OUTLINES OF PUBLIC FINANCE OUTLINES OF PUBLIC FINANCE Copyright, 1921, by Harper & Brothera Printed in the United States of America P-TT TO EVANGELINE GROVES HUNTER MY CONSTANT AID AND INSPIRATION 48338 CONTENTS PAGE PREFACE xv CHAPTER I. INTRODUCTION 1 Public Finance Has Distinguishing Characteristics The Word Finance Has No Definite Meaning Public Finance Is a Division of Economics Public Finance Is Related to Other Sciences Different Methods of Study May Be Used The Systematic Study of Fiscal Problems Began in Italy French and German Scholars Followed Italian Writers in the Study of Fiscal Prob- lems Modern Fiscal Systems Have Well-defined Characteristics The Interest in Public Finance Is Increasing Public Finance May Be Studied Under Different Heads Supplementary Read- ing Should Be Followed. CHAPTER II. CHARACTERISTICS OF PUBLIC EXPENDITURES ... 22 Revenue Has Received More Study than Expenditures Early Writers Did Not Entirely Neglect Public Expenditures Early Systems of Expenditure Were Simple The Nature of Public 4- Expenditure Differs from Private Expenditure The Nature of Public Expenditures Has Changed with Changes in Forms of Government The Universal Tendency of Public Expenditure V Has Been to Increase Increase in Public Expenditure Is Not Confined to Any Political Unit Expenditures in the United States Show an Upward Trend Increasing Expenditures Can- , not Be Considered Apart from Other Factors Many Causes Are Responsible for the Growth of Public Expenditures Public Ex- penditures Supply the Less Material Wants All Public Ex- penditures Cannot Be Justified Public Expenditures Have Im- portant Economic Effects An Accurate Comparative Study of Public Expenditures Is Difficult Attempts to Find a Proper --- Proportion of Expenditure to National Income Have Failed. CHAPTER III. CLASSIFICATION OF PUBLIC EXPENDITURES ... 46 Many Bases Have Been Used in Attempting to Classify Ex- penditures Some Attempts at Classification Have Been Un- satisfactory The United States Census Bureau Classifies Ex- - penditures Expenditures May Be Divided into Four Classes, According to Benefit Conferred Important State Services Are Found in Each Class of Expenditure Reference to Statistics Shows Relative Importance of Principal Expenditures Expendi- viii CONTENTS PAGE ture for Protection Is an Important Item States and Cities Make Expenditures for Protection Expenditures for the Gen- eral Government Are for the Common Benefit Consular and Diplomatic Services Have Been Expensive Expenditures for Education Have Been Large Highways Are an Important Cause of Public Expenditure The Regulation of Private Indus- try Is an Item of Increasing Importance Many Miscellaneous Expenditures Are Made for the Common Benefit The Cost of Providing for Dependents, Defectives, and Delinquents Is Large Governments Often Give Pensions and Bounties to Individ- uals Some Expenditures Are for Individual as Well as Common Benefit Some Expenditures Are Primarily for the Individual. CHAPTER IV. THE DEVELOPMENT OF PUBLIC REVENUE .... 74 Most Demands of the Modern State Are Monetary Gratuitous Services to the State Are Unsatisfactory Public Revenues Re- ceived Many Early Classifications The Question of Public Lands Has Been Important The United States Has Disposed of Her Public Lands Agitation for the Public Retention of Forests and Mines Has Been Increasing States May Success- fully Conduct Some Forms of Industry The Post Office Is a Good Example of Government Enterprise States Enter Many Fields of Activity Public Ownership Has Had Most Rapid Ex- tension in Municipalities Revenue Has a Place of Relatively Small Importance in Modern Public Enterprise The United States Census Bureau Classifies Revenues Statistics Show the Rapid Growth in Revenues Secured by Governments The Majority of Modern Revenue Is Secured by Compulsion. CHAPTER V. TAXATION 97 Many Ideas of Taxes Are Inaccurate Some Terms Used in Con- nection with Taxes Are Important The Economic Effect of Taxes Has Received Much Consideration Adam Smith Gave Four Maxims in Regard to Taxes Many Attempts Have Been Made to Classify Taxes-praxes May Be Justified but Not Meas- ured by the Benefits Conferred by the State Faculty Is Usually a Satisfactory Measure for Taxes Many Problems Arise in Measuring Ability The Social Aspects of Taxes Deserve Con- sideration States Do Not Always Attempt to Follow Principles of Justice in Levying Taxes. CHAPTER VI. FEES, SPECIAL ASSESSMENTS, AND OTHER REVENUES 120 Several Factors May Be Considered in Classifying Revenues- Fees Have an Important Place in Revenue Systems The Char- acteristics of Fees Vary Fees Have Held an Important Place in the Fiscal Systems of European Countries Fees Have Been Used Extensively in the United States Fees Have Important Social and Political Aspects Special Assessments Resemble CONTENTS ix PAGB Taxes and Fees The Special Assessment Has Been Used More Extensively in the United States than in Europe The Justice of Special Assessments Has Not Been Destroyed by Difficulties Encountered in Their Use Prices Are Paid for Commercial Services Supplied by the Government States Have Sources of Revenue of Minor Importance. CHAPTER VII. REVENUE SYSTEMS OF IMPORTANT COUNTRIES . . 138 Modern Revenue Systems Have Developed Since Feudalism Early Taxes in England Took a Variety of Forms Later Eng- lish Taxes Are More Permanent Indirect Taxes Play an Im- portant Role in the Fiscal System of France The Prussian Tax System Has Had a Systematic Development Fiscal Develop- ment in American Colonies Was Not Uniform The Central Government Encountered Difficulties in Financing the Revolu- tion The Federal Constitution Contains Important Fiscal Pro- visions Numerous Taxes Make Up the Revenues of the United States Definite Tendencies Are Indicated by Fiscal Systems. CHAPTER VIII. THE SHIFTING AND INCIDENCE OF TAXES .... 157 The Justice of a Tax May Depend on Its Shifting and Incidence A Study of Shifting and Incidence Is Fundamentally a Study of Price General Poll and Income Taxes Cannot Be Shifted Land Taxes Are Often Called Burdenless Taxes Taxes on Buildings May Be Shifted The Capitalization Theory Has Been Ably Criticized All Taxes on Monopolies Will Not Be Shifted to the Consumer Taxes on Competitively Produced Goods Have Varying Effects Shifting of Taxes Is Influenced by the Elasticity of Supply and Demand. CHAPTER IX. CUSTOMS DUTIES 177 Modern Customs Duties Apply Chiefly to Imports Various Motives May Prompt the Levy of Customs Duties The Inci- dence of Customs Duties Is Important Problems Arise from the Use of Customs Duties Definite Principles Should Be Fol- lowed in Levying Customs Duties Early United States Tariffs Combined Fiscal and Protective Aspects The War of 1812 In- creased the Sentiment for Protection The High Tariffs Were Followed by Reduced Rates The Panic of 1857 and the Civil War Changed the Course of Tariff Rates Revenue Is Given First Consideration in English Tariffs Other Countries Have Used Tariffs for Industrial and Fiscal Purposes. CHAPTER X. EXCISE, CAPITATION, AND BUSINESS TAXES .... 202 The Federal and State Governments Impose Many Taxes Ex- cise Duties Are Taxes upon Consumption The Use of Excise Taxes Presents Various Problems Excise Taxes May Have Industrial and Social Effects Different Methods Are Used in x CONTENTS PAGE Levying Excise Taxes Excise Taxes Will Continue to Form a Part of Fiscal Systems The United States Has Effective Ma- chinery for Administering Excises The United States Did Not Use Excises Extensively Before the Civil War The Civil War Excises Have Been Permanently Retained Excise Taxes Have Important Places in Foreign Fiscal Systems Government In- dustries May Have Effect of Excise Taxes Capitation Taxes Are No longer Important in Fiscal Systems Business Taxes Have Been Extensively Developed in France and Prussia Business and License Taxes May Be Extended by American Fis- cal Authorities. CHAPTER XL PROPERTY TAXES 230 Taxes on Property Have Developed from Early Times Demo- cratic Ideals Have Influenced the Tax System The Southern and Western States Present Centralized Tax Systems Some Features of the Early Property Tax Do Not Now Exist Marked Variations Occur in the Assessment of Real Property Much Personal Property Is Not Assessed Difficulties Arise in Exempt- ing Property from Taxation Evils of Double Taxation Arise with the Use of Personal Property Taxes The Proper Handling of Indebtedness Is Difficult The Personal Property Tax Dis- criminates Among Classes The Personal Property Tax De- grades the Morals of Citizens The General Property Tax Is Intrenched in the United States. CHAPTER XII. PROPERTY TAX REFORM 256 Constitutional Provisions Present Difficulties Attempts Have Been Made to Correct Real Estate Assessments Many Devices Are Used in Personal Property Assessments Classification of Property for Taxation Has Been Attempted Limitations Have Been Placed upon Tax Rates and Borrowing Power The Sep- aration of Sources of Revenue Has Been Advocated The Pres- ent Tendency Is to Centralize Fiscal Authority The State Tax Commission Presents the Best Example of Centralization Tax- ation of Property Remains Unsatisfactory. CHAPTER XIII. INCOME TAXES 278 The Use of Income Taxes Represents a Developed Fiscal System. Difficulties Arise in Denning Income The Concept of Income Is Sometimes Modified to Conform to Justice in Taxation Vari- ations Occur in Methods of Levying Income Taxes Fiscal Au- thorities Meet Difficulties in Ascertaining and Classifying In- comes The Income Tax Has Been Successfully Used in England Prussia Has Used Income Taxes Successfully Many Other Foreign Countries Use the Income Tax Federal Income Taxes in the United States Have Had No Systematic Development- Federal Income Taxes Were Attempted in 1894 The Present CONTENTS xi PAGE Federal Income Tax Was Made Possible Through a Constitu- tional Amendment The Income Tax Was Modified by the Revenue Act of 1916 Defects Appear in Federal Income Taxa- tion Income Taxes Have Been Used by Several States. CHAPTER XIV. INHERITANCE TAXES 309 The Inheritance Tax Is Not of Recent Origin The Inheritance Tax Was Much Discussed by Early Economists The Inherit- ance Tax Is Widely Advocated at Present Some Justify the In- heritance Tax as a Regulator of Fortunes The Benefit Theory Has Been Applied to Taxing Inheritances The Inheritance Tax Conforms to Modern Fiscal Concepts Most Objections to the Inheritance Tax Are Weak The Courts Have Strengthened the Position of the Inheritance Tax Problems Arise in Formulating / Inheritance Tax Laws Conflicting Jurisdictions Create Serious 1 Problems The Federal Government Has Not Regularly Used Inheritance Taxes Inheritance Taxes Are Important in the Fiscal Systems of Some States The Inheritance Tax Is Used Extensively Abroad. CHAPTER XV. TAXATION OF CORPORATIONS *' 335 Different Causes Have Placed Special Taxes on Corporations Special Corporation Taxes Take the Form of Franchise Taxes Taxation of the Franchise to Be Presents Serious Problems Taxes upon Capital Have Been Most General Public Utilities Frequently Have Been Subject to Special Taxes A Tax on Gross Earnings Presents Difficulties Taxes on Net Earnings Have Not Been Satisfactory Taxes on Value Are Becoming More Popular Taxes on Public Utilities Are No Longer Needed for Regulation New York Furnishes the Best Example of Special Franchise Taxation Some Corporations Have Been Taxed in Special Classes Taxation of Foreign Corporations Has Proved Troublesome The Federal Government Taxes Corpora- tions Taxes Have Been Placed upon theJTransfer of Corporate Securities. CHAPTER XVI. THE SINGLE TAX * . " . . ~ . f . >'. T . * . 5 . . . 363 The Proposal for a Single Tax Is Not a New One Henry George Was Responsible for the Modern Single Tax Proposal The Single Tax Program Has a Broad Social as Well as Fiscal Significance The Principle of Natural Rights Is Not Generally Indorsed Social Values and Unearned Increments Are Not Confined to Land The Social Claims for the Single Tax Have Not Been Proved The Use of the Single Tax Would Reveal Undesirable Features and Difficulties The Burden of the Single Tax Would Be Most Severely Felt by Rural Districts Various Tactics Have Been Employed in Propagating the Single Tax The Single Tax Campaign in Oregon Did Not Show Substantial Results The xii CONTENTS Advocates of the Single Tax Have Been Active in Other States The Single Tax Has Found Adherents Outside the United States The Single Tax Agitation Has Emphasized Defects in Our Fiscal System. CHAPTER XVII. PUBLIC INDEBTEDNESS 387 Indebtedness Is Characteristic of Modern Fiscal Systems All Aspects of Public and Private Debts Are Not the Same The Economic and Political Effects of Public Indebtedness Are Im- portant All Countries Have Not Taken the Same Attitude Toward Extinguishing the Public Debt Public Debts May Take a Variety of Forms Many Problems Arise in Floating a Bond Issue Administering a Public Debt Presents Complex Problems A Study of Indebtedness in the United States Pre- sents Interesting Conclusions The Indebtedness of Many ^ Countries Has Reached Vast Proportions. CHAPTER XVIII. THE ADMINISTRATION OP PUBLIC FUNDS . . 414 The Importance of Proper Fiscal Administration Has Been Underestimated The Administration of Public Funds Should Harmonize with Other Institutions The Expenditure of Public Funds Is Carefully Scrutinized Revenues and Expenditures Should Be Closely Correlated England Has Done Much to Systematize Her Fiscal Operations Many European States Use a Form of Budget -The Fiscal Machinery of Canada Resembles That of England Budget Development in the United States Has Been Toward an Unsystematic System The Present Plan of Estimating Revenues and Expenditures Is Unsatisfactory Much Agitation for Budget Reform Has Developed The Bud- get System of Fiscal Administration Is Found in Many American States The Administration of Municipal Finance Is Receiving Much Attention The Outlook for Proper Fiscal Administration Is Encouraging. CHAPTER XIX. FINANCING AN EMERGENCY 445 Expenditures for War Furnish the Best Examples of Emergency Financiering The Problem Is to Secure Revenue or Materials Borrowing Possesses Some Evident Advantages Borrowing Is Likely to Increase the Cost of War Borrowing Does Not Shift the Burden of War to the Future The Extensive Use of Taxes Has Much to Commend It Borrowing Usually Has a Legiti- mate Place in Emergency Financiering The Proper Combina- tion of Loans and Taxes Forms the Best War Finance Policy Earlier Wars of the United States Were Financed Largely Through Borrowing The United States Made Extensive Use of Taxes in Financing the Great War Administrative Problems Developed from the Tax Laws The United States Borrowed Extensively During the Great War Fiscal Problems Did Not CONTENTS xiii PAGE End with the War England Financed the War Through a Com- bination of Loans and Taxes The Revenue of France Was Secured Largely by Borrowing The Central Powers Used Loans Most Extensively The Methods Used by the Different Coun- tries Present Interesting Comparisons. CHAPTER XX. THE COST OP THE WAR 484 The Cost of War Presents a Variety of Aspects The United States Was Not Free from War Costs During Its Early History The Civil War Augmented Our War Burden The Cost of the Great War Eclipsed Any Previous War Expenditures The Ex- pansion of Money and Credit Greatly Affected the War Cost The Indirect Costs of the War Must Not Be Overlooked. CHAPTER XXI. CONCLUSION 506 The Fiscal Burden Will Continue to Be Large Different Politi- cal Units Will Use the Same Bases for Taxes The Social Point of View Has Gamed in Prominence The Employment of Fiscal Experts Is Encouraging The Study of Fiscal Subjects Is In- creasing A More Enlightened Public Is Needed Tax Laws Need Simplification Attempts Have Been Made to Outline a Model System of Taxation. INDEX 519 PREFACE INTEREST in fiscal problems has grown rapidly. Twenty- five years ago the subject matter of Public Finance aroused comparatively little discussion. While public ex- penditures were continually on the increase, wealth and population were increasing more rapidly, so that no greater per capita burden was felt by the citizen. To-day the situation is different. The demands upon the public purse have become so large, because of extended and increased governmental activities, that the burden of taxes has begun to be felt, and in many cases it has begun to cut deeply. A few decades ago, therefore, the principles of Public Finance primarily commanded the interest of pub- lic officials, while at present the citizen upon whom the tax burdens fall is also interested. He is beginning to ask what is being done with the funds he has paid in taxes, whether he is paying more than his share, whether the funds are properly handled, and what can be done to secure a better fiscal system. The nature and rapid increase of public expenditures, as well as the objects for which they are made, have be- come of general interest. The public has learned to place so much reliance upon the activities of the government that it is continually demanding that new activities be undertaken and that old ones be carried out more efficiently. The per capita expenditures of the cities for education, and the expenditures of the states for educa- tion and the care of defectives, delinquents, and depend- ents, have reached an amount that would have been considered enormous a few years ago. The nature of the expenditures of the different political units, the extension xvi PREFACE of governmental activities, accompanied by increased tax burdens, have caused the individual to weigh more care- fully the resulting utilities. The greatest item of expendi- ture, and the one which has made tax burdens most press- ing, has been for war or the preparation for war. The Great War has caused the indebtedness of the principal nations to reach figures which are incomprehensible, the burden of which will last for years. Consequently, the nature and growth of public expenditures, the forms and costs of public indebtedness, the possible methods of financing an emergency, such as a war, as well as the direct and indirect costs of war, are no longer of interest to fiscal officials alone, but are commanding the attention of the general public, upon which the burden finally rests. The rapid increase in public expenditures has made it necessary to seek new fields for revenue, and the taxpayer has come to demand a justification for the new taxes he is called upon to pay. The Federal government still relies extensively upon customs 7 duties and excise taxes, and these, of course, deserve consideration; but in recent years it has begun to use corporation taxes, income taxes, excess profits taxes, and inheritance taxes. The states have ceased to secure their entire amount of revenue from property taxes, but are using corporation taxes, business and license taxes, income taxes, and inheritance taxes as well. The localities are supplementing property taxes with numerous license payments. These are taxes the burden of which the citizen is required to bear, and he not only has the right to know something of their merits and difficulties, but it is his duty to be informed. To accomplish this a somewhat extended discussion of each of these forms of revenue becomes necessary. The pressure of the tax burden has caused much con- cern about justice, the pointing out of many problems, followed by many suggestions for reform. The proper method of levying a tax, together with its shifting and incidence, can be properly understood only when the dis- PREFACE xvii cussion is based upon sound economic principles. Loose thinking, which has otherwise resulted, has been respon- sible for the proposal of reforms which cannot stand under the light of reason. Some of these, such as the single tax, have been propagated to such an extent as to need special emphasis, while others can be dismissed much more easily. It is to help the student, the general reader, and the public official to secure a better understanding of the nature of public expenditures and revenues, and the prin- ciples which underlie a sound fiscal system, that the fol- lowing chapters have been written. They are in no sense an exhaustive treatment, but, as the title of the book in- dicates, an outline, which could easily be expanded. An attempt has been made to eliminate tedious theoretical and philosophical discussions, which cannot easily be understood, as well as to limit the amount of historical material. Some theory will, of course, be found in the necessary underlying economic principles, and historical backgrounds and illustrations will frequently be used. Primarily, however, the purpose is to emphasize the prac- tical aspects of the field of Public Finance, and to acquaint the taxpaying citizen with the important aspects of ex- penditures and revenues with which he is continually coming in contact. In a book of this nature it is impossible to acknowledge all the sources to which one is indebted. Much of the material has been collected from general reading for my courses in Public Finance and Taxation, and acknowledg- ment must be made to all the important writers in this field. I cannot refrain from mentioning Profs. A. A. Young and T. S. Adams, under whose instruction my interest in fiscal problems began to develop. Many of my friends and colleagues at the University of Illinois have rendered valuable assistance. Dean Charles M. Thompson has devoted much time to reading the manu- script and has given many valuable suggestions, as has xviii PREFACE also my colleague, Prof. N. A. Weston. Mr. E. E. Leisy, of the department of English, carefully read the entire manuscript for corrections in composition. Others have assisted in reading proof and in numerous other ways, an indebtedness to whom I hereby acknowledge. M. H. HUNTER. URBANA, ILLINOIS, July 1, 1921. OUTLINES OF PUBLIC FINANCE CHAPTER I INTKODUCTION z* Public Finance Has Distinguishing Characteristics. Man is by nature a social being, and consequently seeks the association of his fellow creatures. As this association develops and becomes more complex, the need for establishing and enforcing certain regulations appears, and governments are inaugurated to safeguard property and insure the orderly conduct of the com- munity. The extent of governmental activities depends largely upon the degree of advancement in civilization. Among the primitive and backward peoples, the functions of governments are few and ill defined; whereas in highly civilized states they are numerous and, although often very complex, they are, nevertheless, well defined. The march of progress in the development of government is from the simple to the complex, and the more complex the organization the more numerous and difficult are the problems which present themselves. The members of an advanced social group frequently fail to comprehend the extent to which they are indebted to their government for the services which it renders them. The Constitution of the United States, for ex- ample, guarantees to the citizen the protection of life, liberty, property, and the pursuit of happiness; yet he often forgets that this guarantee entails the maintenance of armies and navies, of legislatures and judicial systems. 2 ' OUTLINES OF PUBLIC FINANCE Th* postman makes his semi-daily delivery of mail without a consideration by the ordinary citizen as to why or how. The modern progress in science, literature, agriculture, industry, and commerce is a matter of pride to every citizen, although the contribution of the various governmental units toward such progress is often for- gotten. Government aid has fostered the development of educational institutions, the result of which has been that the development of science and literature has been hastened; experiment stations and schools have trans- formed agricultural methods; active health campaigns have wiped out the cause of diseases and pestilence; patent laws have stimulated inventions for the develop- ment of industry, and copyright laws have enhanced the quantity and quality of literature; while sound currency and banking systems have made possible modern commercial life. A government has no superhuman power in exercising the important function of supplying materials and serv- ices to a social group. It cannot create the materials and services, but must either secure them from some already existing source, or cause them to be produced, either by its own activities or by the activities of some other agency. The methods used by governmental units in securing materials and services differ widely, and after they have been secured the uses to which they may be put also differ widely. None the less, it is a part of the business of governments to secure the means of supplying the various demands made upon it by its citizens. The subject matter of Public Finance has to do with that group of governmental functions which have to do with the getting and using of materials and services. 2. The Word "Finance" Has No Definite Mean- ing. In the English language, at least, no definite meaning is attached to the word " finance." A descrip- tive adjective is often needed to clarify the intended meaning and to avoid ambiguity. Such expressions as INTRODUCTION 3 "private finance/' " corporation finance/' "high finance/' and " public finance" are common in the daily newspapers. There are treatises on corporation finance, for example, which explain the nature and business methods of cor- porate organizations. The use of the term "finance" in connection with a firm, business, or individual fre- quently has reference to the condition of the capital or assets, as, for example, "the finances of this business are in good condition." The ambiguity which arises with the use of the word "finance," unmodified, may be avoided when the use of the adjective is contemplated. Two forms of the word appear " financial" and "fiscal" and a uniform use of the words for particular meanings would be conducive to clearness. The word "financial" has had no definite meaning. A financial magazine, for example, treats of stocks, bonds, dividends, and similar items, while the financial condition of a country has to do with its money, credit, and banking. The word "fiscal," however, has usually had a more definite meaning, although its use has not always been clearly separated from that of "financial." For the most part, however, "fiscal" has been used in referring to the expenditures and revenues of political bodies. A financial year, for example, might refer to any number of conditions, while a fiscal year more definitely refers to the revenues and expenditures of a political unit for a particular period of time. The fiscal year of the Federal government begins July 1st and ends June 30th. In this book the word "fiscal" will be used to refer to conditions which are related to revenues and expenditures of political bodies. Public Finance is primarily concerned with fiscal as- pects, yet these aspects are often substantially influenced by financial circumstances. A sound and efficient banking and currency system, for example, materially aids in the collection and expenditure of public revenues. It may not always be possible, indeed, to separate the fiscal from 4 OUTLINES OF PUBLIC FINANCE the financial conditions, as when, in times of war, a gov- ernment issues fiat money or treasury notes for the pur- pose of securing funds. Fiscal authorities are likewise concerned about the financial conditions of industries, because it is to productive enterprises that they must turn as an important source of revenue. Panics and crises, moreover, do not affect industries alone, but the fiscal condition of political bodies as well. A distinction can generally be drawn between aspects of a fiscal and of a financial nature, and our concern in this book will be with the former aspects which deal with expenditures and revenues of governments. 3. Public Finance Is a Division of Economics. There has been some discussion as to whether the study of Public Finance properly belongs in the field of Econom- ics. Some writers treat fiscal problems in their works on general economics, while others treat the problems under the caption, " Economics and Public Finance." Still other writers on general economics give no discus- sion of public expenditures and revenues. The great amount of attention which has been devoted to a dis- cussion of private consumption, production, and dis- tribution has emphasized the importance of these phe- nomena, yet the fact remains that public revenues and expenditures are of sufficient economic consequence to command the attention of students of economics. The principles which underlie the study of Public Finance are clearly the same as those which underlie the study of the other fields of economics. Economics deals with laws which govern the activities of individuals in the expenditure of energy to supply their wants. Public Finance is also a study of the exertion of individual effort to supply wants. Governments secure, through taxes or otherwise, some of the returns from individual effort as a prerequisite to supplying materials and services. The individual is concerned with comparing the utility fur- nished by the government with the utility he could have INTRODUCTION 5 secured had the government made no demands upon him. No individual income can remain unaffected when a part of it is taken in the form of a tax. Public funds are frequently used, either to aid private production or directly to carry on productive enterprises. Those who are interested in efficient production must be concerned about such uses of public funds, and those who have the direction of public funds for productive enter- prises should know the economic principles upon which efficient production rests. The successful management of a government industry must be based upon just as sound economic principles as is a successful industry conducted by individuals. When the effect of securing revenues in different ways is considered from the standpoint of jus- tice, some definite theory of distribution must be in mind. The suggestion to adopt a rigorous single tax, which would take the economic rent of land in taxes, immediately arouses the interest of those who are concerned with rents and land values. Any income, whether it is paid from a public purse or from a private purse, is of economic con- cern. Fiscal officials are concerned with the relationship of cause and effect in the collection and use of public revenues; here the thought is guided by the same eco- nomic laws that govern in the problem of the distribution of wealth. The underlying principles of Public Finance, then, are the same as those upon which all sound economic reasoning is based. 