By the Late Hon. DAVID A. WELLS.

PART III (concluded).

The universal and admitted failure of the general property tax to attain good results and the great difficulty, indeed the impossibility, of reducing it to a form in which it can operate with efficiency and an approach to justice, must lead to its abolition and the gradual substitution of other and more simple taxes. However well adapted to a community in which the taxable property was in evidence and easily assessed for purposes of taxation, it becomes antiquated, unequal, and inquisitorial in a people where credit and credit investments have been highly developed, and where the greater social activities, whether in commerce or industry, transportation or production, are conducted by corporations issuing various kinds of securities, none of which can easily be reached by a taxing authority away from the center of incorporation. To undertake to include these securities, evidences of debt, or obligations in a general property tax is to invite evasion, put a heavy inducement on concealment, and, whenever effective, to give rise to shocking inequalities of burden. The widow and orphan, whose property is in the hands of a trustee, pay the full tax; in any other direction the holder of stocks or bonds, money or notes, escapes according to the elasticity of his conscience. The very exemptions recognized by law give an opportunity for new evasions, based upon analogy or upon some technicality under which the business is conducted. Bonds of the United States, the legal-tender notes, or money are beyond the reach of State authorities for the purpose of taxation. In the same category come also all imported goods in original packages, in the possession of the importers, and all property in transit. These exemptions alone amount to thousands of millions of dollars, and the tendency has been to increase the number of items exempted. But every such exception under the law adds to the burdens of the honest taxpayer, and every evasion of taxation also renders his charge the greater. Here is not distributive justice, but concentrated injustice.

Another large proportion of the personal property owned by the citizens of the State is of the most intangible character, and in great part invisible and incorporeal, such, for instance, as negotiable instruments in the form of bills of exchange, State, municipal, and corporate bonds, and, if actually situated in other States, exempt from taxation where they are held; acknowledgments of individual indebtedness, and a number of similar matters. All property of this character is, through a great variety of circumstances, constantly fluctuating in value; is offset by indebtedness which may never be the same one hour with another; is easy to transfer, and by simple delivery is, in fact, transferred continually from one locality to another, and from the protection and laws of one State to the sovereignty and jurisdiction of some other. It is not to be wondered, therefore, that all attempts to value and assess this description of property have proved exceedingly unsatisfactory, and that nearly every civilized community, with the exception of the States of the Federal Union, have long ago abandoned the project as something wholly inexpedient and impracticable.

The differences among the States in the interpretation of residence, of the situs of the property taxed, are also an objection to this system and an obstacle to its application. The want of uniformity can not be abolished by enactments of law, because absolute uniformity of laws would not insure as uniform interpretation of their provisions. The rules for assessment are uniform for the officers of a State, but the returns made involve such differences in the application of the rules that one is forced to the conclusion that a misunderstanding of the spirit of the law exists, coloring differently the view of each returning officer. Discrimination against the county or municipality and discrimination against the individual are to be met at every turn. No wording of the law can eliminate this personal judgment of each assessing authority, and the supervision of the returns by State boards of equalization has introduced an even greater departure from justice, as a majority, based upon selfish interests, may be had, and its decision may readily be defended as based upon good and sufficient reasons. An appeal to the last resort, the higher courts, may produce redress against unjust assessments, but each case must be decided upon its merits, and only under very exceptional circumstances—as in the recent case at Tarrytown, New York, where striking and general, even personal, spite had been shown in the tax levy—can a number of taxpayers find it their interest to combine and carry the question into the courts for adjudication.

Imperfect in theory, the machinery of the general property tax is imperfect. With at present fully two thirds of the personal property of the State exempted from taxation by law or by circumstances growing out of its condition, or the natural depravity and selfishness of the average taxpayer, and with a large part of the other third exempted by competing nations or neighboring States, what becomes of the theory so generally accepted in the United States that in order to tax equitably it is necessary to tax everything? A very slight examination leads to the conclusion that it is the most imperfect system of taxation that ever existed; that, with the exception of moneyed corporations, it is a mere voluntary assessment, which may be diminished at any time by an offset of indebtedness which the law invites the taxpayers to increase ad infinitum, borrowing on pledge of corporate stocks, United States bonds, legal-tender notes, etc., all exempt from taxation; that its administration in respect to justice and equity is a farce and more uncertain and hazardous than the chances of the gaming table; and that its continuance is more provocative of immorality and more obstructive of material development than any one agency that can possibly be mentioned. A stringent enforcement only leads to greater perversions and a wider evasion. A lax enforcement does not reduce its inequalities and general want of application to actual conditions.[10]

The problem, then, is what taxes to introduce in place of this confessed failure of the general property tax.

