b r a c i n g an ever larger circle of p e r s o n s in t h e c o n s c i o u s n e s s of t h e unity of p u r p o s e a n d ends, so in social e v o l u t i o n t h e r e is an ever increasing multiplicity in the n u m b e r s and v a r i e t y of social institutions, an ever g r o w i n g o r g a n i z a t i o n of c o m m o n interests a n d c o m m o n e n d s , t h e c o m p l e x i t y of t h e social relations b e i n g a reflex of the c o m p l e x n a t u r e of t h e 1

Green, of. cit., p. 199.

• Ibid., p. 192.

• Cf. Green, p. 269.

359]

ORIGIN

AND

NATURE

OF THE

STATE

23

individual, a m e a n s of his giving expression of himself—of his being a person. T h e c o m p l e x i t y of social relations is not a miscellaneous c o m p l e x i t y . E v e r y h u m a n interest, when it becomes sufficiently i m p o r t a n t and sufficiently general a c c o r d i n g to circumstances, is focussed in an organized b o d y of persons with t h e p u r p o s e of giving realization to t h e c o m m o n interest. T h u s , out of social relations are formed social groups, whose totality constitutes society. T h e s e g r o u p s tend to e m b r a c e every h u m a n interest of social importance—intellectual, moral, religious. T h e y divide and subdivide, ever increasing in n u m b e r s and variety with intellectual, moral and religious p r o g r e s s . In content these g r o u p s tend to become more specialized, in e x t e n t more g e n e r a l i z e d ; a condition d u e to scientific progress, as in m e a n s of c o m m u n i c a t i o n , on the one hand ; and to a broader h u m a n fellowship, an enlarging consciousness of the unity of interests and ends, on the other hand. But the consciousness of a c o m m u n i t y of interests and ends that gives rise to social groupings is not a reflective consciousness of ultimate ends, except, perhaps, in certain religious groups. T h e determining consciousness is that of immediate interests and ends. Consciousness of ultimate ends has little direct influence upon social groupings. T h e ultimate end is revealed only b y a reflective analysis of the p h i l o s o p h y of social life with reference to the life of the individual. Yet it is only in and t h r o u g h the almost countless n u m b e r of these g r o u p s , ever increasing in n u m b e r s and variety, t h a t the h u m a n spirit finds its fullest realization. And the " unity in c o m p l e x i t y " of these g r o u p s is typical of the highest form of social evolution.* T h e tendency towards social organization, however, is not without its opposing influences. T h e presence of self-seeking spirits as the dominant factor in h u m a n life is a dis1

Cf. Spencer, Principles of Sociology, Ft. v, chs. 2-4.

JUSTICE

24

IN

TAXATION

[360

i n t e g r a t i n g social force and p r o d u c e s a retardation n e g a t i o n of s o c i a l o r g a n i z a t i o n .

ditioned not only b y the presence

of p o s i t i v e

and

the

favorable

conditions, but b y

forces and conditions.

social

abscnce

of

forces

negative

P r o g r e s s i v e r e a l i z a t i o n of t h e h u m a n

s p i r i t is p o s s i b l e o n l y w h e r e its v o l u n t a r y and

if n o t a

S o c i a l d e v e l o p m e n t is c o n -

t h e c o n d i t i o n s a r e f a v o r a b l e to

spontaneous

a c t i v i t y , b o t h with r e s p c c t t o

i n d i v i d u a l u n d e r t a k i n g s a n d w i t h r e s p c c t t o a s s o c i a t e d effort s u c h a s is m a n i f e s t e d in t h e s o c i a l g r o u p s s e e k i n g a c o m m o n purpose.

That

these

positive

and

negative

conditions

s h o u l d b e m a i n t a i n e d b e c o m e s , t h e n , a m a t t e r of t h e i m p o r t a n c e and of power

is a

general interest.

necessary

requisite,

first

T o this e n d a c o c r c i v e

and

hence,

in

its

t e n a n c e a n d s u p p o r t t h e r e is a u n i v e r s a l i n t e r e s t .

mainSuch

a

p o w e r is r e a l i z e d in t h e p o l i t i c a l o r g a n i z a t i o n of s o c i e t y , t h e state—the all-comprehensive

social group

universal

In

common

interest.

this

representing

group

is

the

centralized

b o t h t h e o b j e c t i v e a n d t h e s u b j e c t i v e c o m p l e x i t y of

socicty,

in it s o c i a l life r e a c h e s its h i g h e s t c u l m i n a t i o n . I I . ORIGIN OF THE

STATE

W i t h t h e a c t u a l h i s t o r i c a l o r i g i n o r with t h e e v o l u t i o n t h e s t a t e we h a v e n o c o n c e r n .

B e i n g in s e a r c h

of

of

princi-

p l e s o u r p o i n t of view is w h o l l y t h a t of a p h i l o s o p h y of t h e s t a t e , a n d is t h e r e f o r e an i n q u i r y i n t o its u n d e r l y i n g p r i n c i p l e a n d c a u s e , of w h i c h

t h e h i s t o r i c a l s t a t e is a m a n i f e s t a -

t i o n , w h a t e v e r m a y h a v e b e e n t h e c o u r s e of its d e v e l o p m e n t . F r o m this p o i n t of view t h e s t a t e ' s origin m a y b e c o n s i d e r e d u n d e r two a s p e c t s , its o b j e c t i v e n e c e s s i t y a n d its

subjective

necessity. B y objective necessity I understand the necessity, pointed o u t a b o v e , o f a c o e r c i v e p o w e r to g i v e u n i t y t o s o c i c t y a n d to make

possible

dividual,

development.

t h e c o n d i t i o n s of s o c i a l , and t h e r e b y inFor

without

such

a

dominating

ORIGIN

361 J

AND NATURE

OF THE

STATE

s o c i a l g r o u p s o c i e t y would a t b e s t b e b u t a n

25 unorganized

m a s s o f s o c i a l g r o u p s in p e r p e t u a l a n d u n r e s t r a i n e d c o n f l i c t with anti-social forces, thus social

organization

and

r e a l i z a t i o n of m a n .

destroying the effectiveness

social

effort

in t h e

w o r k of

T h e n e c e s s i t y , i n d e e d , of this

of the

restrain-

ing and controlling power has been recognized, however unconsciously,

from

the

very

dawn

of

society,

though

its

e a r l i e s t m a n i f e s t a t i o n was in o t h e r s o c i a l g r o u p s , s u c h as t h e f a m i l y and r e l i g i o u s g r o u p s . increasing

I n t h e c o u r s e of t i m e t h e e v e r

m a n i f o l d n e s s of i n t e r e s t s , b y a p r o c e s s of s o c i a l

e v o l u t i o n , g a v e rise to a d i f f e r e n t i a t i o n of t h e g r o u p s , a distinct

p o l i t i c a l g r o u p u l t i m a t e l y e m e r g i n g with t h e

function to the

specific

of m a i n t a i n i n g t h e o r d e r a n d c o n d i t i o n s n e c c s s a r y ends of

realization impelling

of

individual the

force, the

m a y be considered

and

individual

social as

n e c e s s i t y of as o n e

life.

the the

Assuming

unrestrainable objective

of t h e u n c o n s c i o u s

b r o u g h t the s t a t e i n t o b e i n g .

the and

conditions forces

that

I n brief, its v e r y i n d i s p e n s a -

b l e n e s s is t h e c a u s e of its b e i n g .

W i t h h u m a n n a t u r e as it

is t h e s t a t e c a n n o t b e c o n c e i v e d n o t t o b e . B u t the objective state.

necessity

is n o t t h e o n l y c a u s e of t h e

B a c k of t h a t and c o - o p e r a t i n g with it is a s u b j e c t i v e

n e c e s s i t y t h a t s p r i n g s f r o m t h e n a t u r e of t h e individual.

On

the

the

o n e h a n d it is t h e n e c e s s i t y of self-realization

most effective m a n n e r ; t h e s o c i a l n a t u r e of effort

on

in

t h e o t h e r h a n d , it s p r i n g s

m a n 1 that impels him

for individual e n d s of a c o m m o n

to

interest.

r e s p e c t t h e s t a t e d o e s n o t differ f r o m o t h e r s o c i a l

In

m e d i a t e e n d , b u t a l s o in t h e form o f o r g a n i z a t i o n a n d

imgov-

N c r is t h e s o c i a l n a t u r e t h a t binds m e n t o g e t h e r

in s o c i e t i e s a m e r e i n s t i n c t s u c h as p r e v a i l s in a n i m a l eties.

this

groups.

T h e s e differ a m o n g t h e m s e l v e s c h i e f l y in c o n t e n t a n d ernment.

from

associative

soci-

It is r a t h e r a p a r t l y c o n s c i o u s and p a r t l y u n c o n s c i o u s 1

Aristotle, Politics,

i, 2.

26

JUSTICE

IN

TAXATION

[362

recognition of c o m m o n ends of immediate interest; and with the highest d e v e l o p m e n t , also, of ultimate ends. Philosophically the social nature of man as distinct from the social nature of the animal, has its reason, if not its spring, in the conscious or unconscious recognition of man as an end in himself and as a means to the end of others. I I I . T H E NATURE OF TIIE STATE

T h e real nature of the state is revealed on the one side in its origin and on the other side in its end. Its origin, nature and end are, in fact, but different ways of viewing the fundamental conception of the state as an indispensable instrument in h u m a n development. In d e t e r m i n i n g its origin we have, therefore, determined in general its nature and end. But a more specific determination of its nature is necessary, and this m a y best be d o n e by a m o r e specific determination of its end, for, as Aristotle long ago pointed out, the n a t u r e of a thing is determined by its end. 1 W h a t , then, is the end of the state? W e must first of all distinguish between the end of the state and the functions of government. A government is only the agent of a state, an organization within the state for effecting its will—its purpose. A state is a b o d y of people organized into a b o d y politic to effect the p u r p o s e or ends of individuals. The functions of government, then, have reference to the o r g a n ized will of the p e o p l e ; the end of the state to the e n d of the individual. W e may, however, consider the end of t h e state as of a two-fold c h a r a c t e r : proximate and ultimate. Proximate with reference to the establishment of p r e l i m i n a r y conditions; ultimate with reference to the final end. Accordingly Professor Burgess calls the p r o x i m a t e end t h e establishment of government and l i b e r t y ; 2 b u t if we m a y 1

Aristotle, Politics i, 2, 8.

' Burgeu, Political Science and Constitutional

Law, Vol. i, p. 86.

363]

ORIGIN

AND

NATURE

OF

THE

STATE

27

consider government as inseparable from the state, though distinct from it, the proximate end might be more justly considered as the guaranteeing of rights and justice between man and man,' the direct maintenance of them being a function of government. W h a t the specific functions may be is a question that is determined at any time b y the existing state of culture and civilization, by the prevailing conception of the relation of the state to the individual. But into this question we need not enter here. T h e ultimate end of the state is the ultimate end of its units—of the individuals of which the state is composed. T h e state by itself can have no end that is ultimate, since ultimate ends pertain only to entities that are ends in themselves. T h e end is ultimate to the state only with reference to its supreme purpose—to the ultimate purpose of its existence—not with reference to itself. This purpose, and therefore the ultimate end of the state, is the completest realization of the individual—his capacities, his personality, the highest human development, the perfection of humanity.* Considered with reference to itself the ultimate end of the state is the maintenance of the conditions that are essential to the self-realization of the individual. T h e state is a means; man alone is the end. In brief, a state represents the organized effort of a people to realize the fullest development of human personality; or it is the supreme conditioning instrument of that realization. And to be such a condition and instrument constitutes the real essence of the nature of the state. B u t all other human institutions are conditions as well as means to the development of the individual; and since their existence and utility arc conditioned by the existence of the state, we may characterize the state as the condition of conditions that are 1

Cf. Lilly, First Principles

in Politics, p. 30.

* Cf. Burgess, op. cit., p. 85, and Lilly, op. cit., p. 51.

28

JUSTICE IN TAXATION

[364

necessary for the realization of man. This supreme importance of the state to the individual makes it of universal interest, while the ethical character of its end, a consequence of the ethical character of its units, makes it an ethical institution. These characteristics of the state—the universal interest and the ethical character—may be called derivative characteristics of its nature. There are also other characteristics of the state that are essentially connected with the nature of the relation of the state to the individual. A definite conception of the most important of these is necessary to a clear understanding of the nature and principles of taxation. T h e y a r e : The character of the relation of the individual to the state; the charactcr of the state as an organization; and the character of the state as a supreme controlling power. W e shall discuss these characteristics of the state briefly under the following heads: T h e voluntary and involuntary character of political organization; the organic theory of the state; the nature of sovereignty. I V . CHARACTERISTICS OF T H E

STATE

1. The Voluntary and Involuntary Character of Political Organization. W e have thus far seen that the state is the supreme and most important of social institutions; that it originates on the one hand in the social side of human nature, and on the other hand in the effort of man to realize the possibilities of his nature; that its origin dates from the very dawn of social life; that in its development in form and organization it has gradually become differentiated from other social groups, assuming the special function of establishing the conditions that make their development, as well as all social evolution, possible, its ultimate purpose being the realization of human personality; that, finally, it is an ethical institution in which there is a universal interest. Its dominant feature is its conditioning character, but while this

365]

ORIGIN

AND

NATURE

OF THE

STATE

29

feature is prominent in every field of social life it has perhaps its greatest significance in the economic life; not only because economic or industrial conditions are the best objective indication of progressive enlightenment and civilization, but because the economic life is in a sense the foundation of both individual and social life, and so also of the state itself. In such a social b o d y , whose existence is so important to the individual that without it he could not exist as a person, what is the character of the membership? In other social groups membership is limited, and is determined by choice based upon an idea of the Good for the self but with limitations imposed by each social group for itself. Choice and permission are both essential; there is no compulsion either from within or from without, but only a subjective necessity. Is membership in the state of the same character? Membership in this or that particular state is determined b y various influences, as language, custom, tradition, nationality; but with intellectual and economic enlightenment and growth in personal freedom, membership becomes more and more determined from choice, from an idea of a personal Good. But membership in a state is universal, there being no stateless persons in civilized society. It is also universally necessary, and this necessity is not only subjective but is also o b j e c t i v e : subjective, because as we have seen, it is the inevitable expression of certain qualities in human nature; objective, because in civilized society there is no escape from membership in a state and subjection to its laws. But is this membership voluntary and free, or involuntary and c o m p u l s o r y ? Our answer must be that from different points of view it is both voluntary and compulsory. From the point of view of political science it is compulsory, but from the point of view of a philosophy of the state it is voluntary. Objectively considered, that is from the point of

30

JUSTICE

IN

TAXATION

[366

view of empirical political science, the state is undoubtedly founded upon force; and membership in it, support for its maintenance and defense, is compulsory. Without the excrcise of force, or the possibility of its exercise, no state could endure. Without it there would be only individual and factional strife, the " war of all against all," barbarism, undeveloped humanity. But important as is the element of force in a state, force viewed as the foundation of the state expresses but a half-truth. Considered from the point of view of subjective political philosophy, the only point of view that reveals the true relation of the individual to the state, the foundation of the state is will.1 Or, if force is the foundation of the state, will is the foundation of force. In fact, the force which the state typifies is but the embodiment of the wills of its members, the objectified will of persons. Hence also membership in the state is both compulsory and voluntary. The state, as force, exacts support and obedience, but the state as the embodiment of will is created and maintained by the voluntary acts of free agents—of persons. This dual character of the state and of membership in it, a little reflection will make evident. The element of force and compulsion is too self-evident and too admittedly necessary to need special justification; but that the force of the state can not be permanently effective, except as it is the expression of will, reflection must make equally clear. T h e fact, indeed, is well illustrated in the practical impossibility of enforcing unpopular laws—of laws out of harmony with the general public sentiment. The fact that the state is a people organized into a political society, originating in a common interest to achieve a common purpose and common end—based upon an idea of a Common G o o d ' — i s likewise the clearest evidence of the implication of will as its source, •See Green, Political Obligations, pp. 121-141.

* Ibid., p. 126.

367]

ORIGIN AND NATURE

OF THE STATE

31

and that there is not fundamentally any forced subjection to any external power. The purpose of realizing a common good can have no meaning except it be grounded upon consent ; but consent is choice, choice is an act of will,1 and will is based upon an idea of a Good. And, it may be added, in the willing of a common good, the pursuit of a common end, which implies a conscious presentation of the end to the subjects willing, is the final proof that the state is an ethical and not merely a natural institution.' The real fact is that membership in a state—or the support and obedience which it implies—is a result of compulsion only in the case of this or that individual, where ignorance and selfishness has set up a personal good as opposed to the common good. Without such compulsory conformity to the idea of a common good, dissolution would set in and the state soon cease to be a state; but this compulsion becomes less and less a factor in the life of a state, while voluntary participation in and support of the state, becomes more general, the more enlightened a people becomes—the more it rises to the idea of a common humanity possessed with common interests and like ends. Upon the state as a whole, indeed, there can be no compulsion, since the state is itself a body of people organized for the maintenance of rights. Compulsion must be by the whole upon the individuals who contravene these rights. Compulsion is from without, and the state is not a body external to itself that can cocrce itself. The people as a whole and individually will the enforcement of law for the maintenance of rights. Even the violator of law wills the enforcement of the law upon every member of society, and therefore upon himself. He merely takes his chances for a greater personal, temporary good for himself by evasion of it. 1

Cf. Aristotle, S'icomachean

1

Cf. Green, Political

Ethics,

Obligations,

iii, 2, I.

p. 1 3 ; .

JUSTICE

32

IN

TAXATION

[368

In brief, the case is this: B y virtue of a recognition of persons as ends in themselves there arises the idea of the rights of persons, and therefore also a common interest in the maintenance of these rights by the combined force of all. T o this end the state is organized—to centralize the force of the whole upon the individual. F o r the realization of rights, therefore, two conditions are essential: a conception of persons as possessing rights bccausc of their character as persons, and the collective enforcement of these rights. Or, as Green says, force co-operates " with those ideas without which rights could not exist." ' 2. The Organic Theory of the State. W h a t , now, is the character of the political organization in which the citizen freely participates for the realization of himself? Is the state a mere aggregate of individuals, a social organism, or an association of individuals psychically united by a common interest in common ends? An answer to this question will throw light upon the nature of the state and also upon certain principles of taxation, particularly respecting the basis of taxation and the exemption of the minimum of subsistence. Our own answer has practically been given in the preceding discussion, but we may re-enforce our argument by a brief consideration of the opposing theories. The theory that the state is a mere aggregate of individuals need not detain us long, as there are few, outside of the anarchist or the extreme individualist, who would maintain so irrational a doctrine. Clearly, a mere aggregate of individuals cannot make a society, or a social group, any more than a mere sum of sensations can issue in knowledge. Society, like knowledge, implies unity in multiplicity, but such unity is possible only if there is a common principle that pervades the multiplicity—the individuals or sensations— 1

Cf. Green, Political

Obligations, p. 140.

369]

ORIGIN

AND

NATURE

OF

THE

STATE

33

a n d binds t h e m t o g e t h e r a b o u t a c o m m o n idea, p u r p o s e or end.

W i t h o u t this uniting principle t h e r e c a n he no s o c i e t y .

B u t is the unity that m a k e s s o c i e t y an o r g a n i c u n i t y ? society—the state—an organism?

Is

S u c h has been the ac-

c e p t e d d o c t r i n e of w i d e l y different s c h o o l s of t h o u g h t , as S p e n c e r on the one side and G e r m a n p h i l o s o p h e r s and e c o n o m i s t s on the other side.

T h e t h e o r y of t h e social o r g a n i s m

is t o - d a y o n e of the m o s t w i d e l y a c c e p t e d d o c t r i n e s respecti n g s o c i e t y or the state.'

T h a t there is a s t r i k i n g a n a l o g y

b e t w e e n the structure of the state and an animal o r g a n i s m t h e r e can be no d o u b t ; and that this a n a l o g y is helpful to a clearer u n d e r s t a n d i n g of the nature of the state m u s t also b e admitted.

B u t it is a p o o r l o g i c that a r g u e s from an anal-

o g y of structure to an identity of c h a r a c t e r or nature.

In-

d e e d , the a n a l o g y e v e n with qualification is quite ?s harmful as h e l p f u l , since it is s u g g e s t i v e of an entirely e r r o n e o u s c o n c e p t i o n of the relation of the individual to the state, and logically carried out w o u l d lead to strange c o n c l u s i o n s in princ i p l e s of t a x a t i o n , as in political matters g e n e r a l l y .

Upon

the w h o l e I b e l i e v e it to b e in the interest of scientific truth, n o t w i t h s t a n d i n g certain similarities, to a b a n d o n the a n a l o g y entirely, not o n l y b e c a u s e of its m i s l e a d i n g t e n d e n c i e s but b e c a u s e in its most i m p o r t a n t features the a n a l o g y is entirely false.

W i t h o u t a t t e m p t i n g a detailed criticism I w o u l d men-

tion three facts a n y one of w h i c h is sufficient to the doctrine that the stale is a social o r g a n i s m .

overthrow These are:

1. D i f f e r e n c e s in the c h a r a c t e r of the u n i t s ; 2. differences in s e n t i e n c y of o r g a n i s m and s o c i e t y .

3. differences in the

end of the units and the w h o l e . 1 I. T h e units of an o r g a n i s m differ from those of a s o c i e t y ' It is interesting to note that there is a growing tendency among American authors to rcject the organic theory of society, as notably, Giddings, Willoughby and Fairbanks. •See Spencer, Principles

of Sociology, Vol. I, pp. 478-9.

34

JUSTICE

IN TAXATION

[370

or state, in their discreteness, their mobility, their consciousness. ( a ) The units of an organism are concrcte, material things physically united, though endowed also with the physical principle of life. The units that compose a state are materially discrete, though being essentially psychical in their nature are psychically united, (b) The physically united unit of the organism is immobile and performs a specific function in a specific portion of the organism. The psycho-physical unit of the state being discrete has great mobility, and performs various functions in various portions of the body politic, ( c ) Not only is the social unit endowed with mobility, but it has also consciousness, indeed, self consciousness. It has, thus, the capacity of the self-direction of its movements and activities in the pursuit of various purposes that it sets before itself as desirable to attain. Hence its ability to attach itself to this or that society—"social organism " — o r to perform functions not only in the various groups—"organs"—of the same society, but also at one and the same time in different societies or states. In no sense does such consciousness and such self-direction exist in the unit or cell of an organism. There is, in brief, all the difference between a thing and a person. 2. Again, in the animal organism there is a common sensorium for the whole organism which is the center of its sentient and psychical existence. No such sensorium exists for the state, since it exists only in corporeal substance and the state is not such an entity. It has no sentiency or psychical life apart from that manifested in its unitary parts, while in the organism there is no sentiency or psychical life apart from that manifested in the whole. It does not exist in the units or cells. So far as there is any comparison, indeed, it is between the organism as a whole and the units that make up a state. But since these units are in reality the organism with which the comparison would be made, we

371]

U/HGIN AND NATURE

OF THE STATE

35

s h o u l d have o n l y what the logicians call an identical p r o p osition. 3 . B u t perhaps the most decisive d i f f e r e n c e between an o r g a n i s m and the state is in the ends of the units and of the whole.

In the o r g a n i s m the c e l l s — u n i t s — a r e m e r e l y c o n -

tributory parts in the life of the w h o l e and e x i s t only for t h e s a k e of the whole.

T h e y h a v e no end of their own and no

function apart f r o m the s p e c i f i c o r g a n i s m to which they b e l o n g , and apart f r o m it a l s o no reality.

T h e units of the

" social o r g a n i s m , " on the o t h e r hand, d o not e x i s t for the w h o l e , but the whole e x i s t s f o r t h e m , f o r their d e v e l o p m e n t . T h e y arc ends in t h e m s e l v e s , h a v e functions of their own to p e r f o r m as well as those f o r the whole, and h a v e a reality of their own.

B u t the o r g a n i s m , as s u c h , has its end in its own

e x i s t e n c e , while the state h a s its end in the highest e x i s t e n c e of

its m e m b e r s — i t s

constituent

parts.

In the state

the

w h o l e has its e x i s t e n c e in and for the p a r t s ; in the o r g a n i s m the parts exist in and for the whole. T h e s e objections, to w h i c h others might be added, are sufficient refutation of social o r g a n i s m .

the w i d e l y - a c c e p t e d

B u t if

the o r g a n i c theory of society

false, so also is t h s e x t r e m e society.

doctrine of

individualistic

conception

a a is of

If the state is not an o r g a n i s m for which the indi-

vidual e x i s t s , it is nevertheless true, as we h a v e seen, that it is o n l y in the state that the individual has his highest and most c o m p l e t e e x i s t e n c e .

T h e o n l y true theory lies b e t w e e n

the two e x t r e m e s , and sees the mutual d e p e n d e n c e of the state and the individual, n e v e r forgetting, h o w e v e r , that the ultimate factor of p e r m a n e n t i m p o r t a n c e is the individual, for w h o s e end all else is at bottom subordinate. I m p o r t a n t conclusions follow.

