394. THE INCREASING COST OF GOVERNMENT.—In the United States, as in other modern civilized countries, the cost of government is steadily increasing. The settlement of the Great West, the depletion of natural resources and the transition from a primitive to an industrial economy have obliged our government to pay out larger and larger sums for the services of public officials, and for the materials and commodities used for public purposes. The growth—of our cities and the increasing complexity of our industrial life have greatly increased the number of activities which it is to our advantage to carry on, not individually, but collectively or through the agency of government. The spread of altruism and the widening of the concept of social service have caused the extension of governmental activity in such new fields as social insurance, recreation, and public health. Altogether, our total government expenditure is more than seventeen times as large as it was a half century ago, while the per capita expenditure is more than five times as great.

395. SOURCES OF PUBLIC REVENUE.—Writers on taxation generally enumerate as sources of public revenue, public industries, the public domain, gifts, confiscations, fees, special assessments, fines, and taxes. At various times and in different countries of the world, all of these have been important, but in the United States at the present time taxes are by far the most important source of public revenue.

A tax may be defined as a compulsory contribution exacted from the individual by the government, for the purpose of defraying expenses incurred for the common welfare. The government does not return to the individual taxpayer a definite commodity or service. In return for taxes the government indeed renders many valuable services, such as public education, the safeguarding of health, and protection from domestic violence and foreign war. But on account of the collective character of these services, no attempt is made to apportion the payment exacted of the individual to the benefit which he as an individual receives.

Until recently our national government secured most of its revenue from taxes on imports, and from excises or internal taxes on such commodities as tobacco and liquor. Since national prohibition went into effect (1919), the Federal revenues are derived mainly from taxes on imports, from income and inheritance taxes, and from taxes on corporations.

More than three fourths of the receipts of state and local governments are derived from the general property tax, the amounts collected from other sources being as yet relatively unimportant. The general property tax is supposed to be levied upon all the property in the possession of taxpayers, though as we shall see a little later, this tax works out very badly. The old "poll" or head tax was formerly important, but at present less than two thirds of one per cent of state and local revenues are derived from this source. In most states it is being abandoned because of its small yield, and because of the difficulty and expense in collecting it.

A. DEFECTS IN AMERICAN TAXATION

396. LACK OF A TAX SYSTEM.—The fundamental defect of American taxation is the lack of a definite and coÖrdinated system. The tax laws of most states have been radically changed during the last few decades, and are still in a process of development. In many states old taxes are being modified or abandoned, and new taxes adopted. But too often this is being done without regard for the taxation reform of other states or of the Federal government. As a result, the tax burden weighs unequally upon different classes, while between state and state, or between state and Federal government, there is an overlapping of tax power. The effect of this overlapping is to create undue confusion, and to demoralize both tax officials and taxpayers.

397. LEGAL RESTRICTIONS UPON TAXING POWER.—A serious defect of American taxation is the lack of correspondence between taxing power and fiscal needs. Let us inquire into this.

The Federal government has important functions to perform, but has practically unlimited taxing power. So far as the national government is concerned, the problem of finding sources of revenue is relatively simple.

The functions assumed by the state governments are as yet relatively few and inexpensive, while the power of the state to tax is but slightly abridged by the Federal Constitution. States have relatively little difficulty in making both ends meet.

Local governments, and especially municipal governments, have a large number of functions which are increasingly important. Of the total government expenditure in this country, about 35 per cent is made by the Federal government, 10 per cent by the state governments, and 55 per cent by the local governments. But whereas Federal and state governments have relatively adequate taxing powers, the taxing powers of local governments are narrowly restricted by the state constitution and statutes. Such local functions as health, public school education, and recreation are constantly demanding greater expenditures, yet local governments as yet have few opportunities for securing necessary funds.

398. DEFECTS IN TAX ASSESSMENT.—The defects of tax assessment are clearly illustrated in the workings of the general property tax, called by some authorities the worst tax in the civilized world. The basis of levy is the work of local assessors, who are generally elective. The assessors estimate the value of millions of dollars' worth of property, and their estimates are the basis of the tax rates for not only township and county, but generally for the state as well. Incapable and dishonest assessors often work injustice by underestimating the value of some forms of property, and overestimating the value of other forms. In addition, political pressure is brought to bear upon the assessor to cause him to undervalue the property of the township or county as a whole, so that the local unit will bear a relatively small share of the taxes of the state.