There can be little doubt that the desire for greater simplicity in taxation is generally felt, and in part put into practice. The mass of various kinds of imposts, added without any system or real connection or relation one to another, has often resulted in so large a number of charges on Government account as to defeat itself. The French taxes at the end of the last century, with their added fault of inequality and injustice in distribution, led naturally to the theory of a single tax—the impÔt unique of the physiocrats—which did not become a fact, yet registered the protest against the multiplicity and crying oppressiveness of the remains of feudal dues and fiscal experiments undertaken under the stress of an empty treasury. So it has been noted at the present time that where an opportunity has offered there is a tendency in European countries to simplify their taxes, and, as in the case of Switzerland, prepare the way for income and property taxes. It is a greater dependence on such direct taxes in place of indirect taxes that has distinguished the great fiscal changes in recent years. Germany may have wished to establish a brandy monopoly, and Russia may resort to a monopoly of the manufacture and sale of distilled spirits. But England increases her death duties, France and the United States seek to frame acceptable taxes on income, and Switzerland succeeds in modifying her system in the line of direct taxes.

There is an earnest movement in favor of a single tax on the value of land, exclusive of other real property connected with it. As involving a question of abstract justice the proposition has much in its favor, but it can not be denied that practical obstacles oppose its adoption. The recent commission on taxation in Massachusetts thus treats of it: "It proposes virtually a radical change in the ownership of land, and therefore a revolution in the entire social body. In this form of taxation all revenue from land alone is to be appropriated—that is, the beneficial ownership of land is to cease. Whether or not this system, if it had been adopted at the outset and had since been maintained, would have been to the public advantage may be an open question, but it would certainly seem to be too late now to turn to it in the manner proposed. In any event, it involves properly not questions of taxation, but questions as to the advantage or disadvantage of private property in land."[11]

If securities are to be taxed, the methods adopted should avoid a double taxation, and an attempt to reach capital outside of the State. It is evident that a State, like Massachusetts, which taxes the foreign holder of shares in its corporations as well as the shares of foreign corporations held by its own citizens, is inviting a dangerous reprisal from other States. "Wherever the owner may be, if the corporation is chartered within the State the Commonwealth collects the tax on the shares. Wherever the corporation may be, if the owner is within the State the Commonwealth also collects the tax (in theory of law at least)." If this be the best possible system, and it is supposed Massachusetts assumes it to be, general double taxation would follow its adoption by the other States. The effort to carry this rule into practice proves its injustice as well as futility. The most searching and inquisitorial methods of seeking such property will not avail to reach a good part of it, and this results in adding inequality of burden to its other difficulties. Evasion is too simple a process to be unused, and the heavier the rate of tax the greater will be the resort to evasion and even to perjury, express or implied. The fundamental cause of the failure lies in this, "the endeavor to tax securities, which are no more than evidences of ownership or interest in property, and which offer the easiest means of concealment and evasion, by the same methods and at the same rate as tangible property situated on the spot."

This inherent difficulty can be cured only by abandoning the attempt to tax directly securities or evidences of debt, representing ownership or interest in property beyond the limits of the taxing authority. In the case of the securities of home companies they may be readily taxed at the source, but in the case of foreign corporations it is only by methods almost revolting in their injustice and treatment of the taxpayer that even a partial success can be secured. The dependence upon the sworn statement or declaration of the taxpayer is known to be extremely faulty and to offer a premium on untruthfulness. So long as this dependence is retained in whole or in part in a system for taxing personal property, the results must be unsatisfactory. The most judicious, even if it seems the most radical, remedy is to abandon the taxation of securities. Certainly it would be well to put an end to the Massachusetts plan of taxing securities representing property outside of the State, for that involves double taxation wherever it has been possible to impose the tax. What can be reached only by methods at all times trying and difficult, and sometimes very demoralizing, should not be permitted to remain a permanent feature of the revenue system of a State.

The New York commission of 1870 proposed to limit the State taxes to a very few number of objects. That they be "levied on a comparatively broad basis—like real estate—with certainty, proportionality, and uniformity on a few items of property, like the franchises of all moneyed corporations enjoying the same privileges within the State, and on fixed and unvarying signs of property, like rental values of buildings"—such was the scheme proposed. The leading object to be attained was equality of burdens, and a second object of quite as great importance, was simplicity in assessment and collection. Granting that real estate, lands, and buildings were taxed on a full and fair market valuation, and that corporations contributed their share toward the expenses of the State, it remained to devise a tax that should reach all other forms of property that could be properly and easily assessed. This tax was to be known as the "building-occupancy" tax, and was to be levied on an additional assessment of a sum equal to three times the annual rent or rental value of all the buildings on the land.[12] Nearly thirty years later the Massachusetts commission proposed a modified form of this tax. An annual rental value of four hundred dollars was to be exempt from taxation, but ten per cent was to be levied on all rental values in excess of that amount.