F o r if the view that we

h a v e held is the true one, it follows that the individual must contribute to the s u p p o r t a n d

maintenance of the state, but

that in doing so his own p e r s o n a l i t y , a n d therefore e t h i c a l

36

JUSTICE

IN TAXATION

1^372

considerations, should ever be kept in the foreground. But on the theory of a social organism contributions to the state should be determined rather b y principles of expediency than by ethical principles, since the ends of the individual would be of no concern, as they would have existence only for the " organism." On the basis of an extreme individualism there would be no contributions to the state, or if so, only voluntary ones. 3. The Nature of Sovereignty. W e arc not concerncd with all of the characteristics of sovereignty, but only with such characteristics as have any importance in the determination of principles of taxation. W c shall, therefore, consider sovereignty only with respect to its dual nature and the characteristics of each, and with respect to the rights of in dividuals. 1 . B y common consent the chief attribute of sovereignty is supreme, coercive power over the lives and property of individuals, or associations of individuals, that are members of a state; a feature that is common to no other social group. But sovereignty is something more than supreme p o w e r — f o r c e ; but to understand its twofold character it is necessary to keep in mind the distinction between state and government so clearly and forcibly made by Professor Burgess.' A state is a body of people organized as a body politic; a government, as we have seen, is the agent of the state, the instrument for effecting its will. It is in the government that is manifested the direct exercise of sovereignty, but the source of this power is in the people back of the government. It is the former that the statesman or lawyer ordinarily has in mind, but to the political philosopher the latter is of chief importance. T h e former—the sovereignty of government—we may, with Professor Ritchie, 2 call legal 1

Burgess, Political Science and Constitutional law.

' Ritchie, Principles

of State Interference,

Vol. i, p. 57.

Appendix, ncte B.

373J

ORIGIN

AND

NATURE

OF THE

STATE

37

sovereignty ; the latter—the sovereignty of the p e o p l e — ultimate sovereignty. More definitely, ultimate sovereignty is the organized will of a people respecting life and property, liberty and justice, or the conditions of human development. Legal sovereignty, on the other hand, is the immediate exercise of supreme power in accordance with the general will of the people. This double aspect of sovereignty may also be characterized as the sovereignty of force and the sovereignty of will, or objective sovereignty and subjective sovereignty, a view which follows from our conclusions concerning the nature of the state. T h e force of the state, or its supreme power, and the will of the state are but two aspects of the same thing and mutually supplement each other. F o r will implies a conscious activity directed towards a definite end, and without such activity is only a mere subjective wish. S o also sovereign force of a people, as distinct from mere force, implies intelligent direction ; or we may say that such force is intelligently directed will, but with supreme power for the execution of its ends. That is, the intelligently directed force and the will, necessarily in one and the same persons, are, as we have said, obverse sides of the same fundamental f a c t — w i l l , or the activity of will. Hence, the sovereign power cf the slate is the activity, or expression, of the sovereign will of the people of the state, and arc related as effect to cause. T h e primary, subjective fact is will; the immediate, objective fact is force, power. If we consider sovereignty with respect to its sanction, or to the extent of its power, we meet with the same primacy of will. F o r it must be clcar that the sanction for the exercise of supreme power by a state, apparently in the fact of the power itself, is in reality in the sovereign will. T o be otherwise sovereignty would be no more than brute force. Objectively viewed, indeed, the sanction is in the fact of the

JUSTICE

38

IX

TAXATION

[374

possession of supreme power, but without the

originating

and directing will there would be no sucli power, nor d o e s t h e power e x t e n d b e y o n d the range of the organized will of t h e people, t h e sovereign

will of the state.

But

for t h e

sovereign will there can b e no sanction outside of itself, for will is a fundamental fact so far as our purpose is c o n c e r n e d , s i n c e we have not to do with the metaphysics that t r a c e s it to t h e supreme So

likewise

will imminent in the human will. with

respcct

to

its

extent.

Sovereignty,

indeed, as an o b j e c t i v e fact is, b y its VL'iy definition, unlimited in the degree and range of its power, since there can b e no other power within a state to which it m a y be subordinate.

B u t since sovereignty is also objectified will it is

conditioned b y the range of the activity of that will. again,

will is the ultimate fact.

T h e extent, or

Thus, perhaps

b e t t e r the content, of sovereignty is determined, therefore, b y the c h a r a c t e r of the will which it represents ; t h a t is, b y t h e c h a r a c t e r of the wills of the persons in whom the sovereign will is e m b o d i e d .

T h e r e f o r e , though in a sense will is

a law unto itself, sovereign will is, b y the very nature of individual

and

the

nature

and purpose of

the state,

the an

ethically determined will; for, as we have seen, it is o r g a n ized will directed towards the good of every person

repre-

sented in it. 2. I s there, then, any limitation

to sovereignty, or, are

t h e r e rights of the individual as against the sovereign p o w e r ? Politically, it must be admitted, sovereignty is absolute o v e r life and property. endure.

U n d e r no other condition can

a state

T h e right of the state to exercise compulsion upon

t h e individual has been sufficiently discussed in discussing t h e c h a r a c t e r of m e m b e r s h i p in the state, where it was shown t h a t forced obedience is justified as against the

individual

w h o sets his selfish will in opposition to the general will, as in t h e violation of law, the non-payment of t a x e s ;

though

375]

ORIGIN

AND NATURE

OF THE STATE

39

philosophically there is much truth in the contention of Hegel that the criminal wills his own punishment, wills, that is, the direction of the force of the state against himself. But are there no limits to this power of the state over the individual? Only a moral limit. And hence the only rights of the individual against the state are moral rights. Politically, that is legally, the sovereignty of the state is absolute ; but in virtue of its own ethical character, as well as the ethical character of the individuals in whom, upon whom and for whom it is exercised, it is subject to moral limitations. Or, there are rights of the individual that the sovereign power of the state is morally bound to respect, rights that flow from the very law of his being. They are in a very true sense " natural rights." They do not depend upon the state for their existence as rights, but only for a more assured reality. As Green puts it: " The state, or the sovereign [he means the government] as the characteristic institution of the state, does not crcate rights, but gives a fuller reality to rights already existing." 1 Not all " natural " rights are made legal rights, but only such as are of universal interest; and legal rights that are not " n a t u r a l " or moral rights are not permanently enforceable, since they are antagonistic lo the general will, to the prevailing idea of right. The ridicule so commonly heaped upon the doctrine of "natural r i g h t s " loses its force if the distinctions we have made between sovereign force and sovereign will be insisted upon; and only by such distinctions is it possible to arrive at a true philosophy of taxation. The plea for justice in taxation, implied if not expressed in almost every theory of taxation, is proof of the general conviction that there are "natural rights" of the individual which the state does not create but should cnforce; that the sovereign power of the state ought to be governed by definite conceptions of these 1

Political

Obligations, p. 138.

40

JUSTICE

rights, by

ideas

[376

IN TAXATION

of justice; that the state—individuals in

association—no less than the individual, should be ethically determined.

N o other conclusion is possible from the con-

ception of the state upheld in this chapter, which conceives it to be the purpose of the state to enforce right and justice t o the end of the highest realization of the individual.

The

right to develop, to realize himself, is fundamental to every individual, and this implies a right to the means necessary to attain the end, but with a recognition of the equal rights of others.

These rights of

the individual necessarily

in-

volve obligation on the part of the state, whose very essence it is to provide these conditions, to make possible this development.

It is by virtue of these facts—this conception

of the state—that manded ;

and

ethical

principles

it is in accordance

in taxation are de-

with them that ethical

principles must be determined. O u r conception of the nature of rights of the individual, and of the corresponding obligations of the state, may perhaps be made clearer by an illustration. the question of property rights.

Take, for example,

T h e right to property, it

is usually assumed, is a purely legal creation, property being a question of law and not of right.

F r o m the legal point of

view this is entirely c o r r e c t ; but the statement expresses only a half-truth.

Property, that which is one s own, is also

an e c o n o m i c good, produced directly or indirectly by individual exertion for the satisfaction of human needs, by which the self is realized.

Such economic " g o o d , " therefore, be-

longs of right—a moral, " natural " r i g h t — t o the individual as his own, his property, because it is the objective e x p r e s sion of his effort to provide the material means, not only of life but for individual, human advancement.

Or, to borrow,

again, Hegelian terminology, property is the outward manifestation of one's self; is, in a sense, the objectified

self.

P r o p e r t y as a legal right is only a confirmation by the government of an already existing moral right.

377]

ORIGIN

AND

NATURE

OF THE

STATE

41

T h e moral, or " natural," right to p r o p e r t y the state is b o u n d to respect in its d e m a n d s upon the individual, as it respects the right to individual development. A n d , in fact, this right to private p r o p e r t y in the p r o d u c t of one's own labor has been recognized from the very beginning of economic life. T h e case is quite different with land, which as a c o m m o n inheritance was first held in c o m m o n and only later, partly as a matter of e x p e d i e n c y and partly from a general recognition of the right to t h e i m p r o v e m e n t s made u p o n t h e land, was made private p r o p e r t y . A s Locke puts it, whenever one's own labor, which is his own, is added to a natural object " the c o m m o n r i g h t of other m e n " is e x cluded.' T o this right to thn products of one's own labor the government gives a legal existence. If there is only a legal l i g h t to p r o p e r t y , if p r o p e r t y has only legal existence creatcd b y the sovereign power of the state, or by the government acting for it, there can be no question of the rights of the individual to any economic goods which the state m a y demand, or of the obligations of the state respecting them. E x p e d i e n c y , not justice, would supply the norm for taxation. But if p r o p e r t y , that is economic goods, belong of right to the p r o d u c e r of them, as representing his effort and sacrifice to realize the possibilities of his nature, then this right should be recognized as f u n d a mental in the determination of principles of taxation. Expediency must give place to justice. T h e preceding theory of the nature of the state and t h e individual, involving reciprocal rights and obligations, will be assumed as the basis of the following discussion of j u s t principles of taxation. T h e marked feature of this theory is t h e emphasis that it gives, at least b y implication, to t h e idea that the problem of taxation is an ethical o n e : that in taxation as in other matters the good of the individual is the 1

Locke, Civil Government, ch. v, sec. 27.

42

JUSTICE IN TAXATION

[378

f a c t of f u n d a m e n t a l i m p o r t a n c e , the u l t i m a t e o b j e c t t o w a r d s w h i c h t h e o p e r a t i o n s of t h e s t a t e m u s t t e n d ; t h a t , in fine, t h e view-point of t h e p r o b l e m of t a x a t i o n , as of all social p h e n o m e n a , is matt. T h e r e will, h o w e v e r , b e n o a t t e m p t t o m a k e this t h e o r y t h e basis of new a n d s t a r t l i n g c o n c l u s i o n s . T h e object of this s t u d y is r a t h e r , u p o n t h e basis of a t h e o r y of the s t a t e t h a t , it is believed, b e s t e x p l a i n s its p h i l o s o p h y , t o ascertain t h e t r u e p h i l o s o p h y of t a x a t i o n ; u p o n this basis t o discover, b y analysis and criticism of e x i s t i n g t h e o r i e s , t h e t r u e principles of t a x a t i o n ; a n d a b o v e all to give t h e m a rational justification, a n d not, as is c o m m o n l y d o n e , m e r e l y a s s u m e t h e j u s t i c e of certain p r i n c i p l e s w i t h o u t full c o n s i d e r a t i o n of all t h a t is implied in t h e m u t u a l relations of t h e s t a t e and t h e individual.

C H A P T E R III TAXATION, ECONOMICS AND ETHICS I . TAXATION

I . The Nature of a Tax. In the preceding chapter we have learned that the state is an organization of persons effected for the realization of a common end, a common " good "—a good that is " common " because it is the good of every member of the state; that this " good " is from one point of view the attainment of right and justice, while ultimately it is the fullest realization of ihc personalities of the individuals who in their organized totality constitute the state; that primarily necessary for carrying out the ends of the state is the establishment of government—an organization within the state—charged with the general purpose of acting as the executive agent of the collective will of the state. Thus we find that a government, as the agent of the state in the realization of right and justice and in the maintenance of conditions for the highest possible human development, is a fundamental collective need indispensable to every individual, to every person. Now such a government is not a mere subjective idea; it is also an objective fact, consisting as it does of a body of persons selected for the performance of its functions, for executing the will of the people—the state. But that these persons may perform the functions of government, certain material conditions, or means, are neces sary. Hence the need of a government, and so the needs of government, involve two classes of needs: personal service 379]

43

JUSTICE

44

IN

TAXATION

[380

and material goods. B u t since the persons who act as the government retain their individuality—therefore their personal wants satisfied b y means of economic g o o d s — d e m a n d for their services resolves itself into a demand for economic g o o d s , or the means for their procurement. Thus, directly or indirectly, the whole needs of a government may be s u m m e d up in the need for economic g o o d s ; on the one hand, food, clothing, shelter, etc., for the governing c l a s s ; and on the other hand, land, buildings and such equipment as is necessary to provide place and material for the performance of the service, for the preservation of records, etc., and armament, ships and other essentials for national defense, both of which conditions are essential for the maintenance of government. Immediately and directly, however, the need of government is r e v e n u e — m o n e y — b y means of which it can procure both service and the material goods necessary for the performance of its functions. In the past the services and material goods required by a government have been procured in a variety of w a y s : B y tributes and booty, b y feudal services, grants, aids, etc.; b y the cultivation of crown lands, and by direct service to the s t a t e — a s military duty and the corvee; and latterly, indirectly by means of revenue collected in the form of money from the citizens of the state in which the government in question exercises its functions. 1 In earlier times tributes and booty constituted the principal source of revenue, in medieval times feudal dues and crown lands were the most important source, but in the modern civilized state the chief source of revenue is t a x a t i o n — m o n e y contributions from the whole p e o p l e — t h o u g h fees, fines and, in some countries, government lands and' industries yield a not unimportant part of the total revenue. W e are conccrned, however, neither with the history of governmental revenue, nor with 1

See Wagner, Finanxwiiicnsduijt, ii, sec. 103 et seq.

381J

TAXATION,

a s t u d y of

the

ECONOMICS

AND

ETHICS

45

p r i n c i p l e s u n d e r l y i n g t h e v a r i o u s k i n d s of

revenue, but solely with the principles that should

deter-

m i n e t h e c o l l e c t i o n of t h a t r e v e n u e w h i c h c o m c s f r o m t a x a tion. W h a t , in ples we tax

b r i e f , is t h e n a t u r e of t h e

seek

to

have been

determine?

tax, whose

Numerous

given, though

definitions

not w i t h c o m p l e t e

s i n c e t o o g r e a t p r e c i s i o n is a t t e m p t e d

princiof

a

success,

in a s i n g l e s e n t e n c e .

F o r o u r p u r p o s e , at least, it is b e t t e r t o s t a t e the

funda-

m e n t a l idea of a t a x a n d a f t e r w a r d s t o n o t e its l e a d i n g c h a r acteristics.

O t h e r w i s e t h e r e will be i n a c c u r a c y of s t a t e m e n t ,

o r t h e n e e d of t o o m a n y q u a l i f i c a t i o n s . define a tax as a contribution

I would, therefore,

f r o m i n d i v i d u a l s o u t of

their

p r i v a t e p r o p e r t y f o r t h e m a i n t e n a n c e a n d d e f e n s e of g o v e r n m e n t , t o the e n d t h a t it m a y p e r f o r m its f u n c t i o n s a n d e n d s of t h e s t a t e b e r e a l i z e d .

T h e fact that

the

contributions

f r o m p r i v a t e p r o p e r t y are n e c e s s a r y f o r t h e s u p p o r t a n d e x p e n s e s of g o v e r n m e n t r e s u l t s , in p a r t , f r o m t h e c h a n g e f r o m collective to private

economy,

and in p a r t , a l s o , f r o m

g i f t o r sale of c r o w n , o r n a t i o n a l p r o p e r t y , t o i n d i v i d u a l s private p r o p e r t y ;

in a w o r d , to t h e f a c t of p r i v a t e

And

the system

s o l o n g as

individuals must contribute p o r t of g o v e r n m e n t . b e r of t h e state t o

of

private

property

the as

property. subsists

f r o m t h e i r p r o p e r t y for t h e s u p -

B u t w h e t h e r t h e i n d i v i d u a l is a m e m whose government

m a t t e r of n o i m p o r t a n c e .

h e c o n t r i b u t e s is a

T h e f a c t is t h a t c o n t r i b u t i o n s a r e

d u e f r o m all ( w i t h e x c e p t i o n s t o b e n o t e d l a t e r ) o v e r w h o m a

government

may

directly

exercise

jurisdiction,

as w i t h

r e s p e c t to their p r o p e r t y , o r for w h o m a n y of its f u n c t i o n s m a y b e d i r e c t l y p e r f o r m e d , as for the d e f e n s e of t h e i r p e r sons or property. In v i e w i n g t h e t a x as a ' c o n t r i b u t i o n ' w e h a v e it s o l e l y from t h e p o i n t of v i e w of t h e b e l i e v e t h a t this

regarded

individual, and

we

p o i n t of v i e w is j u s t i f i e d b y a t r u e p h i l o s -

46

JUSTICE

IN

TAXATION

382

o p h y of the state as emphasizing the most distinctive feature of a tax, philosophically considered. But it must be admitted that there is another aspcct to a tax, the point of view of the government. A n d from this point of view the t a x may be considered as a method cf procuring a revenue to meet the expenses of the government by means of collections from the private property, or income, of individuals. F r o m the point of view of the individual, therefore, a tax is a 'contribution,' from the point of view cf the government, a ' collection.' 2. Characteristics of a Tax. T h e tax regarded as a ' c o n tribution ' or as a ' collection,' or as both, does not reveal its full nature, but only its general feature. Particularly important to a clearer understanding of the nature of a tax are two characteristics that are in part suggested b y its general feature as described above. ( 1 ) First, the question whether a tax is a tax upon persons or p r o p e r t y ; ( 2 ) Second, whether the tax is voluntary or compulsory. Both questions are of importance, not only because their answers will throw light upon the nature of the tax, but because import^ ant principles of taxation depend upon their determination. ( 1 ) In the first place, then, is a tax imposed upon persons or upon property ? That a t a x is nominally levied upon property no one will question. But is the tax in reality, in its essence, a tax upon property ? Economically speaking, or viewed as an objective phenomenon, a tax is undoubtedly upon property. A government requires economic goods in the form of a money revenue to defray its expenses in the performance of its functions; and this revenue is obtained b y a collection made upon the private property of individuals. Government, in brief, requires property and procures it by assessments upon property and collections of property. But this view of a tax explains only its external and mechanical character, its formal character.

383]

TAXATION,

ECONOMICS

47

AND ETHICS

B u t as the nature o f things in general, so also the nature of a t a x is not determined b y its formal c h a r a c t e r , but by its s u b j e c t i v e idea, its subjective c h a r a c t e r .

A n d the subjective

c h a r a c t e r of a t a x is not determined b y the formal relation of a g o v e r n m e n t to e c o n o m i c goods, but b y the relation of a state to the persons in whom and for whom it has its e x istence.

F o r , as we have seen, a state consists cf

persons

organized as a b o d y politic and has for its purpose gradual development and perfection.

their

S t a t e and persons are

i n t e r d e p e n d e n t and correlative to c a c h other.

Consisting of

persons, the state has direct relation only to persons and d e p e n d e n c e upon persons.

G o v e r n m e n t being the a g e n t c f

t h e state, it is a n e c c s s a r y incident to it, and hence its maint e n a n c e and support is a requisite to the maintenance s u p p o r t of the state.

and

A n d as t h e agent of the state the d e -

p e n d e n c e of the government for support is necessarily the s a m e as that of the state, that is, upon persons.

T h e rela-

tion, we repeat, is to persons and the d e p e n d e n c e upon persons.

T h i s is involved in the very idea of the state.

More-

over, as the state, and so the government, exists for persons and is a necessity to persons, the obligation of support must rest upon persons, as the necessity of support is a necessity to persons.

Neither necessity nor obligation could rest upon

property as such, thougli p r o p e r t y is e>sential to state and government.

T h e t a x is and can be nothing else than a t a x

upon persons, at least upon our assumption of the true c o n ception of the state.

Nor, indeed, is the subjectivity of t h e

t a x , as a tax upon persons, any less apparent when viewed from its e c o n o m i c siandpoint if only the subjective c h a r a c t e r of property be considered.

F o r , subjectively

considered,

property is, as wc saw, the objectified self; and h e n c e a t a x upon property b e c o m e s indirectly a t a x upon persons, upon personal productive c a p a c i t y and ability, upon the e c o n o m i c means of satisfying personal wants, and thus upon the entire personality ol the t a x p a y e r .

48

JUSTICE

IN TAXATION

[384

T h u s , whether \vc consider the tax with rcspect to its necessity to the individual and to the corresponding individual responsibility and obligation (involving the relation of the individual to the state"), or with respect to its economic relation to the individual, it is equally evident that, while empirically and objectively viewed, a tax is upon property, ideally and subjectively viewed it is upon persons. A n d it m a y be added that this subjective character of the t a x has far-reaching results. It supplies the k e y not only to the true philosophy of taxation but to the principles b y which it should be governed. It also furnishes the k e y to the solution of many otherwise difficult problems in taxation, and consistently adhered to avoids much error and confusion of ideas. " T h e subjectivity of the t a x . " says V o c k e , " is the A r i a d n e thread that must be firmly held if one would avoid a multitude of dangerous mistakes and escape from the labyrinth of obscure ( u n k l a r ) , if also old v i e w s . " ' ( 2 ) Granting that a tax is a tax upon the person, is the tax contribution voluntary or c o m p u l s o r y ? A g a i n , it is necessary to distinguish between the objective and the subjective character of the tax, between the objective fact and the subjective idea. A s objectively considered from the view-point of political science, or of the government, the payment of taxes is necessarily compulsory. Compulsion, in fact, is a necessary prerogative of objective sovereignty, and a necessary consequence of the right of the state to be. S o dominant, indeed, is this aspect of the tax that the idea of compulsion has become a central feature in all of the definitions of a tax b y both the legist and the economist, the statesman and the financier. Y e t , historically, the beginnings of the tax, as occasional " a i d s , " " g r a n t s " and " donations," were entirely v o l u n t a r y ; and only gradually, with the change of society from status to contract, and the 'Vocke, Dit Abgaben, Au,Zagen und die Steuer, p. 472.

385]

TAXATION,

ECONOMICS

AND

ETHICS

49

growing insufficiency of other sources of revenue, did these contributions becomc regular and compulsory.' And curiously enough, as the consciousness of the unity and universality of interest in a stable government has developed, and particularly with the rise of the democratic state, the compulsory character of tax contributions has become more universal and more rigid. But the compulsory feature of the tax represents only one side of the question, either historically or philosophically. For, correlated with the fact of an enlarged range, and the rigidity of compulsion, is the further fact that with the growth of a more definite consciousness of our citizenship, and of the vital relations that we sustain to the state and the state to us, there develops the conviction of an obligation to contribute towards the support of the government, and at the same time the right of the government to e x a c t the contribution. 1 A n d , indeed, this conviction attests the voluntary character of the tax, at least where its true nature has been duly reflected upon. Nor is the voluntary character of the t a x a mere subjective concept arising from conscious reflection upon the nature of a tax. T a x e s are in fact voluntarily paid, even though the attempt is almost universally made to evade a part of them, or a protest is made against their amount. A t least in all cases of pure democracy, or of representative governments elected b y the people, the people voluntarily agree, directly or indirectly, to tax themselves. A s was pointed out when discussing the character of membership in a state, the people who voluntarily make up a state voluntarily agree to tax themselves for its support and maintenance; and only here and there the self-seeking individual endeavors to make himself an exception to the general rule, and upon such it is agreed, individually and 1

See Seligman, Eszays in Taxation,

1

Cf. Cohn, The Science of Finance,

pp. 1 - 7 . sec. 192.

JO

JUSTICE IN TAXATION

[386

c o l l e c t i v e l y , that c o m p u l s i o n shall be a p p l i e d , the v o l u n t a r y a n d c o m p u l s o r y c h a r a c t e r of a t a x thus i m p l y i n g e a c h o t h e r . B u t n o t o n l y is the i d e a of v o l u n t a r y t a x a t i o n i m p l i e d in t h e v o l u n t a r y c h a r a c t e r of

m e m b e r s h i p in a state, it is a

n e c e s s a r y c o n s e q u e n c e of the s u b j e c t i v e idea of the t a x a n d of t h e s t a t e .

If, as w e h a v e m a i n t a i n e d , the

fundamental

b a s i s of the state is will, then the s a m e will that c r c a t e s the s t a t e m u s t will to p r o v i d e the m e a n s for its

maintenance;

that is, c o n t r i b u t i o n f o r the s u p p o r t of the state is a v o l u n tary act.

Any

other theory can

rest only u p o n

the

pre-

s u p p o s i t i o n that a r b i t r a r y f o r c e is the sole f o u n d a t i o n of s t a t e , t h u s f a i l i n g to d i s t i n g u i s h b e t w e e n the e m p i r i c a l

the state

a n d t h e C o n c e p t state. Nevertheless,

the

subjective

i d e a of

e x c l u d e the idea of c o m p u l s i o n .

taxation

docs

not

On the c o n t r a r y , c o m p u l -

s i o n , w e r e p e a t , is in the v o l u n t a r y c o n c e p t i o n of the t a x ;

a

f a c t t h a t m u s t b e c o m c a p p a r e n t the m o m e n t t h a t we r e f l e c t upon

the

distinction

individual

self s e e k i n g

between

the

general

will

and

the

will, b e t w e e n the s o c i a l will of the

i n d i v i d u a l a n d his p u r e l y p e r s o n a l will, if we m a y b e a l l o w e d t h e distinction.

In a n y e a s e , h o w e v e r , o n l y the

subjective

i d e a of the state a n d the s u b j e c t i v e idea of t a x a t i o n c a n f u r n i s h a basis for e t h i c a l p r i n c i p l e s of t a x a t i o n , for if f o r c e is t h e s o l e f a c t o r in the p r o b l e m t h e r e can b e no q u e s t i o n of p r i n c i p l e s , but o n l y of p o l i c y ; principles.

s i o n , a s in the e n f o r c e m e n t of upon

still less a q u e s t i o n of ethical

B u t , in f a c t , e v e n t h e o b j e c t i v e right of c o m p u l the law of u n i v e r s a l i t y , rests

the s u b j e c t i v e idea, or, p e r h a p s b e t t e r , the s u b j e c t i v e

fact. 3 . The Limils

of

Taxation.