The estimates of the local assessors are commonly subject to correction by a county, and sometimes by a state, board of equalization. The duty of such a board is to make assessments uniform and just, but notwithstanding the efforts of these bodies, unequal and unfair assessments have persisted.

399. DIFFICULTY OF TAXING INTABGIBLE PROPERTY.—Where taxation is on the basis of assessment, it often happens that the tax burden rests unequally upon different forms of property. Property in tangible form, such as land, cattle, and houses, is easily discoverable, and hence cannot easily evade the payment of taxes. But intangible property, such as bonds, stocks, or mortgage, can easily be hidden, so that owners of this type of property often evade their share of the tax burden.

This evasion is often practiced in the case of the general property tax, which is intended to reach both tangible and intangible property. The general property tax worked well a century ago when the greater share of wealth existed in tangible form, because local assessors could easily locate such things as land and live stock. But the rapid development of corporations, bringing with it a rapid increase in the proportion of intangible forms of property, has rendered the general property tax grossly unjust. The assessors of the general property tax cannot easily discover intangible property, unless taxpayers coÖperate with them. The all too frequent lack of such coÖperation causes a disproportionate share of the tax burden to fall upon tangible property. The general property tax is haphazard, ineffective, and demoralizing to both tax officials and taxpayers.

400. DOUBLE TAXATION.—By double taxation is meant the taxation of an individual or different individuals twice for the same thing. Double taxation is of two kinds.

The first type of double taxation is illustrated by the taxation of both tangible property and the paper claim upon that property. For example, a state may tax a land-owner on his land, and also tax another resident of the state on the mortgage which he holds against that land. Or it may happen that a state will tax the land, buildings and other tangible equipment of a corporation, and at the same time tax those of its residents who hold stock in that corporation, i.e. individuals who hold paper evidence of ownership in the tangible equipment of the corporation. More generally, however, this type of double taxation arises when the holder of the paper claim resides in one state, while the tangible property lies in another state. In such a case, it is common for one state to tax the paper claim, and for the other state to tax the property itself. This type of double taxation is manifestly unfair, and often imposes a ruinous burden upon property.

The second type of double taxation is illustrated by the overlapping of similar taxes between state and state, or between Federal and state governments. Because it is the practice of most states to seek revenue without regard to the taxing activities of other states, or of the Federal government, it may happen that corporations, incomes, or inheritances are taxed by more than one agency of government. If a scientific and coÖrdinated tax system were deliberately to provide for this, the supposition would be that such taxation were reasonable and just, because intended to bear with equal weight upon all forms of property in the taxable class. But because such taxation is haphazard, it bears with unequal weight upon corporations and individuals, and is therefore unjust.

Moreover, it encourages the evasion of tax burdens. Individuals and corporations sometimes migrate from localities or states in which they are subject to double taxation, to localities or states in which the danger of such taxation is less. This in turn has the evil effect of tempting states and municipalities to neglect taxes on corporations, incomes, and inheritances for the sake of attracting wealthy individuals and large industrial organizations from neighboring areas.

B. SOME SUGGESTED TAX REFORMS

401. IDEALS OF TAXATION.—Summarizing the views of the more generally accepted writers on taxation, we may say that the following are the basic ideals in taxation:

Taxes should take as little as possible from the people and still meet the needs of government. Taxes should be uniform, that is, all taxable articles of the same class should be levied upon at the same rate. It is also important that the time, manner, and amount of the tax should not be arbitrary, but that the individual's convenience as regards the terms of payment should be considered. From the standpoint of the government, taxes should be easy to administer and economical to collect.

A good tax system will be elastic, so that taxes may easily be increased or decreased, according as the revenue needs of the government change. The ability to pay ought to have some influence upon the extent to which an individual is taxed. Taxes should adapt themselves somewhat to the local sentiment as to what is expedient or socially desirable.

Finally, taxation policies should be systematized and coÖrdinated.

402. ESSENTIALS OF A TAX SYSTEM.—The construction of an ideal tax system in this country would involve three steps.

In the first place, each branch of government should be enabled to secure revenues actually needed for justifiable purposes. In this regard the greatest need is to increase the taxing powers of our municipalities. This is imperative if the cities of the future are to care for their citizens properly.