4. Public Finance Is Related to Other Sciences. The subject matter of Public Finance is of such a nature that its study cannot be separated from that of other sciences. Students of the subject must take frequent excursions into the related fields of Political Science, History, Sociology, and Ethics. Likewise, those who are primarily interested in these related subjects find that account must be taken of the workings of the principles of Public Finance. Relation to Political Science and History. The principles 6 OUTLINES OF PUBLIC FINANCE which underlie a study of expenditures and revenues have a dependence upon Political Science second only to that which they have upon Economics. The form of govern- ment under which the citizens live and the officials work is of the utmost importance. Differences in the method of conducting fiscal affairs would necessarily be found in states of autocratic, democratic, socialistic, or individu- alistic governmental tendencies. Many political re- straints exist, also, either because of constitutional or legislative provisions, which must always be taken into consideration by the fiscal student or official. In the United States, for example, a tax would not be levied upon exports because of constitutional restrictions to that effect. Political expediency, moreover, is often so im- portant in fiscal matters that it takes precedence over the soundness of economic principles which might be applied. Revenues must be had quickly, at times, and that method is used which will supply the needed funds, notwithstand- ing the economic objections which might be raised. The interest in Political Science cannot be separated from the principles of Public Finance. Revenues must be secured to carry out the policies of executives and legislators. Many of the compromises which have been written into constitutions and statutes have been formu- lated by fiscal considerations. Officials must always be concerned about the exaction and use of funds, for there is no surer and quicker method for gaining the disfavor of a constituency than through the misuse of public revenues. That would be a poor fiscal policy which took no con- sideration of the activities of the past, with then- result- ing successes or failures. A study of history, consequently, is an invaluable asset in helping to formulate modern fiscal policies. Countries have different characteristics, thek citizens have peculiar traits, and it is only by a study of history that these can be properly interpreted. It is because of these inherent differences that a successful system for obtaining revenues in one country would abso- INTRODUCTION 7 lately fail to give satisfaction in another. The student of history, moreover, can be no less interested in what Pub- lic Finance has to offer. In tracing revolutions and con- stitutional reforms, for example, he will frequently find that fiscal considerations have had an important in- fluence, if, indeed, not an overwhelming one. Relation to Sociology and Ethics. The problems of social reform and those of Public Finance are, at present, in- separably related. No longer is the individual held en- tirely responsible for bettering social conditions, but the various governmental units have adopted this activity as one of their primary functions. So extensively have they entered this field that one of the largest single items of expenditure is for the classes of delinquents, defectives, and dependents. The enormous sums which are spent annually upon social institutions are of vital interest to the students of expenditures and revenues. The student of sociology is no less interested. He must be concerned with the results of government activities of this nature, and compare these results with what has been accom- plished through other avenues of endeavor. Ethical considerations must not be omitted from the discussion and formulation of fiscal principles. When the burden of a tax does not rest where it is placed, but is shifted on to some one else, the question of justice im- mediately presents itself. The same question also arises when proposals are made to tax some individuals or classes at a higher rate than others. The fiscal system is fre- quently called upon to help solve the problem of evil through the regulation or elimination of undesirable in- dustrial or social institutions. Examples of this are the use of taxes to eliminate the circulation of state bank notes, and to regulate the use of intoxicating liquors. It is clearly demonstrated, then, that Public Finance is far from being an independent science, but draws heavily from other fields as well as supplies much material to them. 8 OUTLINES OF PUBLIC FINANCE 5. Different Methods of Study May Be Used. Public Finance is properly grouped among the social sciences, and, as just indicated, it is closely related to a number of these. Its field is definite enough, however, to admit of independent scientific investigation. It deals at once with principles and their application ; it is, therefore, both an art and a science. The art nature appears when the formulas which have been discovered through the scien- tific processes of investigation begin to be applied. It was a scientific process, for example, by which it was dis- covered that the burden of taxes does not always rest where it is first placed. The art nature appears when this principle of shifting burdens begins to be used to cor- rect injustices, and to inaugurate a more symmetrical fiscal system. Both aspects are important the scientific aspect to the student who is primarily interested in dis- covering general truths and laws, and the art aspect to the student who is concerned with the application of formulated principles for the purpose of securing desirable changes in the fiscal conditions. Method of Study. Some writers have entered exten- sively into a discussion of the proper methods of approach to the study of Public Finance, but space does not war- rant an extended discussion of this subject here. Some have maintained that the study is primarily " inductive," while others have been just as strong defenders of the " deductive" method of approach. As a matter of fact, both methods have a place and are used simultaneously. Since it is to a great extent a derived science, it necessarily borrows a number of rules and laws, which, as general principles, are bases for further reasoning. With the use of these principles from which to start, it may be con- sidered as a deductive science. These principles them- selves have been derived, on the other hand, through the processes of inductive reasoning the formulations have been made only after bringing together a number of indi- vidual cases from which conclusions could be drawn. INTRODUCTION 9 While the modern study, then, partakes of both inductive and deductive reasoning, yet its early development was marked by the almost exclusive use of the inductive method. Comparative and historical studies also have an important place in the study of Public Finance, for much can be gained from knowing what other governmental units are doing and have done to determine fiscal prin- ciples and to solve fiscal difficulties. Extent of Study. More important than method of study, perhaps, are the classes of persons whose interest Public Finance should command. The idea has been too prevalent that a knowledge of its principles would be use- ful only to the officials who are handling the business of the government, and that they have no practical applica- tion for the average citizen. No belief could be more erroneous. While it is of utmost importance that officials who have the direction of fiscal policies should be well versed in the underlying principles of Public Finance, it is none the less true that their constituents should be well informed in the same field. Never before in the history of the world has such a knowledge been so vital. De- mocracy has been growing apace, with the prevailing idea that it is the panacea for political ills. There is no virtue in self-government itself to cure these ills, nor is there any condition hi democracy to insure its survival, unless the voters be properly grounded in the principles necessary to insure an enduring state. The mere vote is not suffi- cient; the voting must be intelligent as well. The manner in which the purse strings are controlled is of paramount importance, for in no field of governmental activity are corruption and abuse so likely to creep in. The modern writer should attempt to dispel the current notion that fiscal treatises are dismal and uninteresting, and should aim to vitalize them in connection with the life of every citizen. 6. The Systematic Study of Fiscal Problems Began in Italy. Public Finance is, at present, usually given a sub- 10 OUTLINES OF PUBLIC FINANCE ordinate place in the study of economics. In the order of development, however, the study of Public Finance is much older than that of the general principles of eco- nomics in fact, it was the center around which the early economic discussion developed. It was not until after the Middle Ages, however, that fiscal problems reached a degree of importance to warrant careful and systematic investigation. Before and during the Middle Ages refer- ences to the fiscal aspects of the state are not lacking in the numerous political and historical writings which are to be found. During this period the finances of the state were practically synonymous with those of the prince, and their study is of the principles of private finance rather than that of fiscal problems. The development of commerce and trade caused a change in the situation. Cities and city-states that had little connection with the domain of the prince grew and flourished. The initial appearance of this situation came in Italy. The opening of the Mediterranean route of commerce, with its subsequent domination of world trade, made Italy the commercial center of the world. The rapid growth of such city-states as Florence and Naples led to a corresponding growth in their fiscal needs. It was in these Italian city-states of the fifteenth century, moreover, that the first systematic study of the principles which are properly included in the field of Public Finance made its appearance. The discussion centered around such questions as progressive taxation, the administration of revenues, and a systematic classification of expenditures. Many of these early ideas have much in common with modern expressions concerning fiscal subjects. 7. French and German Scholars Followed Italian Writ- ers in the Study of Fiscal Problems. By the latter part of the sixteenth century political organizations had so changed that more attention to fiscal problems became imperative. The disintegration of the feudal regime caused concern to the public officials because a remodeling INTRODUCTION II of fiscal policies became necessary. Jean Bodin, a French- man, first sensed the need for a systematic study of these changing political and fiscal conditions. His treatise, Les six Livres de la Republique, was published in 1576, and exerted a marked influence upon future fiscal and political writings. He considered the nerves of the state to be found in the proper management of its expenditures and revenues, and contended that revenues must be raised honestly, that they must be used for the profit and honor of the state, and that a part should be saved for a tune of need. After the works of Bodin, a decided lull appeared in the interest which was given to the study of expenditures and revenues of the country. It was not until the eighteenth century, when the abuses of the government in handling the public treasury became boldly open and flagrant, that any expressed interest in the study of fiscal problems again appeared. The revival of investigations of this nature was begun by Vauban, who published his Project for a Royal Tythe in 1707. His plan centered around an income tax which was to be supplemented by a number of indirect taxes. A work which had considerable influence upon future fiscal development was the Esprit des lois, which was published by Montesquieu in 1748. Besides con- demning the institution of public credit, he discoursed at length upon the influence which different forms of gov- ernment exert upon fiscal systems. One of the distinct contributions of the French to fiscal and economic thought came through the physiocrats, of which Quesnay and Turgot were leaders. Quesnay pub- lished the famous Tableau ceconomique in 1758. He did much to develop a consistent theory of production and distribution, and correlated his system for securing rev- enues to the theory which he developed. The theory which was proposed for land taxes will be noticed in a subsequent chapter. 1 A number of modern French stu- 1 See the chapter, "The Single Tax." 12 OUTLINES OF PUBLIC FINANCE dents, of whom the best known is Leroy-Beaulieu, have turned their attention to fiscal problems. Leroy-Beau- lieu's works are considered among the best in the field of Public Finance, and his Traite de la Science des Finances is especially worthy of study by all who are interested in fiscal problems. German Writers. German writers were but little be- hind those in France in taking up a study of the problems connected with expenditures and revenues. At first the influence of French writers can be clearly discerned, but it was not long before the investigations of the German scholars divorced themselves from foreign influences. Many writers have appeared in the field, of whom the first of importance was Von Justi. His Staatswirthschaft was published in 1755. He treated public expenditures in detail, considered that incomes from public domains should be the base for a sound fiscal system, yet treated the economic and political effects of the various kinds of taxes. The large number of treatises which the German fiscal students have given disclose not only an uninter- rupted, but a systematic development of fiscal investiga- tions. An important work of the early nineteenth century (1832), which treats different phases of fiscal problems, was the Grundsdtze der Finanzwissenschaft, by K. H. Rau. More modern works of a general nature have been by G. Cohn (Finanzwssenschaftj 1889), and by A. Wagner (Finanzwissenschaft, 1883-1899). 8. English and American Scholars Have Studied Fis- cal Problems. The first real interest in fiscal problems shown by English writers was displayed by the transla- tion of Bodin's work into English, at the beginning of the seventeenth century. Some chance reference to fiscal problems may be found in earlier writings, but they are of such a nature as to indicate that only a very casual in- terest was taken in such problems. A half century after the translation of Bodin's work, Sir William Petty pro- duced the first English work (1662), a Treatise of Taxes INTRODUCTION 13 and Contributions, that properly can be said to deal with the subject matter of Public Finance. His classifications of expenditures and revenues are interesting to modern students. They show the change in the relative impor- tance of the various items which have been, and are, the objects of governmental expenditures. The Wealth of Nations. More than a century passed after the publication of Petty's treatise before another systematic study of fiscal problems was produced. This was in 1776, when Adam Smith published his Wealth of Nations, and thereby planted a new milestone in the progress of fiscal development. Before this, however, the continual increase of expenditures and indebtedness in England caused much debate, and many half-hearted sug- gestions were made for reform, yet nothing in the form of a systematic treatise appeared. Adam Smith has received most mention as an econo- mist. He has, indeed, been called the father of Political Economy, and his Wealth of Nations is looked upon as the first general treatise on this subject. It may just as truly be called the first great treatise on that phase of economics which we now define as Public Finance. The title of the work is indicative that the contents are of this nature. Nations at that tune were becoming more and more con- cerned about the possible sources for the increased rev- enues which growing expenditures were constantly de- manding. The mercantilistic school had been advocating the doctrine of restrictions upon trade, commerce, and industry, by which it was expected to bring more wealth, either directly or indirectly, into the coffers of the state. It was against this artificial regulation that Adam Smith revolted. He purposed to show in his work that a nation could obtain a greater store of wealth, that it could have a greater source of revenue if the government would allow trade and industry to take their own course through a proper division of labor and capitalistic production. The function of the government, instead of attempting to 14 OUTLINES OF PUBLIC FINANCE regulate commerce and industry, was to supply facilities to aid in carrying on industry, commerce, and exchange, such as sound systems of currency, banks, and credit. This purpose explains his "inquiry into the nature and causes of the wealth of nations." The worth of Smith's treatise was soon recognized, and it was almost immediately translated into a number of foreign languages, and in this way it was destined to in- fluence the trend of fiscal thought for years to come. Fiscal subjects continued to call forth discussion and writing, yet English writers produced nothing after the Wealth of Nations until comparatively recent years which can in reality be called a systematic treatise on Public Finance. This recent treatise was written by C. F. Bas- table (Public Finance, 1903). It is still considered as an authority on the subject and can be read with profit by all who are interested in problems relating to revenues and expenditures. Studies in the United States. A systematic study of fiscal problems was not made in the United States during the earlier years of its development. The functions which the government performed were few, and entailed little expense. The citizens were prosperous, and the fiscal burdens were not seriously felt. As more public activities were undertaken, and as the burden of revenues became more pressing, inquiries began to be made by individuals and commissions as to possible changes and remedies. As a result, many sporadic reports appeared, yet no system- atic study of fiscal problems was made until Henry C. Adams published The Science of Finance, in 1898. This continues to be the most important American work in the general field of Public Finance. Much work has been done since then, the most extensive of which has been by D. A. Wells and E. R. A. Seligman. Wells's book, The Theory and Practice of Taxation, appeared in 1900, the nature of which is indicated by the title. Seligman has written a number of volumes, the most important of which are INTRODUCTION 15 Progressive Taxation in Theory and Practice, published in 1908, Shifting and Incidence of Taxation, published in 1910, The Income Tax, published in 1914, and Essays in Taxation, published in 1915. Brief treatises of the field of Public Finance have been written by W. M. Daniels (The Elements of Public Finance, 1899), and by C. C. Plehn (Introduction to Public Finance, 1920). Mention should also be made of the work done by the various tax commis- sions and by the National Tax Association, the results of which are available in numerous reports and proceedings. 9. Modern Fiscal Systems Have Well-defined Char- acteristics. The rapid growth of democracies and con- stitutionalism has been indicated in the preceding topic. With this growth some well-defined characteristics of fiscal policy have also developed. These have been outlined by Prof. W. M. Daniels in a way which cannot be improved upon, and they are repeated here to portray the close relationship which exists between the fiscal activities of governments and individuals. 1 The first characteristic of modern fiscal policy is that there is a normal and calculable field of government activity. During the Great War government expendi- tures mounted to unprecedented and almost unbelievable heights, which seems to disprove the characteristic just mentioned. This, however, is the exception which helps to prove the truth of the statement. In the modern era wars, with their large and incalculable expenditures, have represented an abnormal state of society. In the earlier stages of its development, however, the peaceful pursuit of industry was the abnormal course. Under normal mod- ern conditions, then, the citizen can pursue his occupation with the feeling that the state will require nothing unusual of him. Modern fiscal science has become so exact, in fact, that officials are able to predict the revenues and expenditures for a coming year to within a fraction of one per cent. 1 W. M. Daniels, Elements of Public Finance, p. 7. 16 OUTLINES OF PUBLIC FINANCE A second characteristic is the periodic exaction of money from citizens for the support of the state. Such a state- ment appears axiomatic in the extreme to the citizens of a modern political unit. In a following chapter the de- velopment of taxation will be discussed, and it will be found that the exaction of revenue from citizens is a com- paratively recent phenomenon. Early revenues came from other sources than from exactions from the citizens. These were called upon only in case of extraordinary need. The third characteristic, the necessity for which has already been suggested, is the popular control over in- come and expenditure. The growth of constitutionalism has been more marked, perhaps, by the control of the property owners over state expenditures than by any other single feature. Many constitutional changes have been inaugurated in order to secure this control, and when once secured the principle has always been closely guarded. Some modern proposals for tax reform, which will be dis- cussed later, give little consideration to this principle, yet it still stands at the top of the requirements for safe con- stitutional government. The fourth characteristic given by Professor Daniels is the universality of public credit. This could reach a growth of any appreciable size only with the development of constitutional government. The probability of the repudiation of public debts decreased in proportion to the amount of control which the public gained over fiscal policies. As long as rulers could repudiate the debts of the state at will and this was frequently one of the first acts of a new ruler public credit could have very little stability. With a condition of popular government the individual is lending where he has some control over payment, and he will take every possible precaution to prevent officials from refusing to meet the state's obli- gations. 10. The Interest in Public Finance Is Increasing. Another characteristic of the new era, as marked as those INTRODUCTION 17 which have just been considered, is the present wide- spread interest which fiscal considerations have succeeded in arousing. This can be accounted for partially by the rapid expansion in the number of activities which the state has undertaken. The individual has kept demand- ing that the state increase its sphere of activities, and the supplying of these demands has caused expenditures and revenues to mount higher and higher. There are few who did not cringe at our first billion dollar Congress, while if such a small amount would be spent by Congress in any year in the future, the event would, no doubt, be looked upon with astonishment. That a citizen does not agree in the propriety of the activities of the government should not detract from his interest in the fiscal aspect; rather, this very situation should stimulate a greater interest, the result of which would be to demand investigation, reform, and, if necessary, a retrenchment in expenditures. As concrete evidence of the interest which is being shown in fiscal subjects, the numerous commissions which are working in the field furnish examples. A majority of our states have tax commissions, while the Federal gov- ernment has directed many investigations into problems of a fiscal nature. The numerous reports of these regular and special investigating commissions provide some of the most helpful literature in the field of Public Finance. Another evidence of this rise in the general interest is the large number of conferences which are continually being held for the purpose of investigating and discussing fiscal problems. Neither this recent literature nor the delib- erations of the conferences are of a technical nature, but are admirably adapted to furnish enlightenment for the average citizen on the expenditures and revenues of the various political units to the support of which he is contributing. ii. Public Finance May Be Studied Under Different Heads. The subject of public revenues has always been given a prominent place in fiscal discussions. Early Eng- 18 OUTLINES OF PUBLIC FINANCE lish writers gave little attention to any other part of the science. Germany is the only country which can be said to have given early and consistent attention to the entire subject matter of Public Finance. The lack of interest in the other phases than revenue can be partially accounted for by the laissez-faire doctrine which dominated England, France, and the United States. Even yet there has been comparatively little study of any field but revenues, while this is largely limited to a study of taxation. In this vol- ume, expenditures, public indebtedness, and the adminis- tration of public funds will be given some attention. The major part of the space, however, will be devoted to pub- lic revenues. Expenditures Important. A more extensive interest is developing in regard to public expenditures, and it is highly important that the public should be informed as to the use which is being made of the funds which it has contributed. Public fiscal officials occupy a peculiar posi- tion in that they have the duty and opportunity of spend- ing funds, the burden of which is not felt by themselves. Too often they fail to consider that the amounts which they demand and spend might have been used to better advantage had they been left with the individuals from whom they were taken. Public expenditures, moreover, may frequently be made for objects which are in them- selves admirable, but which, at the same time, impose too heavy a burden upon the citizens. A temptation always exists with the expenditure of funds which are not one's own, and this temptation tends more often to unwise and extravagant expenditure than to parsimony. The surest means of control lies in the use of the ballot, and it is only through a knowledge of how and where expendi- tures are made that this can be intelligently and effec- tively used. In the work of this volume, the first consideration will be given to public expenditures. Their growth and de- velopment will be noted, as well as the change in the INTRODUCTION 19 character of the objects for which public funds have been used. Explanations of their enormous increase will be attempted. A comparison between the nature of public and private business will be made, as well as a comparison of the wants which the individual supplies directly for himself and those for which he makes indirect provision through the agency of the state. The relative increase in our Federal, state, and local expenditures will be noted, and some explanations of the increases will be given. Various classifications of expenditures will be considered, while particular consideration will be given to a classifica- tion according to the methods of conferring benefits. Revenues and Indebtedness Considered. The considera- tion of public revenues, which will follow that of expendi- tures, needs no justification, since such consideration has always been the topic of paramount importance in trea- tises on fiscal subjects. The needs of the early state will be taken up, and some attention will be given to the early attempts to classify revenues. Notice will be made of revenues from public domains and public industries, in- cluding a brief discussion of the public land policy of the United States. The development and justification of the various forms of taxes used by the different governmental units will command the most attention in the discussion of revenues. Less space will be devoted to the indebtedness of states than to their revenues. The problem of indebtedness, however, is one of primary importance in present-day fiscal systems, because this method of securing funds is being called into use more and more to meet ordinary needs rather than the extraordinary ones, which were considered in earlier times the only legitimate purposes for borrowing. The enormous debts which were saddled upon the important nations of the world by the Great War make a study of this phase of the subject all the more interesting and necessary. Reasons for the gradual increase in public debts will be noted, together with some 20 OUTLINES OF PUBLIC FINANCE of their more important economic effects. The methods of securing loans and canceling indebtedness will be studied, while some comparisons of the indebtedness of the more important nations will be made. The Administration of Funds. The importance of the proper administration of public funds has but recently received general recognition. There is no question, how- ever, as to the vital significance which this phase of Pub- lic Finance presents to all who contribute to the common fund of the state. The temptations with which public officials are surrounded have already been indicated, and it is imperative that temptation be removed as far as possible, while the consequences for yielding to tempta- tions should be felt severely by those who are guilty. These results can be accomplished only through strict administrative measures. In the treatment of this phase of the work some attention will be given to the develop- ment of fiscal control, while particular attention will be given to the budget its meaning, preparation, handling, and use, both abroad and in the United States. The handling of the public accounts will also receive con- sideration. Because of the present interest in emergency or war financiering, and because of the administrative problems involved, some discussion will be devoted to this phase of fiscal problems. Some of the merits and defects of the possible methods for financing a war will be presented, together with the methods which were used by the impor- tant belligerent countries. An attempt will also be made to show what a tremendous cost war has been to the nations of the world and to the United States in particu- lar. Some of the more modern fiscal problems will receive brief consideration. 