"The advantages of a tax on house rentals," said the commission, "can be easily stated. It is clear, almost impossible of evasion, easy of administration, well fitted to yield a revenue for local uses, and certain to yield such a revenue. It is clear, because the rental value of a house is comparatively easy to ascertain. The tax is based on a part of a man's affairs which he publishes to all the world. It requires no inquisition and no inquiry into private matters; it uses simply the evidence of a man's means which he already offers."[13] If this tax were to be given it would be possible to wipe out all the tax on incomes from "profession, trade, or employment," to abolish the existing assessments on personal property. The effects would be far-reaching. If loans of money are free from taxation, the purchasing power of money in the same degree must diminish, which simply means that the purchasing power of farms and products of farms for money must to the same extent increase; hence, the borrower on bond and mortgage will not be subject to double taxation—first, in the form of increased rate of interest, and then in taxation of his real estate—and hence the farmer or landowner who is not in the habit of either lending or borrowing money will find his ability to meet additional taxation on his land increased in additional value of land and products of land in proportion as the tax is removed from money at interest. Also, the exemption of the products of farms and things consumed on farms from taxation will give a corresponding increased value to compensate for the "building-occupancy" tax. Tenants controlled by all-pervading natural laws can and will give increased rents, if their personal property is exempt primarily from taxation. The average profits of money at interest or of dealings in visible personal property free from taxation can not exceed, for any considerable length of time, the average profits of real estate, risk of investment and skill in management taken into consideration; and therefore the real pressure of taxation under the proposed system will finally be, like atmospheric pressure or pressure of water, on all sides, and by a natural uniform law executed upon all property in every form used and consumed in the State. Persons must occupy buildings and business must be done in buildings, and through these visible instrumentalities capital can be reached by a rule of fractional uniformity, and by a simple, plain, and economical method of assessment and collection.

This building-occupancy tax, or tax on rental value, does not preclude a supplementary tax on corporations.

Much has been said of the onerous burdens of taxation endured by individuals compared with those of corporations, and especially corporations enjoying certain rights or franchises in public streets and highways or corporations of a more or less public character. The phenomenal growth of municipalities has been one of the notable social movements of the last twenty-five years. The drift of population from the country districts to cities has increased with each year, and finds an explanation in many causes. The opportunities offered in a city for advancement are greater and more numerous; the monotony of the farm life does not keep the young at home, but drives them for excitement and profit to the great centers of population. The economic changes of a half century also have their influence. The competition of new regions, better adapted for certain cultures on a commercial scale, has reduced the profitableness of older and more settled localities, where comparatively costly methods must be resorted to if the fertility of the land is to be maintained. The wheat fields of the West narrowed the margin of profit in New England farming, while the sheep and cattle ranges of the West made it impossible for the same quality of live stock to be raised for profit in the East. Farms were abandoned, and the younger blood went West to grow up with the country, or into the cities to struggle for a living. Further, the advances in agriculture, the application of more productive methods, and the introduction of machinery have reduced the demand for labor in the rural districts, and this has led to a migration to the cities.

The result of this has been an immense development of city life, and with it an ever-increasing field for investment in corporate activities. The supply of water is usually in the city's control, but the manufacture and sale of gas, the production and distribution of electricity, the street railways, telegraph, and telephone interests are private corporations formed for profit and using more or less the public highways in the conduct of their various enterprises. A grant of a street or highway for a railway or electric-wire subway generally involves a monopoly of that use, and the privilege or franchise may become more valuable with the mere growth in the population of the cities. Assured against an immediate competition, there is a steady increment in the value of the franchise, and in the case of a true monopoly there seems to be no limits to its possible growth.An instance of this nature is so striking in its relations and so pertinent to the present discussion that attention is asked to it. In the reign of James I water was supplied by two or three conduits in the principal streets of London, and the river and suburban springs were the sources of supply. Large buildings were furnished with water by tapping these conduits with leaden pipes, but other buildings and houses were supplied by "tankard bearers," who brought water daily. A jeweler of the city, Hugh Myddleton by name, believed something better could be done, and he proposed to bring water from Hertfordshire by a "new river." He embarked in the undertaking, sank his fortune in its conduct, and appealed to the king for assistance. James granted this aid, taking one half of the shares of the company—thirty-six out of the seventy-two shares into which it was divided. The shares that remained received the name of "adventurer's moiety." The work was completed in 1613, and water was then let into the city.