A second fundamental step relates to the separation of taxing power. Each branch of government should pretty well confine its use of the taxing power to definite types of taxable wealth. The Federal government, for example, might secure most of its revenue from import duties, excises, an income tax, and stamp taxes of various kinds. Many taxation experts believe that the states ought to confine themselves mainly to license, corporation, inheritance, and, possibly, income taxes. Local governments might well secure most of their revenue from taxes on franchises, licenses, and real estate. Such a separation of taxing power might aid in the adjustment of fiscal needs to taxing power, as well as helping to remedy the evil of double taxation. However, a complete separation of taxing powers is not necessarily desirable, and certainly it is not practicable, for there is a growing tendency toward duplication in income, inheritance, and other taxes. At the present time, for example, not only the Federal government, but many of the states levy income and inheritance taxes.

A third fundamental step would be the coÖrdination of local, state, and Federal taxing authorities. The central aim of such coÖrdination should be so to distribute tax burdens that no form of taxable wealth would escape its just burden, and so that no form of wealth would be subjected to unduly heavy taxation. There is a growing feeling that to prevent double taxation and similar evils, all local taxing bodies ought to be coÖrdinated under the state authorities, while for similar reasons the Federal government ought to have some measure of direction or control over that share of state taxation which is interstate in its effects.

403. REFORM OR ABOLITION OF THE GENERAL PROPERTY TAX.—The reform of state and local taxation logically begins with the general property tax.

In many states attempts are being made to reform this tax. In some cases "tax ferrets" are employed to discover tax evaders, a policy which may easily lead to corruption and favoritism. In other states the conviction is growing that local elective assessors ought to be supplanted by a permanent corps of state assessors, appointed under the merit system. This would reduce the danger of unequal and unfair assessments.

In other states there is a tendency to abandon the general property tax altogether. In New York, Massachusetts, Pennsylvania, and other states, there is a marked tendency to turn over the general property tax to local governing bodies. In such cases it is intended that the state shall depend for most of its revenue upon income, corporation, inheritance, and license taxes.

The future will doubtless see a more widespread tendency toward the reform or abolition of the general property tax. In some states, however, such changes in the taxation system require constitutional amendment, and constitutional amendment is often a slow and tedious process.

404. REFORM IN LAND TAXATION.—Coupled with plans for the reform or abolition of the general property tax are proposals for the reform of land taxation. A primary aim of these proposals, some of which suggest elements of the single tax doctrine, is to secure a more correct assessment of land values. In many cases a state does not now tax the holder of a mortgage when the mortgaged land is also within the state and thus directly subject to taxation. This is a desirable development, but we ought to go still further, so that the holder of a mortgage would not be taxed whether or not he lived in the same state as the owner of the land. A mortgage is obviously not social wealth, but a paper claim on wealth, and this wealth ought not to be taxed twice.

Some authorities believe that the tax rate on land ought substantially to be increased, when it appears that such land is being held for speculative purposes. To encourage improvements, it is also proposed that certain permanent improvements on land be temporarily exempted from taxation. Lastly, it would appear socially desirable to levy special taxes on urban sites, so as to secure for the community some share of the future unearned increment.

405. THE INCOME TAX.—All taxes ultimately come out of income, but when we speak of an income tax we refer to a direct levy upon income as it arises, chiefly in the form of wages, salaries, and profits. A Federal income tax was levied during the Civil War, but in the nineties the Supreme Court held that such a tax violated the constitutional provision that Congress shall not lay direct taxes except in proportion to the population of the states. In 1913 the Sixteenth Amendment to the Constitution permitted Congress to lay and collect taxes on incomes without apportionment among the several states, and without regard to any census or enumeration.

Since 1913 Congress has passed several income tax laws, and a number of the states have also adopted this form of taxation. The essential features of these laws are as follows. Incomes below a certain amount are exempt from taxation. The limit of untaxable income is raised for married persons living together. In calculating their net income, individuals may make allowance for debts, business expenses, and certain other items. Upon all taxable income above a certain minimum there is then levied a flat rate, constituting a "normal" tax. Where incomes exceed a certain amount, there is an additional tax. Thus the income tax is said to be "progressive," that is, the larger the income the higher the tax rate.

Many benefits are claimed for the income tax. It falls upon those best able to pay, and it is not easily evaded or shifted by the person upon whom it is levied. It is elastic and can readily be increased or reduced according as revenue needs change. Its progressive character is a feature which is considered socially desirable.