12. Supplementary Reading Should Be Followed. It is not intended to give, in the following pages, an exhaus- tive treatment of all the subjects which will be brought into review. It is hoped that the student may become so INTRODUCTION 21 interested as to desire to fill in, more in detail, the outlines of the important fiscal problems which will be taken up. Where works exist which deal concretely with the subject matter of particular chapters, notation will be made of them at the end of the chapter. Only two or three of the better ones will be given in each case. The student should keep in touch with the general treatises on Public Finance as well as the numerous mod- ern publications on fiscal problems. The works which are available in English, of a general nature, to which con- stant reference should be made, and which will not be noted at the end of the chapters because of their general applicability to nearly every chapter, are the following: H. C. Adams, The Science of Finance. C. F. Bastable, Public Finance (third edition). C. J. Bullock, Readings in Public Finance (second edi- tion) . G. Cohn, The Science of Finance. W. M. Daniels, The Elements of Public Finance. C. C. Plehn, Introduction to Public Finance (fourth edition). D. A. Wells, Theory and Practice of Taxation. CHAPTER II CHARACTERISTICS OF PUBLIC EXPENDITURES 13. Revenue Has Received More Study than Expend- itures. Only recently do we find fiscal students turning serious attention to the problems of public expenditure. Comparatively little literature can be found dealing with this phase of Public Finance, while volumes have been written on methods for securing revenue. The reason for this condition is not far to seek. The exaction of revenue has been considered an evil to be minimized as much as possible, and one which comes much nearer home to the general public than does the expenditure of funds once secured. We have had, then, numerous studies in tax reform, with little thought as to needed changes in the way funds have been spent. It is impossible, however, to segregate the two fields. If funds are squandered and wasted, the best possible revenue system cannot give satisfactory results. The increasing tax burden has led the public to inquire what is to be given in return for its sacrifice of funds. This growing burden has led to a demand for reform in revenue laws. A further recent demand is that the administration of public funds be handled in an efficient manner. These awakenings of the public account for the modern interest in other than the revenue phase of Public Finance. Henceforth, no doubt, a much larger proportion of our fiscal literature will deal with the expenditure and the administration of public funds. 14. Early Writers Did Not Entirely Neglect Public Ex- penditure^, Widespread interest in public expenditure CHARACTERISTICS OF PUBLIC EXPENDITURES 23 belongs to modern times, yet we do not find its importance entirely ignored,, even at the beginning of the study of fiscal problems. Carafa, the statesman of Naples, near the end of the fourteenth century, became concerned about the expenditure of the kingdom. He made three important classes of the purposes for which public funds were used: (1) for the defense of the nation; (2) for the support of the ruler; (3) for contingencies. He contended for a reserve fund to meet emergencies, and for close official supervision of the public accounts. Bodin, the first important French student of fiscal problems, wrote in the latter part of the sixteenth cen- tury, and contended that the public funds should be used for the honor of the state. He recommended, further- more, that an annual statement be made which would show the condition of the state's finances. His classifica- tion of expenditure was somewhat more definite than that of Carafa, and included provisions for the care of the poor as well as for improvements. Sir William Petty, near the middle of the seventeenth century the first English fiscal writer of note gave a rather detailed classification of the important needs for public funds. It will be interesting to compare the rela- tive importance of the items in his list with a modern list of expenditures, which will be given later. 1 His classes of expenditures were for: (1) defense; (2) maintaining the government; (3) religion; (4) education; (5) orphans; (6) public works. Yet, notwithstanding the consideration which fell to expenditure, revenue systems received the major portion of the early study and investigation. 15. Early Systems of Expenditure Were Simple. The methods of expenditure which developed in the early state can scarcely be called systematic, because the ex- penditures were made in a more or less haphazard fashion. The state, in its early stages of development, was subor- dinate to the family unit, where most of the personal 1 See p. 31. 24 OUTLINES OF PUBLIC FINANCE needs were supplied. As the power of the state strength- ened, more demands were made upon it. The first dis- tinct public treasury in the different states was usually for religious purposes. There were no expenditures for protection, as the citizens protected the state. In foreign wars the citizens furnished their own weapons and were paid by the spoils of conquest. Expenditures of Greece and Rome. The most lavish of early public expenditure was found, perhaps, in Athens. Large public buildings were erected, and huge sums were spent on public works of various kinds. Expenditures for religious fetes were often wasteful and extravagant. An interesting feature of early Athenian expenditure is that comparatively large sums were spent on the poor and on war orphans. In Rome, likewise, large sums were spent for religion, while the maintenance of the government, the erection of public buildings, and the construction of roads were items of primary importance. Provision was made for poor classes, and various kinds of public charities were estab- lished. The system of expenditures in Rome displayed more development than did that in Athens, since here many citizens who were rendering services to the state were receiving a direct payment from the state. This development had gone so far, before the fall of the Empire, that the soldiers were on the pay roll of the government. Expenditures Under Feudalism. Under feudalism, a study of the expenditures would be a study of the ex- penditures of the prince. He was the owner of the lands whence came the revenues. The public duties performed by the officials were usually few, and these were performed most often when a private benefit was entailed. Feudalism presented a system in which the public expenditure was primarily in the interest of the ruler. If his interests coin- cided with the interests of the public, then only did the public benefit from the expenditures of the government. As constitutionalism grew, and as the public gained a CHARACTERISTICS OF PUBLIC EXPENDITURES 25 voice in the government, this situation became radically changed. 1 6. The Nature of Public Expenditure Differs from Private Expenditure. The expenditure of a state is sim- ilar to that of an individual in that both have to do with the giving up of money. The principles which underlie these expenditures, however, are somewhat different. Eheberg, a German writer, has pointed out these differ- ences under five heads, as follows: (1) the ends sought by the state reach far beyond the sphere of individual ac- tivity; (2) in private business the ruling principle is special service and special payment; (3) the state cannot compare the cost of the service with the value of the product a necessary feature in private business; (4) a state can undertake enterprises of unlimited duration, which individuals would not; (5) the income of the state is measured by its needs, while the expenditure of the individual is limited by his income. 1 Some exceptions, of course, are found to these generali- zations, but as a whole they indicate fundamental differ- ences in state and individual activity. In these days of huge combinations of capital, the sphere open to individ- ual enterprise has materially widened. Yet there remains to the state enterprises of a nature that individuals do not care to enter. No individual cares to undertake the task of supplying all the needed services of an immaterial nature the value of which cannot be measured. Exam- ples of this would be army, navy, and police protection, establishment of systems of courts for maintaining jus- tice, and the maintenance of public parks and libraries. Even the magnitude of enterprises like the Panama Canal would still have a deterrent effect on private undertaking. Returns on Investment. The state is not so much con- cerned about a special payment for a special service as is the individual, neither is it so concerned about a compari- ir This passage from Eheberg is quoted in Bullock's Readings in Public Finance, p. 19. 20 OUTLINES OF PUBLIC FIXAXCE son between cost of production and value of product. This is because the state does not depend to any appre- ciable extent upon its enterprises for its income. The individual cannot continue to sell the products of indu for less than the cost of production. The value of many of the products of the state, on the other hand, does not permit of financial measurement. Who would ventur value the return from the millions of dollars expended annually on education, on the judicial system, or on our eleemosynary institutions? In a broad way the mot i vat ing force of private business is profit, which necessitates pay- ments for senices and a selling for more than cost of production. The motivating force of the state's activity, in general, is service, the value of which often cannot be measured, and for which no direct payment is asked. The individual is concerned, ordinarily, in quick returns on his investment. Few individuals would undertake an enterprise, no matter how much in public demand, if no returns could be had for twenty, thirty, or forty years. The state may often make expenditures on the basis of distant future returns as well as on present returns. Where the element of future service is large, the state may justly borrow funds for the enterprise, and require the future generations that enjoy the sen-ice to repay the loan. While the state is a continuing entity, the individ- ual lives only in one generation, and he is primarily con- cerned with enterprises the fruition of which is not in the distant future, Measure cf State's Income. The statement that a str. income is measured by its expenditure must be hedged with proper qualifications. While it is true that the state has the resources of its citizens upon which to draw, these resources are not infinite, and thought must be had for future as well as for present revenues. It would be as destructive a fiscal policy to use up, for present revenue, the sources capable of supplying a continuous stream of funds, as it would be to cut down a tree to get the fruit. CHARACTERISTICS OF PUBLIC EXPENDITURES 27 Fiscal officials should be concerned about the continued existence of the state, and should not so act in the present as to impair the future. While expenditure which en- croaches upon the source of revenue is to be avoided, parsimony on the part of officials should also be looked upon as undesirable. Officials have sometimes curtailed expenditures far more than the healthy development of the state would justify, in order to make a good showing to their constituency. Political Restraint. Another important limitation upon a state's revenue is the existing political restraints. The form of government and customs which have come down from the past must be considered. The same fiscal sys- tem would not succeed in a monarchical state as in an extreme democracy. The political restraints established by constitutions and legislatures must, of course, be ob- served. Export duties, graduated excise taxes, or other than apportioned direct taxes, could not be used by our Federal government because they are prohibited by the Constitution. A number of the state constitutions con- tain what is known as the "uniform assessment" of prop- erty clause, which provides that all property is to be as- d at the same rate. Frequently tax limitation laws t which place a maximum on the amount of revenue political units may collect. Evidently, then, fiscal officials do not have absolutely a free hand in securing funds, but must be concerned about future needs of the state, and be governed by existing political institutions and laws. 17. The Nature of Expenditures Has Changed with Changes in Forms of Government. It has been noted that in the feudal regime the expenditures of the state were the expenditures of the ruler. This was largely true in all governments before constitutionalism began to grow. An important factor which marked the growth of the constitutional form of government was the increasing control which the public gained over the purse strings. .lually the expenditures of the ruler were curtailed. 28 OUTLINES OF PUBLIC FINANCE These had been primarily for his own desires, and were for the good of the state only if his desires coincided with the welfare of the state. Expenditures now became justi- fied only when they were primarily for the welfare of the public. This change in the nature of the control of ex- penditures has taken definite form in the constitutions of many democratic countries. In the United States, for example, bills for raising revenue must originate in the House of Representatives that branch of the legislature which was directly elected by the people at the adoption of the Constitution. Growth of Public Credit. The growth of public control over revenues has also done much to strengthen public credit. In the earlier states it was an ordinary occurrence for the ruler to pile up heavy debts; and repudiation, in whole or in part, was just as common. It was the regular practice for a new ruler to repudiate the debts of his predecessor. Under such conditions the institution of public credit was indeed weak. As soon as the citizens began to gain control they began to strengthen the credit system. Since the citizens were the lenders, repudiation was their loss, and it is easily understood why repudiation of state debts has not been a practice under constitutional government. 18. The Universal Tendency of Public Expenditures Has Been to Increase. At the close of the eighteenth century it was generally believed that the previous rise in expenditures would cease, and a gradual lowering was even expected and hoped for. That period marked the overthrow of the old monarchical regime, with its lavish expenditures for the courts of the rulers. The introduc- tion of constitutionalism was expected to materially lessen the cost of military support, which had been mounting rapidly, and which had become particularly burdensome. It was considered, too, that the citizenship, which at that time was almost entirely agricultural, must necessarily be freed from some of the tax burdens they had been attempt- CHARACTERISTICS OF PUBLIC EXPENDITURES 29 ing to bear, in order that they could again secure a foot- hold and provide the necessary increase in production. _The old mercantilist^ idea of government was rapidly \ /losing ground, and the laissez-faire policy was being sub- V stituted. That government which governed least was, in the future, to be considered best, and this would entail the retraction rather than expansion of government activities. This line of reasoning, however, proved ill founded, and public expenditures have continued to increase. While government activities decreased in some lines, the result- ing decrease in expenditure was more than offset by ex- penditures for increased activity in new lines of enter- prise. Commerce and industry soon took ranks of im- portance with agriculture, and more revenue could easily be secured with no increase in burden. All this was an impetus to an extended activity on the part of the state. It will be profitable to note some of the aspects of the continual increase in public expenditures. 19. Increase in Public Expenditures Is Not Confined to Any Political Unit. Some conclusions from the study of statistical data will show that the increase in public expenditures has indeed been general that the increase has not been confined to autocracy or democracy, or to Federal, commonwealth, or city units. In the European states expenditures increased about 360 per cent for the sixty-year period following 1830, while the per capita in- crease for the same time was about 400 per cent. In the same period the expenditures of France increased more than 225 per cent, while England's expenditures were nearly 110 per cent greater in 1902 than in 1866. In twenty-seven years after 1874 German expenditures had increased something like 225 per cent, while Russian ex- penditures showed an increase of 125 per cent for the twenty-year period after 1800. Expenditures of smaller European states show the same upward trend, as is illustrated by Belgium and Switzer- 30 OUTLINES OF PUBLIC FINANCE land. The increase in Belgium for less than a fifty-year period after 1850 was about 380 per cent, while in the Swiss Federation, for the same period, the increase wa? nearly 1,600 per cent. 1 The increase in some of the countries can be attributed partially to wars, yet the countries which have been less engaged in war have shown the most rapid increase in expenditure. The conditions in Belgium and Switzerland are examples of this situation. The expenditures of the political subdivisions of European states have increased, sometimes even more rapidly than those for the states. Expenditures for the last few years show, of course, an enormous increase, but they are so influenced by the Great War as to give no comparison with normal increases. 20. Expenditures in the United States Show an Up- ward Trend. A study of expenditures of the United States and its political units will show that everywhere there has been an increase. After a period of war, or some other emergency expenditure, there may be periods in which decreases can be found, but they never get back to the pre-emergency basis. A somewhat detailed study of the expenditures of the United States, and its political divisions, will be of interest to American students of Pub- lic Finance. In most of the following tables the items are given for which expenditures have been made, so that comparisons may be made between increases in the ex- penditures for particular items as well as between the total expenditures. Emergency expenditures show a greater effect upon the figures for the Federal government than upon those for the other political divisions. The following are expenditures of the Federal government: 2 1 These illustrations of the increase of public expenditures are taken from a treatment of this subject by F. S. Nitti. An extract of his work may be found in Bullock's Readings in Public Finance, p. 32. 2 A detailed account of the growth of expenditures in the United States may be found in an article by C. J. Bullock, in the Political Science Quar- terly, xviii, p. 97. The expenditures for each year may be secured from Cables given in Pewey's Financial History of the United CHARACTERISTICS OF PUBLIC EXPENDITURES 31 Year Total Per Capita Year Total Per Capita 1850 1860 1870 1886 $ 40,947,000 63,200,000 293,656,000 242,483,000 $1.76 2.01 7.60 1 4.22 2 1915 1916 1917 1918 $1,047,835,000 1,048,225,000 2,405,932,000 9,312,169,000 $10.44 10.36 25.04 89.16 1 In currency value; gold would be about $6.80. 2 Lowest since Civil War. From this table it will be seen that there has been a gradual increase in the Federal expenditures, with a sud- den increase at the time of the Civil War and the Great War. After the Civil War there was a gradual decrease, and we may expect the same tendency for the next few- years. It is unlikely that the amount will ever be as small as it was in 1913 or 1914. The following table shows the increase in Federal expenditures for particular items from 1903 to 1913 : J EXPENDITURES OF THE NATIONAL GOVERNMENT 1913 1903 General Government Protection to Person and Property. . Health and Sanitation $ 61,784,000 264,671,000 5,701,000 $ 59,924,000 175,875,000 2,533,000 Highwavs 42,652,000 19,590,000 Charities, Hospitals, and Corrections Education . . 182,313,000 17,243,000 146,918,000 10,341,000 Recreation 924,000 505,000 Miscellaneous 13 373 000 12 850 000 Apportionments 10,108,000 5,647,000 Public Service Enterprises 264,107,000 137,695,000 Interest 25 256 000 28 556,000 Outlays l 64,380,000 16,564,000 1 Outlays are such expenditures as those for public buildings, etc. Some of the items in this table may be a little out of proportion because of some particular undertaking in one of these years. For example, a part of the expenditure for 1 The statistical compilations in this chapter, unless otherwise indicated, have been made from the following reports of the Bureau of the Census: Wealth, Debt, and Taxation; Financial Statistics of States; and Financial Statistics of Cities. The figures may not be entirely accurate, yet they are sufficiently so to give general comparisons, the purpose for which they fire intended. 32 OUTLINES OF PUBLIC FINANCE public service enterprises in 1913 was for the Panama Canal. In general, however, the table presents the usual trend in the growth of Federal expenditures in a period when war had very little influence. In some items the percentage of increase has been small, while in others it has been much larger. Some reasons for this will be noted later. In only one item interest was there a decrease. Because of the indebtedness which the Great War brought into existence, this is, of course, larger now than ever before. Expenditures of States and Cities. A comparison of the expenditures of states and cities will show the same tend- ency to increase as is seen in those of the Federal govern- ment. The following table shows this for recent years: Year States Total Per Capita Year Cities Over 30,000 Total Per Capita 1915 1916 1917 1918 $490,708,000 505,399,000 513,063,000 561,000,000 $4.99 5.05 5.04 5.42 1915 1916 1917 1918 $1,057,127,000 1,043,594,000 1,081,866,000 1,144,630,000 $33.92 32.34 32.53 33.35 This table shows for the four years indicated that there has been a gradual increase in both state and city expend- itures. The following gives more in detail the increases in state expenditures from 1903 to 1913 and 1918: EXPENDITURES OF STATES (000 OMITTED) 1918 1913 1903 Total Per Cap- ita Total Per Cap- ita Total Per Cap- ita General Government. $51,395 $0.59 $40,496 $0.42 $25,897 $0 32 Protection to Person and Property 33,218 0.32 24,926 0.26 6,804 0.08 Health and Sanitation. . . . Highways 12,249 38,829 0.12 0.38 6,387 16,884 0.07 17 5,327 4,680 0.07 0.06 118,084 1.14 87,306 0.90 52,515 0.65 Schools 163,183 1.58 132,575 1 37 64,643 0.80 Recreation 1,248 0.01 1,983 0.02 1,563 0.02 CHARACTERISTICS OF PUBLIC EXPENDITURES 33 It is seen by these figures that state expenses have been on the increase, and at a faster rate than the population. The increase in population from 1903 to 1913 was about 20 per cent, while expenditures increased about 110 per cent. The increase has been more marked in some fields than in others, the most noticeable being in protection to person and property, charities, and schools. Some ab- normalities may be found in tables for particular years. A decrease in expenditures for schools may appear, for example, while expenditures for charities may take the rank of first importance for this same year. Comparative statistics of incorporated places, in so far as they are available, show exactly the same trend of ex- penditure upward. Not only is this true of cities of small population, but it is evident in the increasing cost of government as cities become larger. A study of the following table is interesting, not only from the stand- point of increasing expenditure as population increases, but also from the standpoint of the relative importance of the various classes of expenditure, which will be treated in the following chapter. It is seen that, with practically no exception, after a city has reached a population of 50,000, a further growth in size necessitates a greater per capita increase in every line of its activity. When compared with preceding tables, the magnitude of city expenditures is evident. The corresponding burden on property is so great that a comparatively small number of urban citizens can afford to be property owners. The financial advantages of living just outside the corporation limits, yet enjoying much that the city has to offer, are quite evident when, in 1913, the total per capita expenditure of counties was $4.49, while for 146 cities it was $32.46. 21. Increasing Expenditures Cannot Be Considered Apart from Other Factors. If the enormous increases in public expenditure in all our governmental bodies had to be borne, with no change in the ability of individuals to 34 OUTLINES OF PUBLIC FINANCE g 00 8 8 8 CO *""* *_ I I o o o 4 45 8" 8" S CHARACTERISTICS OF PUBLIC EXPENDITURES 35 bear the increasing burdens, there would be cause for grave alarm. Had it been true, however, that this ability were stationary, expenditures would not have reached their present magnitude, for the tree would have been cut to get the fruit long ago. But the facts that population is increasing, and that wealth the source of revenue has also been increasing, must be taken into account. In Europe, it was seen, population was increasing less rapidly than expenditure, which, of course, causes an increase in the individual burden. Expenditures in the United States. In the United States the increase in population has more nearly kept pace with the increase in expenditures, while the increase in wealth has surpassed the growth of expenditures. This means that, in spite of the great increase in state activity, the individual burden has decreased. A lower percentage of the national wealth was spent by governmental units in 1916 than in 1870. In 1850 our national wealth was esti- mated at about $7,000,000,000, while in 1912 it had in- creased to more than $175,000,000,000. In 1870 the Fed- eral government spent about $13.2 per $1,000 of national wealth; in 1912 the expenditure per $1,000 of wealth was $5.3. The per capita change in expenditure from 1903 to 1913 was from $7.90 to $10.15. All other governmental units spent $15.2 per $1,000 of the wealth in 1890, while in 1912 the expenditure was but $13.3. The state govern- ments spent, in 1903, $2.30 per capita, and $3.95 in 1913. The rise in the per capita expenditure for 146 cities for the same period was from $24.64 to $32.46. In the United States as a whole, because of the increase in population and wealth, public burdens have not been increasing faster than the ability to bear them. This has not been true, perhaps, of some of the political divisions, especially the cities, where the enormous increase in ex- penditure has outdistanced the increase in wealth. This burden may be particularly heavy upon certain classes of citizens, for it is a matter of common knowledge that all 36 OUTLINES OF PUBLIC FINANCE property owners do not share the public burden in pro- portion to their wealth. Since the wealth of individuals in general is increasing at a greater rate than government expenditures, there is no cause for the fear that increasing government activity is crushing the individual. It would further indicate that there is no pressing need for new sources of revenue so far as securing funds is concerned, no matter how imperative they may be to secure a more just distribution of the fiscal burden. The Value of Money. When attempts are made to com- pare the increased services which come from increased ex- penditure, it must always be kept in mind that the value of money is not constant. For a number of years following 1873 increased services might have been given with de- creased expenditures, because prices were falling and an expenditure in dollars would give more services than before. Since the late 'nineties, however, the other aspect has been true, especially since the advent of the Great War. In so far as a state is a purchaser of materials in the open market, it is affected by rising prices as much as an individual. On the whole, however, the effect is less marked in the case of the state, because a larger proportion of its expenditures is for salaries and wages, which rise much slower than other prices. Because of rising prices, then, expenditures may noticeably increase, while the services rendered may remain the same or decrease. Expenditures for War. The proportion of public ex- penditure which is due directly or indirectly to war is an item of importance. Everyone is aware that during the Great War all other expenditures were overshadowed by those for war. In a few years, however, it may be for- gotten that indirectly war expenditures still form a large part of the total public outlay. Professor Bullock has calculated the percentage of Federal expenditure due to war for a number of years between 1870 and 1902, the re- sults of which are almost startling. The costs due to war, CHARACTERISTICS OF PUBLIC EXPENDITURES 37 he considered, were for the army, the navy, pensions, and for interest on the debt arising from war. On this basis 80.7 per cent of the Federal expenditure in 1870 was due to war; 74 per cent in 1880; 66.4 per cent in 1890; 68 per cent in 1897; 72.4 per cent in 1900; and 70.6 per cent in 1902. 