G r a n t i n g the p o w e r of the

s t a t e to i m p o s e t a x e s as a s o v e r e i g n ri=;ht—a r i g h t , h o w e v e r , t h a t h a s its s o u r c e in the g e n e r a l w i l l — a r c t h e r e a n y li mi is to the t a x i n g p o w e r ?

If the q u e s t i o n be m a d e to r e f e r to

t h e state p r o p e r it m u s t be said that no t h e o r e t i c a l limits t o

3S7]

TAXATION,

ECONOMICS

AND

ETHICS

51

taxation can be assigned; for if the state is the people organized, and represents their collective will, there can be no limit to its power other than that which it determines for itself, that is, which is determined b y the general will in view of common ideals. But in view of the fact that the g o v e r n m e n t , as the agent of the state, is the practical taxing power, it is with reference to the government that the question has its real significance. In discussing, then, the limits of the power of the governm e n t in taxation we shall pass over all specific reference to t h e individual, since this phase of the question constitutes t h e essence of the main burden of our thesis. Here we wish only to note a few general observations, particularly respecting the amount of the tax burden. A n d in the first place, it m a y be observed that the limits are relative, not absolute; and that while no a priori rule can be given for the limitation, there are, nevertheless, both theoretical and practical limitations. In a general way we may classify the limitations under the following heads : political, ethical, economic. (1 ) Politically speaking the power of a government in taxation is theoretically limited by its creator, the state; and most c o m m o n l y the limit finds objective expression as a constitutional limitation, especially under constitutional governments. Th.it is, the will of the people is the final judge. More than this, in all representative governments the people theoretically exercise a direct control over the amount of the tux in the choice of their representatives. Unfortunately, however, owing to party machinery and political methods, the control of the people is very largely theoretical only. W h e r e , indeed, the government falls into the hands of a " p o l i t i c a l a r i s t o c r a c y " — t h e politicians—the people retain only the semblance of power, while the government bccomes practically absolute. And yet there are practical Iimitatijns, for if the burden

52

JUSTICE

IN

[338

TAXATION

b e c o m e s too o p p r e s s i v e t h e r e is a l w a y s d a n g e r of a r e v o l u tion, s u c h , for e x a m p l e as t h e

Revolution

of 1 7 S 9 ;

unless,

p e r c h a n c e , the o p p r e s s i o n s u c c e s s f u l l y passes a point w h e r e resistance

becomes

condition

of Italy and S p a i n .

hopeless, as is a p p a r e n t l y the

present

In countries of g r e a t e r

en-

l i g h t e n m e n t and a l a r g e r f r e e d o m t h e r e is the restraint t h a t t h e fear of b e i n g d e p r i v e d of o f f i c c , t h r o u g h the ballot, c o n stantly exercises.

S u c h a limit is, h o w e v e r , v e r y indefinite.

It d e p e n d s in part on the a b i l i t y of t h e g o v e r n i n g p o w e r t o t h r o w the b u r d e n o n those w h o h a v e p r a c t i c a l l y the l e a s t political p o w e r ;

in part on the ability to use the m o r e

less d e c e p t i v e m e t h o d of c r e a t i n g public d e b t s . '

or

Thus, po-

litically a g o v e r n m e n t has in p r a c t i c e a wide range of d i s c r e tion in the use of its t a x i n g p o w e r , even the

constitutional

restraint b e i n g v e r y l a r g e l y n e g a t i v e d in the fact t h a t t h e government

interprets

the

constitutional

limitations

put

u p o n it. (2)

B u t t h o u g h a g o v e r n m e n t has a large r a n g e in t a x a -

tion p o l i t i c a l l y , t h e r e are certain e t h i c a l limitations that are i n c u m b e n t u p o n it, for the g o v e r n m e n t is, after all, c o n s t i t u t e d of moral a g e n t s . tation c a n b e assigned.

Still, no definite moral rule of l i m i A l l that can b e said is, that s i n c e

t h e g o v e r n m e n t is the a g e n t of the state in m a k i n g t i o n s possible morally bound

for

the h i g h e s t

human

to c o n s i d e r the effects of a n y

r e t a r d i n g this d e v e l o p m e n t .

condi-

d e v e l o p m e n t , it is t a x a t i o n in

B u t s u c h a limit is relative.

It

d e p e n d s , on the o n e side, o n the functions that are a s s i g n e d to t h e g o v e r n m e n t , and, on the other side, 011 the n a t i o n a l w e a l t h , on the e c o n o m i c condition of the p e o p l e . f u n c t i o n s of g o v e r n m e n t 1

are t h e m s e l v e s

But

the

relative'—relative,

Cf. A d a m s , Public Debts, ch. ii and pp. 4 1 - 2 .

• T h e theory of the relativity o f the functions of government was w a r m l y criticised by the H e g e l i a n scholar, D r . \V. T. Harris, in a discussion following a p a p e r by the writer on " t he Functions of G o v e r n m e n t . "

389]

TAXATION,

ECONOMICS

AND ETHICS

53

that is, to the habits and customs of a people, to their ideals, their intellectual and moral status, their industrial life, their political and economic freedom. The main ethical problem of a government in taxation, however, is the just distribution of the burden, a question we need not discuss here. ( 3 ) Economically, also, the limitations of taxation have the same relative character that they have ethically, the same indefiniteness, the same want of definite rule." Neither a fixed percentage of the national wealth, nor a per capita average can furnish valid criteria for judgment. Hardly more satisfactory is the rule that would limit the amount of the tax upon the individual to a fixed proportion of his revenue.' No less indefinite is the rule that the amount of taxes should be determined by the needs of the government, for not only are these needs relative to the functions of the government, but their satisfaction is conditioned by the national wealth and general economic circumstances. Of far greater importance, since it conforms both to the cthical ideal and to sound economic policy, is the rule of Stein, sanctioned by Professor Adams.s that the amount of the tax should be so adjusted as to maintain a due proportion between the satisfaction of the needs of the state and the needs of the individual. True, the difficulty of this rule is the practical determination of a " due proportion," a problem that is very largely influenced by economic and cthical conditions. The solution of ihc problem, however, is made theoretically simple by the utilitarian economists by an application of the doctrine of marginal utility. But for reasons that will be given later, utilitarian economics has, to my mind, a very limited application in public financc, being subject to the delusions 1

Cf. Wagner, op. eil., sfes. 104-106. Cf. also Adams, Public Finance, pp. 26-33.

1

iiee Vauban, La JJ.:vts A'oyatt.

•Adams, The Science of Finance,

p. 28.

54

JUSTICE

[390

IN TAXATION

t h a t a r e s o c o m m o n in r c s s o n i n g f r o m a n a l o g i e s .

Still, t h e

r u l e is e c o n o m i c a l l y a n d e t h i c a l l y s o u n d as a r u l e i c r g u i d ance.

B u t , p e r h a p s , t h e m o s t p r a c t i c a l e c o n o m i c r u l e is t h a t

t a x e s s h o u l d n o t b e s o l a r g e a s in a n y w a y t o i m p a i r source.

their

T h a t is, t h e e c o n o m i c l i m i t a t i o n is d e t e r m i n e d

by

t h e c f f c c t s of t a x e s u p o n i n d u s t r i e s , a n d so u p o n t h e s o u r c e s of revenue.

T h i s p h a s e of t h e q u e s t i o n w c will d i s c u s s u n d e r

t h e following head. II. TAXATION AND

ECONOMICS

T h e e c o n o m i c life of a p e o p l e is i n t i m a t e l y r e l a t e d t o its s o c i a l life, n o t o n l y b c c a u s e it is itself a p h a ^ c of t h e life, b u t a l s o b e c a u s e

economic

goods foim the

social

matciial

b a s i s of t h e c x i s t c n c c a n d u s e f u l n e s s of all s o c i a l g r o u p s , — religious, philanthropic, scientific, e t c . , — a s political

g r o u p itself.

we'll as of t h e

T h a t is, s o c i a l w e l l - b e i n g is

tioned by economic well-being.

condi-

W h a t e v e r , therefore, affects

t h e e c o n o m i c life, o r t h e e c o n o m i c c o n d i t i o n s of a p e o p l e , a f f e c t s a l s o its s o c i a l a n d s o its indiv i d u a l w e l l - b e i n g .

Hence

it b e c o m e s of g r a v e i m p o r t a n c e t h a t a g o v e r n m e n t in e x e r c i s i n g its p o w e r of t a x a t i o n , in c o l l e c t i n g from individuals, should

carefully

economic

observe

any

gocds

economic

e f f e c t s t h a t t a x e s m a y h a v e , w h e t h e r d u e t o t h e m e t h o d s of t a x a t i o n , t h e a m o u n t of t h e t a x e s , o r t o o t h e r c a u s e s . T h e s e e f f e c t s w e c a n n o t s t o p t o d i s c u s s in a n y d e t a i l , b u t m u s t c o n f i n e o u r s e l v e s t o p o i n t i n g o u t s o m e of t h e i r m o r e i m p o r t a n t f e a t u r e s a n d t e n d e n c i e s , n o t o n l y to i n d i c a t e t h e c h a r a c t e r of t h e p r o b l e m i n v o l v e d , b u t a l s o t o e m p h a s i z e t h e f a c t t h a t j u s t i c e in t a x a t i o n c a n n o t b e r e a l i z e d e x c e p t b y clue o b s e r v a n c e of e c o n o m i c laws a n d p r i n c i p l e s .

F o r while this

a s p e c t of t h e q u e s t i o n is e s s e n t i a l l y o n e of t h e e c o n o m i c s of t a x a t i o n , r a t h e r t h a n of t h e p i i n c i p l e s of t a x a t i o n , a c l e a r u n d e r s t a n d i n g of t h e c h a r a c t e r of t h e e f f c c t s of a t a x is a n i n d i s p e n s a b l e p r e r e q u i s i t e to t h e d e t e r m i n a t i o n of p r i n c i p l e s ;

391] since

TAXATION,

ECONOMICS

AND ETHICS

55

the justification of p r i n c i p l e s must be f o u n d in t h s

e f f e c t s resulting from their practical application, not in

priori

formulae.

a

I n d e e d , it is b e c a u s e of the influence t h a t

t a x a t i o n has upon the p r o d u c t i o n , distribution and c o n s u m p tion of wealth that it is of special e c o n o m i c and ethical imp o r t a n c e to c o n s i d e r its e f f e c t s , since these h a v e an i m p o r t ant b e a r i n g upon principles of t a x a t i o n , as no system c a n b e just which unduly and u n e q u a l l y a f f e c t s the opportunities, o r m a t e r i a l m e a n s of d e v e l o p m e n t .

In the e c o n o m i c e f f e c t s

of a t a x , therefore, and more p a r t i c u l a r l y in the effects u p o n c o n s u m p t i o n , is to be found an i m p o r t a n t factor in determini n g the justice of p r i n c i p e s of t a x a t i o n . 1.

Taxation

and

Production.

T h e question s p e c i a l l y in-

v o l v e d here is not that of t a x e s as ail clement in the cost of production.

It g o e s , indeed, without sav ing that t a x e s m u s t

constitute an essential element in the cost of production s o l o n g as g o v e r n m e n t shall be n e c e s s a r y to guarantee the p r o tection, security and order that m a k e production

possible,

and s o long as taxes shall be n e c e s s a r y for the s u p p o r t of government.

M o r e strictly, t a x e s are a p r e l i m i n a r y e x p e n s e

that m a k e the conditions of p r o d u c t i o n

p o s s i b l e ; but t h e y

are none the less a n e c e s s a r y p a r t of the cost.

Nor, again,

is the question one of the p o s s i b l e use of t a x e s to f u r t h e r production by the g o v e r n m e n t , as, for e x a m p l e , b y the p u r c h a s e of railroads or other industries. policy

T h i s is a question of

and of the functions of g o v e r n m e n t as well as

an

e c o n o m i c question, and is too l a r g e a subject to be c o n s i d ered here.

N j , the question with which wc are

concerned,

is the effect of t a x e s upon the production of individuals, a n d thus upon e c o n o m i c progress and the general material wellbeing of the individual and of s o c i e t y . D o , then, t a x e s e n c o u r a g e or d i s c o u r a g e p r o d u c t i o n ? this question different answ ers h a v e been given.

To

On the o n e

side there is the doctrine that t a x e s necessarily stimulate

JUSTICE

56

IN

TAXATION

[392

production, a theory successfully overthrown by H u m e . 1 M c C u l l o c h accepts the reasoning of H u m e but qualifies his acceptance with the statement that, " it is undoubtedly true that the desire to maintain and improve their condition, stimulates most men to endeavor to discharge the burden oi additional t a x e s by increased industry and e c o n o m y , without allowing them to encroach on their means of subsistence, or on their fortunes."* On the other hand, J . B . S a y . who viewed the problem from a different aspect, thought it " a glaring absurdity to pretend that taxation contributes to the national wealth," since " capital is but an accumulation of the v e r y products that taxation takes from the s u b j e c t ; " 3 that is, since the source of a tax and of capital is one and the same, and to increase the one is to diminish the other. T h e fact of the case, however, is that general positive statements can not be safely made on either side of the question. T h e cffects of taxalion on produclion are relative to a great variety of circumstances and conditions, and these a g o v e r n m e n t should, as far as possible, take into account in its t a x systems and methods. W h a t the effects cf a t a x upon production are, depends, in fact, v e r y largely upon the laws of shifting and incidence in taxation. But these laws arc b y no means simple in c h a r a c t e r ; they depend upon m a n y conditioning influences, and are specific rather than general in their nature. W e cannot, however, stop to discuss this aspect of the question further than to call attention to the evident fact that the effect of a t a x , and therefore its 1

See Hume, Essay on

•McCulloch, Taxation

Taxes. and

Funding,

Petty and Temple see Seligman, Shifting VAvert

t t Imposte, p. 126.

• S a y , t'olitical

Economy,

p. 7 (erf. 1 8 5 7 ) . and

Incidence,

Also Mill, Petit. Icon., bk. iii, ch. viii, sec. I.

For similar views of p. 16.

Cf. also Hear,

sec. 3, bk. v, th. iii. For conditions in which the

tax may lower or raise the " marginal cost," cr influence the rate of remuneration, »ee Edgcworth, The Pure P- 57-

1 heory of 1 axation,

in Economic Journal, Vol. vii,

TAXATION,

ECONOMICS

AND

ETHICS

57

incidence, is indissolubly linked with the problem of justice; and also to point out some of the more important conditions determining the shifting and incidence of taxation. That is to say, the justice of a tax is largely conditioned by its effects, the effects are intimately connected with its incidence, and the incidence, as we have said, is determined by various conditions. Among the more important of such conditions arc the following: Whether the industries taxed follow the law of constant, increasing or decreasing returns; whether or not they are monopolies; whether or not there is mobility of capital and labor; whether the tax is based upon value or is a tax upon surplus; whether the demand for the taxed commodity is elastic or inclastic; whether or not the " law of substitution" is possible; whether the tax is high or low; whether special or general; the condition of the market for labor and capital; the economic condition of the industry taxed relatively to other industries; the form of the imposition and the kind of taxes, as, for example, whether the tax is direct or indirect; and the kind of industry taxed and the stage of the industrial proccss in which the industry is taxed. In brief, whatever conditions, arising from taxation, that have an influence upon price determine the manner and degree of shifting and incidence, since these arc essentially phenomena of price, the objective determination of which is the law of demand and supply, the subjective determination the law of marginal utility. 1 1 For the best statement of Ihe history and theory of shifting and incidence, »ee Seligman, Shifting and Incidence of Taxation. See also Kaizl, Die / ehre von der Ubej-iv httng der Slcuein. i'Vr a theoretical study of the fir?t four ' ' c o n d i tions " mentioned in the text see the al le article of Prof. Kdgewoith on " 1 he l'ure 'theory of Taxation," Economic Journal, Vol. vii. These condition! are net treated by Prof. Edgeworth singly but in groups if assumed combinations. H e t a l u s into consideration also the effects of " s h o r t " and " l o n g peri c's," and whether the lax is on rival or complementary industries. The aiti J c is a splendid illustration of both the cou plcxity and the difficulty of the ¡.rollem of "shiltiDg and incidence."

58

JUSTICE

IN TAXATION

[394

I t ' i s the influences of such individual or c o m b i n e d conditions as the a b o v e that help to determine the operation of a t a x , and without a clear u n d e r s t a n d i n g of these influences it is impossible to determine the effect of a tax upon p r o d u c tion.

A n d y e t t h e y tell us but one f i d e of the

problem.

B y s t u d y i n g the effect of these influences we m a y learn the e f f e c t of a t a x upon price and upon the d e m a n d and s u p p l y f o r the products t a x e d , but not necessarily the effect of a tax

upon p r o d u c t i o n .

T h e question of the e f f e c t of :i t a x

upon production is p r i m a r i l y and i m m e d i a t e l y a question of its cffect upon the :iccumulalion and e m p l o y m e n t of capital, and

upon the zeal and industry of

labor.

A11

important

clement in the solution of this problem is u n d o u b t e d l y influence of d e m a n d and s u p p l y operating

through

the

price,

itself l a r g e l y determined by the a b o v e mentioned c o n d i t i o n s . B u t this is not the o n l y e l e m e n t of

the p r o b l e m .

It is

necessary to know, not only the effcct of a t a x upon

pricc

and d e m a n d , but also the e f f e c t of a t a x - d e t c i mined

price

upon the profits of capital and labor.

N o r even then c a n

we s a y with a n y definiteness what e f f c c t these influences will h a v e upon production.

combined

Positive statements

concerning the cffects can result only from an i n c o m p l e t e a p p r e h e n s i o n of the facts i n v o l v e d . L e t us take, for e x a m p l e , the assumption

of

S a y , that

t a x e s a l w a y s tend to o i r r i n b h production for the reason that what is sper.t as a t a x would otherwise have been c o n s u m e d as c a p i t a l ; or the o p p o s i t e t h e o r y , that a tax tends to s t i m u late p r o d u c t i v e activity, or to " create the ability to bear i t , " en the g i c u r . d that the desire to maintain a certain standard of living stimulates to greater industry and labor w h e n e v e r a t a x curtails the means of maintaining the desired

standard.

T h e fact is that both a s s u m p t i o n s a i c only partial truths. both also there is a noil sequitur.

In

N o t only is it clearly not

a fact that what is spent as a t a x would otherwise h a v e b e e n

395]

TAXATION,

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59

e m p l o y e d as c a p i t a l , b u t it b y n o m e a n s f o l l o w s t h a t , b e c a u s e b o t h t h e t a x a n d c a p i t a l h a v e t h e s a m e s o u r c c , to

increase

t h e o n e is t o d i m i n i s h t h e o t h e r , s i n c e all o t h e r e x p e n d i t u r e s h a v e the same source.

H o w t h a t p a r t of t h e i n c o m e w h i c h

is c o n s u m e d as t a x e s w o u l d

h a v e b e e n s p e n t but for t h e t a x

d e p e n d s in p a r t , i n d e e d , u p o n t h e p o s s i b i l i t y of p r o f i t s , b u t a l s o in p a r t u p o n t h e c h a r a c t e r a n d h a b i t s of t h e i n d i v i d u a l taxpayer.

And

in l i k e m a n n e r is d e t e r m i n e d w h e t h e r a t a x

e f f e c t s a g r e a t e r utility of i n d u s t r y a n d l a b o r .

Influences are

at w o r k in b o t h d i r e c t i o n s and t h e final e f f e c t is a r e s u l t a n t o f m a n y o p p o s i n g forces.

But whatever the general tendencies,

there can be no doubt but that an e x c e s s i v e tax curtails prod u c t i o n , w h i l e a m o d e r a t e t a x m a y , at least u n d e r

ccrtain

circumstances, afford a stimulus to greater production or to l a r g e r a c c u m u l a t i o n s of c a p i t a l . ' I t is, i n d e e d , in t h e f a c t t h a t t a x e s m a y w o r k b o t h w a y s u p o n both capital and labor, m a y even have one cffect u p o n o n e c l a s s of p r o d u c e r s a n d the o p p o s i t e e f f e c t u p o n a n o t h e r c l a s s , t h a t m a k e s it of s u c h i m p o r t a n c e t h a t a g o v e r n m e n t , in t h e d e t e r m i n a t i o n of t h e a m o u n t and a d j u s t m e n t cf t a x e s , should

c a r e f u l l y c o n s i d e r t h e i r p o s s i b l e e f f e c t s , and s o t h e

conditions under which those effects are likely to be duced.

N o r is this i m p o r t a n c e c o n f i n e d t o t h e

e f f e c t of t a x e s u p o n p r o d u c t i o n . l o g i c a l r e s u l t s of o u r a s s u m p t i o n s .

pro-

immediate

It is s h o w n as well in t h e T o a s s u m e , for e x a m p l e ,

t h a t t a x e s a l w a y s e n c o u r a g e p r o d u c t i o n is not o n l y to a s s u m e a fallacious doctrinc, but also a dangerous principle, since there would

b e n o l o g i c a l l i m i t t o t h e e x t e n t of

w h i l e the a s s u m p t i o n t h a t t a x e s a l w a y s lessen

taxation;

production,

b e s i d e s b e i n g false, t e n d s t o e x a g g e r a t e t h e r i g h t s of t h e individual

as a g a i n s t the state a n d t o c r i p p l e t h e n e c e s s a r y

n e e d s of the g o v e r n m e n t . 1

Cf

Marshall, Principles

T h e possible indirect effccts upon

of t'.coromics,

Teoria dilta Pressione Ti'ibutaria, p. 41.

p. 28S ( ; d cc'.).

Also

Fantalconi

60

JUSTICE

IN

TAXATION

[396

production would be far reaching. Thus, both because of its direct and its indirect effects, a government is morally bound to consider the cffect of its tax impositions, both with respect to their amount and their adjustment. The constant aim should be to interfere as little as possible with the processes of production. Whether a government should encourage production by means of protective tariffs or otherwise—creating limited legal monopolies—is a different matter. This is a question of the functions of government and of governmental policy, not of public finance. But when a government by its tax system, or by the amount of its taxes, unnecessarily curtails production or produces unequal conditions of production, it does an injustice to the taxpayers afifectcd by lessening their ability, absolutely or relatively, to satisfy their wants; and at the same time lessens ils own efficiency by diminishing the source of its material means of usefulness; thus constantly threatening stagnation, if not degcneracy, instead of promoting the highest development, intellectually, morally and spiritually—by promoting the material conditions of such development. That the task of the government in duly observing the effects of its taxes and tax system upon production is a difficult one can not be denied. The complexity of the conditions that enter into the problem makes this inevitable. Nevertheless, consideration of these effects is necessary, both that production in general may not be unnecessarily checked, and that the production of one class may not be promoted at the expense of another class, thus effecting inequalities and injustice, instead of the equality and justice for which a government stands. 2. Taxation and Distribution. The effect of taxation upon distribution is not less important than its effect upon production, not only bccause of the influence of the distribution of wealth upon economic and social conditions, but

357]

TAXATION,

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61

bccause the distribution of wealth is a very large factor in the determination of the character, methods and amount of production. F o r instance, large industries and large-scale production are economic phenomena which have their economic basis in large accumulations of capital, which change the whole relation of capital to labor as well as relative social conditions. Both the economic and social importance of distribution, therefore, demand that careful consideration should be given to the possible effects of taxation upon the distribution of wealth. T h e importance of the social and economic cffects of the distribution of wealth must be assumed as self-evident. T o adequately treat the question here would take us too far afield into a discussion of social and economic problems. I would, however, call attention to four different ways in which taxes do, or may, influence distribution; and at the same time call attention to some of the more immediate effects. ( 1 ) In the first place there is the inevitable change in the distribution of wealth consequent upon taxation and the expenditure of its proceeds. Wealth is taken from the pockets of the producing class and transferred to the pockets of those who perform the services of the government or provide it with material goods. T h i s is unavoidable in modern political societies where co-operative division of labor is so fully realized. But no hardship or injustice is thereby incurred. Those who provide the revenue and those who consume it in performing the functions of government are equally supporters and maintainers of the government, and both are equally gainers by this division of labor. There is no injustice, therefore, in this effect of taxation upon distribution, so long, at least, as the effect is but the normal result of legitimate taxation to meet the essential needs of the government. ( 2 ) T h e second method b y which taxation may (indeed

JUSTICE

62

docs) cffect dis'iibution

IN TAXATION

[398

is b y t h e t a x system itself.

This

m e t h o d is e s s e n t i a l l y indirect.

T w o illustrations will m a k e

this m e t h o d sufficiently c l e a r :

P r o t e c t i v e tariffs and per-

sonal p r o p e r t y t a x e s . G r a n t i n g the l e g i t i m a c y and j u s t i c c of p r o t e c t e e

tariffs,

t h e i r first and m o r e d i r e c t cffect is t o divert wealth from employment

in natural

creatcd channels.

c h a n n e l s of production to

to the w h o l e c o m m u n i t y as well as to those concerned.

artificially

T h i s in itself may be an e c o n o m i c

gain

immediately

B u t h o w e v e r this m a y b e , protective tariffs have

t h e further e f f e c t of e s t a b l i s h i n g s p e c i a l privileges to certain classes, m a k i n g p o s s i b l e the c o l o s s a l fortunes of t h e C a r n e gies and

Rockefellers.

monopoly-creating tax.

The

same

is true of

any

other

T h e i m p o r t a n c e of t h e s e c h a n g e s

lies not o n l y in t h e i r r e a c t i v e cffects upon the m e t h o d s and a m o u n t of p r o d u c t i o n , b u t also in widening social

distinc-

tions and c r e a t i n g s o c i a l d i s c o n t e n t . T h e distribution effected b y the a b o m i n a b l e s y s t e m o f personal p r o p e r t y t a x e s in the U n i t e d S t a t e s , while m e r e indir e c t and less p e r c e p t i b l e is not less certain, and at t h e s a m e t i m e results o n l y in the most patent injustice.