The chief defects of the income tax are two. In the first place, the effectiveness of the tax depends upon the willingness of the individual to declare his full income. This is not always done, especially where the income tax is regarded as an undue interference in the private affairs of the individual. Second, wealthy individuals often migrate to states where there is either no income tax or only a relatively light one. This last defect of course applies only to the state income tax.

406. THE INHERITANCE TAX.—Taxes upon inheritances have come into prominence since the opening of the twentieth century. Since 1916 the Federal government has levied an inheritance tax. At the present time most of the states also levy this form of tax upon property passing by will or under the inheritance laws of the state. The essential features of the tax are everywhere the same. Small legacies are generally exempt. Legacies to direct heirs are either exempt, or are taxed at a lower rate than are legacies to collateral heirs. The rates are progressive, that is to say, they increase with the size of the legacy.

Many benefits are claimed for the inheritance tax. It brings in a large revenue, and falls upon those who are best able to pay. The tax cannot be shifted and it cannot easily be evaded. It is easily assessed and collected, because all wills must pass through the probate court. It is held that the state has a social claim upon the property of an individual who has amassed wealth under the protection of its laws, and that this property ought not to be transferred intact to those who did not aid in its accumulation.

If carried too far the inheritance tax would undoubtedly discourage the accumulation of wealth, but tax authorities are already guarding against this danger. On the whole, the inheritance tax is an important addition to our tax system. Its scope is being rapidly extended: rates are being raised, the principle of progression is being more frequently applied, and exemptions allowed direct heirs are being reduced. The tax is increasingly used in the effort to redistribute unearned wealth, though the extent to which this is true depends very largely upon local sentiment.

407. CORPORATION TAXES.—The rapid growth of American industry has been accompanied by an enormous increase in the number and importance of industrial corporations. The proper taxation of these bodies is now challenging the attention of both state and Federal governments.

The difficulties of taxing corporations are two: First, how to prevent that form of double taxation which results from the fact that several states may levy taxes of varying weight upon interstate corporations. Second, how to prevent that form of double taxation which imposes a burden both upon the tangible property of the corporation and upon the stocks and bonds representing ownership in that tangible property.

A number of taxation experts suggest meeting the last-named difficulty by exempting from taxation stocks, bonds, and other securities, and by imposing, instead, a tax directly upon the capitalization of the corporation itself. In the case of corporations which are local and of moderate size, this might be effected by the reform of tax laws within a single state. Where, on the other hand, corporations are distinctly interstate in character, such reform would require either a careful coÖrdination of the tax laws of the several states, or a corporation tax which should be purely Federal in character.

The first difficulty mentioned above would likewise have to be met, either by the coÖrdination of state tax systems, or by allowing taxes on interstate corporations to be levied solely by the Federal government.

It is claimed by some economists that the virtual impossibility of effectively coÖrdinating the tax laws of the various states renders it imperative that all interstate corporations be taxed solely by the Federal government. In such a case the Federal government would be taxing interstate corporations partly for its own benefit, and partly as the agent of the various states. It is said also that such a Federal tax should be levied on corporations at the source, i.e. upon capitalization rather than upon stocks and bonds. Being applied at the source, it would reach all forms of corporation wealth. It would be easy and economical to administer. So far as corporations are concerned, a purely Federal tax on interstate corporations might prevent both forms of double taxation.

Even though the states consented to a purely Federal tax on interstate corporations, however, it might prove difficult for state and Federal governments to agree upon a fair division of the joint revenues derived from such a tax.

QUESTIONS ON THE TEXT

1. Why is the cost of government increasing?

2. Name some sources of public revenue.

3. What is a tax?

4. What is the fundamental defect of American taxation?

5. In what way is there an inadequate apportionment of taxing power to fiscal needs in American government?

6. What is the chief difficulty of tax assessment?

7. Why is it difficult to tax intangible property?

8. Enumerate the fundamental defects of the general property tax.

9. Distinguish between the two forms of double taxation.

10. Outline some fundamental ideals in taxation.

11. What are the three steps necessary in the formulation of a satisfactory tax system in this country?

12. To what extent is the general property tax being reformed or abolished?

13. Discuss the reform of land taxation.

14. Describe the nature of the income tax.

15. What are the benefits and defects of such a tax?

16. Describe the inheritance tax. What are its benefits? What are its dangers?

17. What are the two difficulties in the way of taxing corporations? What are some suggested methods of meeting these difficulties?