1 A somewhat detailed study of the cost of war will be presented in a later chapter. 22. Many Causes Are Responsible for the Growth of Public Expenditures. Many factors have contributed to the rapid and continual growth in public expenditures. States are not only undertaking new activities, but are entering into former activities more extensively, or are attempting to conduct these activities more effectively. The mere fact that population is becoming more dense has caused a number of expenditures to increase. On the whole, governments are institutions of increasing cost a large part of the services cost more per capita as popula- tion increases. Reference to some of the preceding tables, especially the one for cities, will indicate this tendency. Army and Navy. Military and naval activities have been one of the chief causes for increase in Federal ex- penditures. The increase has been general, in democratic as well as in autocratic governments. Wars are, of course, much less frequent than formerly, but the daily cost of a war, such as the Great War, would more than finance an entire conflict in earlier times. A modern twelve-inch gun or battleship would entail, perhaps, as much expenditure as an early army or navy. Another important factor is the maintenance of the large, modern navy and standing army in times of peace. This means that peace-time equipment represents a far greater expenditure than did early wars. A review of the table on Federal expenditures will show the importance of these items in the expendi- tures of the United States. Public Utilities, Highways, and Education. Among the important services which modern governments supply, 1 Bullock, Readings in Public Finance, p. 50. 38 OUTLINES OF PUBLIC FINANCE and which were formerly supplied by individuals, are the various classes of public service enterprises, highways, and education. Many countries have gone further than the United States in supplying the services of public utili- ties. In some countries the railroad, telephone, and tele- graph are operated by the government, while these are still privately operated in the United States. Yet the events of the era when the state and Federal governments were active in internal improvements are familiar to every student of American history. The demand for pub- lic ownership seems to be increasing, and the number of public enterprises is rapidly growing larger. This is espe- cially true in cities. The recent emphasis placed upon education, and the supplying of this utility by the public to such a large extent, has had an important influence in causing expenditures to increase. The same has been true with highway expenditures, since highways are no longer supplied by individuals. The growth and relative importance of these items can be seen by reviewing the preceding tables on pages 32 and 34. Regulative Activities. In recent years the public has continually been demanding the extension of state enter- prises. Catering to these demands has meant increased costs. The most noticeable of these demands, perhaps, has been for the various forms of regulation, and for the development of health and sanitation. The old laissez- faire policy of government is becoming more and more antiquated, while the public is placing greater reliance on the activities of the government to secure its desires. This tendency is clearly shown by the rapid development of functions under the police power. 1 In the matter of health and sanitation governments have undertaken many preventive measures in recent years, while formerly, if they were concerned at all, it was with repressing epi- demics which might arise. 1 The police power is the authority of the American commonwealths to legislate for the physical, moral, and economic welfare of their citizens. CHARACTERISTICS OF PUBLIC EXPENDITURES 39 Extension of Credit. One other item which might be mentioned as having influenced the increase in public expenditures is the ease of public borrowing. Reasons for this growth of credit have already been noted, and a detailed study of public debts will be reserved for a later chapter. The ease of borrowing has given a supply of revenue which could not, perhaps, have been obtained had the other methods of taxes and receipts from lands and industries alone been available. So general has pub- lic indebtedness become that nearly every governmental unit practices the policy of deficit financiering. Citizens are willing to lend to the government because its credit is good, and the burden is not so apparent as when revenues are secured through taxes. Except where political units have reached the legal amount of indebtedness, a tendency toward an increased use of this source of revenue is easily recognized. 23. Public Expenditures Supply the Less Material Wants. Wants of individuals may be classed as material and immaterial. Of these classes the individual is usually first and most concerned with supplying himself with the material things. Often he does not recognize the value of other than material goods to himself, or that he will be a better member of society for having had them. Then, too, many of the immaterial services are so remote that they would scarcely call forth individual effort. Many individuals are incapable of supplying more than the material needs even if they recognized the value of the immaterial, while many cannot even supply the needed material goods. These services, valuable to the individual himself and to his usefulness in society, which he could not or would not supply, must be given by the state if they are to be had. Ordinarily the state makes the supplying of these immaterial needs a duty of first importance. A compari- son of total expenditures for each of the classes of services would show a much larger percentage for the immaterial, 40 OUTLINES OF PUBLIC FINANCE The supplying of material goods arises either when the individual cannot supply his needs, as in charities and state institutions, or when the recipient pays for the utilities in much the same way as he would if they were supplied by an individual. The immaterial goods supplied by the state might be divided into a number of classes. One of the most impor- tant is that of protection. Except in time of war the need for protection by the army and navy seems so remote to the ordinary individual that, even if it were possible, he would exert no effort to secure it. The Federal govern- ment, therefore, provides it as a common service, much better and more effectively than would individuals if left to supply it for themselves. The protection to person and property given by state and city governments is also much more effective than if it were supplied directly by individuals. Expenditure for education, as we have seen, is an im- portant item in the finances of each political unit. This utility is considered so valuable to the individual and state that its acceptance is, to a certain degree, compul- sory. The person with a public school education is so much better able to take his place in the world, and is enough more valuable as a citizen, that the individual is compelled to receive the education the public school can give. Conservation of health, sanitation, libraries, and parks are other sources of immaterial goods which the citizen receives, and which would be secured in a much smaller degree if they were not supplied by the state. 24. All Public Expenditures Cannot Be Justified. While few would deny the value and necessity of public expenditure, yet the desirability of some uses of public funds may be open to question. To lay down a rule by which the justice of every expenditure could be measured would be impossible, because of the immaterial nature of such a large part of the services rendered. In general, however, a state is not justified in making an expenditure CHARACTERISTICS OF PUBLIC EXPENDITURES 41 unless more utility results than would have been secured had the funds been left in the hands of the individuals. There is a temptation, where a public official is dependent upon the constituency of a particular district, to spend public funds for the benefit of his supporters. Some of our states recognized this when the constitutions were formed, and attempted constitutionally to prohibit ex- penditures the utility of which will be of less value than the cost. Pennsylvania is an example of a state which early had a constitutional provision of this nature. The difficulty arises, of course, in attempting to apply this general rule to particular cases. It will be interesting for the student to give examples of public expenditures which appear to him to be unjusti- fiable. Many will be of a local nature, while others will involve state and Federal governments. The constant pork-barrel legislation is one of the standing criticisms against Congress, yet every district is anxious to get an appropriation, no matter how needless. Appropriations for magnificent post-office buildings in small towns, and for improvements of rivers and harbors, far in excess of any need, are so familiar as to scarcely need mentioning. States have squandered thousands of dollars in building roads and making other improvements because of the unbusinesslike methods of letting contracts. It is im- possible to justify such expenditures on the utility basis. 25. Public Expenditures Have Important Economic Effects. No phase of Public Finance, perhaps, has re- ceived so much fallacious reasoning as the economic effects of public expenditures. Many early statesmen and writers favored a large expenditure because it put money into cir- culation, increased the demand for labor, relieved the poor by giving them employment, removed the objections to taxes when the state returned much to the citizens, and for similar arguments. It would be a waste of time to elaborate upon these fallacies for modern students of eco- nomics. Let it suffice to remind them that lavish and use- 42 OUTLINES OF PUBLIC FINANCE less expenditure does not create wealth. The more a state spends out of a given amount, the less is left for in- dividuals to spend. The demand of the state for labor and goods is substituted for that of the individual. When the state demands materials and services, therefore, this demand is not added to that of individuals, as was for- merly believed, but exists instead of the demand of indi- viduals. The revenue exacted from industry to pay an army could have been used by industry to pay wages to men in the army had they not been employed by the state. The total demand cannot be increased by state expendi- ture in fact, it may be materially decreased becaus^ of expenses in administering public funds. Public expenditures, nevertheless, do have important economic consequences which should be kept clearly in mind. The answers to the above fallacies indicate some of them. When the state enters the market for materials or labor, it becomes a competitor with its citizens for these same commodities or services. Under normal conditions, because of the widespread activities of governments, the state is a large purchaser of goods and services. In an abnormal situation, such as a war, the demands of the state are enormous. Since states do not have to measure cost and value of the product, the price paid for materials and services is not based upon the same principle as in individual industries. In cases of emergencies, especially, as in the Great War, the state is likely to pay abnormally high wages in order to attract labor, and abnormally high prices for materials in order to secure the needed supply. A hardship is thus felt among individuals who demand similar services and materials, but who cannot pay such high prices. The abnormal wages cannot but have an effect on the worker. With his increased wages comes a higher standard of living, which he is desirous of main- taining. When the emergency is past, and the govern- ment demand ceases, he must seek employment where wages are determined differently. The tendency is now CHARACTERISTICS OF PUBLIC EXPENDITURES 43 toward lower wages. The dissatisfaction caused by such shifts will have some effect in causing industrial friction. The artificial demand of the government for goods, with a subsequent cessation, will have much the same effect on commodity prices in particular lines. The Unemployed. The problem of the unemployed is one with which the state is confronted. Some contend, while recognizing the economic fallacy of the "make work" idea, that, from the effect on the individual, it is better that the state create some occupation than resort to charity. However this may be, a more sensible and economical scheme would be for the state to utilize labor for its needs when unemployment is greatest hi other fields. Cities, for example, could carry on much of their work as well at one time as another, and would tend to ease the whole situation by employing labor when it is not otherwise needed, rather than by competing for it. The same is true, in a measure, with state and Federal activities. 26. An Accurate Comparative Study of Expenditures Is Difficult. The comparison of expenditures, which has been made in this chapter, is doubtless not entirely ac- curate. A number of difficulties arise which make accu- racy impossible. One of these difficulties is that no uni- form system of accounting exists for the various political bodies for which comparisons are to be made. The vari- ous items may not have the same meaning in the different units. For example, the items under charities, hospitals, and corrections may not include comparative sums for the different states or cities. Again, in our judicial sys- tem, where fees play such a large part, and are used in such a variety of ways, an accurate comparison of costs would be out of the question. In some cases the fee repre- sents the entire cost of the service; hi others it may be only a part of the cost, or no account may be taken of it by the treasury. Similar difficulties are found in attempts to compare practically every item of expenditure. 44 OUTLINES OF PUBLIC FINANCE The obstacles in the way of preparing a comparison of expenditures for different countries are still more formi- dable. The systems of government are different, and just as different are the methods for attacking the fiscal prob- lems. In some countries, as in the United States, a large percentage of expenditure is given over to the local gov- ernmental units, while in other countries, as in France, a larger part is undertaken by the central government. In some countries separate accounts are not maintained by the local and central governments, and the local units are simply agents for the expenditures of the larger bodies. Instead of pensions for worthy citizens, many states use public employment as a means to accomplish the same end. Obviously, then, a comparison of gratuities for different countries would be misleading. These sugges- tions as to the difficulties will indicate the disappointing results that must come from an attempt at accurate com- parison of public expenditures. 27. Attempts to Find a Proper Proportion of Expendi- ture to National Income Have Failed. Many writers have attempted to ascertain what proportion of the national income should be spent by the state. Some have attempted a percentage relationship, and suggestions have ranged from 5 to 25 per cent. Others have suggested a per capita basis, and still others claim that expenditure should be gauged by area. The nature of the factors, however, which should control the amount of expenditures, largely vitiates any relations such as these. The nature of the expenditure will have much force in the determination of the proper percentage of total in- come to be spent by the state. If a state be engaged in a defensive war, for example, it would be proper to go to any length in its expenditures. A larger percentage would be justified on some commercial enterprise which would bring a future return than on one which would not. The size of the income is itself an item of importance. A 15 per cent expenditure for a country with a large income CHARACTERISTICS OF PUBLIC EXPENDITURES 45 might be much less burdensome than a 10 per cent expenditure for a country with a small income. Per capita and area bases are still more unsatisfactory. A per capita comparison of income and expenditure of the state of Illinois and some of the provinces of China would show the uselessness of such a basis. Area fails in much the same way, as it shows neither amount of income nor the need for state activity. Any attempt to measure what the state should spend must consider not only the amount of income, but also the nature of the need for the expend- iture and the hardship it will entail. ADDITIONAL READING Census reports: Financial Statistics of Cities. Financial Statistics of States. Wealth, Debt, and Taxation. Statistical Abstract of the United States. CHAPTER III CLASSIFICATION OF PUBLIC EXPENDITURES 28. Many Bases Have Been Used in Attempting to Classify Expenditures. The early classifications of ex- penditures in Italy and France have been noted. These were based upon the objects for which the money was used, such as government and protection. Many other bases have been attempted with a varying degree of satis- faction as to results. Some have sought to divide ex- penditures into ordinary and extraordinary, while others have attempted to separate the necessary from the un- necessary or to make the classes the necessary, the desir- able, and the superfluous. Some have tried to distin- guish between money spent productively and that spent unproductively, while a merely historical evolution has sometimes been used. The United States Census Bureau has worked out a statistical and accounting classification based largely on functional activities. A classification, aside from a mechanical one, which is perhaps the most interesting, is based on the method of conferring benefits. It will be interesting to note some of the purposes and difficulties of these classifications. 29. Some Attempts at Classification Have Been Un- satisfactory. At any particular time, especially if the budget system be in use, ordinary and extraordinary ex- penditures can be rather closely distinguished. The names, in reality, explain themselves. Ordinary expendi- ture is that which is expected, while the extraordinary is for the unanticipated demands Expenditure for war would be extraordinary, while that for the maintenance of CLASSIFICATION OF PUBLIC EXPENDITURES 47 a standing army or navy would be ordinary. While such a classification can be made at a particular time, it will not hold over a long period of time, nor often for even a period of short duration. Government activities have been increasing at such a pace that an extraordinary use of funds five years ago may now be considered perfectly regular. Even an extraordinary expenditure for war in a particular year may be considered as a normal expenditure the following year. It is seen, then, that the classification has no permanency, and a particular item of state activity cannot be referred to as " ordinary" with no reference to the time element. Much the same objection can be raised against the " necessary, desirable, and superfluous" classification. A superfluous undertaking at one time may become desir- able at another and necessary at still another. Besides the time element, the element of personal judgment plays an important part in this classification. The terms are at best relative, and what might be considered necessary at a particular time by one official or voter might be branded by others as superfluous and extravagant. The difficulty of getting any standard of measurement is in- surmountable. Although the distinction of productive and unproductive expenditure held an important place for early students, it has little significance at present. The idea of production has changed from Adam Smith's notion of making a " material and vendable commodity" to that of a creation of utilities. The vast majority, if not all, of public funds are thus spent productively, although it might be impossible to justify them from the ethical standpoint. A historical classification is interesting, pri- marily, in showing the evolution of state activities. 30. The United States Census Bureau Classifies Ex- penditures. While the census classification is largely for mechanical purposes, American students should be in- terested in the method of listing and handling the funds. There are two primary classifications, those known as 48 OUTLINES OF PUBLIC FINANCE governmental cost payments, and the nongovernmental cost payments. The former includes all the costs of any political unit, accrued, paid, or payable, for services, for property, whether bought, rented, or constructed, and all expenditures for public improvements. It also in- cludes all costs of materials used for whatever purposes, interest on funds borrowed for running the government, and the costs of the different kinds of protection. All expenditures for social activities are included, as well as the costs of caring for delinquent, defective, and dependent classes. The costs of other services per- formed by governments which cannot be easily classi- fied are also put under this head. As a matter of con- venience governmental costs are divided into expenses, interest, and outlays. Expenses include all payments other than interest from which no permanent or subsequently realizable value is received. Such are salaries, rents, costs of materials used in government activities, and the management of funds. It would also include losses from fraud, failures, or similar circumstances. Expenses are divided into two large classes those for the general departments, and those for public service enterprises. The former are subclassified into the costs of the principal divisions under which the work of the general departments is carried on. Interest, of course, is the amount paid for borrowed funds. Outlays designate the payments for land, build- ings, public improvements, and other similar payments, and are used in carrying on some government function or business which possesses some degree of permanency. Any revenue which may be secured from these enterprises is deducted from the outlay expenditure. Nongovernmental cost payments are all the expendi- tures not included in the above classification. They are items usually of minor importance as compared to the above, which do not enter into the general activities. Examples are cost of goods to be resold, paying of debts, CLASSIFICATION OF PUBLIC EXPENDITURES 49 and the balancing of accounts between different depart- ments. While this classification is more or less obscure as to the exact nature of the expenditures, yet, should all our political units adopt it, comparative figures of ex- penditure would be more easily available. 31. Expenditures May Be Divided into Four Classes, According to Benefit Conferred. None of the classifica- tions which have just been noted indicate to any degree the underlying motive in making expenditures. There has been nothing to indicate whether many or a few citizens have been the recipient of the funds spent, or whether individuals benefited have helped to bear the expense of the service. Obviously such a classification, while it could not be exact, would be of interest to students of fiscal problems. Professor Cohn has proposed a division of state activities which readily lends itself into a classifica- tion of expenditures on the basis of benefits conferred. 1 Four groups of expenditure may be distinguished ac- cording to the degree in which individual benefit is the motive. By far the larger part of the state's expenditure, however, is not concerned primarily with individuals, but with the population in general. Hence the most important class of expenditures would be for the common benefit. The state also undertakes activities which directly aid particular classes, yet makes payment entirely from the common fund. This class might be termed expenditure for particular individuals, yet treated as a common benefit. Many state functions, moreover, are undertaken primarily for the common good, yet they also confer individual benefits for which the recipient is required to make pay- ment. This might be termed the rendering of a common benefit, but at the same time a special benefit. It is con- ceivable, too, that the state might undertake activities which confer only special benefits, and this would make a fourth class of expenditure on the basis of benefits con- ferred. 1 Finanzwissenschaft, p. 117. 50 OUTLINES OF PUBLIC FINANCE 32. Important State Services Are Found in Each Class of Expenditure. It will be interesting to note some ac- tivities which fall under each of the above classes, and then consider the more important ones somewhat in de- tail. A large number fall under expenditure for the com- mon benefit. Among those that at once present them- selves to the mind of the reader are the use of funds for protection, for the general government, for education, for highways, for maintenance of standards of coinage, for weights and measures, for diplomatic and consular serv- ice, for maintenance of public buildings, and for the numerous aids to developing commerce and industry. The most important of expenditures for individuals, yet treated as common, are those for defectives and dependents. Bounties and pensions could also be placed in this class. Most of the numerous services for which fees are charged fall under the group of expenditures which confer some special benefit along with the common benefit. The ad- ministration of the courts, maintaining patent and copy- right systems, and chartering corporations are examples. Paving streets, laying sidewalks, and building sewers are usually treated in a similar manner. The class of expend- itures for individual benefits is composed of the industries carried on by the state on a commercial basis, and of the monopolies maintained primarily for fiscal purposes. The importance of these items varies in different countries, and from time to time in the same country. 33. Reference to Statistics Shows Relative Importance of Principal Expenditures. There is no better way to gain at a glance an idea of the importance of the various classes of expenditures than to refer to statistical tabula- tions such as those found in Chapter II. 1 These tables will show this relation, as well as the general increase in expenditures. The following table will show the relative importance of the various items in the states, counties, 1 See pp. 31-34. CLASSIFICATION OF PUBLIC EXPENDITURES 51 and incorporated places 1 for 1913, the latest figures avail- able for all the units: 2 GOVERNMENTAL COST PAYMENTS, 1913 General Government: States $ 40,496,000 Per capita $0.42 Counties 102,335,000 Incorporated places 68,941,000 Protection to Person and Property: States $ 25,066,000 Counties 15,213,000 Incorporated places 140,697,000 Conservation of Health and Sanitation: States $ 6,388,000 Counties 2,815,000 Incorporated places 60,434,000 Highways : States $ 16,884,000 Counties 55,515,000 Incorporated places 87,170,000 Charities, Hospitals, and Corrections: States $ 87,586,000 Counties 37,816,000 Incorporated places 32,896,000 Schools: States $132,575,000 Counties 57,682,000 Incorporated places 223,896,000 Recreation: States $ 1,983,000 Counties 420,000 Incorporated places 21,438,000 Public Service Enterprises: States $ 3,461,000 Counties 189,000 Incorporated places 64,194,000 1.19 1.50 Per capita $0.26 " 0.18 " " 3.08 Per capita $0.07 " " 0.03 " 1.32 Per capita $0.17 " " 0.65 " " 1.91 Per capita $0 . 90 " " 0.44 " " 0.72 Per capita . $1.37 0.67 4.90 Per capita $0 . 02 " 0.005 " 0.47 Per capita $0.04 " " 0.005 " " 1.41 Expenditures of States. The following figures for the expenditures of states are more detailed than in the previ- ous table or the comparative one in. the previous chapter. The figures are for 1918: 1 Incorporated places include all those with a population of about 2,500, and above. 