Such taxation

is p r a c t i c a l l y r e g r e s s i v e ; t h e r i c h e r classes having l a r g e r acc u m u l a t i o n s of p e r s o n a l p r o p e r t y , m o r e easily e v a d e the t a x assessor.

The

t e n d e n c y of s u c h a t a x system is to foster

t h e growth of l a r g e fortunes by relieving them of t h e i r j u s t burde ns, but at the e x p e n s e of the s m a l l e r fortune. class in s o c i e t y p a y s t h e t a x e s of the o t h e r clas:,.

One

T h e eco-

n o m i c effect is p r e c i s e l y the s a m e as if p r o p e r t y was forcibly t a k e n f r o m t h e o n e c l a s s and transferred to the possession of the other.

T o this e c o n o m i c

i n j u s t i c e there is added the

political i n j u s t i c e of t h r o w i n g t h e heaviest b u r d e n of t a x a tion u p o n t h o s e w h o have the least ability to b e a r it.

Thus,

again, instead of p r o m o t i n g j u s t i c e and equality the g o v e r n m e n t is n : a d e an i n s t r u m e n t

in f o s t e r i n g i n j u s t i c e and

un-

399] eq'j.il

TAXATION,

ECONOMICS

AND

ETHICS

o p p o r t u n i t i e s , with the a t t e n d a n t soci.il

63 ncqualities.

T h e s a m e unjust i n f l u e n c e u p o n d i s t r i b u t i o n is e f f e c t e d b y a n y s y s - c m oí t a x a t i o n t h a t r e s u l t s in an u n e q u a l a s s e s s m e n t a n d collection of the t a x b u r d e n . (3)

T l i e influence of the rate of t a x a t i o n u p o n

distribu-

tion i n v o l v e s c h i e f l y the q u e s t i o n of p r o g r e s s i v e t a x a t i o n , f o r a s t r i c t l y p r o p o r t i o n a l t a x l e a v e s the s a m e r e l a t i v e d i s t r i b u tion of wealth after as b e f o r e t h e t . i x , e f f e c t i n g di>tribution o n l y in s u c h m a n n e r as is i n s e p a r a b l e u s e of

taxation.

The

f r o m the n a t u r e and

m a i n t e n a n c e of

the s a m e

relative

e c o n o m i c c o n d i t i o n s or the e q u a l i z i n g of the b u r d e n s of t a x a t i o n , m a y also be the s p c c i a l o b j e c t of the p r o g r e s s i v e rate, a n d s o far as this p u r p o s e is c a r r i e d o u t the p r o g r e s s i v e r a t e s i m p l y c o r r e c t s the d e f c c t s of the p r o p o r t i o n a l

rate b y a c -

c o m p l s h ng in fact w h a t it s t a n d s f o r in t h e o r y .

T h e justice

of t h e p r o g r e s s i v e rate f r o m this p o i n t of v i e w will c o m e u p f o r d i s c u s s i o n in a f u t u r e c h a p t e r .

W e n e e d only to o b s e r v e

h e r e that h o w e v e r j u s t the p r o g r e s s i v e t a x m a y b e it e f f e c t s a d i f f e r e n t distribution f r o m that e n t a i l e d b y a p r o p o r t i o n a l t a x , t h o u g h o n l y such as is incident to the s y s t e m itself. It is a far m o r e s e r i o u s q u e s t i o n w h e r e p r o g r e s s i v e t a x a tion is used with the d e l i b e r a t e p u r p o s e of e f f e c t i n g an artificial distribution of w e a l t h , as in the s o c i a l - p o l i t i c a l t h e o r y of W a g n e r . 1

S u c h a use of t a x a t i o n is, h o w e v e r , a s o c i a l

u s e and d o e s not s t r i c t l y c o m e within the p r o v i n c e of finance.3

public

M o r e o v e r , it rests u p o n the a s s u m p t i o n t h a t it is

a p r o p e r function of g o v e r n m e n t to e q u a l i z e the f o r t u n e s of individuals.

T h i s , h o w e v e r , is not an a d m i t t e d f . m o t i o n of

g o v e r n m e n t in the m o d e m state, t h o u g h it w a s p r a c t i c e d b y the a n c i e n t H e b r e w s , 3 w a s a t t e m p t e d b y s o m e of the S p a r 1

Op. cit, ii, p;). 207, 3S5-5 and 45£-9-

Also i, p. 47.

* Cf. Meyer op. cit., s;c. 67; V j j L e , op. cit., p. 43, and Marzano, Compendie á¡

Scienta delle finance, p. 116. 5 LciiUcus, xxv, 10.

64

JUSTICE

IN TAXATION

tan k i n g s , 1 a n d r e c o m m e n d e d ancient Rome.2 fenders

only

[400

b y t h e a g r a r i a n r e f o r m e r s of

A t t h e p r e s e n t t i m e this d o c t r i n e finds d e -

in t h e

different schools

of s o c i a l i s m .

The

w e a k n e s s of t h e w h o l e d o c t r i n e is e x c e l l e n t l y s u m m e d up b y Professor Seligman, when

he says that

" a legal

equality

w h i c h w o u l d a t t e m p t t o f o r c e an e q u a l i t y of f o r t u n e in t h e f a c e of i n e v i t a b l e i n e q u a l i t i e s of n a t i v e a b i l i t y w o u l d b e a t r a v e s t y of j u s t i c e . " 3 (4)

F u r t h e r c o m m e n t is u n n e c e s s a r y .

A final u s e of t h e p r o g r e s s i v e rate is t o e f f e c t a c o m -

p l e t e r e v o l u t i o n in t h e d i s t r i b u t i o n of w e a l t h b y c o n v e r t i n g p r i v a t e w e a l t h into p u b l i c w e a l t h b y a p r o c e s s of tion.

confisca-

T h i s is a d v o c a t e d o n l y b y the e x t r e m e s of s o c i a l i s m ,

a n d , w i t h r e s p e c t t o l a n d , b y t h e d i s c i p l e s of H e n r y

George.

T h i s use of t h e t a x is so f o r e i g n t o p r e s e n t e t h i c a l s t a n d a r d s t h a t it h a s n o p r a c t i c a l s i g n i f i c a n c e a n d n e e d s n o t to b e d i s cussed here. In t h e brief s u m m a r y t h a t w e h a v e a t t e m p t e d of t h e p o s s i b l e i n f l u e n c e of t a x a t i o n u p o n d i s t r i b u t i o n , i n c l u s i v e of t h e effects upon social and e c o n o m i c c o n d i t i o n s — u p o n spiritual as w e l l as u p o n m a t e r i a l

development—sufficient, I

think,

h a s b e e n s a i d t o e m p h a s i z e t h e n e c e s s i t y of g r e a t c a r e

lest

d i s t r i b u t i o n b e t o o a r b i t r a r i l y and t o o u n n e c e s s a r i l y a f f e c t e d b y taxes.

I t i l l u s t r a t e s a l s o t h e t r u t h of the s t a t e m e n t of

P r o f e s s o r A d a m s , t h a t " t h e d i s t r i b u t i o n of w e a l t h w i t h i n c o u n t r y is of as m u c h i m p o r t a n c e to its p u b l i c e c o n o m y

a as

t h e p o s s e s s i o n of w e a l t h . " 4 B u t b e s i d e s its s o c i a l a n d e c o n o m i c i m p o r t a n c e , t h e use of taxation

to

effect

a

d i s t r i b u t i o n of

wealth

other than

e n t a i l e d in t h e s y s t e m itself, h a s t h e f u r t h e r i m p o r t a n c e

is

that

it v i o l a t e s t h e " n a t u r a l r i g h t " t o p r o p e r t y as u n d e r s t o o d in the p r e c e d i n g chapter. 1

A s w a s t h e r e i n d i c a t e d t h e c l a i m of

See Plutarch's Lives of Aqis and

Cleomene:.

* See Plutarch's Lives of the Gracchi. 4

Adams, Public Debts, p. 151.

* Progressive

Taxation,

p. 69.

4oi]

TAXATION.

ECONOMICS

AND

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65

the state, or government, is limited to its needs. T o go farther than this, to appropriate the property of some to bestow it upon others, however indirectly, is to transgress the " natural law," is to commit an injustice. 3. Taxation and Consumption. Only recently has consumption played any important part in either economics or public finance. With the classical economists the safe-guarding of production was regarded as a prime element in a sound theory of taxation ; while the ethical economists and the socialists have given special attention to distribution—both the distribution of the tax burden and the use of the tax in the distribution of wealth. It has remained for the subjective economists—the Austrian school—to lay emphasis upon the relation of taxation to consumption. Of these several interests consumption is of most vital importance; for objectively and economically considered, consumption is the end of all production, and we may add also of distribution; while subjectively and ethically considered, consumption is the process by which the wants of the individual are satisfied, so far as they are materially determined—that is, the self-perfected, realized. Emphasis upon consumption, therefore, is a recognition of man as a compound of needs whose realization is the essence of his being. It changes the view-point from the thing to the ptrson, the means to the end. Not the creation of wealth, but the use of it, is made the fact of most importance. 1 In the power of consumption is seen the best measure of material well-being; but material well-being, at least until a certain standard is attained, has a most important bearing upon the development of the whole spiritual life of man. In fact, consumption, both by its amount and by its character, entails far-reaching results. It profoundly affects production by affecting the efficiency of labor; for efficiency is 1

Cf. Walker, Political Economy, p. 394.

66

JUSTICE

/.v

TAXATIOS

[402

determined more by what one consumes than b y what he produces. T h e amount and character of consumption affect also distribution, as, for e x a m p l e , b y their influence upon the standard of life, which, in turn, has its effect upon efficiency. Whatever, therefore, affects consumption affects the whole economic life; but whatever affects the economic life affects, directly or indirectly, man's complete development. F o r these reasons, and because private property ir- an e x pression of human personality, of the effort to satisfy human wants, the government is in duty bound to observe the greatest care that its system of taxation does not unnecessarily interfere with individual consumption. But the practical determination of what part of individual wealth should g o to the satisfaction of individual wants, and what part should be given to meet the needs of the g o v e r n ment—to satisfy collective needs—is a problem of the most difficult character, involving as it does so many complicated conditions and circumstances. A s worked out by the Austrian economists, 1 however, the theoretical solution of the problem is made simple enough, b y placing the satisfaction of collective needs upon e x a c t l y the same footing as the satisfaction of private needs. T h a t is to say, the same laws of subjective values, of marginal utility, that rule in private economy are made to rule in public economy. 2 T h e doctrine, however, contains no new principle, but applies to 1 Meyer, Sax and Wieser. This school has a strong following in Italy, RiccaSalerno being one of its most able exponents. His ¿¡cien-.a della Finanza is an excellent and lucid résumé ol the more pretentious work of Sax.

' The credit of first applying the economic theory of subjective values to finance is claimed by Sax for himself. His theory, however, is substantially the same as that of Robert Meyer, in spite of the effort to prove a difference. The Italian economists do not concede the credit to the Austrians. Mazzola, in a note to his I Dati Scientifici della Finanza Publica, p. 24, claims the honor for Pantaleoni, referring to an article published by him in 1883 in the Rassegna Italiana, entitled : Contributo alla 'J'eorìa delle Speci Publiehi.

403]

TAXATION,

finance

ECONOMICS

A\'D

ETHICS

67

as to e c o n o m i c s a p r i n c i p l e l o n g f a m i l i a r to utilitar-

ian, o r

better

Hedonistic,

ethics—the

obtainment

of

the

greatest possible pleasure at the least possible sacrifice. W e m a y for the p r e s e n t d i s m i s s t h i s t h e o r y with the rem a r k , that while m o s t e x t r a v a g a n t ( w h i c h will

be

considered

more

c l a i m s a r e m a d e for it fully

later)

it

correctly

r e c o g n i z e s t h e f a c t t h a t t h e s a t i s f a c t i o n of c o l l e c t i v e a n d of private taxes

needs

is, in

a

sense, mutually

lessen the c o n s u m i n g

exclusive, or that

p o w e r of t h e t a x p a y e r .

It is

t h i s fact t h a t m a k e s t h e p r o b l e m s u c h an i m p o r t a n t

one.

Y e t it is q u i t e as t r u e t o s a y t h a t t h e s a t i s f a c t i o n of c o l l e c t i v e a n d of p r i v a t e n e e d s s u p p l e m e n t e a c h o t h e r , f o r t h e s a t i s f a c t i o n of t h e f o r m e r c o n d i t i o n s , as w e h a v e s e e n , t h e satisfaction

of t h e

latter, t h u s a d d i n g

to

the

complexity

of

the

problem. We

can

further.

not stop

t o d i s c u s s this a s p e c t of t h e q u e s t i o n

W e h a v e s u c c e e d e d in o u r p u r p o s e if w e h a v e m a d e

clear that taxation

and

economics

are m o s t i n t i m a t e l y re-

l a t e d , and h a v e m a d e c l e a r t h e i m p o r t a n c e , a n d , at t h e s a m e t i m e , t h e d i f f i c u l t y of t h e q u e s t i o n i n v o l v e d .

F o r it h a s b e e n

s h o w n t h a t , i n d i s p e n s a b l e as t h e y a r e , t a x e s m a y b e s o l e v i e d as to w o r k m o s t i n j u r i o u s a n d u n j u s t results u p o n p r o d u c tion, distribution and c o n s u m p t i o n economic

t h r o u g h t h e o p e r a t i o n of

laws, t h u s m a t e r i a l l y a f f e c t i n g h u m a n w e l l - b e i n g .

W e h a v e s e e n , also, t h a t t h e w h o l e q u e s t i o n r e v o l v e s a b o u t t h e p r o b l e m of s h i f t i n g a n d i n c i d e n c e in t a x a t i o n , w h i c h , as w e h a v e seen, is d e t e r m i n e d

b y t h e o p e r a t i o n of t h e p h e -

n o m e n o n of p r i c e , w h i c h itself is o b j e c t i v e l y d e t e r m i n e d

by

t h e law of d e m a n d

a n d s u p p l y and s u b j e c t i v e l y b y t h e law

of m a r g i n a l utility.

It is, t h e n , to t h e s e e c o n o m i c i n f l u e n c e s

a n d e c o n o m i c results t h a t t h e s t a t e s m a n s h o u l d g i v e c a r e f u l attention very

if j u s t i c e is to be an a i m in t a x a t i o n .

definite

conclusions

may

not

be p o s s i b l e ,

But while Professor

S e l i g m a n has s h o w n that s u b s t a n t i a l results m a y b e o b t a i n e d

68

JUSTICE

IN TAXATION

[404

1

as a guidance in legislation. Without such observance of economic laws, conditions and results the first requirements of ethical taxation are put to naught. I I I . T A X A T I O N AND

ETHICS

Important as is a knowledge of economic laws and forces in questions of taxation, this knowledge will not of itself determine the true principles on which taxes should be based. From such knowledge we may learn the economic results of kinds and systems of taxes, but nothing at all of principles, that is, of ethical principles. Actual results tell of conditions as they are; ethical principles of conditions as they should be. Yet, without a knowledge of the former it would not be possible to prescribe the latter. Actual economic results have also the further significance that they indicate the extent to which the ideal, contained in the principle, is realized. They are at once, therefore, a manifestation and a guide. It is, however, the ethical principle that is of real primary importance; for the ethical principle is the fundamental principle of taxation, as the ethical basis (as we shall have occasion to see) is the ultimate basis. In thus insisting upon the paramountcy of ethical principles in taxation, that the ends of justice can not be attained by the mere play of economic forces, I am aware of running counter to a theory, implied in the doctrines of the classical economists, and expressly championed by Sax and his school.' For according to Sax, at least, economic laws are but the expression of the process of the realization of justice; or, justice is simply the realization of economic laws, particularly of the subjective law of marginal utility. In economic laws are found the alpha and omega of justice in taxation. Yet justice is not to be directly aimed at, for, so we 1

See, Shifting and Ineidtna of Taxation, ch. viii. Sax, Grmndltgtmf, 83, and Ricca-Salerno, op. cit., bk. ii, cb. vi.

' Cf.

405]

TAXATION,

ECONOMICS

AND

ETHICS

69

are told, ethics has no place in public finance. So far as public finance is concerned ethical ends are a consequence, not an aim.1 To this doctrine two important objections may be opposed: It rests upon the false Hedonistic assumption that pleasure is the highest Good; it assumes that economic motives and ends are one and the same as ethical motives and ends. That the highest Good,—the ethical end,—is not pleasure, it is not our place to demonstrate here;* but it must be admitted that it is not consonant with a theory that makes the ultimate end of the state the realization, or perfection of man. Pleasure (in the sense of satisfaction, happiness—Aristotle's Eudaemonia3—not Hedonistic pleasure) is an accompaniment, a necessary incident, if you will, but is not. itself the end.4 Hence economic pleasure, as such, is by no means necessarily identical with ethical ends. Whether or not it is so, depends upon the idea of the Good whose realization is sought. However closely related, therefore, economics and ethics may be in certain phases of taxation, ethical motives and ends are entirely distinct from economic motives and ends. Purely economic motives are founded upon the idea of a selfish pleasure of a more or less material character, whose realization is the economic end. Ethical motives, on the contrary, are founded upon the idea of a Good of a spiritual character—the fulfilment of the possibilities of our nature. It is not a selfish Good, for it is recognized as the " g o o d " of others as well as for the self. Its realization is the ethical 1

This ix also implied throughout by Sax in spite of his contention to the con-

trary. 1

See Green, Prolegomena,

bk. iii, ch. i.

* Described by a German philosopher as " the culture, the all-sided development of all human faculties, and the satisfaction which is founded thereon." also Paulsen, System of Ethics, p. 49. 4

Cf. Green, Ibid., sees. 158 and 161.

Cf.

JUSTICE

7°

IN

[406

TAXATION

e n d , w h i c h i n v o l v e s j u s t i c e in t h e r e l a t i o n s of m a n t o m a n , individually and collectively.

And

because the ethical end

is t h e h i g h e s t e n d it is p a r a m o u n t o v e r all o t h e r e n d s ; h e n c e o v e r e c o n o m i c e n d s , a n d t h u s , a l s o , in m a t t e r s o f

taxation.

W e c a n n o t , t h e n , a d m i t t h a t in q u e s t i o n s of t a x a t i o n

eco-

n o m i c self i n t e r e s t is t h e m e a s u r e of t h e i n d i v i d u a l l y o r t h e s o c i a l l y j u s t , h o w e v e r d e p e n d e n t o u r n o t i o n s of e t h i c a l j u s t i c e m a y b e u p o n e c o n o m i c results. For

i n s i s t i n g u p o n an e s s e n t i a l d i s t i n c t i o n b e t w e e n e c o -

n o m i c s a n d e t h i c s , a n d t h a t t h e q u e s t i o n of t a x a t i o n is f u n d a m e n t a l l y an e t h i c a l

q u e s t i o n , no a p o l o g y is n e e d e d .

The

s u p r e m a c y of t h e e t h i c a l e l e m e n t is t h e o n l y l o g i c a l d e d u c t i o n f r o m t h e t h e o r y of t h e s t a t e and t h e individual p r e s e n t e d in t h e f o r e g o i n g c h a p t e r .

I n d e e d , from t h e e t h i c a l

nature

o f m a n it follows of n e c e s s i t y , or as t h e old E n g l i s h m o r a l i s t s ' w o u l d s a y , it is " a c c o r d i n g t o t h e r e a s o n of

things,"

t h a t t h e e t h i c a l e l e m e n t s h o u l d b e t h e ruling e l e m e n t s o c i a l r e l a t i o n s and s o c i a l i n s t i t u t i o n s .

in all

I n fact, it is t r u e of

t a x a t i o n , a n d of t h e t h o u s a n d and o n e s o c i a l q u e s t i o n s

that

a r e a g i t a t i n g t h e w o r l d t o - d a y , t h a t no s a t i s f a c t o r y o r perm a n e n t s o l u t i o n is p o s s i b l e w h i c h d o e s n o t c o n f o r m t o an ethical standard, though economic

conditions.

t h a t s t a n d a r d p e r t a i n s d i r e c t l y to

That

is, t h e r e should

b e an

ethical

s t a n d a r d of e c o n o m i c c o n d i t i o n s , f o r as Mill well s a y s : " T h e first

t h i n g in e v e r y p r a c t i c a l d i s c u s s i o n s h o u l d b e t o k n o w

what perfection i s . " J If we a r e a t all c o r r e c t in o u r c o n c l u s i o n , e v e n m o r e u n t e n a b l e t h a n t h e t h e o r y of S a x McCulloch:

is t h e position

maintained

by

T h a t s i n c e p e r f e c t e q u a l i t y is u n a t t a i n a b l e , " i n

l a y i n g down a p r a c t i c a l rule t h a t is to a p p l y to all

taxes,

e q u a l i t y of c o n t r i b u t i o n is of inferior c o n s i d e r a t i o n ; "

and

t h a t , " I t is t h e b u s i n e s s of t h e l e g i s l a t o r t o l o o k a t t h e p r a c t i c a l i n f l u e n c e of d i f f e r e n t t a x e s , and t o r e s o r t b y p r e f e r e n c e

'Cudworth, Clark and Price.

' Political

Economy, v. 2,

see.

2.

407]

TAXATION,

ECONOMICS

AND ETHICS

71

to those b y which the revenue m a y be raised with the smallest i n c o n v e n i e n c e . " 1 T h e error of this doctrine is not so m u c h in the premise as in the conclusion. F o r the doctrine erroneously assumes that the salus populi, which is held to be of " p r i m e consideration," m a y be permanently antagonistic to ethical considerations ; that policy and justice m a y be permanently opposed to each other. N o , the truth is with M a d a m e R o y e r , who places both " utility and justice a b o v e the narrow consideration of p o l i c y ; " but adds, that if " j u s t i c e is at variance with utility, we say that justice is p r e f e r a b l e . " ' T h e fact is that there can be 110 true social policy, no true policy in any of the social relations of life, that is not based upon ideas of justice. Justice is the foundation of a permanent social order, and a permanent social peace. Only upon the grounds of a " p o l i c y " best known to the " politician," or through want of a wholesome influence at the ballot b o x of a powerful minority (unless, perchance, the masses are soothed b y ignorance, lethargy, or hopelessness) can a system of t a x e s long endure, that is recognized b y all competent j u d g e s as full of injustice. 3 Our conclusion, then, i s : T h a t the problem of taxation is partly economic and partly (but also essentially) ethical, the two elements being inseparably related. It is an econ1 McCulloch, Taxation and Funding, p. 18 (2d Ed.). Cf. also Schmoller, who opposes to the principle of Beitragsfähigkeit, the principle : " Nimm wo es geht." Quoted by Meyer, Die Principien der gerechten Besteuerung, p. 128. The declaration of Held, that " the practice of using those taxes over which there is the least complaint is the wisest," is not an acquiescence with McCulloch ; for with Held justice is not sacrificed as end, or opposed to policy. On the contrary, it is policy to heed the " complaint" because it is the surest (negative) guide to the realization of justice, the surest measure " für die Crosse persönlicher Opfer." (Einkommensteuer, p. 1 1 5 . ) 2 5

J 'ht'orie de VImpôt, Introduction, pp. 14—5.

As nute the tax systems in many of the American Commonwealths (See Ely, Taxation in American States and Cities, and Seligman, " The General Property Tax," in Essays in 1'axation).

72

JUSTICE

[408

IN TAXATION

o m i c question in that it has t o d o with economic g o o d s , c o n ditions. and relations ; ethical, in that it has to d o with man as a spiritual and ethical entity, at once an end in himself, a n d the end of all social life. A s Bastable says :

E a c h supplements the other.

" T h e i m p o r t a n t problem of justice in

t a x a t i o n is indeed an ethical one, but until its e c o n o m i c effects are k n o w n it is impossible to s a y whether any g i v e n form of t a x a t i o n is just or the reverse."' In insisting so s t r o n g l y u p o n the ethical character of t a x ation no pretension is made that absolute justice is attainable.

In h u m a n affairs only relative justice is possible.

But

w e can not reach the highest a p p r o x i m a t e to justice without first k n o w i n g , as Mill says, w h a t perfection is, and the " h i g h est a p p r o x i m a t e " is all that can be desired. B u t the p r o b l e m of t a x a t i o n is s o m e t h i n g more than an e c o n o m i c and an ethical one ; it is also political.

F o r our

c o n c e p t i o n of the justice in t a x a t i o n is quite as d e p e n d e n t u p o n our conception of the nature of the state and of the functions of g o v e r n m e n t , as it is upon e c o n o m i c

results.'

B u t the political conceptions, like the desired e c o n o m i c results, are relative to ideals of j u s t i c e . W e m a y therefore consider taxation as h a v i n g three bases —political, are

e c o n o m i c , and e t h i c a l — w h i c h t h o u g h

inseparably

related.

Upon

our c o n c e p t i o n

distinct of

these

bases, and of their relative i m p o r t a n c e , must our principles of t a x a t i o n b e determined.

S o m e t i m e s the one and s o m e -

times the other is assumed as the only basis, with a c o n s e quent narrowness o f views and one-sidedness of conclusions. T h e y must be considered in their mutual relation and mutual dependence.

W e shall consider these bases s o m e w h a t his-

torically and critically in the three following chapters. 1

Public Finance, p. 9.

Cf. also p. 273.

* L a justice dans 1' impôt est une conception extrêmement difficile à formuler parce qu' elle dépend de 1' idée qu' on se fait des droits et des devoirs des

gouvernements.

Léon Say, La question dit imptts,

p. 66.