REQUIRED READINGS

1. Williamson, Readings in American Democracy, chapter xxxii.

Or all of the following:

2. Bullock, The Elements of Economics, chapter xv.

3. Ely, Outlines of Economics, chapter xxxiv.

4. Fetter, Modern Economic Problems, chapter xvi.

5. Guitteau, Government and Politics in the United States, chapter xvii.

QUESTIONS ON THE REQUIRED READINGS

1. Classify the purposes of public expenditures. (Guitteau, pages 187- 188.)

2. What is the "police function" of government? (Fetter, page 241).

3. What is a franchise tax? (Guitteau, pages 201-202.)

4. What is the "magic fund" delusion? (Bullock, page 370.)

5. Distinguish between proportional, regressive, and progressive taxation. (Bullock, page 373.)

6. What is an excess profits tax? (Bullock, pages 382-383.)

7. What is the importance of the license tax? (Bullock, pages 392- 393).

8. Distinguish between direct and indirect taxation. (Ely, pages 710- 711.)

9. What are "taxes on transactions"? (Ely, pages 719-720.) 10. What is meant by the shifting or incidence of taxation? (Fetter, pages 252- 253.)

TOPICS FOR INVESTIGATION AND REPORT

I

1. Make a list of enterprises supported out of public funds and providing services free to all, regardless of the payment of taxes.

2. Discover which of the following taxes are levied in your state: general property tax, income tax, inheritance tax, poll tax, license tax, transaction tax, sales tax, luxury tax, mortgage tax, franchise tax, excess profits tax.

3. Are tax assessors in your locality appointed or elected? Are there county or state boards of equalization in your state? How are these boards chosen?

4. Interview a friendly tax assessor concerning the difficulties of determining property values. Does he believe that people systematically undervalue their own property? What proposals does he make for the reform of the present method of assessment?

5. Interview a friendly taxpayer. What is his attitude toward the poll tax? the general property tax? the income tax? What proposals does he make for the reform of taxation in your state?

6. The general property tax in your state.

7. Status of the income tax in your state.

8. Status of the inheritance tax in your state.

9. The taxation of corporations in your state.

II

10. Federal revenues. (Guitteau, Government and Politics in the United States, chapter xxix.)

11. Public expenditures. (Ely, Outlines of Economics, chapter xxxi; Seager, Principles of Economics, chapter xxvi; Plehn, Introduction to Public Finance, Part II, chapter i; Bullock, Selected Articles on Public Finance, chapter iii; Ford, The Cost of Our National Government.)

12. The power of Congress to tax. (Young, The New American Government and its Work, chapter v; Beard, American Government and Politics, chapter xiii.)

13. Taxation in American cities. (Annals, vol. xxviii, pages 155- 172.)

14. Personal taxes. (Fetter, Modern Economic Problems, chapter xviii.)

15. The poll tax. (Bullock, Selected Articles on Public Finance, chapter x.)

16. Breakdown of the general property tax. (Taussig, Principles of Economics, vol. ii, chapter lxix.)

17. Protection against improper state taxation. (Young, The New American Government and its Work, chapter xxv.)

18. Double taxation. (Seligman, Essays in Taxation, chapter iv.)

19. The corporation tax. (Seligman, Essays in Taxation, chapters vi and vii.)

20. Separation of state and local revenues. (Seligman, Essays in Taxation, chapter xi; Bullock, Selected Articles on Public Finance, pages 445-460.)

21. Excises. (Plehn, Introduction to Public Finance, chapter vi.)

22. Customs duties. (Plehn, Introduction to Public Finance, chapter vii.)

23. The excess profits tax. (Annals, vol. lxxvii, pages 147-159.)

24. The incidence of taxation. (Plehn, Introduction to Public Finance, chapter xi.)

25. Financing the United States in the World War. (Plehn, Introduction to Public Finance, Part iv; Annals, vol. lxxvii, all.)

FOR CLASSROOM DISCUSSION

26. As a principle of taxation, which is more important, the payment of taxes according to the benefit derived, or payment according to ability?

27. What is the remedy when individuals conceal from the tax authorities the amount of their intangible wealth?

28. Does the income tax constitute an undue interference in the private affairs of the individual?

29. To what extent does the inheritance tax tend to discourage the accumulation of wealth?

30. To what extent should the poor be taxed?

31. Can the adequate taxation of corporations be secured without resorting to a corporation tax which shall be purely Federal in character?

32. Should the national debt be paid? (See Bullock, Selected Articles on Public Finance, chapter xxiv.)