2 The statistical compilations in this chapter have been made from re- ports by the Bureau of Census. Sec note, p. 31. 52 OUTLINES OF PUBLIC FINANCE EXPENDITURES OF STATES, 1918 l Total expenditure of all states, $473,962,000. I. General Government: (a) Total $ 51,395,000 (b) Legislative 8,182,000 (c) Judicial 19,224,000 (d) Executive 19,589,000 (e) Elections 701,000 (f) Government buildings 3,610,000 II. Protection to Person and Property: (a) Total $ 33,290,000 (b) Police 1,719,000 (c) Fire 586,000 (d) Regulating financial institutions 2,107,000 (e) Regulating public utilities 3,896,000 III. Charities, Hospitals, and Corrections: (a) Total $118,084,000 (b) Poor in institutions 333,000 (c) Care of children 3,330,000 (d) Blind, deaf, mute 6,172,000 (e) Other charities 9,474,000 (f) General hospitals 5,762,000 (g) Hospitals for insane 49,950,000 (h) Adult Correction 33,000,000 (i) Minor Correction 8,471,000 IV. Education: (a) Total $164,452,000 (b) Supervision 4,070,000 (c) State Institution 52,581,000 (d) Apportionments 104,841,000 (e) Libraries 1,268,000 V. Development and Conservation of Natural Resources: (a) Total $ 21,634,000 (b) Agriculture 17,061,000 VI. Health and Sanitation: (a) Total $ 12,249,000 (b) Tuberculosis 5,748,000 VII. Highways: (a) Total $ 38,829,000 34. Expenditure for Protection Is an Important Item. A glance at the statistics just given and at those in the 1 It will be an interesting gxercise for the reader to secure a copy of Financial Statistics of States for the current year, and compare the various expenditures of his state with the average, and with the expenditures of other states. CLASSIFICATION OF PUBLIC EXPENDITURES 53 preceding chapter will show that the expenses incurred for protection to person and property are large. In the Federal government a large part of such expense is for the army and navy. The maintenance of these modern instruments of war in time of peace is costly, while in time of actual warfare their cost is enormous. This is not only true of the United States, but of every important country. In fact, the expenditure has been much greater in European states than in the United States. This has been due largely to the proximity of the European states and the existing enmity caused by past wars. Even be- fore the Great War attempts were being made to find some other means of settling international differences, and for upholding national honor, than by the commonly ac- cepted one war. It was generally conceded that the Hague conferences had proceeded far in this direction. The Great War, of course, disillusioned the minds of those who thought wars a thing of the past. It remains to be seen what effect the League of Nations will have on ex- penditures for armies and navies. Cost of Maintaining Armies. An attempt to get satis- factory comparative costs for maintaining the military machine in different countries would meet with unsatis- factory results. One important reason for this is the dif- ferent systems used in maintaining armies. The system which has been used in Germany, compared with England or the United States, for example, will indicate the futility of any close comparison of costs. Germany has followed the plan of compulsory military training for all male citi- zens. The standing army, then, is made up of this citizen- ship which is serving without remuneration from the state. In England and the United States, on the other hand, the army is maintained on the basis of paid enlistment. A part of the citizenship makes the army their vocation, for which they receive pay from the state. From the standpoint of direct cost the plan pursued in England 54 OUTLINES OF PUBLIC FINANCE and in the United States would appear to be the more expensive per man. Before total costs could be reckoned, however, a number of other factors would have to be considered. Such would be the expense of training under the two systems, the effect of general training upon the individual citizens, and the effect upon industrial and commercial development. A real comparison of the first item would be difficult because of different wage and liv- ing standards in various countries. An enlisted army is paid entirely from taxes, while in the other system services are substituted for taxes. Rather than give the service, large sums might be willingly given in taxes. Of course there is no way of measuring this feeling of sacrifice. Training, moreover, cannot but affect the individual. Unless conducted in connection with an educational in- stitution it means a postponement of preparation for industrial and social activities. Where general services are demanded, it is evidently impossible to conduct a very large proportion of it in connection with other forms of education. As a whole, it means the postponement of a settled life until the period of military service is com- pleted. Such a situation cannot but have a deleterious effect on industry. Aside from the fact that men do not get settled into their life tasks until comparatively late, it must be remembered that industry is deprived of the services of its entire citizenship during the period of training. If all these factors could be measured on a money basis the cost of the universal service plan would no doubt prove to be much greater than is sometimes thought. Costs of War. The expenses of actual wars are not a part of the costs of a standing army, but must be treated as extraordinary. That they mount to almost unbeliev- able figures is the common knowledge of everyone who has observed expenditures due to the Great War. Legis- lative bodies made appropriations day after day which, a few years before, would have been greeted with horror, CLASSIFICATION OF PUBLIC EXPENDITURES 55 A few comparative figures of the Great War will recall the enormity of the cost. The direct cost of the war to the United States from July 1 to December 31, 1917, was about $5,992,000,000. If loans to the Allies were added to this it would raise the figure to well over $9,- 000,000,000. Had the war continued through the fiscal year in which the armistice was signed it is estimated that about $25,000,000,000 would have been used. From April 1, 1916, to March 31, 1917, England spent for the war almost $11,000,000,000, a daily expenditure of over $30,000,000. From January 1 to December 31, 1917, the cost of the war to France was about $5,820,- 000,000. The figures for the other belligerent coun- tries are similar, and the total reaches an amount so large as to have no real meaning. Modern war places such a burden on a country that the efforts of a number of future generations will be required to remove it. 1 Functions of Army and Navy. It would be impossible to place the maintenance of the army and navy on a cost and value of service basis. If they were useless except in time of war, it would seem that a large amount is being expended with little return. This would be true if only the returns from war be considered. Other services, how- ever, are rendered. The navy gives protection to ship- ping, and thus aids the development of commerce and industry. The existence of an army gives a sense of security, and no doubt does much to keep down both internal and external disturbances which might other- wise arise. The services supplied by the expenditures of the Federal government for army and navy, then, are largely of a nature the value of which cannot be measured. 35. States and Cities Make Expenditures for Protec- tion. The giving of internal protection is largely taken care of by the individual states, cities, or other political 1 A more detailed discussion of the cost of war will be found in Chapter XX. 66 OUTLINES OF PUBLIC FINANCE units. The Federal government, at times, is called upon to give assistance in supplying this class of protection. Reference to the table on page 51 will show the relative importance of protective expenditure by states, counties, and incorporated places. The tables in Chapter II, pages 31 and 32, will show the relative importance of this class of expenditure to other expenditures of the different po- litical units. The cost of protection in cities and incor- porated places is much greater, both in Mo and per capita, than in the states or counties. This is due to the main- tenance of police and fire protection. This expenditure is also greater as a state item than for the counties. As an item of state expenditure it ranks comparatively low, coming about fourth in importance. In cities it is rela- tively high, coming about second. As cities increase in size the cost of protection increases more rapidly than the population. Reference to the table on page 34 shows the per capita expenditure of the smaller cities for protection to be considerably less than that of the larger ones. As in the case of the Federal government, this protection cannot be put on a cost and value of service basis. There is no way of knowing what the citizenship would be willing to give up rather than to do without the protective services. The direct economic returns may appear small, yet the immaterial returns are immeasurable. 36. Expenditures for the General Government Are for the Common Benefit. While expenditure for the general government is, as a whole, not one of the largest, it is, nevertheless, important. It occurs in all political divisions and occupies a position of about the same relative im- portance. Reference to the preceding tables will show that in the Federal government this item stands about third or fourth in comparison to other expenditures; in the states and in the cities it is the item third in importance. The chief items included under general government ex- penses are for the executive and legislative functions, some judicial costs, and costs of public buildings. Perhaps the CLASSIFICATION OF PUBLIC EXPENDITURES 57 expenses incident to securing revenues should also be included here. Administrative Expenditures. The largest executive expenditures come in the administration of laws. The officers concerned with executing law are not the same in different countries, but vary with the form of government. In monarchical countries there is usually a considerable expenditure for the maintenance of the chief ruler and his court. No corresponding expenditure is found in demo- cratic countries. The salaries and positions of chief ex- ecutives in the latter correspond somewhat to the various ministerial officers in the former. The heads of monar- chical states formerly had a private income from lands which subsequently became a part of the public domain. At present, then, the expense must be met from the com- mon treasury. It is usually much greater than the cost of the chief ruler of democratic states. The royal family of England, for example, is an annual expense of about $2,500,000 as compared with the $100,000 given to the President of the United States. The chief ruler in constitutional monarchies, such as England, has very little part in the actual affairs of gov- ernment. The functions of his position are largely social and involve expenses for maintenance and entertainment. On economic grounds such expenditure cannot be justified beyond the point of acquiring greater efficiency. It may, however, increase the pride of the citizenship in the state, or increase their reverence through a feeling of awe at the splendor of the government. It is a question, however, if more respect would not be secured if the expenditure were made in such a way as to be felt by the citizenship in a more tangible and material form. Democracies, moreover, are not entirely free from this class of expenditure. Public buildings are often con- structed of expensive design and materials far beyond the call of pure economic need and efficiency. A number of county court houses, city halls, and state capitols testify 58 OUTLINES OF PUBLIC FINANCE to this. While there is no direct economic justification for such expenditure, hi most cases the majority of the citi- zenship agree as to its wisdom. The psychic value in appeal to civic pride and cultural development frequently offsets any deficit on the economic side. Executive officials are, of course, found in the minor political divisions. Frequently the cost for these is greater in democracies than in other forms of government. In England and other constitutional monarchies such posi- tions are made of long tenure and are clothed with con- siderable honor. Because of this honor, people of means can be found to fill the position for little or no remunera- tion. This situation is seldom, if ever, found in the United States. In estimating whether it is in reality a saving, the efficiency of the service must be considered in each case. The objections to gratuitous services, which are discussed on page 75, are of course applicable here. It would be impossible to get the exact executive costs of the minor civil divisions of the United States, because the officials must often handle other duties than those of an executive nature. Federal Legislative Expenditures. The expenditures con- nected directly or indirectly with making laws form an important place in the costs of the general government. In some cases many items go to make up the total expend- iture, while in others the items are few and little is ex- pended. Much depends upon the law and custom of the various states. In England the expenses of Parliament are comparatively low. Few salaries are paid to members, while public documents are not printed for free distribu- tion. The cost seems smaller than it really is, since some of the administrative officers exercise legislative functions and a part of their expense should be considered as legislative. In the United States many more items enter into the costs of Congress. While each member receives an annual salary of $7,500, this by no means forms the entire cost. CLASSIFICATION OF PUBLIC EXPENDITURES 59 Those who have been present at sessions of Congress have been impressed with the number of pages in constant attendance. These, together with the provision for nu- merous clerks, traveling expenses, and stationery, help to swell costs. The expense of getting information through investigations and public hearings is large. One of the largest single items is the expense of printing. Reports and speeches of all kinds are printed at public expense, and in such quantities that they can have a wide distribu- tion. The franking privilege, which has been granted to our Congressmen, no doubt has an influence on our print- ing cost, since thousands of speeches are printed and sent to constituents which would remain unsent if postage had to be paid. An easy and wide dissemination of knowledge is desirable, but it would be difficult to justify the print- ing and distributing, at public expense, of much of the partisan and campaign literature for which the postal system is gratuitously used. Other Legislative Expenditures. Legislative costs are also found in the various minor civil divisions states, counties, cities, and villages. Counties perform very few legislative functions, while municipal councils are seldom purely of this type, hence such costs for these bodies cannot be accurately determined. The lawmaking bodies of the states, however, are purely legislative. The costs are salaries, clerk hire, and similar items. Usually the members of the legislature are paid by the day, plus' mileage, with permission to appropriate funds for inciden- tal expenses, such as lodging, stationery, and stenographic work. Such abuse has been made of this privilege, and funds have been squandered to such an extent, that some states have put limitations upon the length of legislative sessions and upon the amount of appropriations that may be made for the personal use of the legislators. Some judicial costs, such as those of the Supreme Court, are largely met from the common treasury. Such a large part of the judicial system is now on the basis of part 60 OUTLINES OF PUBLIC FINANCE payment by the recipient of the service, however, that a discussion of this service more properly belongs with that class of expenditure. Public Buildings. Public buildings are a necessary part of the machinery for carrying on the functions of the gen- eral government. Aside from the continual cost of care and upkeep, they represent an investment of the taxpayers which, had it been left with them, would be a source of income. In the construction and maintenance of public buildings this fact should be kept in mind, so that no more will be spent than is necessary to accomplish the economic, political, and cultural ends in view. Collection of Revenue. The machinery for collecting and handling revenues in the various political divisions is maintained as a part of the general government. Com- parisons as to the percentage of cost for collecting the total revenues for different countries, or divisions of the same country, are valueless. This is because of the variety of sources of revenue. Some countries or divisions may own and operate one or more public enterprises at little, if at all, above cost. In such cases the cost of collection would be near 100 per cent. If the United States were to consider the postal returns as a part of its revenue, the cost of collecting this part would be more than 100 per cent for more years than it would be less than this, because a deficit has so often appeared. When total revenues and expenses of collection are considered, those divisions operating a number of public enterprises will show a rela- tively high cost of collection. The only satisfactory com- parison would be for particular classes of revenue, such as the cost of collecting the customs duties, income tax, or internal revenues. 37. Consular and Diplomatic Services Have Been Ex- pensive. The services given by consuls and diplomats represent a governmental activity which has been more expensive in many countries than the economic returns will warrant. Countries which maintain lavish courts at CLASSIFICATION OF PUBLIC EXPENDITURES 61 home have the notion that their prestige can be estab- lished abroad by maintaining similar establishments in foreign countries. The real service which these represent- atives might give is often overshadowed by the ostenta- tious display of the establishments. Countries with a democratic government have not emphasized this feature to a large extent. This fact has made it difficult, at times, to get competent men to fill diplomatic posts. The repret- sentatives of democratic governments feel that they must follow the standards which have been established by other countries, while the salaries will not permit them to do so without individual loss. The consular service has been important in aiding the development of commerce, but this becomes less necessary as market conditions become a matter of universal knowledge. Much might still be done, however, in overcoming national prejudices and in seeking methods for obtaining a market for goods in for- eign countries. 38. Expenditures for Education Have Been Large. The expenditure for education has been an important item in all countries, and in the different political divisions of the United States. At present the actual expenditures of the Federal government for this item is only sixth hi importance, excluding interest and outlay charges. This may be seen by referring to the table on page 31, showing the expenditures of the Federal government. This does not represent, however, the importance of what this branch of the government has done. Public lands, whose value would run into millions of dollars, have been given to develop and maintain educational institutions. These do not show on the expenditure account from year to year. Education in States and Cities. The expenses of educa- tion take a much more important place in the annual ac- counts of our states and cities. In both units it is the item of greatest importance. It has been a rapidly in- creasing expense because of the extension of the service 62 OUTLINES OF PUBLIC FINANCE and the elimination of any individual cost. The public school services are considered of such importance that children are compelled to avail themselves of them. To make it easier for the poor classes, moreover, books and supplies are often furnished to the pupils, while in a num- ber of places noon luncheons are served. Although the high school service is usually not compulsory, it is being made more and more attractive by free tuition, and free textbooks and equipment. This compelling and inducing more individuals to take advantage of a service has been reflected in the huge sums spent in giving the service. The demand is growing that the state provide forms of technical education, since the old apprenticeship methods of learning trades are no longer available. Many Euro- pean political units are emphasizing this part of the edu- cational program, and its influence is being seen here in the development of manual training departments in our public and high schools. We can expect a much greater expenditure along this line of development in the future. Importance of Leadership. Trained leadership is essen- tial in every line of activity, and this can best be obtained through educational institutions giving advanced instruc- tion. Many of our commonwealths have established such institutions in the form of state universities. It has not been the practice, however, to treat this form of education on the basis of common benefit, as some charge is made to the student. The charge is usually so small, however, that practically the whole expense is borne by the public. The annual fees paid by students in state universities are usually not more than $50 per year, while the per capita student cost to the state runs between $500 and $700. The cost of the service, then, is largely met from common funds. The returns to the public have been largely in the increased agricultural, industrial, commercial, and general business productiveness which has come from this citizen- ship with higher educational training. It has been suggested that the state has not gone for. CLASSIFICATION OF PUBLIC EXPENDITURES 63 enough in supplying this service that it should undertake it entirely as a common benefit, not only give the service, but grant to each student a scholarship fund of sufficient size to meet incidental expenses. If, among the added thousands who could then avail themselves of this higher training, there should be developed an Edison, Marconi, or Pasteur, it is contended the expenditure would be well worth while. Such a broad educational expenditure for the common benefit may never be reached, yet there are indications of it in the numerous scholarships and fellow- ships which are given to induce advanced work in various lines. Expenditures of Individuals. The enormous expendi- tures of Federal, state, and local governments for educa- tion do not tell the whole story. To get the real impor- tance which is attached to education, the expenditures of individuals and organizations must be added. Public education is supplemented to a large extent by religious and private schools, while many of our larger universities and colleges are privately endowed and receive no public funds. The private cost of education added to the public cost the item of first importance in the public expense account will show to how great an extent education is considered the need of first importance to the citizenship of a state. Experiment Stations. An item closely connected with education is the maintenance of experiment stations and laboratories, and advisory bureaus of various sorts by the different political units. Everyone is familiar with the extent to which this is carried in agriculture. Similar services are given in many other lines, as in mining and forestry. The meeting of the cost from the common fund has been more than justified by the increased production at lower cost in these various industries. 39. Highways Are an Important Cause of Public Ex- penditure. The expenditure for highways is one of grow- ing importance, The development of motor transport^ 64 OUTLINES OF PUBLIC FINANCE tion has caused an increased demand for good roads. This item occupies a more important place in city and state expenditure than in that of the Federal government, although the expenditure here is not inconsiderable. The per capita expenditure for highways is much larger in cities than in the other divisions. In the future, however, we may expect this item to occupy a position of greater importance in the Federal and state expenditure accounts because of the number of roads to be built with the aid of these governments. The importance of good roads cannot be minimized in commercial and industrial development. The public should be on the alert, however, and see that funds are not wasted in road construction. Contracts have some- times been let, through which the construction company received a certain per cent of the cost as compensation for services. Such contracts do not command efficient services, nor the purchase of materials in the best markets, and the payment from the public purse is likely to be much greater than the service given in return warrants. 40. The Regulation of Private Industry Is an Item of Increasing Importance. The reaction from the laissez- faire policy is becoming more and more marked. This in- creased government interference means an increasing ex- pense. It is found in the different political units, but is perhaps more marked in the Federal and state govern- ments. The expenses of the Interstate Commerce Com- mission, with its numerous hearings and investigations in regulating interstate traffic, are not inconsiderable. The activities of the Federal Trade Commission, and of the continued increase in the amount of government inspec- tion of privately produced goods, are other examples of the growing importance of this service by the Federal government. This service of regulation is augmented and extended by the state governments. In the majority of states public utility commissions seek to secure for the public a satis- CLASSIFICATION OF PUBLIC EXPENDITURES 65 factory service at a reasonable rate from the various public service enterprises. Here again numerous costly hearings and investigations are necessary. Systems of inspection are found in varying degrees in all the states. Among the most common are factory inspectors, food in- spectors, and oil inspectors. Cities often have inspectors of various sorts to carry out provisions of ordinances, such as investigating market, light, or street conditions. A part of their regulatory expenses is met by other political divisions, as the regulating of utilities companies through the state commission. This class of expenditure will doubtless be of growing importance as the public continues to become more exacting. 41. Many Miscellaneous Expenditures Are Made for the Common Benefit. Many expenditures are made for the common benefit by the different political divisions which will not fall under the previous classifications. While most of them are rather small, the aggregate would make no inconsiderable sum. The Federal government maintains a currency and banking system as well as a standard system of weights and measures. Commerce is further aided by maintaining lighthouses, and navigable rivers and harbors. National parks and reserves are pro- vided for recreation and experimental purposes. The amount spent for health and sanitation has increased rapidly. The states and local divisions also spend funds for many of the same things. Recreation, health, and sani- tation hold important places in city expenditures, but comparatively unimportant places in those of the states. States often spend funds for conserving natural resources and for giving exhibitions, such as state fairs for promot- ing commerce and industry. Many of this class of ex- penditures are found almost exclusively in municipalities. Among such are those for street lighting, cleaning, and sprinkling, and for the maintenance of sewers and public markets. A consideration of the number and importance of these 66 OUTLINES OF PUBLIC FINANCE expenditures, which are made without reference to any individual benefit, indicates the social aspect of the mod- ern constitutional government. The needs of the social group are being recognized by the state, which is contin- ually assuming responsibilities that were formerly held by individuals. Through the exercise of its regulatory func- tions, moreover, the apparent rights of individuals are often superseded by the demands of social welfare. 