C H A P T E R IV. THE POLITICAL BASIS AND PRINCIPLES OF TAXATION

A s we have seen in the previous chapter, taxation is a contribution from the private property of the individual for the support of the government—for the satisfaction of a common need. It arises out of the nature of the state, the necessity of government, and the prevailing system of private economy. It was further shown that the tax may be regarded as voluntary or compulsory according to the point of view in question; that it is influenced by economic conditions and involves economic results; and that above all, taxation is a supremely ethical question which must be determined by ethical standards and in conformity to ethical ideals. Now these three phases —the political, the economic, and the ethical—are not separate, but are inseparable phases of the problem of taxation. They nevertheless afford distinct bases of taxation—bases, however, that lead to false results if taken in their isolation and not regarded in their interdependence and unity. The primary basis is the political basis, since the whole problem grows out of the relation of the individual to the state. But since economic goods are necessarily involved, and so the economic relations of the individual to the state, there is, following the political basis and inseparable from it, an economic basis. And finally, because of the ethical character of the taxable subject, and of the ethical character of all social relations, there must be an ethical basis which must act as a guiding norm in the determination of the principles that should control 4 C 9]

73

JUSTICE

74 taxation;

IN

TAXATION

s i n c e b e c a u s e of t h e s u p r e m e l y ethical

character

of the p r o b l e m , t h e h i g h e s t d e m a n d is the attainment of justice. B y t h e ' political

b a s i s ' of t a x a t i o n is understood

that

basis which rests upon a definite t h e o r y of the state, and from which certain principles of t a x a t i o n m a y b e d e d u c e d ; or it is t h e d e t e r m i n a t i o n of principles of t a x a t i o n in a c c o r d a n c e with an a c c e p t e d t h e o r y of the state, or is the logical o u t c o m e of such a t h e o r y .

H e n c e the possibility of a wide

r a n g e of principles, v a r y i n g from t h o s e of t h e e x t r e m e individualist to t h o s e of t h e e x t r e m e socialist.

T h e s e we can

not attempt to c o n s i d e r in any detail, but must confine ourselves to a few of the m o r e i m p o r t a n t t h e o r i e s — t h o s e have the g r e a t e s t influence, either theoretical or Such are:

that

practical.

the c o n t r a c t t h e o r y , the evolution t h e o r y , the

utilitarian t h e o r y , and the social theories

(as

anarchism,

c o m m u n i s m and s o c i a l i s m ) . Now in e x a m i n i n g these views of the principles of t a x ation, as related to and d e p e n d e n t

upon a t h e o r y of the

state, two t h i n g s must be c o n s t a n t l y k e p t in mind :

The

deductions m a d e b y the a d v o c a t e s of a given t h e o r y , and t h e logical deductions of that t h e o r y .

It is also

important

to note w h e t h e r the question is viewed in its entirety, or whether t h e political basis is regarded as t h e only

basis.

B e f o r e , however, discussing t h e theories mentioned we m a y mention

briefly

previous

conceptions

of

the

state

and

taxation. In the t i m e of Plato and Aristotle little was known or t h o u g h t r e g a r d i n g principles of t a x a t i o n , though both Plato and A r i s t o t l e e l a b o r a t e d a t h e o r y of the state.

Had

they

attempted, however, to d e t e r m i n e principles of t a x a t i o n from their theories of the state, it is certain that t h e y would have sought principles consistent with t h e highest development of the

individual.

The

principles of

Plato

would

have

41 i]

POLITICAL

BASIS

AND

PRINCIPLES

looked towards the attainment of ideal justice, while those of Aristotle would have been adjusted to a ' mean ' capable of realizing an approximation to justice. But with both, ethical results, as they saw them, would have stood in the foreground, since they saw in the state the proximate, and in the individual the ultimate, good." A n d yet with neither Plato nor Aristotle would the laws of ' universality' and • equality' apply to all members of the commonwealth. For with Plato the burdens of the industrial life, and so the burden of supporting the government, would fall upon the working classes, the " husbandmen ; " while with Aristotle the same burdens would fall upon those destined " b y n a t u r e " to be slaves. T h e Roman idea of the state and government likewise precluded it from forming a basis for principles of taxation. T h e large dependence of the government upon booty and tribute for its support, together with the exemption of the patrician—the governing—class from the tax burden, prevented taxation from becoming a serious problem whose principles needed investigation and determination. Coming down to medieval society and to medieval thought, we find new conceptions of the state and more definite ideas concerning taxation. The system by which individuals gave up their persons and property to lesser lords for protection, and these, in turn, their persons and property to the higher nobility, and the higher nobility to royalty; the system of sub-infeudation; and, indeed, the whole feudal system, inculcated the idea of the dependence of the individual upon higher political power, and so made protection 1

t h e G r e e k s u b o r d i n a t e d t h e individual to

the

state, I d o not believe that a n y such doctrine c a n b e f o u n d , by any consistent

H o w e v e r t r u e it m a y b e t h a t

in-

t e r p r e t a t i o n , in t h e p h i l o s o p h y of P l a t o o r A r i s t o t l e , a s is s o o f t e n a s s u m e d . b o t h , t h e S t a t e was only a n a t u r e " of t h e i n d i v i d u a l .

m e a n s for the fullest d e v e l o p m e n t

of

the

With

"golden

76

JUSTICE

IS

[412

TAXATION

a dominant idea of the social and political structure of society. F o r this protection personal service was performed. Hence, as the feudal society gradually gave way to the " status of contract," and personal service to taxation, it was only natural that taxation should have been looked upon as a payment for the protection received from the government. T h e tax was simply a payment to the government of the costs of its service of protection. It was the ' cost-of-serv i c e ' theory of taxation. This theory, however, soon gave way, at least in part, to the ' value-of-service' theory—a theory that measures taxation by the value of the service of protection, instead of the cost of that protection. The value of the protection was then conceived to be dependent upon the amount of the property protected, the protection of the person being apparently regarded as a negligible quantity. A tax, therefore, proportioned to one's property would be proportionate to the value of the service that he had received. But amount of property protected was very early regarded as the measure of one's economic ability, or ' faculty,' 1 and so of one's ability to pay taxes. Though ' f a c u l t y ' might be considered as only another aspect of the ' value-of-service' principle, the faculty— facultas — o f the individual to pay taxes was early laid down as a distinct measure, or canon, of taxation.' It was largely out of these conditions that grew the conception of the ' social c o n t r a c t ' and the theory of taxation that evolved from it. I.

THE

S O C I A L C O N T R A C T AND

TAXATION

At the same time that historical conditions were lending much force to the conception of society as founded upon a contract, there was gradually developing out of the old Stoic conception of a " law of nature," though with considerable ' Cicero somewhere identifies faculty with property. * Cf. Seligman, Progressive

Taxation,

p. 127.

413]

POLITICAL

BASIS

AND

PRINCIPLES

77

transformation of ideas, a theory of a " social compact" as a complete explanation of the origin and nature of the state. Although this theory is now universally repudiated by economists and political scientists, no theory of the state has exerted a wider or deeper influence, theoretical and practical, in the fields of politics, economics and finance, particularly in England, France and the United States. The contract theory had, for example, a great influence upon Jefferson and the founders of our Republic, and has also given color to much subsequent legislation, 1 while its assumptions are to-day among the most commonly accepted doctrines of lawyers, statesmen, and the general public, especially in matters of taxation. 2 1. The Political Philosophers. The theory of the Social Contract has received its fullest development in the writings of Hobbes,3 Locke, 4 and Rousseau, s although the doctrine is older than the Leviathan. 6 The theory is so generally understood that it is not necessary to enter into a detailed account of it. In brief it is this: Prior to the existence of civic society mankind lived in a " state of nature," according to Hobbes in an un-social, even anti-social, " state of war," but with Locke and Rousseau under more or less social conditions. In the course of time the individuals composing the non-civic society became, as it were, suddenly conscious of the fact that their happiness and wellbeing would be furthered if they would organize themselves into a body politic and choose a common arbiter, or arbiters, 1

C f . for example, speech of Dallas, Annals of Congress,

14th C., 1st Ses., p. 1681.

* C f . Cooley, Law of Taxation. Also second message of Gov. Black of New York (1896), and newspapers at the time of the Income Tax decisions in 1893. * Leviathan, De Corpore Politico and Philosophical Rudiments. Civil * Social

4

Government. Contract.

* See Grotius, De Jure 157-160.

Belli

et Pads.

Also, Sidgwick, History

of Ethics, pp.

78

JUSTICE

IN

TAXATION

[414

for settling all s u c h disputes as are c o n s t a n t l y arising in a state of nature, and for c o m m o n defense a g a i n s t all a t t a c k s u p o n life and p r o p e r t y ;

thus c o n v e r t i n g the ' n a t u r a l r i g h t 1

of the self-defense of o n e ' s p e r s o n and p r o p e r t y into right

of a legal p r o t e c t i o n

the

g u a r a n t e e d b y the p e o p l e as an

organized whole. A s the t h e o r y is d e v e l o p e d in detail there are c o n s i d e r a b l e d i f f e r e n c e s a m o n g the writers m e n t i o n e d , t h o u g h for our p u r p o s e m o s t of them are unessential.

W e m a y mention, h o w -

e v e r , that with H o b b e s the p u r p o s e of the c o m p a c t was to a v o i d a state of " w a r of all against a l l " that prevails in the state of n a t u r e ; that with L o c k e it w a s to avoid the " inconv e n i e n c e s " that naturally arise in settling any disputes w h e r e t h e r e is not a c o m m o n arbiter to d e c i d e d i f f e r e n c e s ; while with R o u s s e a u the c o m p a c t was rather a c o n v e n i e n t h y p o t h esis for p i c t u r i n g the conditions of an ideal s o c i e t y .

Rous-

s e a u , indeed, had little c o n c e r n for the past, but b e l i e v i n g m a n to b e born free but e v e r y w h e r e in chains, 1 he s o u g h t , like P l a t o , to d i s c o v e r the nature of the ideal state w h e r e l i b e r t y and j u s t i c e

m i g h t be realized. 2

A n d the basis of such a

state he found in the idea of a ' c o n t r a c t . '

T h e r e is also a

d i f f e r e n c e with r e s p e c t to the l o c a t i o n of s o v e r e i g n t y , and to t h e c h a r a c t e r of the p r o t e c t i o n .

H o b b e s emphasized

p r o t e c t i o n of life, L o c k e the p r o t e c t i o n

of

property,

R o u s s e a u the liberty that is c o n d i t i o n e d b y the of b o t h .

the and

protection

But the m o r e i m p o r t a n t fact is, that with all alike

t h e i d e a of a contract best e x p r e s s e s the nature of the s t a t e ; that, further, the state originated in the necessity of protection, or, at least, has as its function the protection of the lives and p r o p e r t y of its citizens. It is unnecessary to enter into a criticism of a t h e o r y n o w s o universally repudiated b y p h i l o s o p h e r s and political scientists, a l t h o u g h the 1

Cf. Social Contract, ch. I.

fiction

is still k e p t u p in m u c h 2

Ibid., Introduction.

legal

POLITICAL

415]

writing. upon

BASIS

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79

W e would simply refer t o the f a c t s :

no historical f o u n d a t i o n ;

T h a t it rests

t h a t it falsely a s s u m e s

the

relation of the individual to t h e state to b e of t h e nature of a contract;

that it m a k e s m e c h a n i c a l and statical what is

spiritual and d y n a m i c , formal what is vital, e x t e r n a l what is internal.

On

the o t h e r

hand, t h e

criticism of

B u r g e s s , that t h e t h e o r y a s s u m e s a logical

Professor

contradiction,

s i n c e the state m u s t e x i s t b e f o r e t h e r e could b e a c o n t r a c t , " s e e m s to us little m o r e than a t e c h n i c a l point of law, as b y the

'contract'

was evidently m e a n t n o t h i n g m o r e than

a

c o v e n a n t , similar to that of t h e S c o t t i s h C o v e n a n t e r s , o r of t h e Pilgrims in the Mayflower. A s s u m i n g , t h e n , the t h e o r y as understood b y its p r o m u l g a t o r s , what is t h e t h e o r y of t a x a t i o n based upon i t ?

If its

t h e o r y of t a x a t i o n depended upon its t h e o r y of a c o n t r a c t we m i g h t dismiss it with the s t a t e m e n t :

T h a t since no s u c h

c o n t r a c t ever e x i s t e d , nor, in fact, e x p r e s s e s the true relation of t h e individual to the state, it can not form the basis of t h e r i g h t s and obligations of citizens in matters of t a x a t i o n .

But

as a m a t t e r of fact the idea of a c o n t r a c t forms no part of t h e t h e o r y of t a x a t i o n of the C o n t r a c t theorists.

With them

t h e b a s i s of b o t h — o f the state and o f t a x a t i o n — w a s in t h e idea of p r o t e c t i o n .

found

F o r this reason their t h e o r y of

t a x a t i o n , most fully d e v e l o p e d by H o b b e s , deserves

more

c a r e f u l c o n s i d e r a t i o n , since p r o t e c t i o n is unquestionably an i m p o r t a n t factor b o t h in the c o n c e p t i o n of the state and in that of taxation. T h a t the basis of t a x a t i o n is found in the protection

that

the citizen receives from the state is m o s t clearly b r o u g h t out b y H o b b e s . v

T a x e s , he says, " are n o t h i n g else b u t t h e

s due to them who hold the sword to defend

men in the e x e r c i s e of their several trades and

private

callings."

M o r e o v e r , since the benefit that every o n e receives from this 1

Burgess, Of. cit.. Vol. I, p. 62.

8o

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[416

protection " i s the e n j o y m e n t of life, which is equally dear to p o o r and rich, the debt w h i c h a p o o r man oweth t h e m that defend his life, is the same which a rich man for the defense of his." 1

oweth

B u t this equality of taxation does

not mean, however, an absolute equality, for the benefit of the protection is the " e n j o y m e n t of l i f e " as measured b y material c o n s u m p t i o n ;

and hence t a x e s

should be based

u p o n what one " s p e n d e t h , " or consumes, b y which " e v e r y man p a y e t h e q u a l l y for w h a t he useth."* Politics:

Similarly in the

" T h e burdens of the c o m m o n w e a l t h b e i n g the

price that we p a y for the benefits thereof, t h e y o u g h t to be measured t h e r e b y . "

And

since

this benefit is the

equal

e n j o y m e n t of the p e a c e and liberty to use our industry to g e t our living, we should contribute equally to the c o m m o n c h a r g e , not as measured b y the results of our industry, but b y our c o n s u m p t i o n .

" T h a t seemeth therefore to be the

most e q u a l w a y of dividing the burden of public when e v e r y

man

shall

contribute a c c o r d i n g

charge,

to what

spendeth, and not a c c o r d i n g to what he g e t s . " 3

he

A g a i n in

the Philosophical R u d i m e n t s it is declared, that t a x e s b e i n g " nothing else but the price of b o u g h t peace, it is g o o d reason that t h e y w h o e q u a l l y share in the p e a c e , should

also

p a y in equal p a r t . " 4 In brief, the position of H o b b e s is t h i s :

T h e p u r p o s e of

the state is the protection of the life of the individual that he m a y e n j o y the peaceful pursuit of a living, and the individual should p a y for the e x p e n s e of this p r o t e c t i o n ;

the

t a x , which is the price of this ' b o u g h t p e a c e , ' should therefore be based u p o n the benefits derived from this p r o t e c t i o n ; and

since

the v a l u e of this benefit is determined b y the

1 Leviathan, Part II, Ch. 30, p. 30. Molesworth's edition.)

(All references to Hobbei »re from

' Ibid. * De Corfore Politico, Part II, pp. 216-7. * Philosophical Rudiments, p. 173.

417]

POLITICAL

BASIS AND PRINCIPLES

81

amount of the enjoyment, which is itself measured b y the amount that one enjoys in the w a y of consumption under the protection of the state, the t a x should be based upon the consumption of the individual; and since all equally enjoy the benefits of protection, as thus measured b y consumption, all should bear equally the burden of taxation according to their enjoyment of consumptive goods, that is, in proportion to their consumption. A n d that this principle should govern the distribution of taxes is in accordance with the 'natural law.' " R u l e r s , " says Hobbes, " a r e by the natural law obliged to lay the burden of the commonwealth equally on their subjects. N o w in this place we understand an equality, not of money, but of burden, that is to say, an equality of reason [proportion] between the burdens and the benefits. F o r although all equally enjoy peace, yet the benefits springing from thence are not equal to a l l , " 1 because of differences in consumption, which is the true measure of benefits. That is, the cost of protection should be distributed among those receiving the protection in proportion to its value to them, or in proportion to the value of the benefits of protection, which is the quantity of consumption. A r e these conclusions of H o b b e s a logical consequence oi his fundamental premise, or the logical outcome of his conception of the state? Or, again, does the theory of H o b b e s give us a satisfactory principle of taxation, grounded upon a sufficient and satisfactory basis? Both questions, we believe, must be answered in the negative. F o r , with respect to the first, if protection is the sole purpose for which political society exists, then the cost of that protection is the logical basis of taxation, but such a basis of tax distribution is a practically impossible basis. Or, if the tax be considered to be paid for the benefits of the protection, not for the 1

Philosophical Rudiments, p. 179.

82

JUSTICE

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[418

protection itself, then the value of those benefits would seem to be the true basis for the distribution of the tax burden. But, again, this is an impossible basis, for the value of these benefits is an incalculable quantity, since the protection upon which they rest is the foundation of our whole civilization and of all the benefits derived therefrom. But since a tax can not equal the benefits let us concede that it should be in proportion to benefits; that is, the share of each should be such a proportion of the total expense, as the benefits that he derives from the protection are to the total benefits. But this, again, is not a calculable quantity. Hobbes, however, gets around the difficulty by first assuming that the benefits consist in the peaceful pursuit of " our trades and callings," and then illogically concluding that the benefits are measured by what we consume rather than by what we produce. In brief there is no logical connection between Hobbes' theory of protection and his theory of consumption as the basis of taxation. Nor is Hobbes more satisfactory in his assumption of benefits as the true principle of taxation. Even if we concede that, in a sense, the theory of benefits is a logical deduction from the theory of protection we maintain, and shall presently show, that the theory of protection is wholly inadequate, as it expresses at best only a half truth. On the other hand the theory of benefits as understood by Hobbes is equally inadequate, since it expresses even less than a half truth. It is a grossly inadequate conception of the state that conceives its benefits to be limited to the power of peaceful industry, or to the personal consumption of economic goods. The benefits of government are manifold and are not to be limited to the enjoyments derived from the consumption of material goods. And the tax must include the whole range of enjoyments. Further, the theory of benefits is a false and impossible principle for taxation; false, because it assumes an erroneous

4

j9]

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BASIS

AND

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83

conception of the relation to the state as the basis of taxation ; impossible, because the benefits that are supposed to form the basis of the distribution of taxes are in no way a calculable quantity. Not only, therefore, does Hobbes commit the double error of assuming benefits as the true measure of taxation, and that these benefits are proportioned to our consumption of economic goods, but his theory altogether ignores the moral element that is involved in the relations of individuals to each other in society or the state, and hence he expressly repudiates the principle that proportions taxation to ability.' Hobbes finds the justice of his principle solely in the assumption that our benefits are proportioned to our individual economic consumption. And he finds corroboration for his principle in that it conforms to the most expedient. A tax proportioned to consumption, he says, " seemeth not only most equal, but also least sensible, and least to trouble the mind of them that bear it." a Turning from Hobbes to Locke and Rousseau, we find that they gave little attention to the problem of taxation. Yet Locke expressly bases taxation upon protection and intimates that it should be proportioned to its cost, though it must be admitted that his statement on the latter point is not very clear. " 'Tis true," he says, " government cannot be supported without great charge, and it is fit every one who enjoys a share of protection should pay out of his estate his proportion for the maintenance of it." 3 .This is practically all that Locke has to say on the subject, so that we are left in doubt how the proportionate share of each in the tax burden is to be determined. But it suffices for our present purpose that the principle of taxation is based upon protection, each sharing his proportion of the cost. It is interesting to note, however, that Locke emphasizes 1

Cf. De Corpore Politico, p. 216.

• Civil Govcrnmtni,

sec. 140.

' Ibid., p. 217.

84

JUSTICE

IN

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[

4 2 0

the importance of free consent in the payment of taxes, i. e., consent of the m a j o r i t y — s i n c e arbitrary taxation " invades the fundamental law of property, and subverts the end of government." This is not only an emphasis upon the moral obligation to pay our share of the cost of our protection, but it follows from Locke's theory of civil government and from his theory of property. 1 Y e t L o c k e , himself, makes this moral obligation stand for naught by his theory that the ultimate incidence of all t a x e s is, b y the inevitable workings of economic laws, upon l a n d ; since the merchant will not and the laborer cannot p a y the taxes. " It is in vain," says L o c k e , " in a country whose great fund is land, to hope to lay the public charge of the government on anything else; there at last it will terminate. T h e merchant ( d o what y o u can) will not bear it, the laborer cannot, and therefore the landlord m u s t . " ' T h e merchant " w i l l not," because he can shift it b y raising the p r i c e ; the laborer " cannot," " for he just lives from hand to mouth."3 Thus, the position of L o c k e amounts to t h i s : W e are all in duty bound to pay our share of the cost of the protection of government, yet the large merchant class will not, since economic laws enable them to shift the burden, and the large laboring class cannot, because they are already at the minimum of subsistence. T h a t is, economic laws and conditions stand in opposition to the moral law, thus compelling one class in s o c i e t y — t h e landlords—to bear the burdens of the rest. T h e theory as a whole, then, is inconsistent with itself, but the fault here is with the theory of incidence rather than with the theory of protection. Finally, in the case of Rousseau, we find no attempt to develop a theory of taxation based upon his theory of a 1

Civil Government, cb. 5.

*Interest, p. 60 (World, Vol. IV, Edition 1824). • Hid., p. 57.

Cf. also p. 57.

421 ]

POLITICAL

BASIS

AND PRINCIPLES

85

social contract. Yet out of Rousseau's theory of ' liberty and equality,' which he made the mainspring of the contract, theories of society and taxation were developed, mainly b y the French communists at the end of the eighteenth century, such as Baboeuf and Morelly. But as these theories were communistic in character we shall postpone their consideration until we take up the question of Social Theories and Taxation. 2. The Protection Theory of Taxation. Our preceding discussion has shown that the contract theorists based their principles of taxation solely upon the idea of protection. This doctrine we have also found to be contained in much legal thinking, as in the popular mind, and it is also found in a certain school of economists. Because, then, of its historical and practical importance it may be well to examine separately, though briefly, both the merits and the demerits of the doctrine, its truths and its limitations. In discussing the protection theory of taxation we should carefully distinguish it from the similar economic theory, better known as the give-and-take, or the quid pro quo, theory of taxation. The latter will come up for discussion in the following chapter. Here we are concerned only with the protection theory as forming the political foundation of taxation and of its principles. True, the kindred economic theory rests upon the assumption that protection constitutes the true political basis of taxation, but it views the relationship that necessitates taxation more from the economic point of view and deduces its principles wholly from economic considerations, or from economic laws. But although there is a clear theoretical distinction, it would be difficult to find any treatment of the subject wholly free from the one or the other point of view. Nevertheless we shall view them separately, though recognizing their practical inseparability. From the purely political point of view, then, I would

86

JUSTICE

IN TAXATION

[422

a d d u c e as t h e m o s t i m p o r t a n t c r i t i c i s m s of t h e theory:

That

its f u n d a m e n t a l c o n c e p t i o n

is

protection inadequate;

t h a t t h e p r i n c i p l e s d e d u c e d a r e n o t c o n s i s t e n t w i t h its l o g i c a l d e d u c t i o n s ; t h a t it s e e s n o e t h i c a l c o n s i d e r a t i o n b e y o n d t h e o b l i g a t i o n of e a c h t o p a y h i s

s h a r e for t h e p r o t e c t i o n t h a t

he receives. I. W e is b a s e d

h a v e a l r e a d y p o i n t e d o u t t h e f a c t t h a t this t h e o r y upon

an i n a d q u a t e c o n c e p t i o n

f r o m o u r p o i n t of v i e w t h i s s t a t e m e n t

of t h e

finds

state,

in t h e t h e o r y of t h e s t a t e o u t l i n e d in c h a p t e r II. right

and

sufficient proof If w e a r e

in o u r c o n c e p t i o n of t h e s t a t e t h e p r o t e c t i o n t h e o r y is

necessarily truth.

inadequate.

I t e x p r e s s e s , in f a c t , b u t a

half-

F o r w h i l e t h e p r o t e c t i o n of p e r s o n s a n d p r o p e r t y is

t h e f u n d a m e n t a l b a s i s of s o c i a l o r d e r a n d

social

t h e p u r p o s e of t h e s t a t e a n d t h e f u n c t i o n s o f

progress,

government

are altogether t o o large to be c o m p r e h e n d e d under the c o n c e p t i o n of p r o t e c t i o n . tection

The

true conception

includes pro-

a n d a d m i t s t h a t it is f u n d a m e n t a l , b u t it d o e s

r e c o g n i z e p r o t e c t i o n as e x h a u s t i n g all t h a t t h e state for.

T h e state n o t o n l y r e p r e s e n t s the h i g h e s t

not

stands

culmination

in t h e d e v e l o p m e n t of t h e s o c i a l life of a p e o p l e , b u t it is at t h e s a m e t i m e t h e c o n d i t i o n i n g i n s t r u m e n t in t h e t o t a l i t y of t h e i r d e v e l o p m e n t , o r in t h e d e v e l o p m e n t of t h e i n d i v i d u a l . To

this e n d the p r o t e c t i o n of

persons

and p r o p e r t y

is

a

n e c e s s a r y i n c i d e n t b u t it is o n l y o n e a m o n g m a n y i n c i d e n t s , t h o u g h w e will g r a n t t h a t it is t h e m o s t most important.

fundamental

and

H e n c e t h e a i m of t a x a t i o n c a n n o t b e l i m -

ited to the o n e e n d of p r o t e c t i o n .