So little was the measure appreciated that its first years were troublous ones for the shareholders. The squires objected to the river, believing it would overflow their lands or reduce them to swamps and destroy the roads. The city residents adopted the use of the water slowly. The shares were nominally worth £100 apiece, but for nearly twenty years the income was only 12s., or $3, per share. In 1736 a share was valued at £115 10s., and by 1800 it had risen to £431 8s. With the first years of this century the company prospered, and its benefits were widely applied, reflecting this change in the value of its capital. In 1820 a share was worth £11,500 and in 1878 the fraction of a share was sold at a rate which made a full share worth £91,000. In 1888 the dividend distributed to each share was £2,610. Eleven years later, in July, 1889, a single share was sold for £122,800, or nearly $600,000. The nominal capital of the company in 1884 was £3,369,000, and besides its water franchise it holds large estates and valuable properties. While the actual real estate controlled by the corporation accounts for some of this remarkable rise in the value of the shares, a greater and more lasting cause was the possession of an almost exclusive privilege or franchise which assured a handsome and ever-increasing return on the investment. Had all the other property been deducted from the statement of the company's assets, there would have remained this intangible and immeasurable right created and conceded by its charter and long usance.

A definition of a franchise has been given by the Supreme Court in terms of sufficient general accuracy to be adopted: "A franchise is a right, privilege, or power of public concern which ought not to be exercised by private individuals at their mere will and pleasure, but which should be reserved for public control and administration, either by the Government directly or by public agents acting under such conditions and regulations as the Government may impose in the public interest and for the public security."[14] A necessary condition, then, is a public interest in the occupation or privileges to be followed. The good will of a person or individual trader is not a franchise in this sense, though a franchise may be enjoyed by an individual as well as by a corporation, and good will may rest upon the privilege implied in the franchise.

The recognition of franchises, a species of property "as invisible and intangible as the soul in a man's body," as a proper object for taxation is now beyond any dispute. It is peculiarly appropriate as a source of revenue for the exclusive use of the State, inasmuch as the grant of franchises emanates from the State in its sovereign capacity. In the case of Morgan vs. the State of Louisiana, Justice Field, of the Supreme Court of the United States, said: "The franchises of a railroad corporation are rights or privileges which are essential to the operation of the corporation and without which its roads and works would be of little value, such as the franchise to run cars, to take tolls, to appropriate earth and gravel for the bed of its road, or water for its engines, and the like. They are positive rights or privileges, without the possession of which the road or company could not be successfully worked. Immunity from taxation is not one of them."[15] Further, the extent to which this taxation of franchises may be carried rests entirely in the discretion of the taxing power, subject only to constitutional restrictions.

The great difficulty in applying such a tax lies in the methods of reaching an understanding on the value of the franchise. How can this indefinite something be made visible on the tax books? In many instances the franchise may be regarded as inseparable from the real property of the corporation. The rails of a tramway, the poles and wires of a telegraph company, the pipes and conduits of a gas company, are real and tangible things, necessary to a proper conduct to the respective functions of the corporations. But the right to lay tracks in the public streets, to sink pipes under the streets, or to string wires overhead is as necessary a possession and as essential to the performance of what the corporation was created to accomplish. Whether this permits the franchise to be regarded as "real estate" and so offers it for taxation is a question of some theoretical interest, but of little practical importance.[16] Unless the franchise is regarded in this way, as belonging to real estate, or as forming a taxable entity apart from other property, it would be simpler to reach it through a corporation tax in one of the many ways open for applying that tax.

Enough has been said to demonstrate the extremely faulty condition of tax methods in the United States. Uniformity is highly desirable, but equality of burden is even more to be desired. The advances in this direction have been few, and accomplished only partially in a few States. The machinery for making assessments is only a part of the problem, as the intention of the law, the spirit of the act, is of even higher importance in securing justice and moderation. If these essays, incomplete as they must of necessity be, have led to a better comprehension of the chaotic condition existing now and of the difficulties to be overcome, their object will have been attained. The remedy may be left for time to effect.

In connection with the celebration of the centenary of the death of the naturalist Lazaro Spallanzani, at Reggio, Italy, in February last, a booklet has been published containing articles on various aspects of the life and work of Spallanzani and matters associated with him. Among the authors represented are Mantegazza, Ferrari, and others well known in Italian science.