42. The Cost of Providing for Dependents, Defectives, and Delinquents Is Large. Expenditures for individuals, although treated as if they were for the common benefit, are not as numerous as the ones for the common benefit. The most important item in this class is the cost of caring for dependents, delinquents, and defectives. A glance at the preceding tables will show its importance. In the state and Federal expenditures this item is near the top, while it is comparatively low in cities. This is true be- cause the other divisions look after the cities' needs in these matters. The per capita cost for cities, however, is greater than for the states. Public Charity. The problem of public charity is im- portant, not only from the standpoint of the amount spent, but from the standpoint of how it is spent. Ex- penditures for charity should be made so as to produce as few deleterious effects on the recipient as possible. If re- lief is administered in a haphazard way the evils which were sought to be corrected will only be magnified. Ex- penditures should be used, whenever possible, to remove the cause, so that they will not have to be repeated. Often only temporary assistance is needed, and if this is given in the right way future expenditures for these indi- viduals may not be necessary. Where the cause cannot be removed, or is regularly recurring, permanent aid must be resorted to. The most common causes of the need for permanent charities are the various sorts of bodily infirmi- ties. The city and county almshouses and poor farms are widespread evidence of permanent public charities. CLASSIFICATION OF PUBLIC EXPENDITURES 67 Private Charity. As in the case of education, only a part of the cost of charity is borne by the public perhaps the smaller part. Other agencies at work giving the same service are individuals, religious bodies, fraternal organi- zations, and various forms of associated charities. There is a place for the work of each, but their energies should not be expended independently of each other. Each should know what the other is doing, so that efforts will not be duplicated that would defeat the ends in view. At best, expenditures for charity are discouraging, since causes never seem to be removed to such an extent that the need for the expenditure decreases. Some laws and customs in the past have made it easy for willful vagrants and paupers to exploit the public. It is needless to sug- gest that legislation, rather than to foster such conditions, should make them extremely difficult. Insurance and Pensions. Some measures are under- taken by the state which are designed to lessen the need for charitable expenditures. Chief among these are the various forms of compulsory insurance. Where workmen are required to deposit a part of their wages in a fund, to be returned in case of disability or old age, or where the employer is required to make some definite provision to compensate for the accidents or sickness of his employees, the public burden is often lessened. There has been a rapid extension of the various forms of social insurance, and it is possible that this may be a means of lessening the amounts spent for charity. The provisions for old- age pensions and mothers' pensions, which are gradually being extended, will likewise tend to lessen the item of expenditures for charity. Care of Defectives. The costs for caring for defectives and delinquents have shown a continued and rapid in- crease. This is due not only to the increasing numbers for which provision must be made, but to the better services which are being given. The most important in- stitutions for the defective class are those for the insane, 68 OUTLINES OF PUBLIC FINANCE blind, feeble-minded, and deaf and dumb. The heaviest burdens in the care of these classes fall upon the state governments. The greatest cost is for the insane. The figures are almost startling. In 1918, out of a total cost to the states for charities, hospitals, and corrections, of $118,084,000, the amount which went to institutions for the insane was $49,950,000. In some states the expendi- ture for the insane is larger than the sum total of the ex- penditures for education a fact which is worthy of con- sideration by serious-minded students. There seems to be little prospect for decreasing the expense for these classes. In fact, as expert medical treatment is extended to replace the old treatment by force, costs may be expected to increase. Corrective Institutions. Corrective institutions are of various classes. They are maintained for adults and minors, and vary from Federal prisons to the village and county jails. Expenses for these institutions have in- creased, partly because of increased numbers of inmates, and partly because of attempts to make them corrective rather than mere institutions for punishment. The possi- bilities for reducing expenditures here, however, do not seem so remote as in the cases of other institutions. In- mates can be engaged to a greater extent than formerly in productive labor, and as society becomes more advanced the conditions for producing and propagating a criminal class may be partially removed. 43. Governments Often Give Pensions and Bounties to Individuals. Some form of the pension system is found in nearly every country. The granting of pensions is generally undertaken on the grounds that a service has been given which has not been properly rewarded, or for the reason that disability has resulted because of services rendered to the government which handicaps the present capacity of the individual for production. Under the first case a pension should be regarded as a payment for value received, rather than as a gratuity. England, in a CLASSIFICATION OF PUBLIC EXPENDITURES 69 large measure, has regarded her pension system in this light, and has allocated the costs to the various govern- mental departments under which the recipients have given services. In the United States the idea of reward for dis- ability has been the chief ground for granting pensions. If this were legitimately followed, no objections could be offered to our pension system. The surplus of funds in the United States in the 'eighties led to such fraud in the granting of pensions, however, as to bring the system into disrepute. While it has been purged of its grosser evils, the chance for politics to play too dominant a role still remains. The rather large item for pensions in state ex- penditures is accounted for by the pensioning of Confed- erate soldiers by the Southern states. In late years the pension system has been extended to include others than those who have rendered some special service to the government. The old-age pensions which have been inaugurated in England are an example of this situation. Every person over seventy years old, who is a British subject, who has resided in the country a certain number of years, and who does not have an income ex- ceeding a certain amount, is entitled to a pension. The size of the pension varies according to the income of the individual. A number of commonwealths of the United States have provided for mothers' pensions. These are given on the ground that a better citizen will be produced if a child grows up under a mother's care than if it is reared in a public institution. Bounties and Tariffs. Government bounties may take various forms. Industries which a government may think desirable may not be able to exist because of foreign competition or for other reasons. The most common form of the use of a bounty is for the government to pay to the managers of such industries a sum sufficient to enable them to exist. Some of the bounties given by European states to stimulate the production of sugar are good examples. Minor political units have often given 70 OUTLINES OF PUBLIC FINANCE bounties to stimulate the eradication of undesirable fac- tors, such as destructive animals. In the United States the promotion of industry has taken another form than the straight bounty, though in the end the results are much the same. These ends have been secured through the use of the protective tariff. Students of economics are familiar with the arguments advanced for protection and with the method of its work- ing. If it is used to enable industry to live, it must reim- burse the manager in some way. It does this by keeping out competitors and allowing the price of products to rise. In this case the consumer pays directly to the producer, while if the payment were made by government bounty the collection would be made from individuals by the government. In the latter case the burden would be more widely diffused, since the collection by the government would not likely be confined to the users of the product. 44. Some Expenditures Are for Individual as Well as Common Benefit. The most general governmental service which takes account of both individual and common bene- fit is the maintaining of the judicial system. The system is maintained primarily for the common good, yet the individual is required to pay for the benefit received when he avails himself of the service. Judicial System. Governments very early undertook the function of settling the disputes of their citizens. At first the costs were borne by the disputants, but it grad- ually became recognized that justice was so much of a public asset that the greater part of the burden of securing it now rests on the public. It would be unwise to remove the entire burden from the litigants, however, for it would mean the congestion of the courts with unimportant cases. In civil cases the part of the cost to be borne by the individual is usually placed upon the one found at fault. This has a beneficial effect in minimizing unimportant litigation. The proportion of the expense borne by the state in criminal cases is usually much greater than in CLASSIFICATION OF PUBLIC EXPENDITURES 71 the civil ones. As a whole, the cost of justice is an impor- tant item of expense in all countries and all political divisions. Comparisons are difficult to make because of the different systems in vogue. Besides establishing justice, the judicial system pro- vides many other services. It has become the function of courts to interpret constitutions, and to pass upon the constitutionality of legislation. Property rights are estab- lished, deeds and mortgages recorded, various sorts of licenses are granted, for all of which the individual who avails himself of the service must make payment. Usually it is small, and the real burden of the cost rests with the government. Other Individual Payments. Other examples of expend- itures of this class are in various kinds of public improve- ment. Paving streets, building roads, and constructing sewers, are common illustrations. Primarily, the improve- ment is undertaken for the public benefit, yet obviously the property near or abutting it receives a benefit. This is why abutting lot owners are asked to help bear the cost of paving streets', and farmers owning land along an im- portant highway are asked to help defray the expenses of improvements. A number of our postal activities is based on the same method of expenditure. The cost of provid- ing this service in the more sparsely settled communities is much greater than the returns. In the United States the importance of the service to the individual has been minimized, since the returns have seldom been more than costs, but generally have been less. In a number of European countries the principle of securing a net return is followed. 45. Some Expenditures Are Primarily for the Indi- vidual. The costs of those industries which government units run on a commercial basis cannot be put in any of the previous classes. No net expenditure is expected to result, since the produce of the industry is calculated to equal or more than equal the expense. Examples 72 OUTLINES OF PUBLIC FINANCE may be found in every political unit where industries have been undertaken by the state for the purpose of supplying commodities needed by the government, or for supplying them to individuals on a commercial basis. Reference to some of the preceding tables will show the importance of expenditures for public service enterprises. Some of the more important materials which govern- ments undertake to furnish for themselves are military and naval supplies. Transportation of goods, passengers, and messages is often supplied for individuals. Gov- ernments sometimes maintain monopolies, primarily for the sake of the revenue returns. Such are the tobacco and salt monopolies of some European states. Because of the revenue returns from this class of disbursements it does not occupy an important place in the consideration of public expenditures. 46. Expenditures Tend to Become More for the Com- mon Benefit. The number of functions which govern- ments undertake for the common good increases as civili- zation advances. In some cases transition from giving a service on the commercial basis to that of the common benefit has been rapid; in others it has been slower, while others are still in the process of change. The maintenance of public schools and highways is no longer considered, in this country, in any other light than for the common benefit. It was not so long ago, however, that neither of these services was supplied to any extent except by individuals. Anecdotes relating to the pay of the public school teacher by the patrons of the district are common. Investigation of the early laws of our states will show that numerous charters were granted to turn- pike and highway companies, with the permission to erect tcllgates. When the state began to give these services individual payments were still required for education, while tollgates were kept on the roads. The charges were quickly given up in the case of public schools, and more slowly in the case of highways, until the expenses of both CLASSIFICATION OF PUBLIC EXPENDITURES 73 are now met from the common fund. The postal system has changed, in many cases, from the basis of profit to the basis of service, and any deficit is made up from the common fund. It is unlikely, of course, that this service will ever be treated as purely for the common benefit. Many municipal services are following the same trend. Such are the supplying of water, gas, and electricity, where they are furnished by the municipality. While the ex- penditure for the common benefit at present holds by far the most important place, its importance will no doubt be still more marked in the future. ADDITIONAL READING Census reports: Financial Statistics of Cities. Financial Statistics of States. Wealthy Debt, and Taxation. Statistical Abstract of the United States. Edward B. Rosa, " Expenditures and Revenues of the Federal Government," The Annals of the American Acad j emy of Political and Social Science, vol. xcv, pp. 1-113. CHAPTER IV THE DEVELOPMENT OF PUBLIC REVENUE 47. Most Demands of the Modern State Are Monetary. In supplying the various materials and services which have been considered in the preceding pages, the state has no superhuman power. The funds required for these expenditures must be secured from some existing source. The two most imperative needs of the state are the con- trol over space, from which it can direct its activities, and the control over services and commodities with which to carry out its desires. The modern state differs vastly from the earlier ones in the method by which this control is secured. Under feudalism and other early forms of government the ownership of the land was in the hands of the state, and the first mark of citizenship was obligation to render services to the state. Gradually the lands passed into the ownership of individuals, and the obliga- tion of service was no longer synonymous with citizenship. The change has continued until the modern state must act very much as an individual in supplying itself with space, services, and commodities. If land is needed for a public building it must be purchased in the open market. Officials are secured to carry out the functions of the state by paying them salaries. The powers of the state are somewhat stronger than those of individuals, however, in that it can commandeer land for its use, or for the use of individuals it may designate, through the right of emi- nent domain. It also has the right to coerce services of its citizens. This always follows some well-defined plan, and may be extended to include a large proportion of the THE DEVELOPMENT OF PUBLIC REVENUE 75 citizenship, as in the case of conscription for army and navy services. The best example, perhaps, in normal times, of coercive service, is in securing men for juries. This is a general practice in the United States. Another form of coercive service which is rapidly disappearing is the requirement of a certain amount of work for the maintenance of high- ways. With few exceptions, then, it may be said that the demands of the modern state are monetary. It requires its revenue to come in the form of money, and uses this money to secure land, services, and commodities from individuals or governments, instead of requiring them to be supplied gratuitously. 48. Gratuitous Services to the State Are Unsatisfac- tory^ The unsatisfactory character of gratuitous services is one reason why they are so little used at present. In the United States services are sometimes given on boards of directors, or as visitors to public institutions, or occa- sionally as mayors of small towns. The motives which prompt citizens to offer such gratuitous services are pa- triotism, distinction, or some such appeal. That patriot- ism gives a strong appeal was evidenced by the number and caliber of some of the "dollar a year" men in the service of the United States government during the Great War. The difficulty with most of the motives for gratuitous services is that they are not of sufficient permanence to insure a continued efficient service. The patriotic flash soon dies with the passing of a crisis, while a position of honor may quickly lose such distinction. Men who re- ceive nothing for their services can hardly be expected to give much in return. It is only when they are put on a "value received" basis that the public can successfully hold them responsible for the proper performance of duties. The motives for gratuitous service, moreover, unless underneath there be a chance for individual gain or pull and then the service ceases to be gratuitous 76 OUTLINES OF PUBLIC FINANCE are ordinarily not strong enough to call men with marked ability. Either they will have accomplished their goal in private life, and are willing to ease off on the public, or will be using the office as a stepping stone, neither of which could give the best results. As a whole, political units have gone to the basis of paying for men to render the re- quired service, and it is the duty of the citizenship to hold officials responsible for the proper conduct of their duties. 49. Public Revenues Received Many Early Classifica- tions. Almost as soon as states began to rely upon rev- enues to carry on activities, those interested in fiscal problems became concerned about the importance and justice of the various sources of revenues. Bodin, the French scholar, gave one of the most interesting early classifications. He enumerated seven sources for securing public revenue wlu'ch, he said, included all that could be thought of. They were: (1) landed domain; (2) con- quests from enemies; (3) gifts from friends; (4) tributes from subject states; (5) public trading; (6) customs duties; (7) taxes. Such a classification is interesting when compared with the important modern sources of revenue. Bodin held that the revenues from public domains were the most just and certain, but that customs duties were wholly just. His reason for the latter was the one commonly held at that time if any foreigner was to gain by trading, let him pay for it. Taxes were only to be used when all other sources failed to produce a sufficient amount. Adam Smith divided revenues into those coming from a fund belonging to the state, and from a fund belonging to the citizens. He was not in favor of the state entering industry, and believed that most revenues should come from the citizens. Most of the other early fiscal writers were likewise concerned about the important sources of revenues, and many of these sources were discussed, not only from the fiscal point of view, but from the standpoint of economic principle and ethics as well. THE DEVELOPMENT OF PUBLIC REVENUE 77 50. The Question of Public Lands Has Been Important. The public domain formerly held the most important place in the source of revenues. Much discussion arose as to the wisdom of this, and the result has been that modern states have almost entirely disposed of their landed pos- sessions. A number of reasons have been set forth why the state should retain these lands, and also why the state should dispose of them. The best summary of these argu- ments has been given, perhaps, by Rau, a German fiscal writer. Some of them are worthy of notice. Disposal of Public Land. A state should give up its public domain, he said, because it was not fitted to enter industry. In private hands the domains would yield a larger income because an individual owner is more ener- getic in seeking to get profits than is a public official. As a rule public officials are not so much concerned in making improvements in methods of production as are individ- uals. The public ownership of land, moreover, gives the government a special interest of its own, which may lessen its activity in undertaking projects which might be needed for the general good of its citizens. Competition with private industry might also lead to dissatisfaction. Experience has shown, moreover, that states that have given up lands have had an ample source of revenue from the citizens, which shows that the retention is unnecessary. Retention of Public Land. On the other hand, some- thing may be said in favor of the state retaining lands so as to have an independent source of revenue. An income from such a permanent source can be depended upon, and the state does not have to rely upon legislative enactment to procure funds. When legislative enactment is neces- sary, officials who desire to gain favor with a part of their constituency may curtail the exaction of revenues far be- yond legitimate needs. Recognition has sometimes been made of the fact that particular officials may be hostile to, or disinterested in, certain public enterprises, the use- fulness of which could be hampered by retrenchment in 78 OUTLINES OF PUBLIC FINANCE the revenues for their development. To prevent this situation, provision is sometimes made that a certain part of the revenue collected shall be used for a particular purpose, as, for example, for the state university. If the citizenship lacks public spirit, moreover, and resents the exaction of funds, an independent source of revenue might mean more harmony within the state. The problems of inequality and injustice, which arise when funds are secured from individuals, would also be minimized, it was claimed. Public credit would be strengthened, it was further contended, if the state had public lands to offer as security. Use was made of lands as a basis for credit to a relatively large extent in the early development of governments. One of the best examples of the use and failure of the public domain as a basis for credit was in France, when John Law used it as the basis for bank note circulation. Not only were the notes based upon the public lands of France, but also upon the lands in the Mississippi Valley. Difficulty arose, however, when attempts were made to redeem the notes. The reasons set forth for the state's retention of public lands would have more weight if they could be managed as efficiently in the hands of the state as when turned over to individuals. This, however, would seldom be true, especially if agricultural pursuits were followed, since this form of industry does not lend itself well to large scale production. The state can draw upon the resources of its citizenship, moreover, and it has usually gained by disposing of its lands and allowing them to be managed by the greater efficiency of individuals. 51. The United States Has Disposed of Her Public Lands. More than three fourths of the continental area of the United States has at some time been the property of the Federal government. Ownership was acquired in various ways. The original thirteen states ceded much of their claims to the Federal government. The Louisiana THE DEVELOPMENT OF PUBLIC REVENUE 79 purchase was the most important single acquisition. It was purchased from France in 1803 for $15,000,000. Florida was purchased in 1819 for $5,000,000. The Ore- gon territoiy was obtained by treaty in 1846. Mexico ceded a large portion of the Southwest in 1848, while a small addition was made by the Gadsden purchase in 1853. An important purchase outside the continental do- main was that of Alaska from Russia in 1867, for $7,500,- 000. Other small additions have been made in the form of islands located in various parts of the world. The government very early took the attitude of dis- posing of its public lands. About three fourths of the amount of land which has passed from the control of the government has been in some form of a gratuity. A part of this has been given to states for various purposes, some to companies and individuals in order to foster internal improvements, while much has gone to aid the develop- ment of educational institutions. Method of Disposition. A number of policies have been followed in the disposal of public lands. At first the at- tempt was made to dispose of large tracts of land for cash payment. The scheme failed because of the lack of avail- able funds for purchasing, and because land had not yet entered into a category to appeal to speculators. The opposite policy of the sale of small tracts on credit was adopted about 1800. Greater success attended this policy, since actual cash was not needed, and because it catered to the speculating class. The net result, however, was somewhat disappointing, since a considerable amount re- verted to the government when payments could not be made. About 1820 another method of sale was put into force. Cash had to be paid for lands, but any amount above a moderate minimum which the purchaser desired would be sold. Sales were slow until just preceding the panic of 1837. The deposit of the Federal funds in the state banks, with the subsequent multiplication of bank note currency, gave an abundance of cash, while public 6 80 OUTLINES OF PUBLIC FINANCE lands formed a good speculative investment. This situa- tion existed until Jackson issued his " specie circular," which prohibited the acceptance of bank notes in payment for lands. The panic soon followed, which, of course, stopped all purchases for the time being. Since then an attempt has been made to dispose of lands to actual set- tlers under different preemption and homestead acts. The government has usually tried to prevent land grab- bing and the accumulation of large tracts of land in the hands of single individuals. This policy has often been frustrated by various frauds and schemes, and by the lax requirements of the government. Numerous cases of fraud have arisen in securing and holding claims. Resi- dents of Eastern states have frequently found themselves owners of tracts of Western lands with which they have had nothing to do except permit some acquaintance to use their names in making the claim. The most serious violation, perhaps, of the principle of breaking the land up into small plots came in the disposal of the large gifts made to the various states for educational purposes, and through the gifts to railroad companies. Some individuals, also, have succeeded in securing tracts which control a much larger area than was intended by the acts of the government. The best examples of this are claims in the West which control the only available water for much larger areas. Success of Policy. Congress was severely criticized for some of the purchases of public lands, while some officials looked upon them as possible sources for immense rev- enues. Jefferson looked upon the Louisiana purchase as a source for the payment of the national debt. The poli- cies used in distributing the lands, however, precluded the materialization of any of these predictions. On the other hand, the returns from sales of lands have lacked more than $125,000,000 of meeting the expenses which the government incurred on their account. These expenses, in part, came from making surveys, extinguishing Indian THE DEVELOPMENT OF PUBLIC REVENUE 81 claims, and maintaining the land offices. An extensive domain still exists, but it is in large part the undesirable land of the country, and will not likely be any source of profit to the government. If the land policy were judged on the business standard of profit and loss, it would be considered a failure. From the standpoint of expediency, however, in spite of the frauds and evils which arose, the policy has been a wise one. The rapid development of the country was an im- portant result of the rapid disposal of lands. The possi- bility of getting title to lands caused a flood of Western immigration which would not have arisen had the gov- ernment attempted to retain title and to lease the land, or to sell at a profitable figure. The grants of lands to transportation companies greatly stimulated the building of railroads, which did much toward hastening the agricultural and industrial develop- ment. The wealth based upon the former public lands has increased many fold since it has been turned over to individuals. The wealth of the citizenship, after all, is the resources of the state, and there is a much larger source upon which the government can draw for support than if it still retained much of the former public lands. It is interesting to speculate whether the government would have been as able to meet such a crisis as the Great War had it followed the policy of retaining its lands as a source of revenue. Policy of the States. The policy followed by the various states in disposing of lands which were in their possession has been similar to that of the Federal government. To dispose of them as quickly as possible has seemed to be the general tendency, at least until a few years ago. The number of frauds which arose has led to a somewhat more guarded policy in managing and distributing what re- mains. This has been most marked with the forest lands of the North, the swamp lands of the South, and the arid and mining lands of the West. Many statutes may be 82 OUTLINES OF PUBLIC FINANCE found which deal with the use and disposal of such of these as remain in the hands of the states, but as yet pub- lic industry on the land is undertaken to only a limited degree. More is done to govern individual ownership and management. 