Its r a n g e is n e c e s s a r i l y

as c o m p r e h e n s i v e as t h e f u n c t i o n s of g o v e r n m e n t

acting

t h e a g e n t of t h e s t a t e in t h e f u l f i l m e n t of its p u r p o s e .

as

This

is p r a c t i c a l l y c o n c e d e d b y d e f e n d e r s of t h e p r o t e c t i o n t h e o r y who,

like

Von

Hock,

make

protection co-extensive

with

n a t i o n a l w e l l - b e i n g , * o r w h o , w i t h S i s m o n d i , m a k e it i n c l u d e 1

Von Hock, Die offettilichen Abgmben und Schulden, §§ 1-4.

423]

POLITICAL

all of the a d v a n t a g e s

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AND

PRINCIPLES

87

that are d e r i v e d

f r o m it, as r o a d s ,

h o n o r , j u s t i c e , e d u c a t i o n , r e l i g i o n , etc. 1

B u t if p r o t e c t i o n

f o r m s t o o narrow a c o n c e p t i o n for the political basis of t a x a t i o n , the principles d e d u c i b l e f r o m this c o n c e p t i o n m u s t likewise be insufficient, as w e shall e n d e a v o r to s h o w . 2. T h a t the p r i n c i p l e s d e d u c i b l e

f r o m s u c h a b a s i s are

insufficient is s h o w n , a m o n g o t h e r r e a s o n s , in t h e f a c t that t h o s e w h o p r o c e e d u p o n its a s s u m p t i o n are u n a b l e to c a r r y the

doctrine to its l o g i c a l c o n c l u s i o n s .

t h e o r y involves t h e c o s t - o f - s e r v i c e

For, logically, the

p r i n c i p l e of

taxation—

t h e a p p o r t i o n m e n t of t a x e s t o t h e c o s t of t h e

protection,

w h e t h e r of p e r s o n s or of p r o p e r t y .

T h i s position, h o w e v e r ,

is s e l d o m maintained, it b e i n g usual to a d o p t in its p l a c e t h e principle that b a s e s t h e t a x u p o n the benefits, derived f r o m the p r o t e c t i o n . that this principle is a l o g i c a l

advantages, or

the

B u t even if w e a s s u m e

c o n s e q u e n c e of its

leading

p r e m i s e , as in a limited s e n s e it, p e r h a p s , is, it d o e s not, a n y m o r e than the c o s t t h e o r y , a f f o r d a w o r k i n g p r i n c i p l e for rules of t a x a t i o n ; for b o t h individual c o s t s and benefits are i n c a l c u l a b l e quantities.

individual

B u t this a p a r t , a c c o r d -

ing to the benefit p r i n c i p l e the t a x s h o u l d be p r o p o r t i o n e d to t h e benefits r e c e i v e d .

B u t this is i m p r a c t i c a b l e .

on the one hand the t a x s h o u l d equal the costs

(else

For the

p r o t e c t i o n must c e a s e ) , w h e t h e r or not the costs e x c e e d t h e b e n e f i t s ; while on t h e other h a n d t h e t a x for the m o s t part c a n n o t equal the benefits, o t h e r w i s e the r e v e n u e w o u l d enormously exceed

legitimate expenditure.

T h u s , neither t h e

principle of individual costs, nor that of individual b e n e f i t s , the o n l y logical p r i n c i p l e s d e d u c i b l e from a p u r e l y p r o t e c tion

basis, are p r a c t i c a l l y p o s s i b l e p r i n c i p l e s o f

taxation,

since t h e y have o n l y a h y p o t h e t i c a l e x i s t e n c e . N o r d o we w h o l l y e s c a p e the difficulty b y h a r m o n i z i n g the two principles, as is universally d o n e , on the basis of the 1

Sismondi, Economic Politique, Vol. II, p. 165 (Ed. 1827).

88

JUSTICE

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[424

totality of costs and the totality of benefits, assuming as the principle of taxation that the taxes of each should be such a proportion of the total costs as he shares of the total benefits. It is true that the total taxes must equal the total expenses of the government, but the protection basis of taxation does not afford in itself any ground for distributing the costs according to the benefits received, e x c e p t upon the gratuitous assumption that the costs and benefits are in every case directly proportioned to each other. But even if this were true in theory no definite result would follow, since a proportion could not be established between two unknown quantities. T h e fact is that upon the political basis of protection the distribution of the costs of protection according to the theory of benefits can have validity only upon the assumptions : ( 1 ) that the idea of protection is confined strictly to the protection of the person and of p r o p e r t y ; ( 2 ) that the value of the protection of the person is precisely the same for every i n d i v i d u a l ; ' ( 3 ) that the value of the protection of property bears a direct, ascertainable ratio to the amount of property protected, 3 a ratio that is most commonly assumed to be directly proportional. But this limitation of the function of government we have already seen to be too narrow even for the defenders of the protection theory. T h e y assume that protection covers all of the advantages derived from the protection, and at the same time assume that these advantages have a definite money value that is proportioned to the amount of property of the individual. But these are assumptions o n l y ; they are not logic. T h e failure of this school to arrive at logically deduced principles is emphasized still more in the fact that, not con1

Cf. Von H o c k , op. cit., same reference.

' Examples are too numerous to mention.

It is the almost unirersally accepted

doctrine of those influenced by the conception of the state in question in the text.

425]

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t e n t w i t h t h e t h e o r y of c o s t s o r of b e n e f i t s , t h e y m a k e a b i l i t y a l s o t h e t r u e n o r m of t a x a t i o n , a p p a r e n t l y r e g a r d i n g it a s deducible

f r o m t h e t h e o r y of p r o t e c t i o n a n d

in

harmony

w i t h t h e t h e o r y of b e n e f i t s , if n o t , i n d e e d , s y n o n y m o u s w i t h t h e latter. 1 quite

B u t , as will b e s h o w n l a t e r , a b i l i t y is a p r i n c i p l e

distinct

f r o m t h a t of b e n e f i t s , a n d

has a foundation

q u i t e d i s t i n c t f r o m t h a t o f t h e p r o t e c t i o n t h e o r y of the s t a t e . The

a b i l i t y p r i n c i p l e i m p l i e s a n e t h i c a l b a s i s t h a t is n o t t o

b e f o u n d in t h e p r o t e c t i o n t h e o r y , o r t h e t h e o r y of b e n e f i t s . And

in f a c t the i n c o n s e q u e n c e s

in t h e c o n c l u s i o n s of

s c h o o l arise v e r y l a r g e l y f r o m t h e a s s u m p t i o n of

this

principles,

in t h e d e v e l o p m e n t of t h e i r t h e o r y , t h a t a r e not i n v o l v e d in t h e i r f u n d a m e n t a l p r e m i s e — t h e i r t h e o r y of t h e s t a t e . 3. N o t least i m p o r t a n t a m o n g t h e s e a s s u m p t i o n s is t h e a s s u m p t i o n of e t h i c a l r e l a t i o n s t h a t a r e n o t i n v o l v e d in t h e t h e o r y of t h e state u p o n w h i c h t h e i r p r i n c i p l e s a r e

based.

F o r if p r o t e c t i o n is t h e s o l e basis of t h e state, o r i g i n a t i n g in an a c t u a l

or implied

h a v e seen, must

c o n t r a c t t o t h a t e n d , the t a x , as w e

b e a r a definite r e l a t i o n t o t h e c o s t , o r

b e s t t o t h e b e n e f i t s , of t h a t p r o t e c t i o n .

at

T h e r e can be no

e s c a p e f r o m the t a x for t h e p r o t e c t i o n of t h e p e r s o n , a n d n o escape

for t h e p r o t e c t i o n of

possess

even

the smallest

property, b y those who

amount

of

it.

may

Moreover,

this

t h e o r y of the state d o e s not in itself i n v o l v e p r i n c i p l e s f r o m which exceptions m a y be logically derived. ground

t h a t of a b s o l u t e n e c e s s i t y . may

H e n c e the o n l y

for a n y e x c e p t i o n t o t h e a b o v e r u l e for t a x a t i o n

say

M a n y writers, i n d e e d I t h i n k

most writers, consistently

m a i n t a i n this

is I

position,

t h o u g h s o m e w o u l d j u s t i f y e x e m p t i o n s o n t h e p r i n c i p l e of a b i l i t y , w h i c h i n v o l v e s ethical c o n s i d e r a t i o n s . Now

it is m y c o n t e n t i o n t h a t

essentially 1

defective

from which

a n y t h e o r y of t h e s t a t e practicable

principles

is of

Cf. (or example A d a m S m i t h ' s f a m o u s first canon of taxation, since w i d e l y a c -

c e p t e d without qualification.

go

JUSTICE

IN TAXATION

[426

t a x a t i o n c a n n o t b e logically derived, s i n c e a state implies as well as necessitates t a x a t i o n . t r a c t , or its counterpart afford.

the

B u t such a t h e o r y the c o n protection, t h e o r y does

not

A n d this mainly b e c a u s e the ethical c h a r a c t e r of

the state is ignored.

T h e state is conceived of as static and

as consisting of external, mechanical r e l a t i o n s ; whereas it is d y n a m i c and its relations are essentially internal, p s y c h i c a l . This

m e a n s also that the relations are e t h i c a l , and

that

ethical p r e c e p t s are involved in the rules t h a t determine the m a n n e r of the state's support.

It m e a n s further, that the

ethical precepts should dominate m o r e and more in

the

p r a c t i c a l rules of t a x a t i o n the more a p e o p l e develops its ethical c o n s c i o u s n e s s ; t h a t principles and rules of t a x a t i o n should not be derived from primitive conditions of s o c i e t y , b u t from the conditions prevailing in a s o c i e t y in the p r o c e s s of developing its internal relations, and with reference t o its ultimate end.

W e m a y , indeed, seek to discover principles

t h a t controlled actions in the past, but in s e a r c h i n g for principles for taxation we are s e a r c h i n g for principles that should c o n t r o l the action of the future.

S u c h principles are not

mere records of past or actual e x p e r i e n c e s , but are formulation of ideal norms for the guidance of

the

conduct,

determined by t h e inner nature of society and the state. I I . T H E EVOLUTION T H E O R Y OF T H E S T A T E AND TAXATION.

T h e preceding discussion has shown us, at least b y implication, that principles of t a x a t i o n are not to be derived from specific functions of g o v e r n m e n t , or from the historical origin of the state, b u t are to b e derived from the nature and end of the state, which involves the nature and end of the individuals b y whom t h e state is c o m p o s e d . government

determine

F u n c t i o n s of

limits of t a x a t i o n , and

the

actual

origin of a state influences t h e c h a r a c t e r of its system of

427]

POLITICAL

BASIS

AND

PRINCIPLES

91

t a x a t i o n , b u t in neither c a s e do t h e y afford a basis for t h e determination of ethical principles for the distribution of t h e t a x burden.

I m p o r t a n t as these truths are, t h e y are fre-

q u e n t l y ignored, not o n l y b y the school of writers just c o n sidered, but a m o n g others, in part at least, b y Mr. S p e n c e r in t h e development of principles of taxation based upon his evolution t h e o r y of the state. T u r n i n g , then, to the evolution t h e o r y of the state (and we shall confine ourselves to t h e t h e o r y of H e r b e r t

Spencer),

we shall not find it necessary to trace t h e evolution of t h e m o d e r n state from the primitive horde and tribe, for the c o u r s c of this development S p e n c e r ' s theory of t a x a t i o n .

has nothing to do with

Mr.

Besides, in this respect the

t h e o r y does not differ essentially from the historical t h e o r y of t h e state, e x c e p t that t h e evolution t h e o r y assumes t o discover t h e underlying principle that guides the course of t h e development.

I t is the principle that controls develop-

ment that is the important thing in Mr. S p e n c e r ' s t h e o r y of evolution, and the principle that controls social evolution is found to be precisely the s a m e as that which determines all evolution in the plant and animal worlds—a principle that m a y b e summarized as the survival of the fittest struggling in t h e direction of the least resistance, or, by c o - o p e r a t i n g forces, o v e r c o m i n g resistance.

H e n c e the evolution of t h e

social world, like that of all life, is mechanical, e x t e r n a l ; m o v i n g power as the determinant

of the " f i t t e s t "

the

being

ultimately F o r c e — t h e force to resist or to subdue, the force to d e s t r o y or to utilize. It is b y the power of a u g m e n t i n g such forces through c o o p e r a t i o n , that political society is made possible, and it is t h o s e peoples that possess this power in the greatest d e g r e e that are the fittest to survive and to develop.

T h i s suggests

that social organization has not for its sole purpose mere survival, but has a larger, ultimate purpose in development

92

JUSTICE

/ for he is an end in himself; if he exists for the state the state exists for him. And if man lives through the state he does not live alone through the state, but also, and indeed in the first instance through himself. Man, generally speaking, is before the state, and if the state takes from him his existence it puts itself in contradiction with its function and its purpose," 1 for the first duty of the state is not to endanger the existence and the support of man." And it is claimed with much truth, that if we remember that the subject of the tax is persons, not things, the problem solves itself.3 2. The Limitation of Exemptions. The argument has thus far assumed that the exemption should be confined to the " minimum of subsistence." But is this " minimum " limited to the absolute necessities of life, or should it extend to a ' " Der Mensch lebt und webt zwar im Staat und für den Staat, aber das alles nicht allein, sondern er ist auch Selbstzweck; er ist nicht nur um des Staats willen, sondern auch der Staat ist um des Menschen willen. Ebenso lebt der Mensch durch den Staat, aber das ebenfalls nicht allein, sondern auch, und zwar in erster Reihe, durch sich selbst. Der Mensch ist überhaupt vor dem Staat, und wenn hiernach der Staat den Menschen in seiner Existenz angreift, so setzt er sich in Widerspruch mit seiner Aufgabe und seiner Bestimmung." Of. cit., p. 459. * Ibid.

* Ibid., pp. 471-2.

593]

ETHICAL

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" culture minimum " ?

OF TAXATION

257

In o t h e r words, D o e s the obligation

to contribute t o the s u p p o r t of the state b e g i n the m o m e n t that income e x c e e d s the n e c e s s a r y m e a n s of p h y s i c a l s u b sistence, or is the obligation relative to an arbitrary standard of life? In the first place t h e " m i n i m u m " m u s t b e sufficient, not o n l y for the subsistence of t h e person b u t also for the maintenance and s u p p o r t of the family.

W i t h o u t such an e x t e n -

sion of the " m i n i m u m " the race c o u l d not be perpetuated, at least

under

the conditions

that

promote

the

highest

civilization, t h e h i g h e s t d e v e l o p m e n t of individual personality. the

M o r e o v e r , t h e family is the natural e c o n o m i c u n i t — unit

of

economic

personality, of

economic

freedom.

A n d without the e c o n o m i c f r e e d o m of the family the important step towards realized personality

must

first

remain

untaken, the first important step t o w a r d s the fulfilment of the ends of the state unattained.

T h e family as m u c h as the

individual p r e c e d e s the s t a t e — c o n d i t i o n s the state.

Provi-

sion for its subsistence is, therefore, not o n l y a right, b u t is a " natural r i g h t , " that the state is in d u t y bound to respect. T o quote V o c k e , " T h e state has the s a m e obligation

to

recognize the necessary care of the family as a duty prior to its own claims, as it has to r e c o g n i z e that of tenance."

self-main-

1

In the second place, there can b e no permanent e c o n o m i c f r e e d o m — r e q u i s i t e t o permanent e c o n o m i c p e r s o n a l i t y — u n t i l the income is sufficient to provide not o n l y the a b s o l u t e necessities of p h y s i c a l e x i s t e n c e , but also to provide for the maintenance of labor power and for times of sickness,* for the family as well as for the self.

F o r a state to l e v y a t a x

that would be prejudicial to either of these conditions would b e to w e a k e n the source of its own s u p p o r t ; and besides, it would b e as m u c h a contradiction of its own p u r p o s e as to 1

Op. ext., p. 467.

' Cf. Vocke, ibid., p. 460.

258

JUSTICE

IN TAXATION

[594

t a x the absolute necessities of physical existence, differing only in degree. O n the other hand, until the " m i n i m u m " is sufficient to meet these requirements there is no real tax ability, and therefore no t a x obligation." But when these requirements have been met, when, that is, there is a " clear " income above the minimum of subsistence as above understood, the obligation to aid in the support of the state begins. O r the obligation that was before potential, because of the importance of the state to the individual, now for the first time becomes actual. If exemption is extended beyond this limit it cannot be as a right, but only on grounds of policy—political, social, or economic. It is true that the limit is somewhat arbitrary, for it is difficult to determine e x a c t l y how much should be set aside •as necessary for the support of the family or to maintain the labor power of the t a x p a y e r . In fact, the limit is a purely relative one, the standard for exemption necessarily depending upon the accepted standard of life, which is itself conditioned b y the customs, habits, social ideals and degree of culture attained; and, above all, by the conditions of individual and national wealth. Practically the standard must be determined b y the same principles that determine the rate of progression. Still, it should be remembered that purely on grounds of theoretical justice only provision for normal support, and normal efficiency, should be allowed. F o r example, allowance cannot, or should not, be made for abnormally large families," since this would be to put a premium upon thriftlessness and irresponsibility, and thus to encourage an increase of population where most detrimental to society, and to the highest individual development. On the other 1

" Die Leistungsflhigkeit aber ist das notwendige Korrelat der Leistungspflicht,.

welcbe obne jene nicbt denkbar ist."

Vocke, p. 284.

' See, ftr contra, Wagner, of. cit., ii, 447.

595]

ETHICAL

PRINCIPLES

OF TAXATION

259

hand, if more than the normal efficiency of labor is allowed for in the exemption, it must be because of the retroactive effects of the exemption, or because of the disproportionate cost of the collection of the tax. But with advancing wealth, advancing culture, and advancing civilization the standard of exemption should be raised in conformity with the ends for which the state exists—the progressive development of mankind.

CHAPTER V i l i PRACTICAL JUSTICE IN TAXATION

In the preceding study of the principles of justice in taxation, we have not wholly lost sight of the fact that theoretical ideals are not always, nay are seldom, fully realizable in practice. Nor have we been unmindful of the fact that economic and social conditions must enter largely into our determination of the ideal. For since the ideal in taxation must necessarily have as its objective point the effects, or results, of this or that system or method of taxation, the nature of the effect must be a controlling influence in determining the character, or the justice, of our ideal. But while we have recognized the relative nature of the ideal of justice in taxation it must be admitted that we have not developed this aspect of the question, but have given our attention almost entirely to theoretical principles. And yet, we insist, not to theoretical principles that are purely visionary in the sense that they are applicable only to ideal beings, but principles that are founded upon the ethical nature of man and upon moral and social facts and forces. Nevertheless, the fact that the dominant thought has been that of the morally right—of justice—has led us to ignore for the most part the possibility of the practical realization of our ideal. So true is this, indeed, that there will be a seeming justice for the critic who urges that our theoretical principles afford no solution to the apparently insoluble problem of practical justice in taxation. Moreover, since the theoretical principles are unrealizable in practice, the critic may further 260 [$96

597]

PRACTICAL

JUSTICE

IN TAXATION

261

u r g e that there can b e no value in these theoretical discussions. B u t before we c o n c e d e the truth of these criticisms let us consider for a m o m e n t w h e t h e r theoretical principles that c a n n o t be fully realized in practice m a y not after all h a v e s o m e practical v a l u e ; indeed, w h e t h e r the principles t h e m selves are not to s o m e extent, at least, practicable.

In t h e

first place, there is always a practical value in determining a norm for t h e g u i d a n c e of real life, or for the g u i d a n c e of action in t h e actual happenings of life.

H u m a n action un-

guided b y an ideal can be but irrational, purposeless, a n d without significance

or

achievement.

This

is as true in

matters of taxation as in the purely moral life.

Indeed,

since h u m a n action is necessarily social action, a norm of c o n d u c t b e c o m e s indispensable, for otherwise there c o u l d b e only

the

self-seeking

of the

individual

which

would

be

destructive of social life, and so ultimately also o f any truly human life. B u t again, Is there nothing practicable in the theoretical principles w e have discussed ? must depend ticable."

T h e answer to the question

upon the m e a n i n g we g i v e

to

the

" prac-

B u t the practicable must mean one of two t h i n g s :

Either a s y s t e m w h i c h is s o in h a r m o n y with

prevailing

sentiments and convictions that there is a possibility of its immediate a d o p t i o n ; or a s y s t e m of w h i c h there is a reasonable

hope

of

adoption

thoughts and ideals.

by

a change

in the

prevailing

N o w we maintain that there is s o m e -

thing practical in our principles from b o t h points of

view.

In fact, there is no principle that we have advocated that cannot be found in actual p r a c t i c e in one c o u n t r y or another, so that the problem is not so m u c h one of a practical application

of

new

principles

as an

application, of a c c e p t e d principles.

extension, or

fuller

B u t t h o u g h there m a y

be some principles not in h a r m o n y with the sentiments of a

2Ó2

JUSTICE

IN

TAXATION

[59«

particular people, there may yet be some practical value in their discussion; for a nation, like an individual, can progress only as its thought and ideals move ever upward to higher and truer standards. But there is yet another point of view from which we may consider the practicability of theoretical principles of just taxation—that of their implications. That is to say, if the principles involve consequences that are impossible to be realized in practice it would seem to be a just charge that the principles are themselves impracticable. What, then, are the implications involved in our principles, if these principles are to be fully realized? Undoubtedly the student of finance will s a y : A single tax on incomes. Nay, more, an income tax with progressive and differential rates together with a broad application of the principle of exemptions. Nor can one deny the justice of this judgment. More than this, however, is t r u e ; for there are not a few economists and students of finance who will grant that under ideal conditions of human life and human relations—when a sound social ethics dominates human affairs—such a system of taxes would most nearly realize the ideal of justice. But we are not dealing with such ideal conditions, and taking the facts as we find t h e m — t h e sentiments, prejudices and convictions of the people—there can be no doubt but that a single progressive t a x on incomes is one of the most visionary of all possible forms of taxation, particularly with respect to the people of the United States. But after all, is such an implication, or such a consequence, involved in our theory? The main burden of our whole thesis has been to show not only that the tax burden should be distributed according to the ability to bear it, but to show the grounds upon which such a principle rests. True, it was found that the ability is determined in part by income and in part by the needs which that income must satisfy, and

599]

PRACTICAL

JUSTICE

IN TAXATION

263

that, therefore, a t a x in proportion t o ability is necessarily b a s e d u p o n income, t h o u g h it m a y b e with p r o g r e s s i v e and differential rates.

Y e t the fact is r e c o g n i z e d (if not b e f o r e ,

it is n o w ) that the t a x c o u l d not b e assessed d i r e c t l y u p o n i n c o m e for t h e reason that o n l y under ideal conditions c o u l d the i n c o m e b e ascertained.

N a y , t o a t t e m p t t o d o so u n d e r

e x i s t i n g standards of social ethics w o u l d b e t o d e f e a t t h e end s o u g h t b y i m p o s i n g , in m a n y cases, regressive b u r d e n s .

We

h a v e before insisted that the principles of j u s t i c e are relative, in the sense that t h e y m u s t b e tested b y results. In the s a m e w a y must w e determine their implications.

Because

under

ideal conditions the implications i n v o l v e certain results it b y no means follows that under actual conditions the s a m e results must o c c u r .

In o t h e r words, b e c a u s e under ideal c o n -

ditions our principles involve a single t a x on i n c o m e s , it d o e s not follow that t h e y involve such a t a x under the social c o n ditions as w e actually find t h e m to be.

T h e main t h i n g is t o

t a x ability b y t a x i n g i n c o m e , w h i c h is the o n l y

ultimate

s o u r c e of a b i l i t y ; b u t if this i n c o m e can be r e a c h e d

and

ascertained b y the indirect m e t h o d , this m e t h o d is the one demanded

b y our principles.

O r if the sentiment of

the

p e o p l e is against the direct ascertainment of ability the same c o n c l u s i o n follows.

In fact, if we c o u l d reach the full i n c o m e

b y either m e t h o d it would matter little w h i c h o n e was employed.

W e must then e m p l o y the o n e that will g i v e us the

most a c c u r a t e results, the o n e that will m o s t n e a r l y ascertain t h e true income.

U n d e r present conditions this is b e l i e v e d

to be that of the indirect method.

I n d e e d , with a p r o p e r

s y s t e m it is believed that ability, so far as it is determined b y income, can be ascertained with a fair a p p r o x i m a t i o n

to

j u s t i c e , and such an a p p r o x i m a t i o n is all that can be h o p e d for in h u m a n affairs.

A n d y e t the i d e a l — a t a x on i n c o m e —

is not w i t h o u t its value, since it serves as t h e g o a l for e v e r y indirect system of r e a c h i n g the i n c o m e ability of t h e t a x -

264

JUSTICE

IN TAXATION

[600

p a y e r , for e v e r y t a x , however assessed, is ultimately a t a x o n income. A s s u m i n g , then, the a b o v e conditions, it remains to indic a t e the c h a r a c t e r of a practicable t a x s y s t e m that will m o s t nearly realize the principles for which we h a v e

contended.

N o r can I d o more than to " indicate " s u c h a s y s t e m .

I

c a n n o t stop either to elaborate or to defend it. It is believed, h o w e v e r , that the s y s t e m w h i c h w e shall p r o p o s e is not o n l y p e r f e c t l y consistent with our principles, but is one of w h i c h there is h o p e for its gradual a d o p t i o n ;

and when a d o p t e d

will give a realization to justice in taxation s u c h as has never y e t been realized in this c o u n t r y , if, indeed, in any c o u n t r y . It is not maintained that all of the principles would b e fully realized, as, for e x a m p l e , the principle of progressive

taxa-

tion, b u t that we should attain the nearest attainable a p p r o x imation of those principles, and at the same time g o a l o n g w a y towards

removing

the

g r o s s inequalities in the

tax

s y s t e m s of our several States. 1 O u r present thesis, then, is to outline a s c h e m e of

taxa-

tion that will most nearly reach the full i n c o m e of the t a x p a y e r and most equitably distribute the t a x

burden—most

nearly and most equitably, I mean, under existing tions.

condi-

A n d this m e t h o d is believed to be that of the indi-

rect one of r e a c h i n g i n c o m e t h r o u g h some index, or t h r o u g h indices, of i n c o m e .