52. Agitation for the Public Retention of Forests and Mines Has Been Increasing. The justification of public ownership of such domains as forest and mineral lands stands upon an entirely different basis from public owner- ship of agricultural lands. Management of forestiy and mining projects is much simpler than agriculture, since these industries can be conducted on a large-scale basis to a much greater advantage. From the standpoint of securing revenue, a state would more likely succeed by owning or managing forests and mines than agricultural projects. Importance of Forests and Mines. The revenue aspect, however, has not been the item of greatest concern in considering the retention of forests and mines. Lumber and minerals are used up once and for all, while agricul- tural lands continue to give their return year after year. It is to the interest of the individual owner, moreover, to conserve the qualities of the soil so it will continue to pro- duce as much as possible. Its fertility may be preserved so that the soil will be as productive for future generations as for those using it at present. This is not true of the other industries under consideration. An individual who owns a tract of mineral or forest land is interested in getting an immediate return. The method of production which will give this return will likely be the method used. Little concern has been had for future generations in the wasteful consumption of forests and minerals. Minerals once used cannot be replaced, while the fruition of reforestation is too distant to interest a particular generation. Since the products of forests and mines are so vital to the life and development of society, and since individuals are not sufficiently concerned with THE DEVELOPMENT OF PUBLIC REVENUE 83 the welfare of future generations to seek to provide a con- tinuous supply, it seems that the government should undertake this function. The state is the one entity which is concerned with posterity and its interests, and should be relied upon to see that future generations are properly protected from the greed of those living at present. Indirect Effects of Forests. That forests supply a useful product directly is, of course, important. Their indirect effect on climate, commerce, and industry is no less im- portant. Porous forest lands assimilate moisture and give it up gradually. The removal of the forests is likely to cause disastrous floods in the winter and spring, and serious droughts in the summer and autumn. Such a situation is a detriment not only to agricultural develop- ment, but also to the use of water power as a means of conserving coal. Streams are a valuable and cheap source of power, which is greatly lessened, however, if the flow is not reasonably steady throughout the year. Steadi- ness of volume is also a necessary feature of streams which are to be used as commercial highways. Any ad- vantage which may come from water transportation is quickly counterbalanced if vessels must lay up for a part of the time because of low water. These indirect influences of forests only magnify the need that the state exercise its authority in preserving them from generation to generation. 53. States May Successfully Conduct Some Forms of Industry. Much discussion has arisen over the relative efficiency of the management of industries conducted by individuals compared with the management of those con- ducted by the state. Some countries have extended their activities in these directions much more rapidly and ex- tensively than have others. The governments of the United States and its political divisions have proceeded slowly in taking up these operations, yet there is at pres- ent much agitation for government ownership and opera- 84 OUTLINES OF PUBLIC FINANCE tion. It is too much to expect that a government could successfully manage every kind of industry, yet some may be carried on to better advantage than others. No rule can be definitely stated which would mark off the field for state enterprise, yet it may be possible to suggest some conditions which favor the success of state activity in industry. Conditions Favorable to State Management. An industry- suitable for state management must be one which can be closely watched by the public. It is necessarily carried on by public officials, with the temptation always before them of securing benefits to themselves at the expense of the public. Not only must it be an industry which can be closely observed, but it must be one in which the public is interested. The managing officials, otherwise, will not be held responsible for the method in which the business is conducted. An industry which has reached, or nearly reached, its final stage in development is better fitted for government management than a new industry in which much progress is needed to make it efficient. State officials do not have the same motives for progress and efficiency as individual entrepreneurs, since the returns of the busi- ness are the rewards to the latter, while the former receive a salary for their services. A mature industry has the further advantage that the necessary operations have been standardized so that it is comparatively easy to assign definite tasks for which the employees can be held responsible. In a new and progressive industry, the entire method of operation may change every few years, while different aspects are continually in the process of change. This makes it difficult to secure men to be held accountable for particular tasks. While many individual exceptions doubtless exist, as a general proposition, however, the government will be more successful in managing a mature industry than one in the formative stage. 54. The Post Office Is a Good Example of Government Enterprise. Some enterprises seem to fall naturally to THE DEVELOPMENT OF PUBLIC REVENUE 85 government management in fact, so naturally that the situation that they are really government enterprises is often lost sight of. The postal systems of various countries give the best example, perhaps, of an industry conducted by the government. The postal system is so generally conducted by the government that the possibility of its existence under individual management is scarcely given a thought. Not only is it one of the most general forms of public industry, but one of the oldest. Adam Smith re- ferred to it as the only mercantile project which had been successfully managed by every sort of government. The beginnings of postal systems were usually with in- dividuals connected with mercantile pursuits. Messages were sent from establishment to establishment by a run- ner, who gradually acquired the habit of carrying messages for individuals who were along his route. An exception to this was the postal system which the Romans estab- lished as an adjunct to the military organization. As a whole, however, the system had very little development before it was taken over by the government in various countries. After the postal system became a government monopoly a number of changes were made in rates of charges, and in the method for their determination. Charges at first were generally very high, and distance of carriage was an im- portant factor to be considered in fixing the rate of charge. Gradually, however, rates were lowered, weight became the sole basis for the charge, while payment was made by affixing stamps. It might be said that the postal system had assumed its present form by 1850. While rates within the various countries were gradually reduced, cheap international postal rates came slowly. The recent establishment of the Postal Union has secured lower rates among the countries which are members. Postal System in the United States. The growth of the postal system in the United States has followed the gen- eral trend of development of this enterprise. Acts passed 86 OUTLINES OF PUBLIC FINANCE by the Mother country provided for a Colonial postal sys- tem. A three-cent rate was adopted in 1851, and a two- cent rate in 1883. Distance as a basis of charge was given up comparatively early, and weight with payment by stamp was adopted. This has no doubt imposed a burden upon some parts of the country at the expense of other parts. If statements could be secured which would separate the postal revenues and expenditure of the part of the country east of the Mississippi from those of the territory west of this line, there is no doubt that the eastern part would show a substantial surplus, while the western part would show a large loss. It appears the people in the more thickly settled part of the country are paying an excessive price for their service, while the more sparsely settled regions are securing services at less than cost, with the deficits paid by the former class. If all the indirect gains were considered, however, which have come to the eastern population because of the rapid develop- ment which a cheap postal service has fostered, it would no doubt be quite evident that all expenditures for main- taining the system have been very remunerative. Motives for Conducting Postal System. The aims which a state may have in view in conducting the postal system are not the same in different countries, nor in the same country at different times. In the earlier periods the idea of securing revenue predominated, while the claim of pub- lic service received little consideration. In that part of the service where the government has a monopoly, as in carrying letters, the charge will be comparatively high, while in the part of the service where there may be com- petition, as in carrying parcels, the rates will be fixed more on a competitive basis. There has been a tendency to minimize the importance of securing the largest possible revenue, however, while public service has been given greater consideration. It is at present the policy of no country, perhaps, to secure more than a good business profit, while some Attempt to THE DEVELOPMENT OF PUBLIC REVENUE 87 conduct the industry on a cost basis, or even run with a deficit which must be made up from the common treasury. France and England usually receive a substantial profit, while the United States has practically attempted the cost basis, although in a majority of years a deficit has ap- peared. Before 1819, in the United States, the annual revenues exceeded expenditures, while a deficit appeared for more than half of the next thirty years. This whole period showed a slight deficit, while a deficit has occurred in practically every year since 1850. During the Great War the revenue aspect received more emphasis. Rates were raised, and distance was adopted as a factor in de- termining the postage upon second class matter. Since the war the letter rates have been reduced, and as expend- itures assume more normal proportions the zone system of charge for second class mail will doubtless be repealed. 55. States Enter Many Fields of Activity. The owner- ship and management of the postal system is perhaps the oldest and most general of government enterprises, yet modern state activities reach into many other fields. Many causes have contributed to the development of this situation. The success which attended the various states in the management of the postal system, whatever the aim primarily in view, soon led to the conclusion, among certain classes, that the state could be just as successful in other lines of endeavor. The doctrine of laissez faire, moreover, under which competition was expected to work out justice in charges and services, soon proved to be un- satisfactory. This became increasingly true in the indus- tries with which the public is most deeply interested the public utilities. From factors inherent in the nature of their business, competition is destructive, and combina- tions and trade agreements soon began to appear. Public ownership has been proposed as one method of escape from the abuses perpetrated by these monopolies. It has been carried much farther in some countries than in others. In many European states the telegraph, tele- 88 OUTLINES OF PUBLIC FINANCE phone, railroad, and express companies are owned and operated by the government. In the United States these industries still remain under individual management in spite of increased agitation and pressure from certain classes for government ownership. The extension of the postal system to the carrying of parcels has made the government a competitor with express companies, while the extensive regulation through the Interstate Commerce Commission and the numerous state public utility com- missions substantially limits the activities of the individual enterpriser. 56. Public Ownership Has Had Most Rapid Extension in Municipalities. The larger governmental units of the United States, as has been indicated, have been slow in developing public industries. The opposite tendency has been shown in the municipalities, especially in the smaller ones. The waterworks very early began to be taken over by the cities, and the policy has grown until at present comparatively few individuals are supplying water for cities. A few large cities have taken over the task of sup- plying gas and electricity, yet unqualified success has not crowned the efforts. Cases have arisen where failure was so marked that the plants have been turned back to private management. In the smaller cities, however, ex- tension of ownership has been much more rapid. Not only is the supply of nearly all the water furnished from public plants, but the cities have frequently undertaken to supply a number of other utilities. In some cases the success has been certain; in others, doubtful, while failure has sometimes resulted. Instances in which smaller cities have given such industries over to individuals are infre- quent, which would lead to the belief that the experiment has been fairly satisfactory. Reasons for Municipal Industries. The reasons for the rapid municipalization of industries are not far to seek. Competition naturally gave way to monopoly, followed by an exploited public. Antagonistic public sentiment THE DEVELOPMENT OF PUBLIC REVENUE 89 was quickly aroused, in the development of which the public press played an important part. A number of magazines devoted to municipal problems rapidly came to the front, which supplemented the agitation already carried on by numerous newspapers. State legislatures influenced the development by facilitating the acquisition of the industries by the cities. Debt limitations frequently have been lifted so that bonds could be issued for con- struction or purchase. The above factors have not only caused a rapid exten- sion of municipal ownership, but have had a salutary effect upon the individuals who continue to operate public utilities, in that more consideration is given to the wishes of the public. Where this results in a satisfactory agree- ment between the operator and the public, the desire for public ownership may be indefinitely postponed. The inauguration of regulation by public boards, in so far as this succeeds in securing just relations between the public and the individuals or corporations supplying its utilities, will postpone and weaken the desire for municipal owner- ship. However successful public management has been, it does not indicate that a rapid extension may be expected. The agitation has, perhaps, done much to accomplish its purpose through the changes in the service given by indi- viduals, and the past successes of public ownership sug- gest a plausible alternative if the desired results cannot be obtained through private management. 57. Revenue Has a Place of Relatively Small Impor- tance in Modern Public Enterprise. It has been indicated that the post office may be conducted with a number of ends in view. The same may be said of public industries in general. The revenue aspect first held an important place, such as it still holds in the tobacco and salt monop- olies of some European countries. The general trend, however, has been to emphasize the service aspect, and with this in mind net revenues have often disappeared, 90 OUTLINES OF PUBLIC FINANCE and deficits have to be made up from the general fund. Such a situation does not indicate that the conduct of the industry has been a failure, because success is not always to be measured in financial returns. The postal system of the United States must be considered a success in that it has been a factor for the cheap dissemination of informa- tion, even though there has been a financial deficit. Highways were once conducted with the idea of getting at least some return, yet the public tollgate is an institu- tion that most members of the younger generation have never seen. The maintenance of highways, moreover, is not branded as a failure because no revenue, gross or net, is received. Municipal waterworks, while they have never been conducted on the same principle as highways, frequently tend in this direction. Deficits often occur, not because the enterprise could not be made financially successful, but because the aim in view has been to give a service at a low cost. In measuring the success of a public industry, then, the aim with which it is conducted must always be considered. In most cases the fiscal aim has been superseded by the desire to give a public service. 58. The United States Census Bureau Classifies Rev- enues. The classification of revenues which is used by the census bureau is similar to its classification of expend- itures, in that it is largely for mechanical purposes. The reports must be based upon official records, and since there is a lack of uniformity in the various political divi- sions, a detailed classification would be impossible. Only a broad statement of receipts, therefore, has been at- tempted. A number of classes have been formed with a definite meaning assigned to the terms used to designate them. The meaning assigned has been taken from the usage of the best authorities on fiscal problems, modified in particular instances by some special requirement. Revenue Receipts. The two primary classes of revenues correspond to the two primary classes of expenditure. They a.re revenue receipts an4 norjreyenue receipts, The THE DEVELOPMENT OF PUBLIC REVENUE 91 former applies to all money and wealth received by gov- ernmental bodies which increase the aggregate assets with- out increasing the liabilities. Under this head the follow- ing items are listed, a detailed discussion of which will be taken up in succeeding chapters: general property taxes; special property taxes; poll and occupation taxes; special assessments; business and income taxes; business license taxes; nonbusiness license taxes; fines, forfeits, and escheats; highway privileges; interest and rents; sub- ventions and grants; donations and gifts; earnings of general departments; and earnings of public service enterprises. Nonrevenue Receipts. The class of nonrevenue receipts is described by the census bureau as follows: "The term nonrevenue receipts is applied to all receipts of a civil division other than its revenue receipts, as previously defined. The nonrevenue receipts of a fiscal year of any civil division comprise all receipts recorded during the year from (1) sales of investments and of supplies which have been purchased for sale; (2) issue of debt obligations and transactions which increase the indebtedness without the issue of formal debt obligations; (3) trust and agency transactions; (4) receipts offsetting outlays, as the col- lections of insurance to be applied to the reconstruction of destroyed property, refunds of erroneous payments, and receipts in error; and (5) such counterbalancing re- ceipts as transfers between the funds or divisions of the governmental unit." From the nature of the items in this second classification, it is readily seen that it occupies a place of comparative unimportance. In so far as the discussion of succeeding chapters deals with revenue, therefore, the revenue receipts will occupy a place of much greater importance than nonrevenue receipts. 59. Statistics Show the Rapid Growth in Revenues Secured by Governments. The lack of uniformity in fiscal systems of the various governmental bodies makes it difficult to get accurate comparative statistical data. 92 OUTLINES OF PUBLIC FINANCE The census reports on the revenues of the Federal govern- ment and of the states are accurate enough, however, to show the rapid growth in the amount of funds secured. The following table shows the revenue receipts of the Federal government for 1903 and 1913, the last year which can strictly be classed as a year of normal operations. 1 REVENUE RECEIPTS OP THE FEDERAL GOVERNMENT 1903 1913 Special Property Taxes $281,612,000 $313,953,000 Poll Taxes 1,356 000 4721 000 Business Taxes 42,064,000 113,385 000 Liquor Licenses and other Imposts. . Other Business Licenses 179,501,000 84,000 230,146,000 206,000 Fines, Forfeits, and Escheats 835,000 2,444,000 Interest and Rents. 997,000 44,000 Earnings of General Departments, and Miscellaneous 16,658,000 17,994,000 Earnings of Public Service Enter- prises . . 134.224.000 270.704.000 It is seen from this table that from only one source the revenue was less in 1913 than it was in 1903. The total increase is a little less than 50 per cent. The interest of the table will be enhanced by briefly noting the signifi- cance of the items. The important item under special property taxes is the customs receipts. The tax on the circulation of national bank notes and some other small items are included. The four-dollar levy upon each alien entering the United States makes up the bulk of the poll tax. Business taxes consist of the internal revenue collec- tions other than those from liquor. The returns from the income tax, since its inauguration, are also included here. The receipts from taxes upon liquor comprise the re- turns under liquor licenses and other imposts, while the amount received from certain liquor and trade licenses in Alaska comprise other business licenses. The important source of interest is the amount paid by banks on govern- 1 See note p. 31. THE DEVELOPMENT OF PUBLIC REVENUE 93 ment deposits. Formerly the government owned a num- ber of industrial securities, principally railroad, which were interest-bearing, and which helped to swell this item. Many items go to make up the earnings of the general departments. Some of the more important included in these earnings are the returns from the consular, patent, and land offices, rents of buildings and grounds, receipts from the sale of materials, profits on coinage, and receipts from forest reserves. The earnings from public service enterprises include such items as the postal receipts and returns from the Panama Canal. Revenues of States. The principle sources of the rev- enues for the various states, together with the increase for the period from 1903 to 1913, may be seen from the following table: TOTAL AND PER CAPITA REVENUES OP THE STATES 1903 1913 Total Per Capita Total Per Capita General Property Taxes $ 82,320,000 $1.02 $139,750,000 $1.44 Special Property Taxes Poll and Occupation Taxes Special Assessments and other Special Charges 24,990,000 2,232,000 3,737,000 0.31 0.03 05 67,676,000 2,965,000 6,455 000 0.70 0.03 07 Business and Income Taxes . . . Liquor Licenses and Imposts. . Other Business Licenses 27,129,000 9,750,000 8,607,000 0.34 0.12 11 53,642,000 20,993,000 8 589 000 0.55 0.21 09 Nonbusiness Licenses 205,000 6,451 000 07 Fines, Forfeits, and Escheats. . Interest and Rents 431,000 10 942 000 0.01 14 1,428,000 21 300 000 0.01 22 Subventions and Grants . . 2,703,000 03 3,191 000 03 Donations and Gifts 127,000 435,000 Earnings of the General De- partments 12,809,000 16 32 995 000 34 Earnings of Public Service En- terprises 3,184,000 0.04 1,785,000 0.02 This table shows that practically every source of revenue gave substantially larger returns in 1913 than in 1903. In both years the sources of outstanding importance were the general property tax, special property tax, and taxes 94 OUTLINES OF PUBLIC FINANCE upon business and income. Receipts from inheritance taxes are placed with the special property taxes. The remarkable increase in nonbusiness license taxes is due to the general practice of licensing automobiles. The large decrease in returns from public enterprises can be explained in a measure by South Carolina giving up the state dispensary method of handling liquor. It must be remembered that this is a general table showing the combined figures of forty-eight states. The tendency for particular states might be entirely different from the general results. A study of the general property tax in the states, for example, will show that in some cases it is becoming of comparatively little importance as a source of state funds. Likewise many states show a decrease in a number of the items hi spite of the increase indicated by the combined figures. 60. The Majority of Modern Revenue Is Secured by Compulsion. Revenue systems have gone through a long process of development, and it is only in recent years that they have assumed their present form. The early state scarcely functioned so as to commend itself for sup- port by its citizens. Revenues had to be secured from independent sources, such as public lands. These soon became inadequate, and the public consciousness had not been sufficiently aroused to permit the direct exaction of funds from the citizens. Roundabout methods had to be used, such as claiming a payment for a more or less ficti- tious service, or by the use of taxes, the burden of which was hidden by their indirectness. It has only been with the development of a high sense of individual responsi- bility in public affairs that the state has made compulsory levies upon individuals and property without creating a disastrous antagonism. Historical Development. Various writers have traced the historical development of the idea of compulsion. The available sources of funds often proved insufficient and the citizenship had to be relied upon to meet the THE DEVELOPMENT OF PUBLIC REVENUE 95 need. That it was looked upon as a gift to the state is evidenced by the terms donum and benevolence, the desig- nations by which the first payments by citizens were known. That the state had to implore help at times is shown by the fact that revenues sometimes were called prcecarium and bede. The idea that the state had a right to expect assistance from its citizenship, or that the citi- zens should be under obligation to sacrifice anything for the welfare of the state, did not develop until later. That these ideas did develop, however, is shown by such rev- enues as the aid, steuer, and duty. The more modern stage was reached when the right of the state to assess, levy, and collect funds from its citizenship became recognized. The use of such expressions as impost and tax marks the beginning of this modern situation, in which the citizen is so interested in the welfare and activities of the state that he will consent to pay the levies that are placed upon him. English Poor Rates. An interesting example of this de- velopment is found in the poor rates of England. It be- came 'necessary, very early, that the state give assistance to the poor, and funds had to be secured. At first volun- tary contributions were made. It was not long until the amount secured by this means was insufficient, and the authorities were instructed to prosecute those who had not contributed. This did not succeed in getting what was considered a just amount from the various contribu- tors, and power was conferred upon the justices of the peace to determine what would be considered a reasonable con- tribution, and if it were not made, prosecution was likely to follow. The next change was to that of regular levies, with a compulsory payment of the amount. This policy has continued to be used to the present. Motives Beneath Modern Revenues. Many of the mo- tives suggested in this sketch of the development of revenues, no doubt, are still active. Gifts still form a part of the revenue of most governmental units, either as 96 OUTLINES OF PUBLIC FINANCE a conscience fund or for the building or endowing of some public institution. The feeling of obligation, moreover, often prompts payments for particular purposes. The state may still receive returns from the conduct of indus- try, the products of which are purchased by the citizens of their own volition. Yet the sum total of these would form a small share of the income of the modern state, for the greater part of the amount received would doubtless remain with the individual if he were not compelled to turn it over to the public treasury. Even the modern sense of public duty has not been developed to such an extent that all state activities would be supported by voluntary contributions. It will be the various classes of these compulsory exactions with which the succeeding chapters will deal most extensively. ADDITIONAL READING Bullock, Readings in Public Finance, chaps, iv, v, vi. CHAPTER V TAXATION 61. Many Ideas of Taxation Are Inaccurate. To the layman a tax is any compulsory payment made to a po- litical division, or, very often, to other institutions. Stu- dents of fiscal problems, however, cannot accept this broad characterization, but must make a differentiation between the compulsory payments to the state and other compul- sory payments. Definition of Taxes. A number of attempts have been made to define taxes, many of which leave something to be desired. The idea of compulsion is general. Various ideas as to method and purpose of the levy have been given. Such ideas as the following may be found in analyzing the definitions of various writers: Taxes are legally collected contributions for meeting necessary and general expenses; taxes are proportional contributions levied on property; taxes are for the purpose of meeting public needs; taxes are for the purpose of meeting the expenses of government; taxes are one-sided transfers with the intention that a common burden will be main- tained. A little inquiry into the nature of the levy of taxes, and the purposes for which they are used, will show the in- sufficiency of these statements. Many examples could be given of where the funds collected from taxes have been used for other than the necessary and general ex- penses of the government. In the ancient autocratic state the funds collected were often used to subserve the private ends of the ruler. The same is equally true in such mod- ern states as Turkey. In any state, however, it is not 98 OUTLINES OF PUBLIC FINANCE difficult to find expenditures from the common fund which have been so extravagant as to be worse than useless. Many of the familiar "pork barrel" appropriations of our Congress are of this nature. Taxes, moreover, are frequently used for other than public purposes. Numerous examples may be found where funds from the common treasury have been used to aid individuals or groups of individuals in distress. In times of fire, flood, famine, and pestilence, the purse of political units has often been called upon to furnish relief. Wealth, moreover, is not the only criterion which may be taken as the basis for the tax levy. The wide use of poll taxes, es- pecially in earlier revenue systems, is evidence of this. While a tax is not to, be expended for the direct individual benefit of the one by whom it has been paid, it does not necessarily convey the idea that the transfer is one-sided. The prevalence of such an idea would no doubt have the effect of making taxes very much more unpopular than they now are. A proper definition of a tax, then, must be broad enough to include many of the suggestions in the above paragraph, and yet narrow enough to exclude voluntary payments, and those through which the one who makes payment expects to get a direct benefit from the expenditure of the fund. The following definition is suggested as one which meets these requirements. A tax is a compulsory contribu- tion, exacted by public authority according to some general rule, without reference to any special benefit conferred by the expenditure of the funds so exacted. This definition allows that a state may collect funds from any source, so that some general rule is followed, and that the expenditure may be for any purpose that the spending authorities may desire. 62. Some Terms Used in Connection with Taxes Are Important. It is important that the student of fiscal problems know the meaning of a number of terms used in connection with taxes. Some of the more important are TAXATION 99 base, rate, ad valorem, specific, customs duties, excise duties, shifting and incidence, levy, assessments, and tax list. The base is the thing or circumstance upon which the tax is computed. The rate is the amount taken from each unit of the base. A tax rate of fifteen mills means that for every unit of the base of the tax, fifteen mills will be taken. Usually when the rate is so expressed, the unit of the base is one dollar. The base of the tax, however, might be a pound, foot, or gallon. A number of taxes are known by the base upon which the computation is made, as land, poll, income, or inheritance taxes. The base of a tax should not be confused with its source. Money might be borrowed to pay any of the preceding taxes. The base, then, is the object upon which the computation is made, and the source is the means by which the result of the computation is paid. As already indicated, the base may be either a value measurement or some other characteristic. When taxes are computed upon value as a base they are said to be ad valorem. When some other unit of measure is used, as pound, yard, or gallon, taxes are said to be specific. A 10 per cent tax on the value of wheat sent from the coun- try would be ad valorem, while a five-cent tax per bushel would be specific. Customs duties refer to taxes placed upon goods entering or leaving a country, while excise taxes or internal revenues refer to taxes placed upon goods produced within a country. Shifting of a tax signifies the removal of the burden from where it was first placed, while the incidence refers to the place where the burden finally rests. Shifting and incidence are discussed in de- tail hi a following chapter, as are also customs duties and excise taxes. The levy, assessment, and tax list have to do with the machinery of taxation. The levy of a tax is the legal process of its imposition. Since taxation is a prerogative of the state, the levying process is necessary to establish 100 OUTLINES OF PUBLIC FINANCE the tax. This process is usually retained by the legislative department with no power of delegating it to anyone else. The assessment consists in putting the tax levy into operation. It includes all the steps in determining the units of the base, and what the holders of these units must pay. The tax list is simply a record of this assessment. It may be used by various governmental units that have levied taxes upon the same base, or for various legal pur- poses, such as recording ownership and transfer of property. 63. The Economic Effect of Taxes Has Received Much Consideration. When the compulsory payment of funds to the state became a fixed and important part of fiscal systems, students became concerned about the economic effects of such procedure. An idea commonly held among early writers was that a tax, to some degree at least, created a new ability on the part of the person who paid it. It was contended that the fear of being compelled to change one's manner of living because of the burden of the tax, would cause exertion to provide for the tax and still leave the individual as well situated as before. Ex- amples of the increased exertions during several wars were cited to prove this effect of taxes. Some pointed out, however, that such a result could be expected only if the burden was not so great as to seem insurmountable. Others took the view that there was no power in a tax to create ability to meet it that people did not get ability to spend from spending, but spent because they had the ability. Energies might be intensified either to pay the tax or to devise some scheme for evading it, but any other reason than a tax might have caused a similar intensifica- tion. Energy itself, moreover, had little power of pro- duction, but was really effective only when applied to capital. A tax which curtailed the amount of capital, therefore, lessened the effectiveness of energy and cur- tailed the ability to meet the burden. It is very possible that a tax may stimulate production, TAXATION 11 but its burden is felt, none the less, in this increased use of energy which is designed to provide the tax. If taxes encroach upon capital, it means a lessening of productive power, and with this a lessening of ability to meet burdens. The real economic consequences, however, cannot be de- termined without knowing what would have been done with the fund had the state not taken it, and then what use the state makes of it. If the source of the tax is one which otherwise would have been squandered, perhaps, in a way to lessen the efficiency of production, then it is more economical for the state to take it and use it. State expenditure, moreover, may often increase productive efficiency, and hence increase the ability of bearing tax burdens. Expenditures for maintaining a sound system of banking and currency, standardizing weights and meas- ures, and providing experiment stations, are no doubt ex- penditures of this nature. Many early writers opposed taxes which would affect capital. Ricardo favored an income tax, though Mill pointed out that a tax on incomes might affect capital by impairing savings. All were agreed that capital should not be impaired by taxation. Whether any tax will im- pair capital will depend, after all, on the habits and in- clination of the individual. Two men may each have an income of $2,000, out of which each has been saving $500. A tax of $100 is placed upon the income of each. One now spends only $1,400, and still adds the $500 to his capital account, in which case the tax has had no effect on the accumulation of his savings. The other still spends $1,500, and adds only $400 to his savings account, in which case the tax has curtailed savings. It can be readily seen, therefore, that no categorical statement can be made as to the economic effects of a tax. 64. Adam Smith Gave Four Maxims in Regard to Taxes. Adam Smith devotes considerable space in his Wealth of Nations 1 to a treatment of taxation. His four maxims, 1 Wealth of Nations, bk. v, chap. ii. 102 OUTLINES' OF PUBLIC FINANCE or canons, as they are commonly called, have become more famous, perhaps, than any other passage in fiscal literature. Since they are just as applicable to-day as they were a century and a half ago, space cannot be used to better advantage than in quoting these canons some- what at length. (1) The subjects of every state ought to contribute toward the sup- port of the government, as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is thaojjality or inequality of taxation. (2) The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of pay- ment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. Where it is otherwise every person subject to the tax is put more or less in the power of the tax gatherer, who can either aggravate the tax upon any obnoxious con- tributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the in- solence and favors the corruption of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt. The jgrj/fJnf.y of what each individual ought to pay is, in taxation, a matter of so great importance, that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not nearly so great an evil as a very small degree of uncertainty. (3) Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it. A tax upon the rent of land or of houses, payable at the same time at which such rents are usually paid, is levied at the time when it is most likely to be convenient for the contributor to pay, or when he is most likely to have wherewithal to pay. Taxes upon such consumable goods as are articles of luxury are all finally paid by the consumer, and generally in a manner that is very convenient for him. He pays them by little and little as he has occasion to buy the goods. As he is at liberty, too, either to buy or not to buy, as he pleases, it must be his own fault if he ever suffers any considerable inconvenience from such taxes. (4) Every tax ought to be so contrived as both to take out and to TAXATION 103 keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. A tax may either take out or keep out of the pockets of the people a great deal more than it brings into the public treasury, in the four following ways: First, the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose prerequisites may impose another additional tax upon the people. Secondly, it may obstruct the industry of the people, and dis- courage them from applying to certain branches of business which might give maintenance and employment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so. Thirdly, by the forfeitures and other penalties which those unfortunate individuals incur who attempt unsuccessfully to evade the tax, it may frequently ruin them and thereby put an end to the benefit which the community might have received from the employment of their capi- tals. . . . Fourthly, by subjecting the people to the frequent visits and the odious examination of the tax gatherers, it may expose them to much unnecessary trouble, vexation, and oppression; and though vexation is not, strictly speaking, expense, it is certainly equivalent to the expense at which every man would be willing to redeem himself from it. It is in some one or other of these four different ways that taxes are frequently so much more burdensome to the people than they are beneficial to the sovereign. 65. Many Attempts Have Been Made to Classify Taxes. -The different tax classifications are almost as numerous as the individuals who have made classifications. The most significant failures at satisfactory classification have occurred, perhaps, where the attempt has been made to follow some natural lines. A little consideration will indicate the futility of such a basis of classification. Taxes are used for various purposes in different countries, while the same tax may be used for different purposes in the same country. The idea of a just measure for taxes varies widely, and different bases have always been used to attempt to arrive at that justice which an adopted theory might suggest. With such a diversity of fundamentals it is an idle waste of energy to attempt to place taxes into natural categories. on Shares of Social Income. Many attempts have 104 OUTLINES OF PUBLIC FINANCE been made to base taxes upon the shares into which the social income may be divided. Adam Smith pointed out that "the private revenue of individuals arises ultimately from three different sources rent, profit, and wages. Every tax must finally be paid from some one or other of these three different sorts of revenue, or from all of them indifferently." Others have followed Smith in attempting to use this classification. If the present social income is not squandered, so that modern taxes must be paid out of past accumulations, then it may be said that taxes do properly fall upon the four shares of distribution: rent, interest, wages, or profits. As a workable classification, however, it has little value. A tax placed upon rent may be paid out of interest. The four shares are often so combined, moreover, that it would be impossible to de- termine what part of a $500 tax falls upon each share if it were placed upon the recipient of all of the four shares. For example, who could determine the part of a $500 tax, placed upon an Iowa farmer, which falls upon the separate items of rent, interest, wages, and profits? Other Bases of Classification. Other classifications are taxes upon persons, property, and income, and upon property in the process of getting, keeping, or spending. These may be used as long as they simply indicate the thing against which the tax is levied, but are valueless in indicating the source from which payment is made. Taxes upon persons might be levied upon the individual as such, or upon members of a particular class, designated by some particular mark, such as property, age, profes- sion, or title. A general poll tax would be an example of the former, while a poll tax on males over twenty-one years of age, or upon all owners of land, would be examples of the latter. Where the tax is upon property or income, these are considered without reference to the individual. The tax is against the property or income rather than against the person. Taxes classified as against wealth in the process of getting (income), keeping (property), and TAXATION 105 spending (consumption) simply indicate the stage in this process against which the tax is levied. Of course all per- sonal taxes must be paid from some other source than that against which the levy is made, while a tax on income might possibly be paid from property, and one on property will probably be paid from income. Direct and Indirect Taxes. One early classification, which has retained its importance to the present, is that of direct and indirect taxes. A common distinction is that the burden of a direct tax will remain where the tax is levied, while the burden of an indirect tax will be shifted to other than the place of levy. This statement, however, is too sweeping. It is more nearly correct to say that such is the intention or expectation of the authorities who levy the tax. A tax on mortgages, for example, is a direct tax, for it is expected that the holder will consider it as a part of his property and pay the tax assessed against it. What often happens, however, is that enough higher rate of interest is charged to the mortgagor to offset the tax bur- den. In this case the burden of a direct tax has been shifted. Taxes on monopolies, on the other hand, are generally believed to be shifted over to consumers in the form of higher prices, and are usually considered indirect. Modifying factors exist, however, which may cause the monopoly to bear the tax burden. 1 Direct taxes are usually much more definite and ascer- tainable than indirect. This is because they are based upon a more definite fact. Authorities may be sure that land, buildings, incomes, and similar bases are going to continue to exist. They cannot be so certain, however, as to how stable the demand for a particular commodity is going to be, or how it will be affected by a tax. The best examples of direct taxes are poll, land, building, income, property, and inheritance taxes. The best examples of indirect taxes are the import duties and excise taxes, as well as a large number of license taxes. A few exceptions 1 For a discussion of the effect of a tax on monopolies, see p. 170. 106 OUTLINES OF PUBLIC FINANCE may be found to this classification, but in general it will hold. The Civil War income tax, for example, was held by the Supreme Court to be an indirect tax, although the same court some years later held a similar tax to be direct. Another exception is that the French government does not class its import duties as indirect taxes. Direct and indirect taxes do not hold the same relative importance under different forms of government, or in the different political divisions of the same country. In general, direct taxes will be used more extensively in countries with a democratic form of government, while the indirect taxes will be more prominent in aristocracies. The control which the citizens have over revenues and expenditures under a constitutional government makes them more willing to contribute directly. Where the citi- zen does not have this control, or where the expenditure is likely to be made in opposition to public desire, resort must be had to the indirect method in order to conceal the tax burden. The more remote and immaterial the service which the state gives, therefore, the more difficult it is to get direct payments. This accounts for the almost exclusive use of direct taxes by local political units, while the Federal government uses a much larger proportion of indirect taxes. 66. Taxes May Be Justified but Not Measured by the Benefits Conferred by the State. With the advance of civilization and the development of governments, the functions of the state increased. To carry on these new activities, added sources of revenue had to be sought, not only to meet the increased expense, but also to make up deficits which had been incurred by giving up some of the former sources of revenue. The citizen, naturally, de- manded a reason for the increasing taxes, and the repre- sentatives of the state were obligated to furnish them, if the needed funds were to continue to be peacefully secured. One reason sometimes given was that the citizen should make a money payment to the state, since the state no TAXATION 107 longer required services and commodities, as in an earlier regime. This was the idea of commutation. The more general justification of taxes, however, was that the citizen was the recipient of benefits from the expenditure of the funds. When this conclusion had been reached, the at- tempt was made to go farther and measure what each individual should pay by the amount of benefit he re- ceived. This is known as the benefit theory of taxation that individuals should contribute to the state in propor- tion as they are benefited by it. It was pointed out that larger exactions could justly be made from the wealthier classes because the state was giving them more benefit through protecting a larger amount of property. Difficulties with Benefit Theory. Difficulties at once ap- pear in attempting to use benefit as a measure of the amount of taxes to be paid. The state gives a number of common benefits to all, such as the guarantee of life, liberty, and the pursuit of happiness. Just what the benefit of this immaterial service is worth it is of course impossible to measure. No individual can say just what good the standing army, or the navy, or the city police force is to him. No estimate could be formed until the service was removed and the situation then compared with the previous one. Not all services are of this in- tangible nature. In some cases a rather definite estimate can be formed of the value received from the public ex- penditures. It is often true, however, that those who receive the most direct benefits are able to pay the least in return. If revenues were to be exacted according to services rendered, a substantial amount would come from such public institutions as asylums, poor farms, etc. The inmates of these receive their all from the state clothing, food, shelter, protection, and medical services. In return they are unable to give anything for this consideration in their behalf. The benefit received from the state may explain to a rich bachelor why he is expected to contribute, but it does 108 OUTLINES OF PUBLIC FINANCE not convince him that it is just for him to contribute more into a fund, a large part of which is used for education, than does a man whose children are availing themselves of this utility. Likewise many other examples can be called to mind of where the payment required is so out of proportion to the direct benefit received that it is evident that some other criterion must be found for the measure of taxes. Attitude of Courts. In spite of the difficulties with this measure of taxation, the courts have continued to give it an important place in their decisions as to justice. The line of reasoning is that there is a relation between the amount of property held, or the amount of income re- ceived, and the protection given by the state. The recog- nition is made, however, that other benefits exist which cannot be measured, and that a tax based upon the benefit received from the protection of property or income is only an approximation of justice. 67. Faculty Is Usually a Satisfactory Measure for Taxes. The difficulties encountered in attempting to use the benefit theory soon led to numerous other proposals. Some were simply modifications of this theory, while others sought justice in entirely different lines. The theory which came to be generally accepted as the one which would most nearly approximate justice is called the fac- ulty or ability to pay theory that is, every individual should pay to the support of the state according to his ability. Adam Smith stated the theory in his first canon of taxa- tion, yet connected it with the idea that benefits measured ability. Mill approached it from the idea of equality of sacrifice. Equality should be the rule in taxation, since it should be the rule in all affairs of government. The state made no distinction in the strength of individual claims upon it, consequently its requirements should fall with the same weight upon all. In this way the least sacrifice would be felt by the whole. His criterion of TAXATION 109 equality was that taxes should be so apportioned that in the contribution of each person no one would feel more or less inconvenience than any other person. He realized that this standard of perfection could not be completely realized, but that the first object should be to know what perfection is. 1 In this discussion Mill embodies the real justification of ability to pay as the basis for justice in measuring taxes. It is in the nature of the state itself. It is an existing entity only because of the citizens which make it up. If these are destroyed the state no longer exists. It is an organization, then, of very much the same nature as other organizations made up of the membership of individuals, and whose perpetuation depends upon the interest of the members. If the membership of a church, lodge, or college fraternity is destroyed or becomes disinterested, the or- ganization expires. The state is of much the same nature, and its continued existence is, or should be, of such vital interest to each member that its funds can justly be secured on the same basis as in a church, or other similar organization. Here the members are not expected to con- tribute in respect to the benefit received, which may be immeasurable, but in accordance with their ability. Like- wise, in raising a building fund, a fraternity expects an alumni member who has the ability to contribute liber- ally, while a small amount or nothing is expected of a student member with little means. It is because of the nature of the relation of the citizen to the state that taxes should be levied in accordance with the ability to bear them. 68. Many Problems Arise in Measuring Ability. The decision that taxes should be measured by ability to pay by no means gives a solution to all tax problems. One of the most puzzling questions is how ability can best be measured. In early stages of development this was com- paratively easy. There was little difference in the owner- 1 Mill, Principles of Political Economy, bk. v, chap, ii, sec. 2. 110 OUTLINES OF PUBLIC FINANCE ship of property, and a poll tax was equitable. As soon as differences in property developed, however, the idea of equal obligation vanished and poll taxes now have only a small place in fiscal systems. The first property distinc- tions were between those who owned some land, cattle, slaves, etc., and those who owned more of these same commodities. As industry developed differences in capi- tal, wages, and incomes had to be considered in arriving at the ability to pay. Personal property, both tangible and intangible, must now be considered, as well as the earlier forms of wealth. In assessing the product of land or industry, choice must be made between gross product and net product. Taxes which can be shifted must be weighed against those which cannot when the determina- tion of a proper base for taxes is under consideration. Proportional Taxes. Land, income, property, imports, or domestically produced goods might be considered as a just base for measuring the ability to pay taxes. With this decided, however, the method of assessment becomes important. Some have contended that more justice is secured when the same proportion is taken from each base, no matter what the size. This is known as propor- tional taxation the rate remains the same, no matter how large the base. If 2 per cent is taken from a base of 100 and 1,000, the result is that proportional amounts have been taken 2 r the amount taken from the 100, is to 100 as 20, the amount taken from the 1,000, is to 1,000. The advocates for this method claim that its justice lies in its definiteness. It is sometimes admitted that proportional amounts do not always mean equal sac- rifices, but it is contended that greater injustice will result if proportion is abandoned. As an early writer put it, when proportion was abandoned you were at sea without rudder or compass, and there was no amount of injustice or folly you might not commit. Progressive Taxes. Many authorities, on the other hand,, believe that justice,, equality of sacrifice, and ability TAXATION 111 to pay can be measured more accurately by using pro- gressive rates that is, to have the rate increase as the base increases, and hence take a greater proportion from a large base than from lesser ones. This system is known as progressive taxation. Two per cent from a base of 1,000, 4 per cent from a base of 10,000, and 6 per cent -fronTa base of 100,000 would represent a progressive scheme. The first justification for progression is that it more nearly secures equality of sacrifice than does proportional taxation. To take $100 from a base of $1,000 would entail a much greater sacrifice than to take $1,000 from a base of $10,000. In the one case only $900 are left, while in the other $9,000 are left. To give up the $100 may mean an encroachment on necessities at least very much more of an encroachment than to give up the $1,000. A second important justification for some rate of progression as best measuring ability is that, as wealth increases, the ease of producing more wealth increases faster than at a proportionate rate. That is, the diffi- culties that must be overcome in producing a second $10,000 are very much less than those for producing the first $10,000; the difficulties in obtaining the second half of the $1,000,000 are much less than those in obtaining the first half. As wealth or incomes increase, therefore, the owners become more than proportionately able to meet tax burdens. Degressive Taxes. One important objection to pro- gressive taxation is that with its adoption any definite rule is abandoned, while the only logical stopping place is 100 per cent, or confiscation. When this is reached the source of the tax will be destroyed. This difficulty is usually alleviated by making the rate degressive that is, to have the rate increase as the base increases, but by an ever decreasing amount. This system is known as de- gressive taxation. A true progressive increase would be 6, 8, 10, etc., until 100 were reached. Degression 112 OUTLINES OF PUBLIC FINANCE would make each increase less than the preceding one, so that the rate would always be approaching 100, or some other definite amount as a limit, but would never reach it. A mathematical computation of these rates some- times might prove difficult, so the desired results can be GRAPH No. I SHOWING THE REAL TAX BURDEN OF A 10 PER CENT TAX WITH A $1,000 EXEMPTION 7% 1% 1000 200Q^3ooo^'f