S u c h an i n d e x is to b e found in prop-

erty w h i c h , as w e h a v e seen, m a y be regarded either as the source or the c o n s e q u e n c e of income.

A n d b y t a k i n g differ-

ent forms of p r o p e r t y we m a y g e t several indices, w h i c h if wisely selected will constitute a fair basis for the determination of income. B u t the problem something

more

of an equitable system of t a x a t i o n is

than

this.

It

is necessary

not o n l y

select such indices as shall b e fairly representative 1

For an outline of a rational system of taxation, see Adams, Public

to

of infinance.

6oi]

PRACTICAL

JUSTICE

IN TAXATION

265

c o m e , but such as m a y be most easily and most fairly a s s e s s e d — p e r h a p s the most difficult problem in the w h o l e field of practical taxation. F o r if property is to b e made the basis, or measure, of income, an honest assessment b e c o m e s fundamental to an equality of taxation. A n d , therefore, very much d e p e n d s both upon the character of t h e property taxed and the method b y which it is taxed. Moreover, much depends also upon the character of the political unit that taxes the different forms of property. Or in other words, the problem is also one of a distribution of the t a x system among the different political units in such a way as to realize the best e c o n o m i c and ethical results. In brief, then, the problem before us is one of the assessment of property, of the methods of taxation, of the kinds of property to be selected for taxation, and the proper spheres of state and local taxation. W e cannot s t o p to discuss the question of rates or of e x e m p t i o n s . N o t the question of rates, because it is admitted that only the proportional rate is feasible for the present; not e x e m p t i o n , because the principle is universally adopted in practice, and we do not feel it necessary to add to what has already been said on the subject. A n d y e t we must acknowledge, that the principle of e x e m p t i o n is not carried out in practice to the e x t e n t that our principles would demand, not to the e x t e n t that we believe to be justified. Still, as previously pointed out, it must b e admitted that the limit, or rather the extension of e x e m p t i o n , is relative to the prevailing economic and social conditions of the people and to the e c o n omic needs of the state. But assuming the question of exemptions to be on the whole fairly settled, and the question of rates to be for the present outside of the field of practical discussion, let us attempt to portray in s o m e detail, though briefly, the system of taxation indicated above.

266

JUSTICE

IN

TAXATION

I . ASSESSMENTS

That equitable assessment is one of the most difficult problems in practical taxation is admitted on all hands. It is the crucial point in the investigations of all tax commissions and in all practical plans for the reform of our present methods and systems of taxation. And yet if property is to be made the measure of income—the index of ability—equal assessment is indispensable to justice. Indeed, given an honest assessment of property and the battle for justice in taxation is as well as won. Whether such an assessment may be approximated will depend very largely upon the character of the property taxed and the method by which it is assessed. What, then, are the conditions that are essential for the equal assessment of property? I. Declaration versus Doomage.—Much has been written concerning the relative merits of a declaration by the taxpayer, and doomage by the government. Theoretically the principle of declaration is no doubt the correct one. This follows inevitably from the voluntary character which we found in the relation of the citizen to the state. Yet we found at the same time that there is also a compulsory feature in this relation, which is founded upon the necessity of the state's existence. From the character of this compulsion, founded upon a political necessity, it follows that the declaration should be supplemented by the doomage power of the government. This double feature—declaration and doomage—is the prevailing system of our several Commonwealths, though with some the " declaration," with others the " d o o m a g e " is made the key-note of the system. But however much the principle of declaration may conform to the highest ideals of taxation, experience shows that it is not a principle that can be relied upon to attain justice until there prevails a higher standard of social ethics. No system can be just, either in theory or in practice, that

603]

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puts a premium u p o n p e r j u r y b y ignoring facts of h u m a n nature ; that induces p e r j u r y on the part of s o m e because of the well k n o w n fact of the p e r j u r y of others, p e r c h a n c e with the connivance of officials; that i n d u c e s p e r j u r y b e c a u s e honesty would invite upon one's self a penalty in the form of an assumption of a part of the t a x burden that rightfully devolves u p o n those w h o h a v e e s c a p e d b y an act of p e i j u r y . It is, for e x a m p l e , within our personal k n o w l e d g e that an a g e d widow w h o s e sole means of support is the i n c o m e from nine thousand dollars loaned on m o r t g a g e s at five per cent, ( a small part at s i x per c e n t . ) , p a y s a t a x of three per cent, because she insists u p o n an honest declaration; thus p a y i n g in taxes more than fifty per cent, of her small income !

And

this is but one of hundreds of similar instances fostered b y the p e r j u r y s y s t e m s of taxation in our various C o m m o n wealths.

T h e iniquity and injustice of such a system cannot

b e too s t r o n g l y

emphasized.

T h e s e iniquities should

be

r e m o v e d b y the a d o p t i o n of s o m e system that will reach the income and distribute the burden a c c o r d i n g to the income ability of the t a x p a y e r , and not a c c o r d i n g to the conscience of the individual. S u c h a s y s t e m , h o w e v e r , is not to be found in the w a y of a p r e m i u m u p o n honest declarations in the form of a lower t a x rate on certain

forms of intangible p r o p e r t y , such as

m o r t g a g e s — a m e t h o d practiced tially a p p r o v e d For

b y the

such a method

in Pennsylvania and par-

Massachusetts

of e v o k i n g

honest

Tax

Commission. 1

declarations is a

species of class legislation that p u r p o s e l y relieves a part of the t a x p a y e r s from their p r o p e r and just share of the t a x burden, only to impose it u p o n those whose visible p r o p e r t y prevents their evasion.

T r u e , such a method m a y e v o k e a

1 Tax Commission Report, 1897, PP- 88-9. Connecticut has adopted a similar device which the Michigan Tax Commission deems " w o r t h y of most serious consideration." Report, 1 goo, pp. 18-9.

268

JUSTICE

IN TAXATION

[604

larger sum of taxes upon a given form of property—intangible personalty—than would result from the normal rate upon the declaration (with implied o a t h ' ) of the individual. But such a concession, or purchased honesty, is quite as unnecessary as it is unjust. For if such property must be taxed there are simpler and more rational methods of reaching it. What these mothods are we shall presently consider. Here we wish simply to emphasize the fact that equal assessment is the foundation of justice in matters of taxation, and that that system is inherently wrong and unjust that seeks honest declaration by a veiled method of bribery. 2. Taxable Property. Before discussing the proper methods of assessments it will be well to consider the kinds of property that should be taxed as most nearly and most adequately representing income, the ascertainment of which is the real aim of the government and the real purpose of the assessment. It follows, therefore, that in the selection of property for taxation two conditions are essential: First, the property selected should be fairly indicative of income, and, secondly, it should be such that its value may be easily ascertained with some degree of truth; for while income is not always proportionate to the value of property, it nevertheless remains true that upon the whole the value is a fair index of income. A t any rate the value of property is about the only standard, or measure, of income that we have, so long as it is not feasible to ascertain the amount o j income directly. But the justice of such a standard of income depends more than all else upon the equality of the assessment. A n d this equality, again, depends both upon the kind of property taxed and upon the method by which it is assessed. A s to the kind of property that best measures tax abiliy, it is the common theory and practice of our several Stales 1

T h e actual taking of an oath is, I believe, rarely required.

60s]

PRACTICAL

JUSTICE

IN TAXATION

269

that every variety of property is equally indicative, and that, therefore, no form of property should escape assessment. Wagner's devices for reaching every form of property give sanction to this theory. In practice, Ohio has carried the doctrine to very near its extreme limit. The experience, however, in all of our States is a clear demonstration of the utter failure of the attempt to reach ability by any such method. This, indeed, is recognized by most Tax Commissions 1 as one of the most patent evils of our tax systems. The fact is that no form of property can be considered as indicative of income, or ability, of which it is morally certain that only a small fraction can be reached. Hence, for purposes of taxation, only such forms of property should be assessed whose value can be determined with some degree of accuracy; or, better, perhaps, property should be assessed only in such form as lends itself to the determination of its value. This leads us to remark that we believe the principle of multiplicity of taxes to be entirely erroneous, both in theory and in practice. For apart from the impossibility of determining all forms of property, as mentioned above, there are certain types of property that are more accurate measures of income than other types, and tax systems should seek such types if such property can be found and its value can be ascertained. Without stopping to develop this feature, it may be remarked that a " habitation tax," or a tax on house rent, affords an excellent example of what is meant. Such a tax, too, has the advantage that it can be easily ascertained. That, within certain limits, such a tax is a fair measure of income will be generally conceded, since the amount paid for house rent is, in general, proportionate to income. So true is this, that it is recommended by many French writers and by the Italian econo1 As Massachusetts, Ohio, Wisconsin and Michigan. For the opposite view see minority report of Geo. E. McNeill in Mass. Tax Com., 1897.

2JO

JUSTICE

IN TAXATION

[60«

mist Baer.' It is also recommended in the majority report of the Massachusetts T a x Commission. 2 Still, it must be admitted that house rent as a measure of incomes must bt confined to moderate incomes. For the income of the multimillionaire house rent would be no measure whatever. Sucli a tax must, therefore, be used with caution. A s a single tax, except upon small incomes, such a tax would be most unjust. Indeed, any form of a single tax must work injustice, largely in consequence of the differing effects of shifting and incidence, but partly because of the differing opportunities for evasion. The multiple tax is also objectionable because of the cost of assessment and collection, thus violating one of the cardinal principles laid down by Adam Smith, and since accepted by all students of taxation. Because, then, of their double injustice—evasions and unnecessary costs—multiple systems of taxation should be avoided. But we have seen that the single tax is also objectionable. Hence a wise system will consist of such a selection of plural taxes as can be based upon forms of property at once indicative of income and of easily ascertainable value. What these forms are will appear a little more in detail as we proceed. But after all, it is, perhaps, not so much the form of the property to be assessed as the method of its assessment that is important. 3. Methods of Assessment. The problem of equitable assessment involves two difficult tasks: The discovery of property, and uniformity of valuation. Though a constitutional requirement of most of our states, it is a notorious fact that, with the comparatively few exceptions of " widow's mites," there is not only no pretense at a full valuation, but hardly a pretense at a valuation at a uniform rate. B u t 1

Baer, L'avert t P Imposta, p. 32.

* Report, 1897, PPpp. 153-4.

opposition see minority report of McNeill,

6o 7]

PRACTICAL

JUSTICE

IN

TAXATION

271

whatever the "pretense," it is the universal verdict of T a x Commissions, tax officials, and of students of our taxing systems that uniformity of assessments is an unrealized dream, an ideal of the imagination, to say nothing of the total escape of certain forms of property from all taxation. Lack of uniformity of assessment applies to all forms of property, though to some more than to others, depending in part upon the successful intrigue and deception of owners, in part upon the intelligence and honesty of officials; but the complete escape from assessment pertains essentially to intangible property. Let us consider, briefly, each of these problems—the discovery of property and the uniformity of its assessment. Concerning the discovery of real estate and tangible personal property little or no difficulty arises. The problem, as wc have seen, attaches to the discovery of intangible personal property. How, then, is this to be reached? T w o methods are possible; Either the compulsory recording of all possessions of intangible property—of mortgages, bonds, stocks, etc.—similarly to the recording of deeds, in order that they may have legal validity; or the taxing of such forms of property b y taxing their visible representatives— lands, corporations, etc. With respect to mortgages either method is applicable; only care should be taken to avoid the injustice of double taxation by taxing both the land and the mortgage. If the land is taxed to its full value the mortgage is indirectly taxed and should not, therefore, be taxed directly. But if it is deemed best to tax the land at its full value, less the value of the mortgage, and to tax the mortgage directly, then the mortgage should be recorded that its full value may be ascertained without difficulty, and with only a nominal expense. Other credits could be treated in the same manner, though some forms of personal notes it would seem to be advisable to exempt from taxation and to use other indices of income.

272

JUSTICE

IN

TAXATION

[608

F o r the taxation of stocks and bonds the only rational and effective method is that which taxes them by taxing the corporation or other property which they represent. Viewed as a t a x upon income, as in effect it is, it is the principle of t a x i n g income at its s o u r c e — a principle extensively practised in the English Income T a x . T h e extent to which such forms of property escape assessment is too notorious to need specific proof, there being, as a rule, from 80 per cent, to 90 per cent, that wholly escapes taxation.' Nor has any effective method y e t been adopted, other than the English method, b y which the income from such property can be reached for purposes of taxation. The compulsory recording of stocks and bonds would be a decidedly objectionable method, both on account of the expense attending the recording, assessment and collection (the stocks and bonds constantly changing hands), and on account of the practical difficulties of the enforcement of such a m e t h o d ; as where the owner of the stock or bond resides in a State other than that where the corporation is situated, or the stock or bond recorded. On the other hand, it is a simple matter to obtain from corporations the amount of their earnings, of their capital, or of stocks and b o n d s ; and the collection of the tax directly from the corporation has the merit of involving the minimum of expense. It is the absence of a rational system for the taxation of this form of p r o p e r t y — t h e mere pretense of its t a x a t i o n — t h a t has given to the tax systems of the A m e r i c a n States their well-earned opprobrium—begetters of perjury, fraud and injustice. But by the simple expedient of taxing at the source, order and justice may come out of the present chaos and injustice. W e shall return to this subject later in another connection. 1 See, for example, Ely, Taxation in Amtriean Cities; Seligman, " The Personal Property Tax" (in Essays); and the Reports of the Tax Commissions of Massachusetts, Pennsylvania, Ohio, Michigan, Wisconsin and Colorado.

609]

PRACTICAL

JUSTICE IN TAXATION

273

W e have said that the assessment of tangible personal p r o p e r t y and of real estate affords but little difficulty. This, however, is true only theoretically. Being tangible, it is true, indeed, that it is theoretically, nay, in a sense, practically possible to discover these forms of p r o p e r t y ; yet it is a notorious fact t h a t both forms are very unequally assessed. Particularly is this true of tangible personal p r o p e r t y in the form of household goods, but a small fraction of which is reached by t h e t a x assessor. The chief difficulty of reaching this form of p r o p e r t y lies in the fact that every h o m e is felt to be sacred from the intrusions of government officials, a sentiment respected by the officials themselves. T h e result is that the official assessor must rely upon the t a x payer's declaration, a very unsafe criterion as we have seen. Only injustice can result from such a method. T h e only feasible solution would seem to be the total e x e m p t i o n of this form of p r o p e r t y from taxation. A n d this suggestion will appear all the more rational when we consider that the purpose of taxing any form of property is to reach the income of which the property is but a symbol. True, household goods constitute such a symbol, or index, but only in a very general way, and then dnly for moderate incomes. But there are other and more certain indices of income which will serve t h e p u r p o s e far more satisfactorily. T o obtain substantial justice it is not necessary to seize upon every possible index of i n c o m e ; but, as we have seen, only such as are at the same time most indicative and most easily applied. The case is quite different with real estate. This is upon the whole ( t h o u g h there are exceptions) a just index of income, and there are neither sentimental nor technical reasons against its assessment. T h e problem here is essentially one of the intelligence and honesty of the assessor, his ability to estimate the value of property and to withstand the

274

JUSTICE

t e m p t a t i o n s of b r i b e r y . real

estate.

IN TAXATION

[610

N o r is t h i s d i f f i c u l t y c o n f i n c d

Precisely the same

difficulties are to be

to met

w i t h in t h e a s s e s s m e n t of c o r p o r a t i o n s , p a r t i c u l a r l y r a i l r o a d corporations.*

I n t h e c a s e of real e s t a t e , it is t h e

require-

m e n t of m o s t of o u r S t a t e s t h a t it s h a l l b e a s s e s s e d t o

the

f u l l e x t e n t of its v a l u e , t h o u g h it is not u n c o m m o n to find it assessed, even within the s a m e city, a n y w h e r e from 40 per c e n t , t o 75 p e r c e n t , of

its v a l u e . '

Such

a n i n e q u a l i t y of

a s s e s s m e n t is m o s t u n j u s t in its e f f e c t s , b e i n g e q u i v a l e n t , in e x t r e m e c a s e s , t o t h e i m p o s i t i o n of a t a x u p o n s o m e g r e a t e r b y 100 p e r c e n t , t h a n t h e t a x u p o n o t h e r s .

And, by

the

w a y , w e n e e d o n l y t o c a l l a t t e n t i o n t o this i n t e n t i o n a l u n d e r v a l u a t i o n of r e a l e s t a t e t o e m p h a s i z e the g r o s s i n j u s t i c e of taxing

the

poor

amount

of

her

rational

ground

widow's honest

mortgage

declaration.

or

bond

And

to

yet

the

full

there

is

for the s i x t y per cent, v a l u a t i o n — t h a t

a by

d e c r e a s i n g t h e a m o u n t of t h e t a x v a l u a t i o n , w i t h a c o n s e q u e n t i n c r e a s i n g of t h e t a x r a t e , t h e r e will result a t e n d e n c y t o c h e c k e x t r a v a g a n t a p p r o p r i a t i o n s and s q u a n d e r i n g of t h e public funds. should

be

B u t w h a t e v e r t h e b a s i s of t h e a s s e s s m e n t it

uniform.

The

real

difficulty,

however,

is

to

o b t a i n an e q u a l a s s e s s m e n t of all p r o p e r t y o n a n y a c c e p t c d b a s i s , of Yet

r e a l e s t a t e a s w e l l as of o t h e r f o r m s of

the taxation

of

r e a l e s t a t e is d e m a n d e d

on

property. political,

economic, and ethical grounds. 1

In the decennial appraisement of Ohio in 1900 the railroad property in many

counties was assessed at about 12 per cent, of its value. Cuyahoga county (Cleveland).

Notably was this so in

This condition was made possible by a vicious

system of appraisement (by county auditors) which lent itself to a system of incirect bribery through the grant of railroad passes to the assessors—the auditors. ' S u c h was the (act in the appraisement of real estate in Cleveland in 1900, as the writer was reliably informed by a real estate owner who made personal inquiries of the different assessors.

It was within the personal knowledge of the same

authority that in the assessment of 1890 large owners of real estate got low assessments by bribing the asseason through a third party.

6 I I ]

PRACTICAL

JUSTICE

IN

TAXATION

275

W h a t , then, is t h e solution of the p r o b l e m — i . e., of uniform and honest assessments? T h e remedy lies very largely with the taxpayers themselves. F o r first and foremost is the necessity of honest and efficient assessors, 1 without which any system of taxation may be m a d e to work injustice, while with them any systems in themselves defective may be made to realize substantial justice." But while very much depends upon the character of the assessors, the m e t h o d s of assessment are also of much importance. F o r however honest and intelligent the assessors, there can be only a chance equality of assessment, unless there is some c o m m o n basis for the determination of values and some common agreement for the percentage of valuation. W h a t method will best accomplish the desired result we cannot stop to discuss. W e may note, however, that it lies in the direcfion of a more centralized control of assessments, the degree of centralization being determined by the character of the property assessed: the taxing area for real estate being the township, county or city; that for railroads and other corporations the state. T h e r e should also be fixed and uniform rules for determining values and a rigid enforcement of some fixed percentage of valuation. But so long as the matter rests very largely upon the judgment of individual, local assessors, the pretense of justice becomes a farce. With some such system as suggested, and with intelligent and honest assessors, a fair approximation of justice may be attained. But the methods of assessment are closely allied with a system of taxation, to which let us next turn our attention. 1

See last note.

' Cf. Report of Professor Bolles in Report of Pennsylvania tint

of ISS-J, p. 157.

Revenue

Commit-

276

JUSTICE

IN TAXATION

II. T H E TRUE T A X

[612

SYSTEM

In the p r e c e d i n g discussion it has b e e n pointed out that a just s y s t e m of assessment involves a direct assessment b y the taxing

authorities, a c o n s e q u e n t wise selection of the

k i n d s of properties to b e t a x e d , and m e t h o d s of assessment that shall reach all assessable p r o p e r t y equally.

Without

s t o p p i n g to discuss these m e t h o d s in a n y detail it was indicated that they should b e s u c h as to eliminate, as far as possible, any personal factor within the s a m e t a x i n g political u n i t — e l i m i n a t e , that is, the individual j u d g m e n t s of different assessors as well as the personal declarations of the a s s e s s e d ; thus diminishing, on the one hand, b r i b e r y and corruption, and, on the other hand, d e c e p t i o n and p e r j u r y .

It was also

pointed out that in the c h o i c e of t a x a b l e p r o p e r t y three things must b e c o n s i d e r e d : T h e indicativeness of the prope r t y as a measure of i n c o m e — t h e taxes;

ultimate source of all

and the readiness with w h i c h the t a x e d

lends itself to equitable a s s e s s m e n t ;

and

finally,

property that this

readiness, or e q u a l i t y of assessment ( a n d , we m a y add, of t a x a t i o n ) , d e p e n d s v e r y largely upon the tax s y s t e m ; or, in other words, upon the kind of t a x e s and the methods of taxation, and the distribution of the different taxes a m o n g the different political t a x i n g units. W i t h , then, a wise system of t a x a t i o n — a p r o p e r choice of subjects and methods, and a p r o p e r d i s t r i b u t i o n — i t is believed that m u c h would be a c c o m p l i s h e d in the way of rem o v i n g the glaring absurdities and inequalities of present m e t h o d s , and for the practical introduction of the principle of " equality of burden " as based u p o n " ability," so far, at least, as ability is measured b y i n c o m e .

A brief

considera-

tion of such a system, which w e must confine to the barest outline, will supplement our remarks u p o n assessment, and at the same time point out w h a t be believe to be a rational s y s t e m of taxation that will at o n c e realize substantial jus-

613]

PRACTICAL

JUSTICE

IN

TAXATION

tice in taxation and come within the realm of the practicable —essentially conform to the ideals of justice and to the requirements of practical application. Let us consider, then, the outline of such a system. I. Subjects and Methods of Taxation. We have already indicated the principles that should determine the choice of subjects—i. e., of property—for taxation, and also the relation which this choice bears to equitable assessments, which will appear further as we proceed. Our present purpose is to give an outline of the more important subjects for taxation that will realize the requirements of these principles. No attempt will be made to weigh the pros and contras of different kinds of taxes. Our aim shall be positive and constructive, rather than negative and by elimination. Yet we may again emphasize the fact that no rational system of taxation can contain a "general property t a x " which treats alike taxes on real estate, on tangible, and on intangible property. Nor is it necessary to add to what has already been said in justification of this conviction. We shall, therefore, assume the abandonment of the " general property tax," as such, in compliance with the logic of experience and the all but universal opinion of expert testimony. 1 This, however, does not imply that some forms of property are to escape taxation altogether. On the contrary, so far as they are proper subjects for taxation they will be taxed equally (at least more equally), and will be taxed in fact and not merely in name, but under a different name and by different methods than those now in vogue. The system of taxes which we have in mind may, perhaps, best be outlined by a consideration of taxes on consumption, on real estate, on personal property (tangible only), on mortgages, on corporations and on inheritances; though special assessments, fees and fines should have their place 1

As Dunbar, Taussig, Seligman, Adams and Ely.

278

JUSTICE

in the s y s t e m .

IN TAXATION

[O14

T h e s e , however, have for their purpose local

i m p r o v e m e n t s , special benefits, or penalties and must, therefore, b e passed over in a s c h e m e for g e n e r a l taxation based u p o n ability." (1)

Taxes

on Consumption.

If it w e r e true that all in-

c o m e s are spent in personal satisfactions and e n j o y m e n t s there would be m u c h to be said for the contention of Sir William

Petty:

that

"a

man

is actually

and truly

rich

a c c o r d i n g to what he eatetli, drinkctli, wcarctli, or in a n y other way really and actually e n j o y e t h ; " and that, therefore, " e v e r y man o u g h t to contribute a c c o r d i n g to what he takcth to himself, and actually e n j o y e t h . " '

But such a condition of

things would be true only under the circumstance that the total i n c o m e was spent in this manner, a circumstance that, as

a rule,

would

happen

only

with

moderate

incomes.

I n d e e d , with the e n o r m o u s d e v e l o p m e n t of savings banks and

other

means

for m a k i n g

small

investments—stocks,

b o n d s , e t c . — i t does not a p p l y universally to even moderate incomes.

A n d y e t with moderate i n c o m e s (especially with

the more moderate incomes) e x p e n d i t u r e is a v e r y fair index of i n c o m e , and a t a x on e x p e n d i t u r e a v e r y fair a p p r o x i m a tion to justice.

B u t such a tax would reach only a fragment

of the larger incomes, and hence is o b j e c t i o n a b l e as a single t a x ; and, besides, has the further o b j e c t i o n that there are m a n y technical difficulties in the way of its c x c c u t i o n , so far as there should be an attempt to reach e v e r y possible form of consumption. B u t while there should be other forms of taxes to reach the parts of income that d o not find their w a y to personal " e n j o y m e n t s , " a t a x on consumption is a legitimate

and

' F o r a full report of these sources of revenue see Scligman, Essays, cb. ix. For criticism of Prof. Seligman's " s p e c i a l assessments" and " f e e s , " see Bastable, Public Finance,

pp. 153-6.

' Petty, A Treatise of Taxes and Contributions,

p. 83.

6 i 5]

PRACTICAL

JUSTICE

IN TAXATION

279

ncccssary part of every t a x system that seeks to reach income by the indirect method, since in all cases consumption docs afford some index of i n c o m e ; in many cases a fairly perfect index. But such a tax should be applied indirectly, as by customs duties, taxes on manufactures and corporations, and taxes on real estate—lands and h o u s e s — n o t only to realize e c o n o m y in assessments and collections and the Smithian canon of " c o n v e n i e n c e " in time of p a y m e n t ; but also to avoid any possible antagonisms that might arise on account of the strong popular sentiment against personal inquisitions on the part of the government, as a violation of individual liberties. S u c h a t a x , too, lends itself very fittingly to the higher taxation of larger incomes b y means of heavy taxes on articles of luxury. T o carry out this purpose, however, would require the non-taxation of articles of necessity with a constantly increasing rate for articles of decreasing necessity. B u t it must be admitted that no such scientific system is possible with protective tariffs. B u t though it may not be possible to realize the ideal system of consumptive taxes, they should form an essential feature in any t a x s y s t e m ; not only for the reasons given above, but also for political reasons. F o r though a direct t a x is important as tending to stimulate an active interest in the government, and to check extravagance in expenditures, an attempt to raise all public revenue from direct taxation would result in social revolution, or a niggardliness that would effectively cripple the government in the performance of its functions. F o r , however much we may philosophize about taxes, there is much truth in the statement made b y Mr. B u c k , of K e n t u c k y , in the early debates in Congress on the subject of t a x a t i o n : T h a t " t a x e s are always disagreeable, and it is with reluctance that people consented to pay any, e x c e p t they saw advantage arising from the payment of them greater than to counterbalance the evil of pay-

280

JUSTICE IN TAXATION

[616

ing." 1 Hence the importance of supplementing direct taxes with indirect taxes, particularly in the taxing system of a national government. It is not less true that the indirect tax should be supplemented by direct taxes; in part to offset the uncertainty of the incidence of indirect taxes, in part because of their greater certainty and economy, and in part because of their direct relation to the government. Most important among these are property taxes and taxes on inheritances. W e omit the income tax because of its admitted impracticability. Let us briefly consider the property and inheritance taxes viewed as essential parts of a good tax system. (2) Taxation of Real Estate. The taxation of real estate is theoretically simple enough. It is one of the oldest, as well as the most universal, of all taxes. Indeed, the fact that real estate is a source of income, cannot be hidden from the assessor, and has an immediate relation to and dependence upon the expenditures of government, makes it a peculiarly fitting subject for taxation. A n d yet, as we have seen, under present systems there is no guaranty of an equality of assessments and of burdens, either between individuals or between different political units. Nor, for the former inequality, is there any effective remedy other than the adoption of a uniform basis for assessments, a larger use of official records—deeds, bequests, mortgages, etc.—and the choice of men of character and intelligence for assessors; while the remedy for the latter inequality—that between different political units— is to be found very largely in an entire rearrangement and readjustment of the tax system, on the basis of greater fiscal independence of the different political divisions within the same system of government—a question which will come up for consideration later. Upon the justice of levying upon real estate for purposes Annals of Congress, 4th Cong., 2d Sess., p. 1862. Richardson, of Tennessee, 14th Cong., 1st Sess., p. 84. 1

Cf. also ipeech of Mr.

617]

PRACTICAL

JUSTICE

IN TAXATION

281

of public revenue there is no difference of opinion. It conforms to the ideal of taxation according to ability, since the value of real estate is determined very largely by its incomeproducing power, if we omit the exceptional cases of the speculative holding of land. With this exception, it is in the main true that land, buildings and machinery, and dwelling houses have their value fairly represented in the capitalized amount of the income derived from them. Hence, omitting as we do in the present discussion the question of progressive and differential rates, a tax based upon the valuation of such forms of property is a fair approximation of a tax based upon the derived income, and so likewise a fair approximation of justice. That such taxes may and do become, in part at least, taxes upon consumption does not lessen their effectiveness or their justice. With a rational and stable system of taxation, the burden will adjust itself fairly in the long run. To this end, however, it is important that other forms of property should be reached. (3) Taxation of Personal Property. A sound and just system of taxation must include taxes whose ultimate incidence shall bear upon productive personalty, as well as those that bear upon productive realty. T o reach personal incomes it may be necessary, also, to tax some forms of unproductive personalty; unproductive, that is, to the consumer in the sense that Adam Smith used the term. Indeed, such taxes are taxes upon consumption, which have already been sufficiently considered. Y e t we may perhaps add, that to us there is some question whether household goods should not be exempted from taxation; not only because they are at best but very roughly indicative of income, but because such a tax must always be upon but a nominal part of the total amount, and that, too, in very unequal portions ; must, that is, so long as public sentiment remains as it is concerning the sacredness and privacy of the home.

282

fUSTICE

IN TAXATION

[618

Moreover, there is little of a scientific character in a system of taxation that places unproductive personalty, which is only roughly indicative of income, upon exactly the same basis as productive property. On the other hand, such forms of tangible personalty as farming implements and live stock may well be included in the tax system, not only as indicative of income but as also productive of income ; while they are at the same time easily assessable; in fact, for the reasons just given, tangible personalty in general should be included in any well rounded system of taxation, and taxed in the same direct manner as realty. The same cannot be said of intangible personalty. A s already sufficiently shown, every attempt of this nature leads to the grossest inequalities (to say nothing of perjuries), while its enforcement is a practical impossibility; this impossibility, indeed, being the occasion of the inequalities. Some other method than the direct one must, therefore, be found for reaching the income that has its source in this form of property; or, rather in the forms of property that stand back of and are represented by the intangible forms— mortgages, stocks, bonds, etc. Such a method, and indeed the only practicable method, is to be found in the taxation of this class of income at its source. In this way alone can evasion be avoided and the burden equitably distributed. A s the form of property under consideration is most largely represented by mortgages and by stocks and bonds, we may consider briefly the best method of taxing these at their source, which will indicate the true method of taxing the income from all forms of intangible personal property. (4) Taxation of Mortgages. The proper method of taxing mortgages has, perhaps, been sufficiently indicated in our discussion of methods of assessment. Either the real estate, which is represented by the mortgage and is the source of its income, should alone be taxed, leaving mort-

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gagor and mortgagee to make the proper adjustment of interest; or, if the mortgage is taxed, the tax should be based upon a compulsory court record, similar to the recording of deeds. A t the same time, the amount of the mortgage should be deducted from the value of the real estate that is back of it, according to some such methods as those in vogue in Massachusetts and California.' There is but one source of income, and therefore but one source of ability. Hence, to tax both the land and the mortgage is to inflict the patent injustice of a double taxation on that part of the income from land that goes to pay the interest of the mortgage. The better method would seem to be to tax the land and exempt the mortgage, since the land is the direct source of the tax-paying power. Certain it is, at any rate, that the present methods of taxing mortgages are open to so many possibilities of evasion that only the most flagrant inequalities can result, the amount of the mortgages taxed being directly proportional to the sensitiveness of the consciences of the mortgage holders. (5) Taxation of Corporations. A still more important form of intangible personalty is to be found in corporate stocks and bonds, whose income-producing power is to be found in the corporation. In fact, the net earnings of corporations are, in the main, distributed to. the holders of these stocks and bonds. If, then, we levy a tax upon the net earnings of a corporation, we thereby impose a tax upon the incomes of its stocks and bonds at their source. The ease with which the imposition of such a tax may be effected, and the unquestioned impossibility of reaching this class of income by the direct method, make the method of taxing at the source the only rational and scientific method of taxing income of this character. 'See Report of Massachusetts Tax Commission, 1897, p. 7, and Plebn, The General Properly Tax in California (Economic Studies of Am. Econ. Ass.), pp. 126-7 ai> d 148.

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T h e principle of taxing incomes at their source is now v e r y generally recognized by economists to be the only sound principle of public finance. This is done in the case of real estate, and it is believed that the same principle should be applied in the taxation of intangible personalty. N o t only is this the most practicable and most effective method, but it is the most economic, entails the least inconveniences, and is the most equitable in its results. B y eliminating the intangible forms of property and the personal equation in assessments, evasions would become practically impossible; while b y reaching the whole income there is secured a uniformity in the distribution of the tax burden. A n d since such a tax necessarily bears upon individual incomes, it meets the ethical requirement of the imposition of a t a x upon the source of ability. Granted, then, the principle of taxing the incomes from stocks and bonds at their source, and that individual tax ability—so far as conditioned b y such holdings—is reflected in the corporate ability—i. e., in the corporate net income— the question arises: How, or in what manner, may this corporate ability be most effectively and most efficiently reached? Our answer to this question must be v e r y brief, and somewhat dogmatic. T h e problem of the taxation of corporations is too large and too c o m p l e x to be treated with any fulness in the closing chapter of a treatise on the principles of justice in taxation. 1 Thirteen different methods are given b y Professor Seligman for taxing corporations.* These are reduced to three b y Professor A d a m s : as based upon property, upon the volume of business, or upon earnings. 3 Both, however, 1 For a thorough treatment of the subject see Seligman, " Taxation of Corporations," Essays, ch. 6, 7 and 8. For an excellent brief statement see H. C. Adams,

Public Finance, pp, 446-466. * Seligman, op. cit., pp. 177-9.

* Adams, op. cit., p. 454.

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agree that the true measure of corporate ability is to be found in the net income of the corporation; and it must be evident that there can be no other standard. The limitation made by Professor Adams in the case of railroads: that the tax should be based upon the net " income from operation," is important only in calling attention to the fact that double taxation should be avoided in the case of leased corporations.' Undoubtedly, if the leased corporation is taxed, the basis of a corporation tax should be the " earnings from operation; " but if only the operating companies are taxed, the basis of the tax should be based upon the total net income. In any case the taxable net income should include the gross earnings, minus operating expenses; but not deducting the outlay for interest, rent, taxes, or improvements.' Accepting, then, corporate net income—not the net income to stockholders and bondholders—as the true basis of corporation taxes, it does not follow that the desired end can be reached best, in all cases, by imposing the tax directly upon the net income. Whether or not this is the best method must depend upon the practical possibility of uniform and fixed rules of accounting. But according to Professor Adams, 3 such a system of accounting is practicable. We may, therefore, accept the net income basis as, upon the whole, affording both the best theoretical and best practical basis for corporate taxation. But if in any particular case such a method is not practicable, we must agree with Professor Seligman that a tax based upon the market value of stocks and bonds will most nearly realize the ends of justice, being, besides, " certain and simple of enforcement." 4 It is only, or chiefly, because the market values of stocks and bonds are not always determined by their net 1

Ad»m», ibid., pp. 460-1.

* Cf. ibid., p. 461.

Cf. Seligman, Essays, p. 199. ' Ibid.

4

Essays, p. 21a.

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incomes, that this method of taxing corporations is not always the most just, as it is the most simple. The correct determination of the basis of assessment, however, is by no means the least difficult problem in the taxation of corporations. There would, indeed, be little difficulty if the tax were aimed at the corporation per se, or if stockholders and bondholders lived wholly within the tax area of the corporation. But from our present view-point, the subject of the tax is not the corporation, but its individual stockholders and bondholders; who, moreover, are scattered throughout various areas of taxation. Yet theoretically, at least, the problem is easy of solution. For all that is necessary is that there should be, among the different commonwealths concerned, a uniformity in the methods of taxation, based upon a common agreement respecting the taxation of resident holders of stocks and bonds of foreign corporations, and of foreign holders of the stocks and bonds of domestic corporations. The only ethical or logical basis for such agreement is, that each commonwealth should tax only such portion of the net profits as are earned within its borders; this portion being determined, for practical reasons, on the basis of mileage, gross earnings, amount of business, or capital within the commonwealth, according to the nature of the industry. In other words, the net income taxed within a given commonwealth should bear the same proportion to the total net income that the mileage, gross earnings, etc., within the commonwealth bears to the total mileage, or gross earnings, etc. The assumption here is, that the net income within any area is proportional to the mileage, earnings, business or capital within the same area; and if the choice of these methods is wisely made, according to the character of the corporation, substantial justice will be attained, though only if there is uniformity throughout all of the commonwealths.

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Such, in brief, is the ideal of corporate taxation, as a means of reaching the individual abilities of stockholders and bondholders. Practical obstacles in the way of state constitutions, and the uncertainties of " politics," do not, however, promise a speedy realization. Nor does this doubt grow less when we contemplate the fact that not one of the American States has ever adopted the recommendations of its various expert T a x Commissions. Nevertheless, the practice in some of the states is evidence of a tendency in the right direction.' But for some time, at least, we shall have to put up with the injustice of double taxation; an injustice that is, perhaps, very largely nullified in the fact of extensive evasions under present methods of taxing stocks and bonds. (6) Taxation of Inheritances. Concerning the inheritance tax we may be very brief. It is now very generally justified and very generally adopted. W e may consider it from two points of view: That of the decedent and that of the heir. Viewed with respect to the ability of the former, a tax upon the inheritance must find its justification in the assumption that past taxes have been evaded, but have held a permanent lien upon the property. While there is much ground for this theory,* it applies only to personal property, and even then is but the crudest approximation to justice, since the amount of the evasion is an incalculable quantity. 3 The more correct point of view, however, is undoubtedly that of the heir, or legatee. And from this viewpoint the justice of the tax is to be found in the increased ability arising from the inheritance, or legacy. According to both 1

For examples and a fuller discussion of the interstate taxation of corporations,

see Seligman, Essays, pp. 223-254. ' A lady in New Y o r k , the sole heir to her father's estate, told the writer that her father never paid a personal property tax, though at the time of his death he held stock in ten different banks. 1

Cf. Seligman, Essays, p. 131.

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Professor Seligman and Doctor West, this ability arises from t h e fact that the inheritance should be regarded as an " accidental income "—measuring ability like other incomes—and t h e tax as an "accidental income" tax. 4 This is no doubt t h e true attitude to take in the case of small inheritances that are spent in the manner of regular incomes. But to us the argument is not so evident with respect to the inheritance of productive property, from which there is the enjoyment of only the annual income. From the viewpoint of income, the ability of the heir is increased, practically at least, only by the amount of the increase of his annual income; and, theoretically, this increased ability should be reached by progressive rates, if not also with differential rates on account of the source. Certainly, from the viewpoint of the government, there has been no increase of social ability, because no increase of social income; but only a transference from decedent to heir. True, there is a sense in which the whole inheritance may be regarded as a gratuitous and "accidental" income, therefore increasing by its full amount the ability of the heir. If this is the correct view, then, logically and justly, this income should be treated like other incomes of the same class. If this is the only basis and justification of the tax, there should be the same principle of rates that is applied to other incomes, no allowance being made for degrees of relationship. But this is seldom advocated in theory, and is nowhere applied in practice. If, indeed, this theory be true, then are the existing arbitrary rates and distinctions of relationship both illogical and unjust. The fact that they are both justified and practiced is evidence that the " accidental income " theory is, at least, not the only consideration in the inheritance tax. The theory at least assumes that the true tax principle should here be deviated from or grounds of policy or 4

Seligman, Jistays, p. 132, and Wot, The Inheritance

Tax, p. 118.

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sentiment. Whatever truth, therefore, there may be in this theory of the inheritance tax, it is not a theory that permits of logical application in practice. It needs, too, to be supplemented b y other considerations. W e shall not attempt, however, to discuss the various theories of the inheritance t a x — c o s t of service, value of service, co-heirship, escheat, etc. A l l of them, as Dr. W e s t says, contain some element of truth, and therefore to that extent afford some justification for the tax. Not only is this t a x justified on theoretical grounds, but it has also the practical merit of being difficult to evade, and of occasioning little disturbance of industry; besides being less oppressive and less reluctantly paid than most other taxes. Viewed in all of its aspects it forms a necessary adjunct to any scientific system of taxation. W e cannot, indeed, quite agree with the implication in the statement of Dr. West that " no tax is better adapted to replace the antiquated personal property t a x , " 1 since this implies substitution. T h e true substitute for these antiquated taxes lies, as we have seen, in the direction of a t a x on corporations, though the inheritance tax (on personal property) may well be used as supplementary to the corporation taxes. In the above outline of a system of taxation no attempt has been made to exhaust every legitimate source of public revenue, but only to indicate the main features of a scientific system that will most nearly conform to the theoretical principles of justice—a tax based upon ability, so far as this ability is measured b y income. W e have omitted a discussion of rates, because, as we have said, we believe that under the prevailing sentiment on this subject this is not, in this country at least, a practical question, though without the progressive rates the highest ideals of justice in taxation must remain unattainable. Of the principle of exemptions 1 West, of. p. 132.

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we need only to say that it is fairly well realized in practice, though, as previously pointed out, we believe that there should be further extensions of the principle, at least in some cases, in order to correspond to the progressively higher standards of living. There is, however, another question of great practical importance, which, because of its immediate bearing upon the execution of such a system as that outlined above, is, indeed, an essential requisite to such a system, and therefore should constitute a vital part of it. I refer to the separation of state and local taxes, which let us in conclusion briefly consider. 2. State and Local Taxation. The importance of the separation of national, state, and local taxation is another of those financial questions upon which there is now very general agreement. 1 This granted, the question arises: On what basis should the distribution of taxes be made? According to Professor Bastable it cannot be made on t h e ground of a difference of governmental duties, since there is no correlation between these duties and tax systems. H e n c e the distribution must be made on financial and economic grounds.* This is, no doubt, in part true. But in this country, at least, it should be modified by the more correct view of Professor A d a m s : That " a government should select for purposes of taxation those industries with which it holds some fundamental or constitutional relations." 3 In other words, while financial and economic conditions are important factors in determining the political distribution of taxes, the governmental relation to the industry taxed is, perhaps, of prime consideration. Indeed, it is this relation that very largely determines the financial conditions. T h e principle may be best illustrated by calling attention to the 7.

' For a very good treatment of this question see Adams, Public Finance, ch. Cf. also Bastable, Public Finance, iii, 6. 1

Bastable, op. cit.. pp. 367-8.

* Adams, op. cit., p. 493.

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more important taxes that should be assigned to national, State and local revenue. (1) National Taxes. The revenue system of our national government is so thoroughly established that there could be only a speculative interest in a discussion of possible reforms. At the very outset the policy was adopted of relying solely upon indirect taxes, leaving all direct taxes for the States. At first it was thought that sufficient revenue could be obtained from customs duties, but it was very soon learned that they would be inadequate, and so excise duties were added. Only twice have direct taxes been resorted to, and with the exception of war periods customs and excises (on spirits, malt liquors and tobacco) have been, and promise long to remain, the chief source of national revenue. Nor is this without much reason. For, as Professor Adams shows, not only do they meet his requirement in the governmental selection of taxes, but they also give realization to the important fiscal principle of permanence of government revenue. To realize the other important principle—that of elasticity— Professor Adams would have a national tax on interstate commerce. However desirable such a tax may be, there would seem to be little chance of its adoption in the near future. The national system of indirect taxes is not without other important merits. For, however desirable it may be, from a theoretical point of view, that the citizen should pay a direct tax, in order to emphasize his responsibility to the government and make him watchful over expenditures, there can be no doubt, as we have seen, but that a dependency upon a direct tax would greatly cripple the efficiency of the government. Moreover, the rather indirect relation of the citizen to the national government, at least his remoteness from its operations, goes far to justify the indirect tax for national purposes. Again, if we suppose the tax to retain anything of

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permanency it will b e ' f o u n d , in the long run, fairly to distribute the burden according to ability; so far, at least, as ability is determined b y consumption. ( 2 ) State Taxes. For the same reason that customs duties and excise taxes were assigned to national r e v e n u e — that of the peculiar relations of the industry taxed to the government—there should be assigned to State revenue the taxation of corporations and quasi-public monopolies. Being dependent upon, and under the regulations of, the State governments, there is a peculiar fitness in their taxation for the purposes of State revenue. Such a tax would be difficult to evade, and would have the fiscal importance of being easily and economically collected. A t the same time it would meet the requirements of permanence and elasticity. Moreover, under conditions similar to those assumed in the case of customs and excises, there would be a fair distribution of the burden. T o these taxes might also be added the inheritance tax. Certainly, upon the principles set forth above, the inheritance tax does not properly belong to the system of national taxes. S o far as the inheritance tax is regarded as a fee for cost or value of service in the transference of property, it belongs more properly to county taxes; but so far as regarded on the principle of escheat, of co-heirship, or of guaranteeing the right of inheritance, it is very properly a State tax. As grounded upon the idea of compensation or of ability, it should be distributed between State and local governments. O n the ground of the dependence of the inheritance upon, and its control and protection by, the government, the inheritance tax belongs, again, more properly to the system of State taxes. On fiscal and economic grounds there is also reason for this disposition of the inheritance tax. Upon the whole, the inheritance tax should go into the State revenue, except, perhaps, such portion as might be necessary for the

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probate fees, or other expenses incidental to the conveyance. But we fail to see any good reason why this tax should be assigned to any specific purpose, such as State education, as suggested by Professor Adams. 1 With these two sources it is believed that ample revenue would be supplied for all of the necessary expenses of the State governments. As Dr. West says: "The experience of New York with the inheritance tax and the experience of a number of States with corporate taxes show that by these two methods of taxation alone most, if not all of the State governments, could pay all of their expenses, leaving all taxes on property to local political divisions." * (3) Local Taxes. We have left, then, for local taxation, land, houses, manufacturing plants and real estate generally; also tangible personal property and municipal licenses and franchises. Since county expenses are mainly devoted to the improvement of roads and bridges, which add materially to the value of the surrounding lands, it is very fitting that a land tax should constitute the chief source of county revenue. For township purposes there is the tangible personalty and real estate, including the real estate of corporations. While for municipal expenses we have, in addition to the property taxes of townships, municipal licenses and franchises—such as those of street railways, water works, lighting plants, etc. A special justification for this assignment of local taxes is not needed, since it is directly involved in the principles of distribution of national and state taxes. If further justification were needed it might,, perhaps, be found in the fact that in local taxation, as distinct from national or state taxation, there is some justification in the application of the benefit principle as a basis of taxation. It may be added, too, that with such a system of local taxes, where each political unit is fiscally inde1

Op. cit., p. 505.

'

Op. cit., p. 132.

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pendent, there will be an end to the evil of political units shifting their burdens upon each other b y undervaluations. T h e above outline of w h a t is c o n c e i v e d to b e a rational s y s t e m for the political distribution

of

t a x e s , it m u s t b e

admitted, is not w h o l l y free from arbitrariness.

F o r in spite

of the more or less clearly m a r k e d political divisions, the parts of our federal s y s t e m are so intimately connected, and s o c l o s e l y interdependent, that the relationship of the citizen to one of the units involves his relationship to e a c h h i g h e r and

lower unit in the s y s t e m .

There

is, nevertheless,

a

difference that is substantial e n o u g h for forming a legitimate basis for a political division of t a x e s .

If our division is in

contradiction with any of our previous principles, it is with that principle w h i c h declares that ability is the o n l y true basis of taxation, for the division is a p p a r e n t l y v e r y l a r g e l y based upon the principle of benefits.

A s to local t a x a t i o n ,

it is admitted that there is s o m e validity in the benefit principle.

But carefully e x a m i n e d it will b e seen that the c o n -

tradiction is little more than an apparent one. T h e r e can be no d o u b t

but that it is the f u n d a m e n t a l

t h o u g h t in taxation that e v e r y individual should contribute towards the s u p p o r t of the political units with w h i c h

he

stands in some direct relation, and should contribute a c c o r d ing to his ability.

T h a t such a result would follow f r o m

such a system of t a x a t i o n as that outlined

in the present

chapter, taken in c o n n e c t i o n with its political distribution, we believe that a careful analysis of p r o b a b l e results w o u l d m a k e sufficiently clear.

B u t even t h o u g h it m a y not give

realization to theoretical principles in e v e r y particular, it offers so

m a n y practical a d v a n t a g e s — r e a l i z i n g

uniformity

and equality, as well as h a v i n g political, e c o n o m i c and

fiscal

a d v a n t a g e s — t h a t it m a y well b e considered as o f f e r i n g the h i g h e s t form of the practical i d e a l ; at the same time that it c o n f o r m s substantially to the theoretical ideal.

T h e effect

PRACTICAL

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of such a s y s t e m u p o n the elimination of those personal and political factors that are the s o u r c e of so m u c h i n e q u a l i t y — fraud, corruption, undervaluations, evasions, e t c . — w o u l d

go

far to p r o m o t e the conditions o f an ideal equality, the e n d s of a c o m p l e t e justice. Finally, there are hopeful s i g n s that s u c h a s y s t e m is not always to remain a mere fiscal ideal.

T h e abuses a n d in-

equalities of present m e t h o d s are b e c o m i n g so flagrant that political parties are b e i n g forced to take c o g n i z a n c e of t h e m and

to

consider

remedies

for the

solution

of

the

evil. 1

normal s c h o o l s in the U n i t e d States and other c o u n t r i e s . T h e second g r o u p hold t h a t the most effective results are Nevertheless, the ideal is far from attainment.

T h i s is m a d e

inevitable on a c c o u n t of the great number of our

states,

their varied e c o n o m i c conditions, and the natural c o n s e r v a tism of political parties.

B u t until s o m e such s y s t e m as that

outlined in the p r e s e n t c h a p t e r is p u t into practice, w e c a n h o p e for o n l y makeshift reforms.

W i t h such a s y s t e m o n c e

in operation we shall, at least, have taken a l o n g step toward realizing the ideal e n d s of j u s t i c e in taxation, and shall h a v e attained a close a p p r o x i m a t i o n to justice, which is all that can be h o p e d for in h u m a n affairs. 1

In the State campaign in Ohio, in the fall of 1901, Mr. T o m L. Johnson, in

behalf of the Democratic party, made the issue upon the equalization of taxes. T h e present writer took occasion to write a letter for a Cleveland paper, briefly advocating the system set forth in this chapter.

In reply, letters were received

from the leader of the Republican party and from Mr. Johnson, while a D e m o cratic candidate for the legislature made a public reply.

In every case it was con-

tended that the system advocated in my letter was essentially the same as that for which they stood committed.

In the next legislature the Democratic party did

attempt to carry out some tax reforms along these lines, but their efforts were negatived by the Republican majority.

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